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Select Sec­tor SPDR-Consumer Sta­ples (XLP) is our top pick for con­sumer sta­ples sec­tor ETFs. XLP is one of four ETFs, out of the 270 we cur­rently cover, to get our very attrac­tive rat­ing. We also rate the invest­ment merit of the top five con­sumer sta­ple sec­tor ETFs.

Per our first-quarter-2011 review of U.S. Equity Sec­tor ETFs, the con­sumer sta­ple sec­tor is one of three sec­tors that gets our “attrac­tive” rat­ing. Per Fig­ure 2, the con­sumer sta­ple sec­tor allo­cates 58% of its value to stocks with an attractive-or-better rat­ing. Only 4% of its val­ues goes to dangerous-or-worse-rated stocks.

Some good stocks in the con­sumer sta­ple sec­tor to buy indi­vid­u­ally or as part of an ETF are Wal-Mart (NYSE:WMT), Proc­tor and Gam­ble (NYSE:PG) and Clorox (NYSE:CL). Some stocks to avoid, sell or short in the con­sumer sta­ple sec­tor are Bunge (NYSE:BG), Whole Foods Mar­ket (NASDAQ:WFM) and United Nat­ural Foods (NASDAQ:UNFI).

Though the con­sumer sta­ples sec­tor offers many stocks with strong invest­ment poten­tial, not all ETFs can be trusted. Investors must assess the mer­its of each ETF based on its con­stituents. Per Fig­ure 3, there are sev­eral ETFs to avoid in this sec­tor.

Fig­ure 1: Con­sumer Sta­ple Sec­tor – Cap­i­tal Allo­ca­tion & Hold­ings by Risk/Reward Rating

Sources: New Con­structs, LLC and com­pany filings

(Click charts to enlarge)

When ana­lyz­ing the con­sumer sta­ple sec­tor ETFs, we started by iden­ti­fy­ing those ETFs with accept­able struc­tural integrity as mea­sured by XTF, an ETF research firm. We chose the 6 ETFs whose XTF rat­ing was above the sec­tor aver­age XTF rating.

Fig­ure 2: Con­sumer Sta­ple ETFs With Accept­able Struc­tural Integrity

Sources: New Con­structs, LLC; XTF and com­pany filings

Fig­ure 2 shows clearly that not all con­sumer sta­ple ETFs are made the same. Dif­fer­ent ETFs have mean­ing­fully dif­fer­ent num­bers of hold­ings and, there­fore, dif­fer­ent allo­ca­tions to hold­ings. Given the dif­fer­ences in hold­ings and allo­ca­tions, these ETFs will likely per­form quite differently.

After deter­min­ing the struc­tural integrity, we ana­lyzed the invest­ment merit of each ETF based on how it allo­cated value to each stock it held. Fig­ure 3 shows how the five con­sumer sta­ple sec­tor ETFs stack up ver­sus each other and the over­all sec­tor based on their over­all risk/reward rat­ings and the allo­ca­tion of their hold­ings by rating.

Fig­ure 3: Invest­ment Merit Based on Hold­ings and Allocations

Sources: New Con­structs, LLC; XTF and com­pany filings

Attrac­tive ETFs:

XLP, VDC and PSL – these 3 ETFs earn an attractive-or-better rat­ing and there­fore, they are the only con­sumer sta­ples ETFs we rec­om­mend. Our top pick from this group is XLP.

Neu­tral ETFs:

PBJ allo­cates its value in a way that earns it a neu­tral rat­ing. We rec­om­mend investors buy the very attrac­tive and attrac­tive stocks in this sec­tor before buy­ing any of the con­sumer sta­ples ETFs except those we rec­om­mend.

Dan­ger­ous ETFs:

We rec­om­mend investors avoid or sell short PSCC because of its dan­ger­ous rating.

Bench­mark Comparisons Sec­tor Benchmark

XLP has sim­i­lar rat­ings to the over­all sec­tor. XLP has a market-implied growth appre­ci­a­tion period (GAP) of only 2 years com­pared with the over­all sector’s GAP of 5 years. XLP’s shorter GAP makes it a more attrac­tive invest­ment than the over­all sector.

Fig­ure 6: XLP – Risk/Reward Rating

Sources: New Con­structs, LLC and com­pany filings

Fig­ure 5: Con­sumer Sta­ples Sec­tor – Risk/Reward Rating

Sources: New Con­structs, LLC and com­pany filings

XLP more effec­tively allo­cates cap­i­tal than the over­all con­sumer sta­ples sec­tor. Per Fig­ure 4 above, XLP allo­cates 62% of its value to attractive-or-better-rated stocks while the sec­tor allo­cates 58%. XLP also allo­cates less than 1% of its value toward dangerous-or-worse-rated stocks com­pared with the sector’s dangerous-or-worse weight­ings of 4%.

For expla­na­tion and details behind our risk/reward rat­ing sys­tem, see one of our Com­pany Val­u­a­tion reports, avail­able for free here.

Mar­ket Benchmark

XLP out­per­forms the S&P 500 (NYSEARCA:SPY) in val­u­a­tion rat­ings. XLP has a price-to-EBV of only 0.7, earn­ing it a very attrac­tive rat­ing, and a GAP of 2 years com­pared to the S&P 500’s price-to-EBV of 1.5 and GAP of 24 years.

XLP and the S&P 500 have sim­i­lar qual­ity of earn­ings ratings.

Fig­ure 6: XLP – Risk/Reward Rating

Sources: New Con­structs, LLC and com­pany filings

Fig­ure 7: S&P 500 – Risk/Reward Rating

Sources: New Con­structs, LLC and com­pany filings

XLP allo­cates cap­i­tal more effec­tively than the S&P 500. Per Fig­ure 3 above, XLP allo­cates 62% of its value to attractive-or-better-rated stocks while the S&P 500 allo­cates 41%. XLP also allo­cates less than 1% of its value toward dangerous-or-worse-rated stocks com­pared with the S&P 500’s dangerous-or-worse weight­ings of 24%.

Method­ol­ogy

This report offers rec­om­men­da­tions on con­sumer sta­ples sec­tor ETFs and bench­marks for (1) investors con­sid­er­ing buy­ing Con­sumer Sta­ples sec­tor ETFs and for (2) com­par­ing indi­vid­ual ETFs to the Con­sumer Sta­ples sec­tor and the S&P 500. Our analy­sis is based on aggre­gat­ing results from our mod­els on each of the com­pa­nies included in every ETF and the over­all sec­tor (123 com­pa­nies) based on data as of April 20th, 2011. We aggre­gate results for the ETFs in the same way the ETFs are designed. Our goal is to empower investors to ana­lyze ETFs in the same way they ana­lyze indi­vid­ual stocks.

Source: Many Tasty Choices in Consumer Staples Sector ETFs