Is This Consumer ETF Too Top Heavy?

| About: iShares U.S. (IYK)

Consumer stocks have been moving higher, with the iShares Dow Jones U.S. Consumer Goods Sector Index Fund (NYSEARCA:IYK) hitting a new high on September 21, 2012. It is always nice to break down winning ETFs to see if there are a few stocks that are driving the increase or if there is a sustainable trend.

iShares lists the components of the fund as of September 21, 2012, and although there are 122 companies represented in the fund, the IYK is quite top heavy, with 10 stocks making up 58.37% of the fund, and four stocks making up 38.22%.

Those top four stocks are:

  • Proctor and Gamble (NYSE:PG) - 12.18% of the fund
  • Philip Morris (NYSE:PM) - 9.66%
  • Coca-Cola (NYSE:KO) - 9.36%
  • PepsiCo (NYSE:PEP) - 7.02%

The stocks listed are clearly consumer stocks and are based in the US, but derive a substantial portion of revenues from overseas. As part of the beverage industry under attack in many places, including New York City, Coke and Pepsi make up a disproportionately large part of the fund.

Philip Morris presents similar concerns, with tobacco under constant threat from national and local governments. Tobacco stocks are often shunned by social investors, and Altria (NYSE:MO) is the sixth largest fund holding.

A review of charts shows that IYK has underperformed the S&P 500 (NYSEARCA:SPY) over the last year, but outperformed for five years. As a conservative investment, the ETF is made up of solid, dividend paying stocks and is likely to lag the market in good times and outperform during downtrends. But, any major negative headlines impacting the heavily weighted stocks in the fund could cause it to fall behind its benchmarks.

Another point relates to the stocks missing from the fund. You could make the case that Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) are consumer stocks, and they are both unrepresented here.

Should You Buy This Fund?

Truly conservative investors may want to find another fund that is less top heavy with news sensitive stocks, or focus on individual companies without the baggage. Investors looking for a bit more may want to search for a fund with some of the newer consumer names.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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