PowerShares Dynamic Consumer Staples ETF Offers Shelter From Market Storm

As the retail sector scales back prices to meet newly curtailed budgets nationwide, some investors have begun to bargain hunt among the consumer staples equities hit hard by recent market woes. In a reflection of the sector that it is designed to track, the PowerShares Dynamic Consumer Staples Fund (PSL) has gained momentum in recent months, helping the fund outperform the S&P 500 benchmark index by 2.74% in the week ending September 8.

The consumer staples sector has been surprisingly resilient, even as other sectors wax and wane in the face of increased market volatility. When payroll and unemployment data forced a sharp decline in U.S. markets September 5, bargain hunters scrambled to grab consumer staples—a move that tempered early losses and prompted a rebound in equities.

Since its debut in October of 2006, PSL has experienced many of the pullbacks that have plagued the broader market. In 2008, however, PSL’s losses have been smaller and its subsequent rebound more substantial. According to Morningstar, PSL’s market return has outperformed the S&P 500 by more than 6% in the three months ending September 8, while the year-to-date return shows the fund outperforming the S&P by more than 10%. PSL’s returns have helped the fund to improve its standing on our PowerShares Momentum Tracker sector rankings from the 30th position at the end of July to the 12th position on September 10.

Designed to track the Dynamic Consumer Staples Sector Index, PSL comprises equities that demonstrate the greatest capital appreciation potential based on the index’s investment criteria: fundamental growth, stock valuation, investments and risk factors. This methodology allows for a broad range of equity size—large-cap equities composing 48% of the fund, mid-cap equities composing 25% and small-cap stocks making up the remaining 27%. This type of diversification is helpful to many investors who hope to cushion their sector exposure against the headlines of any one large-cap holding.

Despite the range of equity size, PSL’s portfolio is distributed conservatively among its 60 components. Rather than concentrating the fund’s exposure in the top components, PSL places less than 3% in any single equity. The fund’s top 10 components compose only 26% of the fund’s holdings—a fact that may be comforting to those who are wary of sharp moves in individual stocks. The combination of a relatively small number of holdings—just 60—and wide range of depth in allocation style could make the fund appropriate for investors looking to capture a broad swath of the consumer staples market.

PSL certainly owes some of its recent success to positive headlines from sector giants and its top components. Sysco (SYY), with a 2.61% allocation, is narrowly the fund’s largest component. The company, which distributes food and supplies to restaurants and institutions, recently settled a dispute involving the identity of grouper products sold throughout Florida. While the conflict presented a PR challenge for SYY, company brass used the incident to applaud inspection procedures in place at the company. SYY has continued to increase its stock dividends for the last 37 consecutive years, delivering an annual average return of 11.60% for its investors.

Colgate-Palmolive (CL), PSL’s No. 3 holding at 2.56%, has also used reinvested dividends to garner shareholders a 15.2% annual return. In addition to maintaining its dividend growth, CL has also made strides to adapt to “green” consumers and investors. CL’s $100 million acquisition of Tom’s of Maine in 2007 indicates the company’s willingness to adapt to the changing landscape of consumer staples.

Bargains in the consumer staples sector have made these companies attractive to individual investors as well as major public companies. On Wednesday, September 10, Altria (MO), the maker of cigarettes and other tobacco products, announced that they would be acquiring UST Inc. (UST) for $69.50 a share. While this news will certainly boost the sector—the impact of this acquisition was already reflected in the prices of both companies. On Friday September 5, The New York Times released a report that Altria had plans to acquire the smokeless tobacco firm. While Altria quickly dismissed the claim as pure speculation, the news helped to boost UST by $13.55, or 25%, to $67.55 and Altria 29 cents to $20.95. Altria in included among PSL’s holdings, so the acquisition of UST could help to strengthen PSL’s momentum and revive hopes of other major acquisitions during a trough in share prices.

While poor job numbers and lackluster consumer spending have left an indelible impact on already nervous investors, bargain prices may be available among the ticker symbols of many household brands. Despite market volatility and consumer skittishness, many components of the consumer staples sector—and PSL—have maintained their dividends even in difficult markets. This level of consistency and corporate management may help to boost PSL in the future and make the ETF a welcome addition for wary investors.

Comments

[WEBISKING:]

I have become financially independent owning consumer goods stocks,especially Altria.If you count its annual return with reinvested dividends included from 1957-2003 in jeremy siegel's legendary study Altria BLEW AWAY the field

2008 Sep 14 12:46 PM

[John in Pas...:]

How can you celebrate making money on other people's emphysema?!

2008 Oct 15 02:02 PM