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Michael Le
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I am a Economics Student at Portland State University. I am also the President and Market Research Analyst of the PDX Investment Club which has changed to the PDX Financial Literacy Group as of 7/2014. I am interested in Heterodox based crisis theory, and market/economic cycles. I hope to pursue... More
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  • XLP: An All-Seasons ETF.  0 comments
    Aug 18, 2014 12:28 PM | about stocks: XLP

    XLP is a SPDR ETF that represents the consumer staples sector. This sector faired the financial crisis in 2008 extremely well, falling from $30.29 on 9/19/08 to about $19.31 on3/06/09. This represents a decline in price of about 36.25%. This sounds pretty bad, but compared to the S&P 500, XLP did relatively well. During that time,SPY, the ETF that tracks the S&P 500, fell 47.58%.

    Consumer staples are simply necessities to the majority of living human beings. Some examples include, but are not limited to, food, beverages, and household items. Consumer staples generally do well because given bad or good household financial health or economic health in general, consumers need to purchase staples in order to survive. Consumer staples also have inelastic pricing power which could be a huge advantage to staples in they were to all raise prices or simply keep up with inflation in an environment with stagnate wages such as they one we are experiencing now.

    Although XLP as underperformed the S&P 500 YTD, it has had instances where it did outperform the S&P Index. This spread between YTD returns is only a good entry to get into XLP, but as I state further down, there is an ideal time to enter into XLP.

    (click to enlarge)

    In the long-run since inception, XLP has actually outperformed the S&P 500.

    (click to enlarge)

    Not only is a this a downturn resistant stock, but one that investors are looking into as the markets become riskier, and less predictable given the federal reserve soon-to-be rate hike, and geopolitical crises. On the 13th of August, there was a huge inflow into this ETF which represented a 18.4% increase from the previous week.

    In addition, the second quarter of this year has seen about 1.01 billion dollars in fund inflows, compared to Q2 of 2013, and 2013, which had 415 million, and 112 million net inflow respectively. As we can see from the above comparison, as the bull market progressed throughout the years, investors have become more and more attached to XLP, and its non-cyclical nature.

    Furthermore, with the strength of the rising dollar, many companies are being hurt due to currency conversions; however, staples don't have much to worry about because a majority of there production and sales happen in the United States.

    Technical Risk and Return

    If we compare XLP to SPY given the last ten years ending in 2013, we find that XLP has more favorable Sharpe ratio, higher CAGR and a more favorable Sortino ratio as well. XLP: less risk, more reward.

      2003-2013 CAGR StdDev Max. Drawdown Sharpe Sortino
    XLP SPDR Consumer Staples Select Sector Fund ETF 9.81% 10.13% -28.12% 0.87 0.87
    SPY SPDR S&P 500 ETF 9.09% 18.68% -50.79% 0.5 0.46

    Recommended Entry

    The best entry for a short term trade would be in the month of January, and a longer term trade would be June. Recommended exits from either trade is discussed below.

    (click to enlarge)

    Recommended Exit

    Futhermore, out of from 2010 to 2014, August has seen 60% beat by XLP relative to SPY (ETF that tracks the S&P 500). The best time, as seen by the outperformance graph below would be in March or April, when the XLP outperforms the SPY. Also noted is that the above graph shows that in the last 4 years, XLP has closed the month higher 100% of the time in February and March.

    (click to enlarge)


    XLP has faired well in financial crises, and could be a beneficial defensive non-cyclical holding in your portfolio, but as stated, there are entries and exits that may be better than others.

    Disclosure: The author is long XLP.

    Stocks: XLP
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