ETF Monkey Focus: Consumer Staples ETFs

Summary

• Every investor desirous of developing an ETF-based portfolio does well to start by selecting a few core holdings.
• To this core, however, investors may wish to add specific exposure to certain sectors of the market. Those with a defensive bent may do well to consider Consumer Staples.
• In this article, I will evaluate three competitors in the Consumer Staples sector that meet the ETF Monkey Focus criteria.

Based on that first bullet point in the summary, in previous articles in the ETF Monkey Focus series, I have featured U.S. Total Market ETFs, U.S. Broad-Market Bond ETFs and International Total Market ETFs, as well as sub-categories of some of these, such as S&P 500 ETFs and Emerging Market ETFs.

Here is a handy index to all ETFs covered to-date, including a link to the first article in the series, which highlights the criteria I used for ETFs to be included as well as common features that I hope will make these articles very useful tools for an investor as they begin their research. This article brings the total to 30 ETFs I have covered in this series.

With their core intact, however, investors may wish to add exposure to specific sectors of the market, based on their personal needs and risk profile. I plan to focus the next few articles in the series on ETFs that allow investors to do this.

What Are Consumer Staples?

Generally, stocks specifically involving the consumer are categorized as either Consumer Staples (sometimes referred to as Consumer Non-Cyclicals) or Consumer Discretionary (sometimes referred to as Consumer Cyclicals).

In brief, Consumer Staples is the term given to products, and the companies which produce these, that are considered essential, such as food, beverages, household items, and tobacco. These are the sorts of items that people need to function each and every day and therefore are generally unable to cut out of their budget even in bad times. Examples of companies in this sector are Procter & Gamble (PG), Colgate-Palmolive (CL) and General Mills (GIS). This also explains the term non-cyclicals, as these products are required regardless of the ups and downs of economic cycles.

In contrast, Consumer Discretionary is the term given to products, and the companies which produce these, that are considered non-essential, such as apparel, entertainment and leisure, and travel. These are the sorts of items that people find desirable, but are often willing to cut out of their budget during bad times in favor of conserving cash. Examples of companies in this sector are Nike (NKE), Marriott International (MAR) and The Walt Disney Company (DIS). This also explains the term cyclicals, as these products tend to be quite directly affected by the ups and downs of economic cycles.

Why Include Consumer Staples In Your Portfolio?

Why might you want to include a specific allocation to Consumer Staples in your portfolio? They say "a picture is worth a thousand words." With that in mind, take a look at this picture:

^IXR data by YCharts

The blue line in the above picture represents an AMEX consumer staples index, the orange line the S&P 500. Additionally, the area shaded in grey represents recessions. Forgetting the relative outperformance of the consumer staples sector for a minute, focus on how it performed during that recessionary period. From this picture, you can likely draw the accurate conclusion that, in addition to solid overall performance, consumer staples can be referred to as a defensive sector; one that will protect your portfolio during periods of economic turmoil.

The Competitors

With that basic introduction out of the way, let's take a look at three Consumer Staples ETFs. Each are worthy competitors. And, they may be even more worthy if your brokerage offers commission-free trading in these ETFs, particularly if one of your goals is to invest regularly and in small increments.

In the following table, you will find key high-level profile and portfolio information.

	FSTA	VDC	XLP
ETF Name	Fidelity MSCI Consumer Staples Index ETF	Vanguard Consumer Staples ETF	Consumer Staples Select Sector SPDR Fund
Assets Under Management (AUM)	$268.1 Million	$3.6 Billion	$8.73 Billion
Index Tracked	MSCI USA IMI Consumer Staples Index	MSCI US IMI Consumer Staples 25/50 Index	Consumer Staples Select Sector Index
Number of Holdings	104	103	39
Weighting of Top-10 Holdings	62.24%	59.00%	63.21%
30-Day SEC Yield	2.47%	2.41%	2.42%
Expense Ratio	.084%	.10%	.14%
Average Spread	.12%	.03%	.02%

Click to enlarge

Notes on terms that may be unclear:

• 30-Day SEC Yield refers to the dividend income available to shareholders minus the fund's expenses for the most recent 30-day period. This measurement was introduced by the SEC to ensure fair comparative reporting between funds.
• Average Spread refers to the average price difference between the price buyers were willing to pay and sellers were willing to sell, averaged over the latest 45 days.

Here is a brief overview of each of the ETFs in alphabetical order by ticker symbol.

Fidelity MCSI Consumer Staples Index ETF

With an inception date of 10/21/13 and a relatively small AUM of $268.1 million, FSTA is far newer, and smaller than either of its competitors in this segment. Eager to be competitive in the space, Fidelity offers a segment-leading .084% expense ratio. Additionally, Fidelity clients can trade this ETF commission-free, making it perhaps even more attractive for this subset of investors.

FSTA tracks basically the same index as Vanguard's VDC, as can quickly be seen from comparing the Top-10 holdings and even its complete list of holdings. I will feature this index in more detail in my review of VDC in the next section. Due to its far smaller size, at .12% FSTA carries a significantly higher average trading spread than either VDC or XLP. It must be noted that this difference could easily offset the benefit from the slightly lower expense ratio.

Here is a look at FSTA's exposure breakdown:

Next, its Top 10 holdings:

Vanguard Consumer Staples ETF

With an inception date of 1/26/04 and AUM of $3.6 billion, VDC is a premier player in this sector. While, at .10%, its expense ratio is slightly higher than segment leader FSTA, it offers superior tradeability, with an average spread of .03%.

VDC tracks the MSCI US Investable Market Consumer Staples 25/50 Index. The index is comprised of a benchmark of large-, mid-, and small-cap U.S. stocks in the consumer staples sector, as classified under the Global Industry Classification Standard (GICS). Please note that this index pulls from a very broad total basket of stocks, as this differs somewhat from the index used by XLP, which will be discussed in the next section.

While these are sector ETFs, and thus their Top 10 holdings comprise a significant percentage of the total, you will notice that, at 59.00%, this ETF is the least concentrated in our comparison. In other words, it offers slightly greater diversification than either of its competitors.

Here is a look at VDC's exposure breakdown:

Next, its Top 10 holdings:

Consumer Staples Select Sector SPDR Fund

With an inception date of 12/16/98 and AUM of $8.73 billion, XLP's history traces back to some of the earliest days of ETFs and it remains a truly venerable player in this sector. At .14%, its expense ratio is the highest in our comparison. At the same time, as evidenced by its average spread of .02%, its liquidity and tradeability are the class of this sector.

While the other two ETFs track essentially the same index, XLP tracks the Consumer Staples Select Sector Index. The key difference between this index and the MSCI index used by XLP's two competitors is that this index starts with stocks in the S&P 500, as opposed to the broader market. As a result, it only contains 37 stocks as opposed to over 100 in the MCSI index. As a result, XLP is more concentrated than its two competitors. Still, if you compare its Top 10 list, you will find that it is very consistent in this area. If you are looking to invest in this sector, but like the idea of sticking with large-cap stocks, this may well be the ETF for you.

Here is a look at XLP's exposure breakdown:

Next, its Top 10 holdings:

Summary and Conclusion

Finally, here is a chart of returns since 10/21/13, FSTA's inception date, for all three ETFs for your review.

FSTA data by YCharts

As I put everything together, my conclusion is that I would likely select either VDC or XLP, depending on whether you value VDC's greater level of diversification or like XLP's concentrated focus on large-cap stocks. While FSTA replicates the same index as VDC and has a slightly lower expense ratio, I would prefer VDC's size, track record, and superior tradeability. However, if you are a Fidelity brokerage client, and particularly if you are looking to make regular incremental investments. FSTA might be the choice for you.

Until next time, I bid you...

Happy investing!

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Disclosure: I/we 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.