- Growth loses to value, we show you one longer-term case study.
- The staples sector is perfect for this as it is about the hardest one to get excited about, growth wise.
- We use two sector ETFs and tell you which one we would choose if we had to.
- I do much more than just articles at Conservative Income Portfolio: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
Cycles. We have them in the laundry room and we have them in biochemistry. We also have them in the market. Unfortunately, people forget that. Consider this article as a reminder. In this one we are going to do a few things. First, we will discuss what is a good way to measure performance of a sector or fund. Second, we will go over two staples sector ETFs and tell you how the staples sector crushed the Nasdaq 100 (referred to further as the growth sector) since March 2000. Third, we will tell you why this is happening again today and finally we tell you why the protagonist should be considered for that victory.
Returns are best appreciated over a full cycle. This allows a full course of market evaluation and also allows time for plenty of fads to draw money from the last sucker before going to zero. There are other reasons as well. Some sectors are stronger in up markets while others more defiant when the tides turn. Assessing in just one aspect, such as during the latest bull market, leaves the investor vulnerable to recency bias.
This full cycle return assessment should be done either peak to peak or trough to trough. That is take returns from one peak to the next or from one trough to the next. One can of course do both. Here, it is important to not get too tied down in the minutiae. General broader market peaks as represented by S&P 500 (SPY) works well for this, even though individual sectors peak a little before or after. If there is a difference, you will see it without a need to massage the data.
Staples ETFs & Staples Crushing Growth
Vanguard Consumer Staples ETF (NYSEARCA:VDC) is an ultralow expense fund with fees of just 10 basis points and a 5-star rating from Morning Star. The fund is top heavy and the top 10 make up a huge chunk of the ETF.
Despite being top heavy, the fund carries 99 holdings.
This is one reason we are going to gravitate towards VDC, even though we will use another very similar ETF to run some comparisons.
The Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP) is very similar to VDC and a cursory glance at the top 10 holdings might give you Deja Vu.
But the fund only has 32 total holdings and here is where we think VDC has a slight edge.
We can see above how closely XLP and VDC have tracked each other since the latter came into existence. With that visual in mind, we can use XLP data as it predates VDC, for the purposes of this exercise. Let us now get on with the task of showing how staples crushed the Invesco Nasdaq 100 ETF (QQQ), aka growth.
In the first cycle, XLP beat QQQ by a resounding 100%.
Note that we are starting here from the exact Nasdaq peak to the October 2007 peak before the global financial crisis.
The second cycle, XLP got slammed with QQQ generating a big advantage.
One deceptive aspect of that chart is that it does not show you the full impact of the previous cycle underperformance. You cannot just add up percentages over two cycles. Over the last 21 years, staples have left QQQ so far behind, even after this monstrous challenge of every valuation metric, that it is not funny.
Why Did This Happen?
Money is made in bear markets and not in bull markets. When you lose the least, you make it very hard for the other sector/fund to catch up. You can see above that QQQ has been trying really hard. We have multiple stocks trading at valuations that one could not have fathomed, ever. Yet, the ETF has no chance of overcoming this gap. Note that we compared XLP to QQQ above as a proxy for growth. If we look at Technology Select Sector SPDR (XLK) the results are even better for XLP.
If we use Ryan Jacob's Internet Fund, the hottest growth fund of the Nasdaq bubble phase, as the growth proxy, you better sit down before you look at the results.
What Does The Next Cycle Look Like?
Investors heady from the recent gains in growth indices might argue "yeah but, you did not look at the last cycle before the internet." While we don't claim to have looked at every possible statistic that exists, there are some broad brush strokes that one can recognize. For example, information technology is generally a bad sector over very long periods. Note that this one goes back to 1974.
Source: Kailash Capital
Technology is inherently deflationary and price competition always wins, especially when investors are ready to finance growth despite losses.
The next cycle is likely to be very similar to what we saw from the Nasdaq in 2000. Certainly, valuations look right in the ballpark.
Source: Kailash Capital-2
The staples sector continues to be hated. Consumer Staples to Consumer Discretionary Sector (XLY) ratio is much lower than even what we saw at the Dot Com bubble peak.
The only question remains is when will this turn. As we have seen, currently only the generals are holding the frontlines and they are likely to fall soon.
VDC has lower fees than XLP and is less concentrated, giving you 99 holdings instead of just 32. Either fund though, is fine to invest for the next decade as the growth bubble fully implodes and everyone slowly gets with the "last time was not different" bandwagon. We prefer individual trades, but are finding more to like in the consumer staples and healthcare sectors than most others today.
Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.
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This article was written by
Trapping Value is a team of analysts with over 40 years of combined experience generating options income while also focusing on capital preservation. They run the investing group Conservative Income Portfolio in partnership with Preferred Stock Trader. The investing group features two income-generating portfolios and a bond ladder.
Trapping Value provides Covered Calls, and Preferred Stock Trader covers Fixed Income. The Covered Calls Portfolio is designed to provide lower volatility income investing with a focus on capital preservation. The fixed income portfolio focuses on buying securities with high income potential and heavy undervaluation relative to comparatives. Learn more.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.
We have some long positions on Staples Sector ETF components and some short positions on QQQ components.
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