iShares Global Consumer Staples ETF: Play Defense


  • The current environment calls for capital preservation.
  • The 10Y/2Y yield spread signals higher recession risk.
  • KXI’s low standard deviation profile and pricing power could be useful in this environment.
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The cost of performing well in bad times can be relative underperformance in good times. - Seth Klarman

The iShares Global Consumer Staples ETF (NYSEARCA:KXI) is an ETF designed to measure the performance of the 92 global stocks belonging to the defensive- consumer staples sector. In this article, I will lay out some of the reasons why this may be a useful product to own at this juncture.

An environment that calls for defensive positioning

If you're a subscriber of The Lead-Lag Report, you'd note that I've been urging investors to start taking on some form of defensive posturing for a while now. Currently, the financial markets are experiencing the longest bout of volatility since the end of 2020 and what makes things even trickier is that you also have a more pronounced drawdown underway.

Then you also have the Fed which is trapped between trying to slow inflation, even as recession risks gradually creep up. The futures market continues to price in anything between five to six 25bps rate hikes by the year-end; I believe we could be in a position where the Fed overshoots and tightens too quickly.

Persistently high inflation is something that has dominated the financial news for months now (for instance, most recently, the global food price index hit record highs of 140.7, up 24% annually and 5% sequentially) but the latest geopolitical tensions between Ukraine and Russia have put another spanner in the works. This region plays a crucial role in the supply of items such as soybean, wheat, corn, energy, amongst others. As noted recently in The Lead-Lag Report, the speed with which this landscape has changed, coupled with tighter monetary conditions on the anvil means we could well be in for a deflationary shock.



In fact the bond markets continue to signal a rather worrying outlook; something I study very closely is the 10Y/2Y Treasury yield spread. For context do note that every time the spread has turned negative, we've faced a recession shortly after. We're not quite there yet but currently, the spread is closer to 30bps and continues to shrink implying growing recession risk.


When you have high-growth landscapes such as tech and discretionary on offer, owning something like the staples sector may not necessarily be the most exciting place to park your funds, particularly when you consider that the expected earnings growth rate of KXI - both in the short-term and the long-term- is only expected to be in single-digit terms (meanwhile the broader markets as represented by the SPY is expected to deliver 20% earnings growth in the short-term and 14% over the long term).

Growth estimates


Having said that, if you've followed The Lead-Lag Report over the years, you'd note that one recurring theme that I've always harped on about is the need to inculcate this perverse goal of owning a bunch of stocks, or a sector, that you loathe. I believe the staples sector is something that would fit the bill for quite a few young investors, as things can be quite staid and uneventful here.



I say this because newbie investors often tend to get obsessed with the prospect of upside potential whilst paying scant regard to downside risks. With luck on your side, you can get away with this type of mentality on an occasion or two, but over the long term, this will inevitably come back to bite you. Staple stocks may not quite be the high-flyers that you need when all is hunky-dory, but when the tide turns, it tends to serve as a useful lifeboat for your hard-earned wealth.

Basically, in an environment such as this, the more prudent thing would be to focus on ways to minimize losses rather than generate gains. Sustained wealth generation is an art, where you need to pivot between offense and defense across different risk environments; KXI with an annualized volatility of only 10% which is only half as much as the asset class median of over 20% will likely be less immune to these wild market gyrations. KXI's volatility managing credentials are being reflected in the relative differential of its AUM with that of the broader markets; on a YTD basis, KXI's AUM has been only compressed by 6%, half as much as the drawdowns seen with the SPY.



The other benefit that you get with the staples sector is its innate ability to absorb high raw material costs and pass this on to customers without breaking sweat. Most of the products that the staples sector produces and sells are structurally quite inelastic, and consumers reluctantly go with the flow. So, even though staples may not quite live up to the high-growth potential narrative of the tech sector, you're at least likely to see pricing power and margin protection during this difficult time. Surely that too should count for something?

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This article was written by

Michael A. Gayed, CFA profile picture
Anticipate Corrections and Volatility with Award Winning Research
5x Dow & Founders Award Winner. Risk-On/Off $RORO, Junk-On/Off $JOJO, & $ATACX Portfolio Manager. Anticipate Crashes, Corrections, & Bear Markets With The Lead-Lag Report. Sign Up For 2 Weeks Free.

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.

Additional disclosure: This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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