Consumer Staples Sector Snapshot

An introduction to the Consumer Staples Select Sector SPDR Index (XLP)

Welcome back to another edition of our Sector Snapshot Series, where we dive into the different sectors represented by the 11 Select Sector SPDR ETFs. Together, these ETFs encompass all the constituents of the S&P 500. As some of the oldest and largest sector ETFs available in the market, they share key features, including low expense ratios of 0.09%, excellent liquidity, and market-cap-weighted structures.

Among these, the Consumer Staples Select Sector SPDR (XLP) has a market value just below $17 billion – mid-sized considering the $17.5 billion median across other sectors. XLP is fairly concentrated, holding just 38 stocks, with its top holding accounting for 14% of the fund right in line with the median of 14% among the other sectors. Its top 10 holdings make up 73% of the fund (vs. a 65% median). 

A look inside 

XLP is spread out across six sub-sectors: 

• Consumer Staples Distribution & Retail (33%)

• Household Products (22%)

• Beverages (19%)

• Food Products (14%)

• Tobacco (9%)

• Personal Care Products (3%)

Top 10 XLP Holdings

The Consumer Staples sector tends to be relatively unaffected by economic cycles since it offers inelastic products, particularly those related to basic human needs, which are consumed consistently regardless of economic conditions. This stability has resulted in the XLP ETF significantly underperforming the S&P 500 over the past decade, with total returns of 139% compared to the S&P 500's 236%. 

A key advantage of XLP is its resilience during market downturns, such as the 2022 bear market. However, the fund's performance has trailed the broader market in the current bull market, as observed in the chart below. The defensiveness of the sector is evident in the fund's beta, which has averaged below 0.6 over the last five years compared to the broader S&P 500.

XLP Performance Versus S&P 500 - Last Two Years

XLP’s growth rate is slowing down 

As previously mentioned, the consumer staples sector is not known for rapid growth. Its annual earnings growth rate typically falls within the low- to mid-single digits. The chart below illustrates the average short-term earnings growth (STEG, calculated as the 1-year forward consensus earnings growth) and long-term earnings growth (LTEG, the average 5-year forward consensus earnings growth) rates for consumer staples stocks in the S&P 500 index since 1996.

As shown in the chart, both LTEG and STEG rates have been on a downward trend over the past three decades. The LTEG rate has decreased from a peak of about 15% in 1997 to below 8% today. In contrast, the LTEG for the overall S&P 500 index has consistently remained above 10% over the past 40 years and currently stands at 17.5%.

S&P 500 Consumer Staples - Forward STEG & LTEG (%, annual rate)

In conclusion, if it seems that the risks of recession are growing as the Federal Reserve maintains a “higher for longer” interest rate policy, XLP might present a defensive choice. Businesses in the consumer staples space also tend to see relatively steady cash flows, since consumers have a recurring need for the products sold by these companies. Steady cash flows support dividend payments, and XLP offers a dividend yield of 2.5%, above the median from all sectors (1.6%).

^{_{The Street Sheet (SS) and its principals are not affiliated with any of the assets mentioned above or in this article. The Street Sheet and its principals do not own any of the stocks mentioned in this email and/or web post. The Street Sheet is a research service not owned or managed by registered brokers and therefore this site does not make any investment recommendations. The information provided in this newsletter is not guaranteed as to the accuracy or completeness. Each user of SS chooses to do trades at their sole discretion and risk. SS is not responsible for gains/losses that may result in the trading of these securities. This newsletter includes paid advertisements. The source of all third-party content in which SS receives some sort of compensation is clearly and prominently identified herein as "ad", "Sponsored", or “Together With”. Although we have sent you these advertisements, SS does not specifically endorse any third-party product nor is it responsible for the content, the accuracy, or the completeness of the advertisement or the experience with the third-party advertiser. Furthermore, we make no guarantee or warranty about what is in the advertisement. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. This communication from The Street Sheet is for informational purposes only. It is not intended to serve as a recommendation to buy, sell, or hold any security and is not an offer or sale of a security. Information contained within should not be perceived as a research report and is not intended to serve as the basis for any investment decision. Any third-party views reflected herein do not reflect the opinion of The Street Sheet. All investments involve risk and the past performance of a security does not guarantee future results or returns. There is always the potential for financial loss when investing in securities or other financial products. The information contained in this newsletter is subject to change without notice, and we do not undertake any obligation to update it. Readers are encouraged to conduct their own research and due diligence and seek advice from licensed professionals regarding their specific financial needs and circumstances. By reading this newsletter, you agree to hold us harmless from any and all losses, liabilities, costs, or expenses arising from your use or reliance on the information provided. There is no warranty as to the accuracy or completeness of the factual matters included in any advertisement or sponsored content in the newsletter. You have not performed any research on any entity, or its business, that advertises or submits any sponsored content. The Street Sheet is reader-supported. When you buy through links on our site, we may earn an commission.}}