Investors seeking a safe haven from recession or market swoons can often find solace in consumer staples stocks.
That’s because products such as groceries, toiletries and cleaning supplies are always in demand – even during a difficult economy. Consumer staples companies are attractive because they often pay healthy dividends. And their shares are typically less volatile when markets are rocked by trade disputes or other unforeseen events.
However, the risks to this sector range from rising interest rates to company-specific challenges. Food giant Kraft Heinz Co., once a stalwart, slashed its dividend this year as its stock tumbled sharply amid rising losses.
As exchange-traded funds (ETFs) offer an easy alternative to choosing stocks, we asked three ETF experts for their top picks in this defensive sector.
Daniel Straus, vice-president, ETFs and financial products research at National Bank Financial Inc., Toronto
Management expense ratio (MER): 0.18 per cent
This ETF owns U.S. consumer staples stocks chosen by a methodology that’s driven by artificial intelligence and more in tune with company changes, Mr. Straus says. BlackRock Inc., which develops and manages iShares ETFs, has developed a machine-learning and language-processing system that reads public filings to classify stocks. Companies could wind up in more than one sector.
Launched in March 2018, this active ETF holds 123 names, including predictable ones, such as Coca-Cola Co., McDonald’s Corp. and Starbucks Corp. Companies such as Shake Shack Inc. and Cheesecake Factory Inc. also make the list. This ETF offered partial downside protection during the sharp market sell-off from Oct. 1, 2018, to Dec. 24, 2018, Mr. Straus notes. The ETF lost 8 per cent versus 19 per cent for the S&P 500, including dividends. The fund’s dividend yield is about 3.3 per cent. The ETF’s fee, he adds, is at the lower end among peers.
MER: 0.41 per cent
This global consumer staples ETF – the only one listed in Canada – offers plenty of diversification for investors who have portfolios heavy in Canadian equities, Mr. Straus says. It holds 161 stocks from more than 20 countries. U.S. equities make up 50 per cent of assets while Canadian stocks are less than 2 per cent. Top names include Nestlé SA and Procter & Gamble Co.
From its inception in April, 2017, to May 31, 2019, the ETF’s annualized total return was 2.1 per cent versus 7.7 per cent for the MSCI World lndex in Canadian dollars. The ETF has a dividend yield of 2.1 per cent. However, this ETF has “displayed lower volatility, especially recently,” Mr. Straus adds. Because the fund trades infrequently, resulting in a wider bid-ask spread, investors should consider using limit orders, he says. The fee for this currency-hedged ETF is at the lower end versus Canadian-listed global-equity sector peers.
Alex Bryan, ETF and mutual fund analyst at Morningstar Inc., Chicago
The pick: Vanguard Consumer Staples ETF (VDC-A)
MER: 0.10 per cent
This ETF’s appeal is its low fee and diversification from owning smaller to larger company stocks, Mr. Bryan says. Its 92 holdings are weighted by market value. They include predictable names, such as Procter & Gamble and Coca Cola as well as others, such as Boston Beer Co.
Although the ETF tilts toward larger firms, they are also the more stable and profitable companies, he says. About 65 per cent of its assets, however, are in the 10 largest names, which could have an impact should any of these stocks underperform, he says.
The ETF returned an annualized 12.3 per cent for the 10 years ended May 31, 2019, versus the 13.9-per-cent gain for the S&P 500, including dividends. The ETF, which has a 2.6-per-cent dividend yield, lagged slightly owing to the strong U.S. market, Mr. Bryan adds. The risk, he says, is that consumer staples is a bet on a sector that can still underperform.
MER: 0.40 per cent
The equal weighting of the consumer staples stocks in this ETF reduces the risk from a company that may be struggling, Mr. Bryan says. The fund holds the 33 names from this sector in the S&P 500, but “you don’t really know what is going to happen with individual stocks,” he adds. That’s because with the rebalancing that takes place quarterly, the weighting of each name is just more than 3 per cent, he says.
The downside of this ETF is it lacks diversification from smaller firms because it only has exposure to large-company stocks in that index, he says. For the 10 years ended May 31, 2019, the fund returned an annualized 14.1 per cent versus 13.9 per cent for the S&P 500, including dividends. However, the ETF has been less volatile than the broader market, he notes. It also has a dividend yield of 2.3 per cent. The ETF’s fee, he says, is more expensive than some of its peers.
Edmund Fernandez, ETF and mutual fund analyst at Industrial Alliance Securities Inc., Toronto
MER: 0.08 per cent
This ETF will appeal to cost-conscious investors because it’s the cheapest U.S. consumer staples ETF, says Mr. Fernandez: “With trade tensions front and centre today and the volatility that comes with it, consumer staples companies could benefit … given its perceived relative stability.”
Launched in 2013, this ETF has produced an annualized return of 4.5 per cent for three years ended May 31, 2019, and 6.8 per cent over five years. The ETF, which owns 89 stocks and has a dividend yield of 2.6 per cent, has lagged the S&P 500 over those periods, but that’s because of the “record-setting bull market that we are currently in,” he notes.
A risk comes from concentration in a few names, he says. Procter & Gamble, Coca-Cola and Pepsico Inc. make up about 35 per cent of the portfolio. Although the consumer-staples sector could benefit as a safe haven during times of turmoil, it “would not be immune to a bear market,” he adds.
MER: 0.47 per cent
This ETF is suitable for investors seeking exposure to consumer staples stocks around the world, says Mr. Fernandez. U.S. stocks make up more than half of the assets, with the rest mainly in Europe and Japan. Nestle is the largest name with a 9-per-cent weighting, but the top 10 make up 47 per cent of the assets, he notes.
Launched in 2006, this ETF has returned an annualized 10.6 per cent for the 10 years ended May 31, 2019. It has lagged its U.S.-focused peers because of the strong U.S. market, Mr. Fernandez adds. Because stock valuations in Europe and Japan are reasonable, “growth prospects for the fund look good.” The ETF has a dividend yield of 2.6 per cent. Despite its defensive nature, the ETF would not be immune to a bear market, he adds. Its fee is higher than other consumer staples ETFs, but the benefit is its international diversification, he adds.