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May 1, 2024

Insights From ETFs - Consumer Staples ETFs

by Michael Huynh

Why do investors love consumer staples?

Consumer Staples is the industry sector that refers to companies that sell essential products to consumers, things that people consume on a day-to-day basis including foods, beverages, household goods, personal care products, etc. Due to the predictability and resiliency of the sector even during economic downturns, no matter what happens on the macro level, individuals still need to buy groceries and other essentials. As a result, the Consumer Staples sector has been one of the preferred industries by income investors, and the industry is comprised of companies that have been around for decades and have created tremendous shareholder wealth over the years.

A few key characteristics of consumer staples that make the sector attractive.

1. Stable Demand:

The investing community refers to Consumer Staples as the “defensive sector”, since the industry has stable demand because it sells things that meet people’s basic needs. As a result, these companies can manage decent performance, even when the economy is struggling.

2. Dividend Income:

Any consumer staples companies are known for a solid track record of consistently raising dividends for their shareholders. These dividends create a steady stream of income, which also helps these companies’ share prices fluctuate much less than the general market, especially during periods of high volatility. These factors make this sector highly attractive for income-seeking investors.

3. Brand Loyalty:

Brand names play a crucial role in the consumer staples sector. It is not easy to convince consumers to switch their habits and try something new once they have been a consumers of certain brands for a while. Therefore, companies with well-established brands have established meaningful customer loyalty, which translates into high recurring revenue streams and significant pricing power.

4. Marketing Budgets:

Large consumer staples companies have large marketing budgets relative to other small companies or start-ups, allowing these companies to create certain barriers to entry, as it requires a meaningful amount of upfront capital to compete, which is expensive for start-ups. That said, with the revolution of e-commerce and digital marketing, this “moat” has somewhat deteriorated in recent years.

5. Competitive Advantage:

Competition used to be favourable for these large consumer goods companies, because due to their scale, these companies tended to consolidate the industry over time, which gives consumers only a few viable options. That said, the competitive landscape has been intensified, since large retailers and e-commerce giants started to produce their own private labels at much lower margins with on-par quality.

Overall, with superior economics of predictable growth and solid pricing power, the Consumer Staples sector is considered an above-average industry that should perform well against the indices. Investors’ portfolio can perform well by having a decent allocation to the sector to balance their portfolios, which is especially valuable in times of economic downturn. Investors can approach the sector by owning well-diversified, low-cost Exchange-Traded Funds (ETF) of consumer staples names:

iShares S&P/TSX Capped Consumer Staples Index ETF (XST)

The Horizons Laddered Canadian Preferred Share Index ETF (XST) seeks to replicate the performance of the S&P/TSX Capped Consumer Staples Index net of expenses. The ETF inception date was April 12, 2011, and XST currently has around $207 million in assets under management (AUM), charges a Management Expense Ratio (MER) of 0.61% and   posted a twelve-month trailing yield of 0.86% and the average Price/Earnings ratio of 18.3x.

The ETF’s performance since inception has been quite strong, with around 13.7% annualized, well ahead of the general TSX market. XST’s portfolio is heavily concentrated in the top five holdings accounting for around 80% of the portfolio. The two largest positions of the portfolio include Loblaw (L) and Alimentation Couche-Tard (ATD) contributing 23.3% and 23.2%, respectively, the other three names in the top five include Metro (MRU), George Weston (WN) and Saputo (SAP). In terms of sub-sector, XST is dominated by food retail (82.6%) and packaged food (11.9%).

iShares Global Consumer Staples ETF (KXI)

iShares Global Consumer Staples ETF (KXI) is a global ETF that provides exposure to companies that produce essential products including food and household items. The ETF seeks to track the performance of an index composed of global equities in the consumer staples sector. KXI was established back in September 2006, and the ETF has achieved an annualized return of 7.5% since inception. KXI has amassed a total AUM of around $860 million, with a MER fee 0.41%, which is fair.

The fund has approximately 100 holdings with an average yield of 2.97% and a Price/Earnings of 22.4x. The top five securities include large, well-capitalized names with solid franchises including Procter & Gamble (PG), Costco Wholesale (COST), Nestle SA (NESN), Pepsico (PEP), and Coca-Cola (KO).

PSCC Invesco S&P Small-Cap Consumer Staples ETF (PSCC)

PSCC Invesco S&P Small-Cap Consumer Staples ETF (PSCC) seeks to invest at least 90% of its assets in small-cap U.S consumer staples with non-cyclical characteristics including beverage, tobacco, and non-discretionary retail. The ETF provides investors with exposure to emerging names in the Consumer Staples sector, which is interesting due to its long runway for growth.

The portfolio’s average market cap is around $3.3 billion. PSCC currently has around $82 million in AUM, which is small due to its niche approach, an MER of 0.29%, a twelve-month trailing yield of 2.3%%. PSCC’s portfolio valuation is quite reasonable with an average Forward Price/Earnings ratio of 20.2x and a healthy return on equity profile of approximately 19%.

The ETF’s performance since inception has been quite solid around 13%, beating the overall S&P Small-Cap 600 Index. PSCC’s portfolio is broadly diversified. The five largest positions of the portfolio include WD-40 (WDFC), Simply Good Foods (SMPL), Cal-Maine Foods (CALM), Inter Parfums (IPAR), and J&J Snack Foods (JJSF). Most of these companies provide critical products for consumers, which is quite recession-proof in nature.

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Disclosure: Authors, directors, partners and/or officers of 5i Research have a financial or other interest in XIT and ZRE.