During extended periods of market volatility and stress, consumers still have to buy items for daily consumption. While overall consumption might be reduced, investing in strategies that own shares in solid consumer products is a conservative bet that can generate consistent returns.
Owning shares in corporations that produce items such as soap, razor blades, shampoo, bleach and other everyday goods is a theme that numerous fund managers and ETF sponsors use to attract investor capital.
The iShares Dow Jones U.S. Consumer Goods ETF (NYSE:IYK) is, as it sounds, based on consumer goods stocks in the Dow Jones U.S. Consumer Goods Index. The top 10 holdings are:
- Procter & Gamble (NYSE:PG): 12.56%
- Coca-Cola (NYSE:KO): 10.78%
- Philip Morris International (NYSE:PM): 8.77%
- PepsiCo (NYSE:PEP): 7.01%
- Kraft (NYSE:KFT): 4.03%
- Altria Group (NYSE:MO): 4.02%
- Colgate-Palmolive (NYSE:CL): 3.24%
- Ford (NYSE:F): 2.81%
- Monsanto (NYSE:MON): 2.63%
- Kimberly-Clark Corp. (NYSE:KMB): 1.92%
This index ETF follows the benchmark of the reference group and delivers returns that are in line with the conservative nature of this subset of stocks. The concept is simple, and the performance has been in line with expectations.
The ProShares Ultra Consumer Services ETF (NYSE:UCC) is another strategy that seeks returns from consumer goods. However, this ETF applies leverage through the use of derivatives and will result in gains or losses two times what this portfolio would generate. The top 10 holdings of this ETF are:
- Wal-Mart (NYSE:WMT): 5.56%
- McDonald’s (NYSE:MCD): 5.20%
- Amazon (NASDAQ:AMZN): 4.26%
- Walt Disney Co. (NYSE:DIS): 4.10%
- Home Depot (NYSE:HD): 3.42%
- Comcast (NASDAQ:CMCSA): 3.08%
- CVS Caremark (NYSE:CVS): 3.02%
- Time Warner (NYSE:TWX): 2.38%
- DirectTV (NASDAQ:DTV): 2.31%
- Walgreen (NYSE:WAG): 2.30%
A word of caution: While the perception is that investing in a consumer services ETF is conservative, by no means is such philosophy found in this program. If you look under the hood of UCC, you might get a few “ah-hah” moments.
Lastly, meeting investor demand for such staple ideas is a recent creation, the Global X Food ETF (NYSE:EATX). This new ETF invests in food stocks on a global basis. Not only does this ETF lack a track record, the index that is its benchmark also has a short history. The ETF was released to the general public on May 31. Based on this — regardless of the top 10 holdings or the international exposure — investing money into an unproven program might be far more speculative than presented.
An investor should look at any investment program with a cautious eye. A program’s title is influenced more by marketing than its actual contents. The use of the terms “consumer goods,” “consumer services” or “consumer staples,” if taken without further due diligence, might lead to disappointment.
Jeffrey L. Stouffer is the principal of Mercantile Capital Group, a Herndon, Va.-based introducing broker registered with the CFTC and a member of the National Futures Association. He can be reached at mercapitalgroup@aol.com. He owns no direct or indirect holdings in any of these ETFs.
