H.J. Heinz’s late-March grab for Kraft Foods Group Inc (NASDAQ:KRFT) provided a rare bout of fireworks in the consumer staples sector, which is typically known for gathering two things: dividends and cobwebs.
But that same yawn-inspiring, headline-unfriendly goodness is exactly what makes State Street Global Advisors’ Consumer Staples SPDR (NYSE:XLP) one of the best sector holdings you can find.
Consumer Staples: You Need ‘Em
Consumer staples are just that — staples of everyday life. Groceries. Toilet paper. Medicine. Nothing here changes. On the flip side of the coin, you have consumer discretionary — restaurants, media, apparel companies, automobiles.
If you get a bonus today, most of that money is going into the consumer discretionary pie. You go out to eat a little more often, buy yourself some new clothes, go to the movies, what have you. On the other hand, if you lose your job today, you’re eating out less, and putting off as many purchases as you can, like new shirts or a new car.
But not much changes when it comes to consumer staples. If you see a bunch of new money, you might upgrade your toilet paper from the store brand to something a little more quilted, but you’re not going to buy a whole lot more of it. That said, if you lose your job … you’re still buying toilet paper.
Rich or poor, everybody poops.
That kind of stability and security is the calling card of XLP’s holdings. From the aforementioned P&G and Walmart to CVS Health Corp (NYSE:CVS) and Philip Morris International (NYSE:PM) — if you don’t consider cigarettes a “staple,” you’ve never known a smoker — XLP is a who’s who of companies whose goods will enjoy stable demand come hell or high water.
This is reflected in how consumer staples stocks and the XLP broadly behave. These companies just slowly churn along, trying to sell a little more of their product each year. Moreover, they tend to be cash cows — not really needing to spend that much on R&D or capital expenditures — so they typically throw off sizable dividends.
Granted, you’re not going to see stocks like this double in months, and the XLP is never going to explode for a quick trade. But for as slow and steady as this kind of investing is, the numbers — over time — are awfully eye-popping, even compared to sexier sectors like tech.
Just take a look at the total returns of the XLP compared to the S&P 500 — measured via the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) — and the other Select Sector SPDRs.
As you can see from the first two time frames — the dot-com bubble burst, and the 2007-09 market crash — XLP is about the safest place you can be if you choose to remain invested in stocks through thick and thin. Heck, thanks to dividends, XLP actually put out a positive return while Internet stocks crashed and burned to drag the broader markets lower in the early aughts.
But the real gem is XLP’s performance over the long haul. The period from March 24, 2000, through today includes the aforementioned pair of crashes, some flat times and our roaring multiyear recovery out of the Great Recession.
Even if you just looked at returns since the recovery, XLP wins, registering 132% including dividends since the 2009 lows vs. 125% for the SPY — and that’s with a much more modest decline to bounce out of.
This ETF is invested in one of the most basic principles of life: People need stuff. It’s simplistic, but it’s true.
“Slow and steady wins the race” is embarrassingly cliché, but in the case of XLP, it’s also the clean truth. The XLP and individual consumer staples stocks will rarely give you more than 3% or 4% in short order, but if you can afford a longer time frame, you should at least beat the broader market … and worry a lot less along the way.
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