If you’re expecting the return of volatility and downside risk, the Consumer Staples SPDR ETF (NYSEARCA:XLP) is a fund that should be on your radar for one of the best ETFs for 2020.
Along with the historic recovery for stock prices, the story of irrational markets will certainly go down in history as a prevailing theme describing the second quarter of 2020. But is the market really irrational? Can prices go higher from here? The short answer is yes, but don’t bet the farm on it.
This may bring to mind a quote from John Maynard Keynes: “The market can remain irrational longer than you can remain solvent.” In other words, don’t bet against the crowd. Similarly, wise investors and traders will keep in mind the old mantra, “Don’t fight the Fed.” However, crowds get tired and Federal Reserve policy changes … eventually.
Fortunately, making a classic defensive move with a fund like XLP is not betting against the crowd or fighting the Fed. In a market filled with uncertainty and increasing downside risk, investing in consumer staples stocks can be a way of having your cake and eating it, too. You can still participate in the upside while minimizing risk on the downside.
Why Invest in the Consumer Staples Sector?
Also called non-discretionary stocks, the consumer staples sector includes companies that sell products that consumers need, no matter which direction the economy is headed. For this reason, consumer staples stocks are considered defensive because they tend to maintain price stability, compared to the broader market, during times of uncertainty and economic recession.
Consumer staples products include food, beverages and tobacco products, household products. personal products and drugs. Top holdings in XLP include Proctor & Gamble (NYSE:PG), PepsiCo (NASDAQ:PEP), Coca-Cola (NYSE:KO) and Walmart (NYSE:WMT).
Best ETFs for 2020: The Case for XLP in the Second Half
Making a case for XLP in the second half of 2020 is making a case for stocks in the consumer staples sector. While this doesn’t mean you’re betting against the market or economy, it does mean that you expect a return to volatility and downside risk.
Here’s what could contribute to volatility and downside risk for the remainder of 2020:
- Retailers have cut costs, leaving them prepared for limited pricing power and slower growth.
- Grim milestones on worldwide coronavirus numbers, such as 10 million cases and 500,000 deaths, remind investors that the novel coronavirus is here for the foreseeable future.
- As U.S. states see new peaks in Covid-19 cases, some enter Phase 3, while others are restricting or shutting down restaurants and bars.
- While the unemployment rate got a surprise boost in May, 13.3% is still a terrible number. For reference, the average unemployment rate during the Great Recession was 10%.
- The $600 unemployment boost is set to end July 31.
- Uncertainty and political divisiveness will ramp up and add to market volatility as the presidential election approaches. Any surprises could have potential to place downside pressure on stocks.
Bottom Line on XLP and Consumer Staples in 2020
Keep in mind that buying consumer staples does not mean that you’re betting against the U.S. economy. It means you want to at least participate in some of the upside potential but avoid the worst of the downside, should volatility or even panic selling return to the market.
Also, remember that investing in sectors should be part of a broader investment strategy. For example, an investor may use a fund like XLP as a core holding and build around that with satellite holdings for diversity. This makes XLP one of the best ETFs to buy in 2020, depending on your investment approach.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. However, he holds XLP in some client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.