While investors don’t always think of consumer staples as the most exciting part of the economy, I believe there’s nothing boring about the steady and reliable Consumer Staples Select SPDR Fund (NYSEARCA:XLP) ETF. Consumer staples are also a great way to play defense in the stock market amid an uncertain economic environment, meaning it’s a good time to take a closer look at XLP.
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What is XLP ETF’s Strategy?
XLP is part of State Street’s popular Sector SPDR ETFs, which invest in specific sectors of the S&P 500 (SPX). XLP invests in the consumer staples sector of the S&P 500, which includes food and beverages, tobacco products, personal care products, and more. XLP launched all the way back in 1998 and has $16.9 billion in assets under management (AUM).
The Beauty of Consumer Staples
While many consumers may try to put off major purchases like a house or a car while interest rates are high or hold off on some discretionary buys because their purchasing power is down thanks to inflation, most will likely continue to buy the staples that they usually do, as these are typically necessities or part of everyday life.
Furthermore, staples can be everyday pick-me-ups or simple pleasures that customers can indulge in at a relatively low price in lieu of larger purchases in times of duress. Someone might be hesitant to pay for a vacation in the current economic climate but can still buy their favorite soda or candy bar as a treat, which is the beauty of the consumer staples business.
You can see the defensiveness of these consumer staples borne out over time in XLP’s steady results over time. The ETF has posted total annualized returns of 9.2%, 10.1%, and 9.1% over the past three, five, and 10-year time frames, respectively.
It should be noted that these results have slightly underperformed the returns of the broader market, as represented by the Vanguard S&P 500 ETF (NYSEARCA:VOO), which has returned 13.7%, 12.2%, and 12.6% over the same time frames. However, these are still solid returns, and I like the idea of adding XLP to portfolios to add some ballast to them during periods of market turbulence.
XLP proved its mettle as a defensive holding during the challenging 2022 market, where it lost just 0.8% for the year versus more significant losses of 18.2% for the aforementioned VOO and 32.6% for the Invesco QQQ Trust (NASDAQ:QQQ), which represents the tech-centric Nasdaq 100 (NDX).
Resilient Holdings
XLP holds 37 stocks, and its top 10 holdings make up 67.7% of its portfolio. Below, you can take a look at an overview of XLP’s top 10 holdings using TipRanks’ holdings tool.
This is a high-quality group of large-cap, blue-chip defensive companies. Consumers aren’t going to stop buying their favorite soft drinks from Coca-Cola (NYSE:KO) or Pepsico (NASDAQ:PEP) in the event of a recession, and consumers who smoke cigarettes are likely to stick with their favorite brands from Philip Morris International (NYSE:PM) and Altria (NYSE:MO) regardless of what is going on in the broader economy.
Additional top 10 holdings include powerhouse big-box retailers like Walmart (NYSE:WMT), Costco (NASDAQ:COST), and Target (NYSE:TGT), and personal care giants like Procter & Gamble (NYSE:PG) and Colgate-Palmolive (NYSE:CL).
Collectively, these top 10 holdings boast some very strong Smart Scores. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating. The score is data-driven and does not involve any human intervention.
An impressive eight of XLP’s top 10 holdings feature Outperform-equivalent Smart Scores of 8 or better. Perhaps even more impressively, XLP’s top three holdings, Procter & Gamble, Pepsico, and Costco, all clock in with ‘Perfect 10’ Smart Scores.
XLP itself has an Outperform-equivalent ETF Smart Score of 8.
While consumer staples companies are often mature, defensive businesses, this doesn’t mean that there isn’t room for some exciting growth stories amongst XLP’s portfolio as well. For example, Monster Beverage (NASDAQ:MNST) has quietly been the best-performing U.S. stock over the past 25 years and looks like it has plenty of runway for growth ahead.
Meanwhile, Constellation Brands (NYSE:STZ) owns the U.S. licensing rights for beers like Modelo, Corona, and Pacifico. Modelo Especial recently surpassed Bud Light as the top-selling beer in the United States.
Is XLP Stock a Buy, According to Analysts?
Turning to Wall Street, XLP earns a Moderate Buy consensus rating based on 24 Buys, 11 Holds, and four Sell ratings assigned in the past three months. The average XLP stock price target of $82.69 implies 13.5% upside potential.
Favorable Expense Ratio
Like its fellow Select Sector SPDR ETFs, XLP sports a reasonable expense ratio of just 0.10%. This means that an investor putting $10,000 into the ETF would pay just $10 in expenses in year one. Over the course of 10 years, assuming that the expense ratio remains at 0.10% and the fund returns 5% a year, this same investor would pay just $128 in fees.
Investing in ETFs with low fees and expenses like this is a smart way to preserve the principal of your portfolio over time and to avoid seeing large portions of your gains eaten up by fees.
Longtime Dividend Payer
In addition to its strong portfolio and investor-friendly expense ratio, XLP also boasts a long history as a dividend payer. The ETF has paid investors a dividend for nearly a quarter century, having made a payout for 23 straight years. Furthermore, XLP has increased its dividend payout for nine consecutive years.
XLP’s dividend yield of 2.6% may not be enough to get income-oriented investors excited now that interest rates are higher, but it is still a nice added bonus that adds to an investor’s total returns over time.
Investor Takeaway
XLP has been a solid, reliable performer for years. While its performance isn’t necessarily blowing the doors off, it has posted steady returns and proven its worth by holding up well during the recent bear market. It owns a strong portfolio of large-cap, blue-chip consumer staples names that can perform well during good economic times and help investors batten down the hatches during more challenging periods.
In addition to this resilience, XLP looks like an appealing investment opportunity due to its reasonable expense ratio and its solid track record as a dividend payer.
