The Two Consumer Staples ETFs Going Head-to-Head
Consumer Staples ETFs gained a reputation for being defensive investments. Read on to find out how to armor your portfolio with these ETFs.
If you follow market news, chances are you came across consumer staples on several occasions. They are the essential products that consumers use daily. Think beverages, food and staples retailing, food products, household goods, personal goods, alcohol, and even tobacco. It is generally accepted that these products are considered a necessity.
Everything Has Gone Up
Statistics Canada reported earlier today that prices of all goods and services, from food and energy to shelter costs and transportation, rose last month. This has pushed Canada's inflation rate to a record 30 year high of 6.7% in March, far more than what economists expected. For businesses, the key dynamic that may drive performance is their ability to pass rising input costs to their customers.
As consumer staples are the essential products we use every day, this sector is well-positioned to benefit from an inflationary environment. Demand for such goods tends to be less cyclical with low elasticity. It remains relatively constant while consumers are either unwilling or unable to eliminate these products from their budgets regardless of the prevailing economic conditions.
Companies in the sector generate consistent revenue because of that ongoing demand. This makes the consumer staples sector a safe haven for investors in times of economic hardship. On the flip side, it also means the sector underperforms cyclical stocks in times of economic growth.
As a result, investors looking for steady growth and low volatility can turn to consumer staples. The NEO ETF Screener identifies two consumer staples ETFs currently listed in Canada, the iShares S&P/TSX Capped Consumer Staples Index ETF (XST) and the BMO Global Consumer Staples Index ETF (STPL).
The iShares S&P/TSX Capped Consumer Staples Index ETF (XST)
XST posted a year-to-date performance of 5.75% as of April 14th. Assets under management reached a total of CAD$180 million attracting CAD$23 million of investors’ money this year. This passively managed fund celebrated its eleventh birthday eight days ago on April 12th. It seeks to replicate, to the extent possible, the performance of the S&P/TSX Capped Consumer Staples Index. XST will primarily invest in Canadian equities participating in the consumer staples sector. The fund is not geographically diversified. All its assets are in Canada out of which 82.85% are in Food Retail, 12.88% in Packaged Foods and Meats, 2.82% in Soft Drinks, and 1.35% in Personal Products. The fund only holds 10 underlying stocks. The top 5 components account for 81.29% of total assets. XST has a TER of 0.61% and follows a distributing dividend policy.
The BMO Global Consumer Staples Index ETF (STPL)
STPL is a younger and smaller sibling of XST. This passively managed ETF was launched on April 07th, 2017. It seeks to replicate the performance of the FTSE Developed ex Korea Consumer Staples Capped 100% Hedged to CAD Index. The index includes large and mid-cap consumer staples companies according to the Russell Global Sector classification system, with a 10% cap on each security. These global consumer staples companies exclude businesses in Korea. Assets under management reached CAD$55 million with lackluster performance of 1.04% YTD compared to XST’s 5.75%. The fund netted CAD$13 million of inflows in 2022. STPL is globally diversified, holding its assets in more than 12 countries. It invests 56.73% of its assets in the United States, 12.67% in the United Kingdom, and 10.65% in Switzerland. STPL holds 156 underlying stocks where the top 5 components represent 36.97% of total assets. This ETF has a 0.40% TER which is relatively cheap compared with the 0.61% TER charged by XST. STPL follows a distributing dividend policy in a similar fashion to XST.
Bottom Line
Consumer staples can make a solid investment case, despite their shortcomings (slow growth and limited highs). Given their defensive nature, many investors use them to hedge or protect their portfolios against market downturns to some degree. They are good options for investors seeking steady growth and low volatility. As such, Canadian investors can either research individual stocks or select one of the two consumer staples ETFs, XST and STPL, to face economic headwinds.
