Utilities and consumer staples ETFs offer stability amid market turbulence

Aug 25th, 2015 | By | Category: Equities

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Exchange-traded funds tracking defensive sectors of the stock market can play an important role in an investor’s portfolio, especially during bouts of market volatility. Defensive sectors, such as consumer staples and utilities, are those sectors that have typically delivered less volatile earnings and provided more consistent dividend streams regardless of the prevailing phase of the business cycle. Although defensive sectors generally underperform the market during periods of growth and expansion, they have historically yielded superior returns during recessions and bear markets, thus adding much-needed stability and diversification to a portfolio.

Play safe with Consumer Staples ETFs

Play safe with consumer staples ETFs

Defensive sectors can be thought of as classifications of firms that provide the basic requirements of life (in simple terms, things such as food, clothing and power). Utilities and consumer staple sectors are some of the most pertinent examples. Firms in these sectors supply products that usually exhibit very inelastic demand curves, meaning the quantity demanded by consumers generally does not change significantly for changes in price or income.

Stocks within these sectors on average tend to have betas less than 1. Beta is a measure of the risk arising from exposure to general market movements as opposed to idiosyncratic stock-specific factors. A beta of 1 indicates the firm moves in line with the market while a beta between 0 and 1 indicates lower volatility than the market.

The utilities sector, which comprises electricity, gas and water companies, is considered defensive owing to the fact that consumers always demand electricity to power their appliances, gas to heat their homes and water for drinking and washing, regardless of the state of the economy. Moreover, consumers require these utilities at fairly steady, consistent and predictable levels.

The consumer staples sector is considered defensive for similar reasons. In basic terms, the sector comprises firms that produce, manufacture, supply and sell various personal, household and food products. Firms such as food producers, personal beauty and grooming brands, manufacturers of household cleaning products, grocery chains and tobacco companies fit within this category. Once again, consumers demand these goods in fairly consistent and regular quantities.

Owing to these characteristics, ETFs linked to these sectors can be a useful addition to a portfolio during times of uncertainty. Fortunately for investors, there is a broad array of such ETFs offering exposure at various regional and country-specific levels, including world, US, Europe, Asia ex Japan and emerging markets.

Global

The Lyxor MSCI World Consumer Staples TR UCITS ETF (STAW) tracks the MSCI World Consumer Staples TR Index. The fund trades on the London Stock Exchange in US dollars or in British pounds. The index currently has 119 constituents of which the largest members are Nestle (7.5%), Procter & Gamble (6.0%) and Coca-Cola (5.1%). Country allocation is tilted towards the United States (54.5%), the UK (15.3%) and Switzerland (8.2%). The total expense ratio is 0.40%.

The Lyxor MSCI World Utilities TR UCITS ETF (UTIW) tracks the MSCI World Utilities TR Index. The fund trades on the London Stock Exchange in US dollars or in British pounds. The index currently has 79 constituents of which the largest member is Duke Energy (5.2%). Country allocation is tilted towards the United States (53.7%), the UK (10.5%) and Japan (7.4%). The TER is 0.40%.

International

The SPDR S&P International Utilities Sector ETF (IPU) tracks the S&P Developed Ex-U.S. BMI Utilities Sector Index. The fund trades in US dollars on the NYSE Arca and currently has 136 holdings of which the top exposures are to National Grid (9.2%), Iberdrola (6.6%) and Enel (5.6%). Country exposure is currently tilted towards the UK (21.7%), followed by Japan (15.1%) and Spain (11.3%). The weighted average Price-to-Earnings (P/E) ratio is 14.5x and the TER is 0.40%.

The SPDR S&P International Consumer Staples Sector ETF (IPS) tracks the S&P Developed Ex-U.S. BMI Consumer Staples Sector Index. The fund trades in US dollars on the NYSE Arca and currently has 182 holdings of which the top exposures are to Nestle (14.4%), British American Tobacco (6.2%) and Anheuser-Busch (5.5%). Country exposure is tilted towards the UK (26.3%), followed by Japan (18.1%) and Switzerland (15.7%). The weighted average P/E ratio is 23.5x and the TER is 0.40%.

Europe

The SPDR MSCI Europe Consumer Staples UCITS ETF (CSTP) tracks the MSCI Europe Consumer Staples Index. The fund trades in euros on the Euronext Exchange, London Stock Exchange, Deutsche Boerse and Borsa Italiana. It currently has 42 holdings of which the largest exposures are to Nestle (21.5%), British American Tobacco (8.9%) and Anheuser-Busch (7.7%). Country exposure is tilted towards the UK (37.9%), Switzerland (23.3%) and France (11.3%). The P/E ratio is 18.8x and the TER is 0.30%.

The SPDR MSCI Europe Utilities UCITS ETF (UTIL) tracks the MSCI Europe Utilities Index. The fund trades in euros on the Euronext Exchange, London Stock Exchange, Deutsche Boerse and Borsa Italiana. It currently has 22 holdings of which the greatest exposures are to National Grid (15.5%), Iberdrola (11.9%) and Enel (9.8%). Country exposure is tilted towards the UK (34.1%), Spain (20.9%) and Italy (16.1%). The P/E ratio is 13.1x and the TER is 0.30%.

The iShares STOXX Europe 600 Food & Beverage UCITS ETF (EXH3) tracks the STOXX Europe 600 Food & Beverage Index. The fund trades in euros on the Deutsche Boerse and currently has 23 holdings of which the top exposures are to Nestle (31.5%), Anheuser-Busch (14.1%) and Diageo (12.8%). Country exposure is tilted heavily towards Switzerland (34.3%) and the UK (27.4%), with Belgium (14.1%) and France (12.2%) also commanding significant influence. The TER is 0.46%.

The iShares STOXX Europe 600 Personal & Household Goods UCITS ETF (EXH7) tracks the STOXX Europe 600 Personal & Household Goods Index. The fund trades in euros on the Deutsche Boerse and currently has 30 holdings of which the top exposures are to British American Tobacco (16.0%), Unilever (9.9%) and Reckitt Benckiser (9.2%). Country exposure is tilted predominantly to the UK (48.7%), followed by France (17.6%) and the Netherlands (9.9%). The TER is 0.46%.

The iShares STOXX Europe 600 Utilities UCITS ETF (EXH9) tracks the STOXX Europe 600 Utilities Index. The fund trades in euros on the Deutsche Boerse and on the Swiss Exchange. It currently has 26 holdings of which the top exposures are to National Grid (15.1%), Iberdrola (11.3%) and Enel (9.1%). Country exposure is tilted towards the UK (34.6%), Spain (18.2%) and France (16.0%). The TER is 0.46%.

United States

The SPDR S&P US Consumer Staples Select Sector UCITS ETF (SXLP) tracks the S&P US Consumer Staples Select Sector Index. The fund trades in US dollars on the London Stock Exchange or in euros on the Deutsche Boerse. It currently has 37 holdings of which the top exposures are to Procter & Gamble (11.3%), Coca-Cola (9.1%) and Philip Morris (7.3%). The P/E ratio is 19.2x and the TER is 0.15%.

The SPDR S&P US Utilities Select Sector UCITS ETF (SXLU) tracks the S&P US Utilities Select Sector Index. The fund trades in US dollars on the London Stock Exchange or in euros on the Deutsche Boerse. It currently has 29 holdings of which the top exposures are Duke Energy (8.8%), NextEra Energy (8.7%) and Dominion Resources (8.2%). The P/E ratio is 15.9x and the TER is 0.15%.

Asia ex-Japan

The Lyxor MSCI Asia Ex Japan Consumer Staples TR UCITS ETF (STAA) tracks the MSCI Asia ex Japan Consumer Staples Net Total Return Index. The fund trades on the London Stock Exchange in US dollars or in British pounds. There are currently 49 constituents to the index and the top component is ITC (6.7%). Country exposure is tilted towards South Korea (25.5%), India (21.1%) and China (17.6%). The TER is 0.65%.

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