Why are so few investors buying consumer staples ETFs?

May 14th, 2013 | By | Category: Equities

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By David Stevenson –

Why are so few investors currently buying into consumer staples sector ETFs? I realise that this isn’t exactly one of those raging questions that ranks up there alongside “should we dump Europe?” and “why, oh, why are most of the singers on The Voice so bloody awful?”, but for investors I think the question really, really matters.

Why are so few investors buying consumer staples ETFs? By David Stevenson

Consumer staples: You either love them or you hate them.

To understand why I’m so nonplussed, let’s rewind the investment debate and establish some basic principles.

The first and most basic principle is that investors worldwide are fearful about macro risk. Although shares are pushing ahead, especially in the US, scratch beneath the surface and you’ll see that volume inflows for equities are steady rather than startling.

Investors are worried by any number of things including (in no particular order):

  • The re-emergence of inflation at some point
  • Central bankers withdrawing all their QE-inspired interventions
  • Insipid global growth
  • The eurozone
  • A massive run on bonds
  • That Will.I.Am might win The Voice – alright this last one is entirely made up and anyway no-one would believe it even if it were true.

I could of course add any number of other factors including worries about muted volatility, but I think you get the picture by now. Equity markets look positive, but frankly anything could go wrong very quickly and we’d all start selling shares and taking profits at the drop of a hat.

So given this lukewarm endorsement for equities (and I haven’t even bothered to repeat what value investors say in public about expensive American equities) you’d have thought that investors would crave defensive companies with quality attributes in all shapes and sizes.

Again, we all know the argument by now about these quality defensive stocks. They possess:

  • Relatively low levels of volatility
  • Sound balance sheets
  • Pricing power in the event of an inflationary catastrophe
  • Pricing power in a deflationary economy
  • Decent, well-backed dividend payouts
  • Brand names even your mother would have heard about

The great Quality Carry Trade has in fact been churning away for at least the past two years, with share prices of all manner of quality consumer stocks steadily heading northwards. Outfits like Unilever were once relatively unloved with lowly multiples….alas no more!

This flight to quality has mightily helped the few active fund managers with a real focus on this space – guys like Nick Train at Finsbury/Lindsell Train as well as Hugh Young in Singapore for Aberdeen have made hay from this phenomenal growth story. Their funds have piled into a wide range of quality, consumer-orientated names with global franchises and made their investors a great deal of money.

But we all know a secret truth, which is that active fund managers eventually revert to mean – their prowess at picking the right trends eventually results in them overplaying their hand. Idiosyncratic or just stupid stock picks emerge and that once treasured outperformance usually (though not always) ends up withering on the vine. As an investor in Hugh Young’s funds I sincerely hope this won’t happen, but I think investors need to diversify their risk levels and maybe diversify out of the big-name quality fund managers. For me that means that investors need to make two key decisions:

1)      Do we decide that quality stocks, especially in the consumer space, have had their day in the sun and that now is the time for a bit of judicious profit taking?

2)      Or…if we decide to maintain exposure to the great consumer story, how do we diversify our exposure without taking on too much manager-specific risk?

My sense is that although I believe many individual quality consumer stocks to be overvalued, I also think that the long-term, patient investor will probably still make money from this space.

An alternative way of looking at this is to ask what else a defensive investor can actually buy at the moment that isn’t even more expensive than overpriced Unilever shares!

  • Bonds – I think not if you believe that value has any bearing on the price you are willing to pay for a fixed income security?
  • Value stocks – probably not as they look to be underperforming at the moment?
  • Growth stocks – too risky by a country mile!
  • Really very boring utility stocks – maybe, but these shares look even poorer value and could be very vulnerable in a deflationary environment.

My conclusion? I can’t help but think that the defensive investor will probably stick with quality consumer stocks through thick and thin. But how to diversify away from those active stock pickers I mentioned earlier?

Cue the useful list of London-listed consumer staples sector ETFs below (fyi, most also have European cross-listings). Each of these funds tracks a different geographic segment of the consumer staples universe: Europe, US, World, Asia and Emerging Markets. Each, barring perhaps the EM fund, is jam-packed full of quality names that any defensive investor should probably kill to own.

Yields are, as you’d expect, a bit like many of The Voice singers, rubbish, but the Total Expense Ratios (TERs) are very reasonable – without exception you’re probably getting an extra 1% per annum in lower costs than most active fund managers in this area with a similar set of holdings and less manager risk. Take the db X-trackers MSCI World Consumer Staples UCITS ETF, for example, you’d be buying Nestle (7.31%), P&G (6.83%), Coca-Cola (5.53%), Philip Morris (5.01%), Walmart (4.21%), PepsiCo (4.13%), BAT (3.5%) and good old Diageo (2.47%).

My own (tiny) preference is for Amundi’s Europe ETF, where your focus is much more on the big UK and Swiss brand names (Nestle at 20.03%, Unilever at 10.87%, BAT at 9.32% etc). It’s also very cheap, at just 25 bps pa! I also have a soft spot for the Lyxor Asia ex Japan fund, which would appear to tick most of the boxes for an adventurous “go where the growth is” portfolio.

Yet, if we look at the assets under management (AUM), we discover that these trackers, despite their usefulness in the current investment climate, are relatively unloved. Only the db X-trackers MSCI World Consumer Staples Index UCITS ETF approaches the £50m AUM mark! I reckon this is partly because people don’t know these funds exist – which I guess is why ETF Strategy is here to help!

Amundi ETF MSCI Europe Consumer Staples (CS5)                                           TER 0.25%            £18.2m

Consumer Staples S&P US Select Sector Source ETF (XLPS)                        TER 0.30%            £11.1m

Lyxor ETF MSCI World Consumer Staples (STAG)                                              TER 0.40%            £32.1m

db X-trackers MSCI World Consumer Staples UCITS ETF (XWSS)                 TER 0.45%            £49.1m

Lyxor ETF MSCI Asia ex Japan Consumer Staples (COSG)                              TER 0.65%            £6.0m

db X-trackers MSCI EM Consumer Staples Index UCITS ETF (XECS)             TER 0.65%            £30.8m

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