Steady Staples

Published on Monday, 26 March 2012 20:46 Written by Todd Shriber

As has been noted time and time again, 2011 was a great time to be involved with conservative sectors such as consumer staples, health care and utilities. Measured by ETFs, the Consumer Staples Select Sector SPDR (NYSE: XLP) is the top performer of the trio consisting of itself, the Health Care Select Sector SPDR (NYSE: XLV) and the Utilities Select Sector SPDR (NYSE: XLU). Year-to-date, XLP trails XLV, but both are well ahead of the laggard XLU.

Still, XLP is up a solid 4.7% on the year, and that performance is being driven in large part by tobacco giant Philip Morris (NYSE: PM). You don’t have to consume or condone the products the company makes, but there is no denying the fact that the shares are up 12% this year, and that’s does NOT include the decent 3.5% yield.

With a weight of just over 11%, Philip Morris is XLP’s second-largest holding behind Dow component Procter & Gamble (NYSE: PG) and the tobacco company are certainly helping XLP weather some mediocre performances from other top-10 holdings. Procter & Gamble is essentially flat on the year. Fellow Dow stocks Coca-Cola (NYSE: KO) and Wal-Mart (NYSE: WMT) are up just about 2% while PepsiCo (NYSE: PEP) is down on the year.

XLP has also been getting a lift from CVS Caremark (NYSE: CVS). The largest U.S. drugstore operator has surged over 11% this year.

With an eye toward the rest of 2012, the global macroeconomic environment remains challenging and uncertain, and that could prompt investors, once again, to take a look at the steady staples group. As Zacks Equity Research recently noted "product demand has remained relatively stable for companies that are more exposed to fast-growing emerging markets in comparison to the slow-growing developed markets."

Said differently, XLP has a hidden emerging markets kicker through holdings such as Coca-Cola, PepsiCo, Philip Morris, Colgate Palmolive (NYSE: CL) and several others. Overall, it can be said that more than half, if not three-quarters of XLP’s holdings, have some kind of emerging markets exposure.

Another 2012 (and beyond) issue that staples need to be aware of is commodities costs, particularly with regards to stocks such as Coke, Pepsi, Kraft (NYSE: KFT) and General Mills (NYSE: GIS). So if, you own XLP, make sure to keep an eye on agricultural commodities prices because there is a limit to how much brand names can pass on to consumers in terms of higher costs.

So maybe the reality is that staples stocks and ETFs such as XLP really aren’t as low-beta as they appear given their emerging markets exposure and inverse correlation to commodities prices, but the perception on Wall Street is that staples are boring and defensive, and that should remain true this year.