The consumer staples sector is roughly flat year to date compared to a 15%-plus return for the S&P 500. Chock-full of stodgy companies, the sector doesn't have the glitz and glam of red-hot artificial intelligence growth stocks. But it does have qualities that could make it a perfect fit for value investors seeking passive income.
Here's why the Consumer Staples Select Sector SPDR Fund (XLP 0.29%), an exchange-traded fund (ETF) that tracks the sector, is worth a closer look in November.
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A sectorwide slowdown
The consumer staples sector includes a variety of household and personal products companies, retailers, grocery stores and food distributors, non-alcoholic beverage companies, tobacco and spirits companies, and consumer packaged goods companies.
The sector tends to be resilient during recessions because demand for these products remains consistent regardless of the economy. Consumers are more likely to cut their spending on vacations, big-ticket items, or discretionary purchases like dining out before they alter their spending on everyday products like dish soap and toothpaste. But there are still ways to cut back on basic needs spending, such as shifting from name brands like Coca-Cola to generic brand colas.
Many top consumer staples companies are experiencing low organic growth, pressure on sales volumes, and resistance to price increases as consumers are pulling back on spending and seeking more value amid the higher cost of living.
Instead of betting on one company or industry, consumer staples ETFs offer a catch-all way to invest in a recovery in consumer spending and collect sizable passive income in the process. Two of the most popular consumer staples ETFs are the Consumer Staples Select Sector SPDR Fund and the Vanguard Consumer Staples ETF (VDC 0.41%). Let's see how they compare.
NYSEMKT: XLP
Key Data Points
Distinct differences between the top two consumer staples ETFs
State Street Global Advisors Inc. runs the Consumer Staples Select Sector SPDR Fund, which features $16.1 billion in net assets -- roughly double Vanguard's consumer staples ETF and significantly more than BlackRock's iShares U.S. Consumer Staples ETF -- which has just $1.3 billion in net assets. So investors looking for the most popular consumer staples ETF may lean toward the SPDR product.
The Consumer Staples Select Sector SPDR Fund has 37 holdings compared to over 100 for the Vanguard Consumer Staples ETF. The expense ratios are almost identical at 0.08% for the SPDR fund and 0.09% for the Vanguard product. But the SPDR Fund sports a higher dividend yield at 2.7% compared to 2.3% for the Vanguard Consumer Staples ETF because it has lower weightings in Walmart and Costco Wholesale and higher weightings in select high-yield dividend stocks.
Walmart and Costco have been standout winners in the sector. But because their stock prices have outpaced their dividend growth rates, both companies have seen their yields compress in recent years.
All told, the Consumer Staples Select Sector SPDR Fund is the better buy for investors seeking passive income. In contrast, the Vanguard Consumer Staples ETF may be better for folks looking for more holdings and higher weightings in Walmart and Costco.
A great choice for risk-averse investors
With a 22.4 price-to-earnings (P/E) ratio, the Consumer Staples Select Sector SPDR Fund trades at a steep discount to the SPDR S&P 500 ETF's 28.6 P/E. And because growth stocks continue to make up a larger share of the index, the SPDR S&P 500 ETF only yields 1.1% -- making it an insufficient choice for income-oriented investors.
Consumer staples stocks may not be appealing when the broader indexes are making all-time highs. But they can be excellent choices for investors looking to incorporate passive income into a financial plan or generate stable income even when the stock market is selling off.
With a reasonable valuation, high yield, and low expense ratio, the Consumer Staples Select Sector SPDR Fund stands out as a top ETF to buy for passive income in November.
