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Why Consumer Staples Stocks Are Lagging, and How to Play Them

From high to low this year, XLP lost over 7% of its value but recovered about half of that drop on the latest bounce. In addition, this ETF broke below its 200-day moving average for the first time in over a year. That long-term trend line is often regarded as a significant technical level that can signal a change in momentum is afoot.

The question you should be asking yourself is whether to continue holding these defensive stocks or step off for greener pastures?

The answer to that question is largely a function of where you sit. If you have been holding this ETF or similar consumer staples stocks for a long period of time and expect this is just a short term blip then you should continue to hold the position. On the other hand, if you have been unimpressed with the recent results and are considering making a switch you may be better off choosing a different fund to rotate into.

One ETF to consider is the First Trust Consumer Staples AlphaDEX Fund (FXG). This ETF is based on a fundamentally driven index that selects stocks based on their recent price momentum, book value, sales growth, and cash flow. It then weights the stocks according to the companies with the highest overall scores based on these metrics. What you are left with is a fund with approximately 38 holdings that is reconstituted quarterly.

The stocks within FXG are culled from the broader Russell 1000 Index so you get a subset of small and mid-cap companies in addition to large-cap names. As of the most recent data, this ETF has over 40% of its holdings in the food products industry and its two largest company weights are Constellation Brands (STZ) and Tyson Foods (TSN).

The results of this fundamental strategy have been impressive. Over the last one, three and five years, FXG has significantly outperformed the S&P 500 Consumer Staples Index as you can see in the table below.

 

1 Year

3 Year

5 Year

FXG Market Price

42.09%

20.66%

21.73%

S&P 500 Consumer Staples Index

26.14%

16.78%

15.86%

       

*Data as of 12/31/13 via www.ftportfolios.com

   

The drawback to a smart-beta ETF like FXG is that it has a significantly higher expense ratio of 0.70% when compared to the miserly 0.16% fee of XLP. In addition, this ETF only sports a 30-day SEC yield of 1.15% which is less than half of the 2.57% annual dividend stream from XLP. Those factors should certainly be taken into consideration given your individual preferences and portfolio goals.

In my opinion, consumer staples should still be represented in your portfolio and any pullbacks can be used to add to core holdings or shift to new opportunities. These stocks may still revert to their traditional role as a defensive sector if we see additional volatility come into play this year. However, I would caution that it's always a good idea to implement a stop loss or sell discipline on any new position in the portfolio to guard against the potential of a reversal in price.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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