NEW YORK (
) -- Thanks to our implicit desire to meet basic needs and feed addictions, consumers will continue to flock to stores to fill up on staples like toilet paper, cigarettes and other necessities, whether we are in the midst of market turmoil or economic prosperity.
ETF investors looking for a strong defensive play on some of the largest companies that profit from our predictable buying habits should look no further than the various consumer staples ETFs available.
Today, investors can choose from a number of large, liquid offerings from some of the largest providers of exchange traded funds. Funds such as the
Consumer Staples Select Sector SPDR Fund
Vanguard Consumer Staples ETF
provide investors with ample exposure to the companies that produce the products we can't live without.
My pick for playing this industry right now is the
iShares Dow Jones U.S. Consumer Goods Index Fund
IYK is neither the cheapest nor the most liquid of the consumer staples ETFs available. However, I believe that the fund's underlying holdings provide investors with the best play on this defensive industry with an added twist that primes it for great upside. Additionally, with a 2.4% yield, IYK provides investors with a nice flow of income no matter which way the fund and market moves.
Most of IYK's portfolio, like other consumer staples ETFs, is dominated by its top holdings which include stable giants such as
Procter & Gamble
Phillip Morris International
Together, the fund's top holdings account for more than 60% of the fund's total portfolio. Other notable firms like
can also be found among IYK's underlying index.
Going deeper, however, it becomes clear where IYK strays from other staples funds. Most telling is the fund's lack of exposure to retailers and pharmaceutical companies such as
. In other consumer ETFs, these two companies represent some of largest slices of their respective indexes.
Interestingly, rather than replacing retailers with other large defensive plays, IYK goes a different route. The instrument enhances its index with exposure to the U.S. automotive industry. Top players including
and the popular
can all be found among the fund's vast index. In total, car makers and parts manufacturers account for more than 7% of IYK's total portfolio.
Though in recent weeks, the troubles facing
have put a damper on the broad automobile industry and weighed on IYK's performance. Prior to Toyota's travails, the auto industry had been one of the brightest stars of the nation's economic recovery.
The solid performance from Ford and other auto industry constituents helped lift IYK over its competitors in the past year through Feb. 9: IYK gained 30%, while XLP and VDC climbed 21% and 23%, respectively.
Due to IYK's unique take on the consumer staples industry, investors holding this fund are exposed not only to the large, stable companies that will hold up well in any market climate, but also the recovering auto industry that still has some gas left in its tank. By playing the likes of Ford and Johnson Controls alongside Proctor & Gamble and Coca-Cola, investors holding IYK have the best of both worlds: stability and growth.
-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion owns the iShares Dow Jones U.S. Consumer Goods Index Fund.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.