When Belts Tighten, Focus on Food ETF

A consumer ETF limited to food and beverage stocks is more likely to outperform in a recession.
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Gas prices are up, the economy may or may not be on the verge of a slowdown, and interest rates are going higher. All of these things might leave many investors worried about the stock market for the rest of the year.

But no matter what happens with the stock market, you will still need your Cheerios, Doritos and half-caf, no-foam skinny latte. These inelastic needs are behind the composition of the

PowerShares Food & Beverage Portfolio

(PBJ) - Get Report

. (Get it? PBJ, like the sandwich?)

Whether a bear market might be starting now is certainly subject to debate. Once a bear market does start, however, consumer staples stocks often hold up better than the rest of the market. The idea is that consumers will not forgo the most basic food needs. Realistically, would your soda consumption change in the face of a recession?

While it is too soon to know how significant the

S&P 500's

action was in May, clearly there was fear in the market last month, with the S&P falling 3%. But in the same month, the PBJ fell only 0.6%. This could be a microcosm of what may happen in a bear market, regardless of whether or when you think that may come.

PBJ is narrower than the other consumer ETFs from iShares, Vanguard and State Street. You won't find drug stores, detergent or razor blades in PBJ.

Like most PowerShares products, this fund is fairly evenly distributed, with no stock having much more than a 5% weight in the fund. The top holdings include

General Mills

(GIS) - Get Report

,

Coca-Cola

(KO) - Get Report

,

Kellogg

(K) - Get Report

and

PepsiCo

(PEP) - Get Report

. Looking at those names, it becomes apparent that PBJ has a large-cap bias; 66% of the fund is in large-cap stocks.

The composition is an important consideration in comparing PBJ with other ETFs. Both

iShares Dow Jones U.S. Consumer Goods Sector Index Fund

(IYK) - Get Report

and

Consumer Staples SPDR

(XLP) - Get Report

have more than 15% in

Procter & Gamble

(PG) - Get Report

and more than 12% in

Altria

(MO) - Get Report

. That's pretty concentrated. Less concentration within an ETF typically should result in less volatility. Given the context of this discussion, that makes PBJ an attractive choice.

Yummy Returns
PBJ fared well compared with the S&P in May

Source: BigCharts.com

One surprise with PBJ is the relatively poor dividend. According to ETFConnect, PBJ yields 0.43%, while the iShares Consumer Goods yields 1.75% and Consumer Staples SPDR yields 2.11%.

But over the past six months, the lower dividend yield has been less important, as PBJ has significantly outperformed. (Although PBJ did badly lag IYK and XLP in the first couple of months after its initial listing last summer.)

The Best of the Staples
PBJ's food-only focus helps it outperform.

Source: BigCharts.com

What matters here is the narrower exposure available within the sector. In thinking defensively, I believe that the narrow, food-only part of the consumer staples sector has a chance to outperform because an economic downturn is likely to have the least impact on basic food products.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider PowerShares Food & Beverage Portfolio and iShares Dow Jones U.S. Consumer Goods Sector Index Fund to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

At the time of publication, Nusbaum was long iShares Dow Jones U.S. Consumer Goods Sector Index Fund for a client account, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;

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to send him an email.