Defensive Sector ETFs for Turbulent Times

This week’s featured US equity ETFs, all focused on the US Consumer Staples Sector, are projected to outperform the market going forward. The similarities with last week’s blog end there.  These all get a more modest 4 (buy) recommendation.  Risk versus safety differentiate the last blog from this one.

My last blog entry profiled ETF opportunities in the Biotech subindustry group. They were all listed as top 5 rated ETFs from ValuEngine, following recent pullbacks.  All had been characterized by above-average market volatility and above-average returns during the past 10 years.  All had very different construction and maintenance methodologies. This week the chosen ETFs are all from the US Consumer Staples Sector.

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Other differences are more striking.  All 3 ETFs had below-market returns during the past 10 years, offset to an extent by well-below-average volatility and Beta.  The three ETFs have similar methodologies and are dominated by the same 10 holdings.

We selected:

XLP, The Consumer Staples Select Sector SPDR ETF;

FSTA, Fidelity MSCI Consumer Staples Index ETF; and

VDC, Vanguard Consumer Staples ETF.

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First Page of the ValuEngine report on XLP (blog continues below the report page):



The following table provides much of the pertinent information as of March 31, 2021.  VOO, the Vanguard S&P 500 ETF, is provided for Comparative benchmarking.

ValuEngine Rating 4 4 4 3
1-Yr Return  28.56% 31.99% 32.71% 38.65%
3-Yr Return 12.11% 12.44% 12.31% 56.23%
5-Yr Return 8.06% 8,43% 8.39% 16.09%
10-Yr Return 11.57% N/A 11.73% 13.83%
Volatility 13.0% 12.8% 12.8% 15.1%
Sharpe Ratio (3-Year) 0.51 0.52 0.48 0.93
# of Stocks 32 98 96 500
VE Beta 0.64 0.65 0.65 1.00
VE Alpha -0.05 -0.03 -0.03 0.00
P/B Ratio 6.2x 5.1x 5.1x 4.2x
Div. Yield 2.5% 2.3% 2.4% 1.5%
Expense Ratio 0.12% 0.08 0.10% 0.03%
Index Provider S&P Dow Jones Indexes MSCI MSCI S&P Dow Jones 




Mkt. Cap Weighting Mkt. Cap Weighting Mkt. Cap Weighting Mkt. Cap Weighting
ETF Sponsor SSgA Fidelity Vanguard Vanguard

A few immediate observations we can make:

  1. Although these defensive ETFs underperformed VOO, their risk-adjusted alphas were not very far below zero.
  2. The dividend yields and Price/Book ratios are higher than those of VOO.
  3. VDC and FSTA are extremely similar across the board.  
  4. XLP, the oldest Consumer Staples ETF, is much narrower with about 1/3 the number of names as the other two.
  5. FSTA has the lowest expense ratio of the three while XLP has the highest. 

The reason many conservative investors may find US Consumer Staples ETFs somewhat more interesting now is that they are boring – especially to the media.  While cryptocurrencies, marijuana stocks, ESG, technology and alternative energy companies dominate market media conversations, these stocks are mostly old news.  The top 10 holdings of each ETF are:

  1. Procter & Gamble (PG)
  2. Coca-Cola (KO)
  3. Pepsico (PEP)
  4. Wal-Mart (WMT)
  5. Costco (OOST)
  6. Mondelez Inc. (MDLZ, brands include Philadelphia, Oreo, Cadbury, etc.)
  7. Philip Morris International (PMI)
  8. Altria Group (MO)
  9. Estee Lauder (EL)
  10. Colgate Palmolive (CL)

These ten stocks comprise more than 70% of the weight of XLP and about 60% of the weights of FSTA and VDC.  All of the companies have been targeted to various extents by ESG advocacy organizations for products and/or practices characterized as detrimental to consumers.  Given the rise of ESG investing, that fact may have contributed to recent underperformance by this group relative to the market.  That said, all ten continue to be consistently profitable.

One reason some market experts think that this may be the time to trim back on winners and divert funds to the Consumer Staples Sector is that it his historically characterized as a defensive sector. This is because its stocks tend to underperform when S&P 500 index returns are above average, but they also tend to be resilient, outperforming the index when returns are below historical averages.

Let’s look at four historical periods when the market declined.  In this analysis, the price return of XLP is compared against the price return of SPY, the original SPDR tracking the S&P 500, because they have histories that stretch back to before 2000.  All price returns are amalgamated, not annualized.

Time Period 1/1/2000 – 12/31/2002 4/1/2008 – 3/31/2009 1/1/2011 – 8/31/2011 8/1/2018 – 11/30/2018
XLP -12.47% -18.38% 4.01% -4.91%
SPY -38.22% -35.11% -11.25% -13.92%

Historically, this sector has held up during market downturns considerably better than the overall markets.  In periods of time when fund managers perceive that the chance of a pullback is higher than the probability that the current climb will continue to be robust, they will sell some of the biggest recent gainers they own and replace them with stocks in the consumer staples sector.  ETFs allow fearful investors to implement a similar strategy by selling 20% or so of their core index holding in order to purchase a Consumer Staples ETF.  This keeps the overall asset allocation in line with the investor’s target allocation but lowers the portfolio’s overall sensitivity to market drops. 

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Although XLP was used for this analysis because of its long history, I recommend that investors who are fearful of a market decline and wish to pursue this strategy buy FSTA.  It has the lowest fee and much better risk diversification than XLP.  Given ESG concerns and other factors, there is certainly no guarantee this strategy will work to help investors weather the next market storm as well as it has done so in the past.  However, the strategy is still a reasonable way to reduce exposure to violent market turbulence while not taking what is often the greatest risk to wealth accumulation – getting out of the equity market altogether.   

Herb Blank


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