XLP Consumer Staples Select Sector

Earnings season has been pretty mixed overall, with most companies reporting estimates that were in line with expectations. In fact, in the earnings season to date, total profits are up 2.9% while revenues have increased 3.2%, suggesting a pretty mediocre result so far.

From a sector perspective though, events have been a little clearer with some segments falling by the wayside despite strong investor demand before the earnings season. In particular, the consumer staples segment was a popular choice for investors, thanks to an uncertain market and the traditional low volatility in the sector (read the Comprehensive Guide to Consumer Staples ETFs).

Consumer Earnings in Focus

And in this increasingly in-focus space, one of the bellwethers is easily the Ohio-based giant Procter & Gamble (PG).  The company is well-known for its wide variety of consumer products and is well-sought after by investors due to its stability, solid yield, and extremely low beta.

However, the company has apparently run into a significant rough patch, as evidenced by its latest earnings release. In the report, the company revealed that it beat earnings slightly (3.1%), posting EPS of 99 cents a share, while revenues barely missed expectations, coming in $220 million light of the $20.72 billion expectation.

In addition to this miss on the top line, analysts and investors zeroed in on the underwhelming guidance for the firm. The company said that it expects Q4 net income between 69 and 77 cents a share, well below current estimates of 82 cents a share (read Top Ranked Consumer Staples ETF in Focus).

This news also combined with reports that it was cost savings, and not any meaningful growth, that led to the earnings beat, which led many analysts and investors to become more bearish on the stock. This was reflected to a large degree in Wednesday trading of PG, as the stock lost about 5.9% of its value on volume that was about 2.5x normal.

Consumer ETF impact

The pain also carried over into the ETF world, with consumer staples ETFs being the hardest hit. Many of the key funds in this segment have a double-digit allocation to the consumer product giant so they faced the brunt of the downturn in the day’s session.

And, since many smaller companies in the sector were also impacted by PG’s weakness, they too had rough days, leading to sluggish trading overall for the segment. In particular though, poor trading was seen in the following three ETFs, as they have the biggest allocations to Procter & Gamble:

iShares Dow Jones US Consumer Goods Sector ETF (IYK)

This ETF was down about 1.3% in Wednesday trading on volume that was a little lower than normal. Still, the ETF has a big holding in PG, allocating 12.3% to the giant (read Lower Wal-Mart Exposure with These Consumer ETFs).

It is also worth pointing out that the ETF has seen a pretty solid run up to this point, adding more than 13.7% YTD. This represents a solid level of outperformance when compared to broad market indexes, although one has to wonder if this will continue if big staples names like PG continue to show weakness.

Vanguard Consumer Staples ETF (VDC)

Vanguard’s entrant in the consumer staples market was down a bit more in Wednesday trading, losing about 1.5% in the session. However, the fund allocates only a slight bit more to PG, putting about 12.5% in the stock.

Much like IYK, this ETF has had a solid runup in 2013, adding about 16% in the time frame. This fund also represents a cheaper choice in the segment, charging investors just 14 basis points a year, and adding to the total return outperformance for this ETF.

Select Sector SPDR- Consumer Staples ETF (XLP)

XLP is easily the most popular consumer staples ETF in the market, as it has over $7 billion in assets and usually sees about 6.5 million shares in volume a day. Wednesday was a bit different though, as the fund saw volume cross the 30 million share mark as PG weakness (14% of the ETF) dragged the fund down 1.6%.

Obviously this higher holding level in XLP was a large factor in XLP leading the way on the downside for Wednesday trading. However, the ETF is still doing quite well from a YTD look, adding about 15.7% in these terms, putting it in the middle of its two aforementioned competitors (see 3 Consumer Staples ETFs for the Shaky Market).

Bottom Line

Even though PG had a horrendous day, its impact on the rest of the consumer staples market wasn’t as severe as some might have anticipated. Yes, all of the major consumer staples ETFs were down more than the overall market, but their losses were not too devastating.

Still, the trend isn’t too encouraging as many were thinking that the consumer staples market was overbid anyway. The space was seeing PE ratios around the high teens, a pretty incredible level given the low growth prospects for the sector.

So this could just be the market readjusting and giving other sectors a chance to play a leadership role for the time being. Consumer staples have had a pretty good run so far this year, but if PG’s outlook is any guide, their status as market leaders may be coming to an end pretty soon.

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ISHARS-DJ CN NC (IYK): ETF Research Reports
 
PROCTER & GAMBL (PG): Free Stock Analysis Report
 
VIPERS-CONS STA (VDC): ETF Research Reports
 
SPDR-CONS STPL (XLP): ETF Research Reports
 
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