This article originally appeared in the April issue of the Investor Guide to Vanguard Funds.
Consumer staples companies have enjoyed a strong month. Vanguard Consumer Staples (NYSEARCA:VDC) climbed 5.69 percent, beating the S&P 500 Index. In the wake of bank failures, investors have shifted capital in one of two main ways. The first was bidding up Big Tech companies that dominate the S&P 500 Index. The other was buying stocks that are sometimes dubbed defensive stocks, such as utilities and consumer staples.
Many actively managed funds must remain fully invested. Their managers cannot reduce their equity exposure, but they can shift their sector and stock exposure. When they see a risk-off environment, they prefer holding stocks with a lower downside: those with lower valuations, steadier earnings, higher dividends, stronger balance sheets and so on. Many buy-and-hold investors also hold these types of stocks for income, and keep on holding through recessions and bear markets. As a result, these stocks usually hold up better than the more speculative stocks that dominate selling waves in corrections and bear markets.
Behavior of consumer staples stocks versus the broader market, along with slowing economic growth, indicate investors may continue their defensive ways moving forward. Consumer staples bottomed relative to the broader stock market in the middle of 2007. They peaked, relative to the market, near the stock market low in March 2009. Consumer staples would make another relative-high in early 2016, just as the world’s central banks began a global coordinated easing effort. Consumer staples made a relative-low in late 2021 near the time the Nasdaq was peaking. Since then, the relative performance of staples has been similar to the relative performance in 2007 and early 2008. Only hindsight will prove beyond a doubt whether this is a sustainable move, but if it continues, it indicates a choppy sideways market such as we saw from 2014 to 2016.
VDC tracks the MSCI US Investable Market Consumer Staples 25/50 Index, which includes large-, mid- and small-cap consumer staples companies. It has $7.8 billion in assets spread across 101 holdings. There is an Admiral Class of the fund that trades under the symbol VCSAX.
VDC was launched in January 2004. It is no longer the cheapest consumer staples ETF, but it remains among the lowest cost, with an expense ratio of 0.10 percent.
It yields 2.30 percent, well ahead of the 1.53 percent yield of SPDR S&P 500 (SPY).
VDC has a 4-star and Gold rating from Morningstar.
Portfolio
VDC has an average market capitalization of $78.48 billion. This beats the sector average of $63.69 billion, but comes in shy of the market capitalization weighted index average of $82.37 billion. VDC has seen its largest stocks grow faster than average over the past year, as small-caps underperformed. Giant-caps now make up 45 percent of assets, with most of that increase coming from the large-cap exposure that has dipped to 29 percent. Mid-, small- and micro-caps have 17 percent, 6 percent and 3 percent of assets, respectively.
As of the February 28 snapshot, Procter & Gamble (PG) was the top holding with 12.22 percent of assets. Coca-Cola (KO) has 8.87 percent, Pepsi (PEP) 8.67 percent, Costco (COST) 7.69 percent, Walmart (WMT) 7.57 percent, Philip Morris International (PM) 4.41 percent, Mondelez (MDLZ) 3.74 percent, Altria (MO) 3.51 percent, Colgate-Palmolive (CL) 2.48 percent and Estée Lauder (EL) 2.37 percent.
VDC is different from some of the most popular consumer staples ETFs such as SPDR Consumer Staples (XLP) because it has more diversified exposure. Procter & Gamble makes up more than 14 percent of XLP’s assets. It also has more retail exposure. Soft drinks have 21.10 percent of VDC’s assets, followed by household products with 19.20 percent, packaged foods 17.40 percent, hypermarkets 16 percent and tobacco 8.30 percent.
VDC has a beta of 0.63, less than the category’s 0.67, and slightly lower than the index’s 0.65 beta. The standard deviation is 14.94, below that of the category’s 15.75 and the index’s 15.19 standard deviation. VDC is less volatile than the average fund in the category, but all consumer staples funds and indexes are less volatile than and less correlated with the market.
Performance
VDC has increased 2.23 percent in 2021. Over the past 1-, 3-, 5-, 10- and 15-year periods it gained an annualized negative 1.20 percent, 13.16 percent, 10.26 percent, 9.55 percent and 9.80 percent, respectively. Except for the past 3-year period, VDC has otherwise outperformed the category in all periods.
Performance has been helped by stocks such as Pepsi and Coca-Cola. The former made an all-time high in late 2022, while the latter is barely off its record high. Walmart was rocked in 2022, but has recovered the bulk of its losses, sitting less than $10 away from its previous high. Mondelez has powered on to new all-time highs, the latest being set in early April.
Outlook
VDC offers a diversified exposure in the consumer staples sector. These companies and this sector are the tortoises in the hare versus tortoise race of the investing world. Consumer staples earn nearly all of their relative outperformance versus the S&P 500 Index during bear markets. That isn’t to say they don’t perform well over time, as the returns data attests. During bear markets, these stocks hold up far better, and that drives their long-term performance relative to the broader stock market.
For conservative investors and those drawing down principal in retirement, the lower volatility of consumers staples stocks, particularly during corrections, makes them a good sector overweight. Investors may also reassess their overall equity exposure in light of the cautionary signal being thrown off by staples’ outperformance. As long as the economy stays on track, money will flow into the markets and investors will continue bidding up consumer staples shares even if the overall market remains choppy.
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