Consumer Non-Cyclical ETFs Outperform

Non-cyclical stocks weathered last month’s pandemic-induced selling onslaught better than most other sectors as investors sought refuge in the group amid ongoing uncertainty gripping global financial markets. Although the segment shed 6% in March, its losses were about half those of the broader market. What’s more, consumer staple stocks have been at the forefront of the recent market recovery, gaining over 2% in the past five days.

Leading names in the sector have benefited from a huge surge in demand as shoppers stockpiled their pantries and medical cabinets with necessary items to ride out one of the worst pandemics since the Spanish flu. While panic buying has eased in recent weeks, a quick trip to a local Costco Wholesale Corporation (COST) store provides a quick reminder that above-average demand isn’t going away anytime soon.

Traders can gain broad exposure to consumer staples stocks by purchasing one of the three exchange-traded funds (ETFs) discussed below. Let’s review the metrics of each fund and highlight several tactical ideas using technical analysis.

Consumer Staples Select Sector SPDR Fund (XLP)

The Consumer Staples Select Sector SPDR Fund (XLP) has an investment mandate to provide a similar return to the Consumer Staples Select Sector Index. Multinational consumer goods behemoth The Procter & Gamble Company (PG) receives the fund’s top stock allocation (16.65%) in a basket of 35 holdings. Low trading costs and a 0.13% expense ratio suit both short-term strategies and buy-and-hold investing. XLP holds $13.1 billion in net assets, yields a respectable 2.79%, and has fallen 14.47% on the year as of April 3, 2020.

The ETF’s share price tested the December 2018 low amid last month’s sell-off but subsequently recovered and now trades above a multi-year trendline at $53. Additionally, the relative strength index (RSI) crossed above its trigger line earlier this week to generate a buy signal. Those who take a long position should think about targeting a move to overhead resistance at $60 and placing a stop-loss order below the March 27 low at $52.50.

Invesco S&P 500 Equal Weight Consumer Staples ETF (RHS)

With assets totaling $451.16 million, the Invesco S&P 500 Equal Weight Consumer Staples ETF (RHS) tracks the performance of the S&P 500 Equal Weight Consumer Staples Index. Sanitized wipes maker The Clorox Company (160) and supermarket giant The Kroger Co. (KR) sit among the ETF’s portfolio of 34 holdings. Slightly wider spreadsalong with an average daily volume of about 45,000 shares, warrant the use of limit orders to minimize slippage costs. As of April 3, 2020, RHS has returned -16.35% year to date and -7.57% over the past month. A 2.33% dividend yield partially offsets the fund’s depreciation.

After flirting with multi-year lows, the fund’s share price has clawed back about 40% of its pandemic-driven plunge. Furthermore, an RSI reading below 50 gives the price plenty of room to test the $136 level, where the fund may find sellers near an area of horizontal price resistance and downward-sloping simple moving average (SMA). Those who buy at current levels should protect trading capital with a stop situated underneath this month’s low at $119.74.

Fidelity MSCI Consumer Staples Index ETF (FSTA)

The Fidelity MSCI Consumer Staples Index ETF (FSTA) aims to deliver returns that closely match the performance of the MSCI USA IMI Consumer Staples Index. The seven-year-old fund achieves its objective by investing at least 80% of its $574.3 million asset base in stocks that make up the underlying index. The ETF’s top 10 holdings carry a cumulative weighting of about 70% but provide exposure to key defensive names such as Procter & Gamble, The Coca-Cola Company (IS), and Walmart Inc. (WMT). Daily dollar volume liquidity of over $9 million allows traders to enter and exit positions with ease, while a tiny 0.08% management fee also facilitates longer holding periods. As of April 3, 2020, FSTA yields 2.68% and has fallen 15.22% so far this year.

Although the fund gave back most of its 2019 gains in the space of a month or so, it sits 15% above its recent lows and closed above a major trendline as investors seek safe-haven sectors in which to shelter. Traders who open a position here should set a stop order below intermediate support at $31 and book profits on a run-up to vital resistance at $35.70. The trade offers a risk/reward ratio of 1:2 ($1.57 risk per share vs. $3.14 profit per share), assuming a fill a yesterday’s $32.56 closing price.

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