Investing in consumer staples stocks
A sector that is defensive in an economic downturn.
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Consumer staples stocks are not going away. These companies are essential to our daily life and do well even if the economy is waning. But investing in consumer staples stocks may not suit every type of investor in Australia.
What's in this guide?
What are consumer staples stocks?
The consumer staples sector is one of the stock market’s 11 sectors and is sometimes called the consumer defensive sector. It includes companies that produce goods and services that people need daily, such as food, clothing, and household and personal care products. This category also includes alcohol and tobacco.
Consumer staples stocks are goods that are always in demand. Consumers generally buy these products regardless of their financial situation or economic stability.
What industries does it include?
Consumer staples stocks can be broken down into the following six industries:
- Beverages. Brewers, wineries, distillers and soft drink producers.
- Food and staples. Companies that distribute and sell food and pharmaceutical drugs to other companies.
- Food products. This industry encompasses all agricultural goods, and packaged foods and meats.
- Household products. These companies sell non-durable household essentials, like detergent, soap and diapers.
- Personal products. Manufacturers of personal health care and beauty products.
- Tobacco. Those that grow and sell tobacco products, like cigarettes and cigars.
Investing in consumer staples stocks vs. consumer discretionary stocks
Consumer staples stocks provide goods and services that are essential for daily life. People regularly buy these items — like milk and bread — regardless of the economy.
On the other hand, consumer discretionary stocks tackle goods and services that you may enjoy but are unnecessary to live.
For example, you might buy things like a new surfboard or a new camper if you have the extra income. But if you lost your job or if the economy was declining, you might reduce or eliminate these items from your budget.
How to invest in the consumer staples sector
You’ve got two main options for investing in the consumer staples sector in Australia: investing in consumer staples stocks or exchange-traded funds (ETFs). With a particular stock, you purchase shares of a specific company. This option is highly liquid but is riskier than an ETF. Sector-tracking ETFs give you a basket of securities, which offers portfolio diversity but has higher fees.
What stocks are in the consumer staples sector?
What ETFs track the consumer staples sector?
A few popular consumer staples ETFs include:
- iShares Global Consumer Staples (IXI)
- Vanguard Consumer Staples ETF (VDC)
How is the consumer staples sector performing?
Use the graph below to track how the Consumer Staples Select Sector SPDR ETF (XLP) has been performing over the past three months, year and five years. Tracking the performance of this ETF is one way to gauge how the sector as a whole is doing.
Why invest in consumer staples stocks?
Since the demand for consumer staples doesn’t slow even in a weak economy, the sector is noncyclical. These stocks are less susceptible to the swings of the stock market when consumer spending on luxury goods and nonessentials rises and falls.
The consumer staples sector outperformed the broader S&P 500 index during the last three recessionary periods. For example, during the Great Recession of 2008, the consumer staples sector returned 13.7% from 2007 to 2009, compared to the broader S&P 500 index decline of 5%.
Consumer staples stocks generally see slow and steady growth and can help diversify your portfolio. An added perk is its higher dividend yield than the S&P 500 Index — even during a recession.
What unique risks does the consumer staples sector face?
Even though the consumer staples sector will likely always be around, they face unique challenges today.
- Slow returns. Consumer staples stocks make most of their return when the market is falling. When the economy is thriving, the sector may underperform or see very slow growth, which may not suit investors’ appetites.
- Rising interest rates. Higher interest rates usually mean that borrowers end up paying more for their purchases. If interest rates go up, consumer spending may drop, affecting sector performance.
- Changing consumer preferences. Customers have shifted their buying habits to include e-commerce and specialty brands, such as organic, fresh options. Companies need to continually keep in touch with consumers as Australians stray from buying traditional brands through old-school retail outlets.
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The consumer staples sector may be a good choice if there are signs of a recession on the horizon or if you don’t mind slow, long-term growth.
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