Consumer Products a Source of Good Risk Adjusted Returns

Jeff is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Seeking profits by owning stock in companies that bring consumer products to the market has always been considered by many investment professionals to be a prudent strategy. The simple belief that goods necessary for basic needs of life will not be subject to the whims and fancies of market conditions places this type of investment in the defensive category. The operating cash flows and profits of such companies tend to not be at risk as companies in more speculative ventures. 

The investor that looks to portfolios designed around this central theme is well advised to consider exchange-traded funds that take a passive, indexed-based approach. Here are three ETFs to review. 

The SPDR S&P Retail ETF (NYSEMKT: XRT) tracks the S&P Retail Select Industry Index. Take this link to get the latest snapshot. XRT uses an equally weighted index approach, reducing the risk of any one stock. Price changes of individual stocks will change this, but for now the number one holding of XRT is Cabela’s Inc (NYSE: CAB) and the second spot goes to Ann Inc. (NYSE: ANN).

This is a focused ETF. The concentration is retail stores only and with 96 stocks held, the main risk to XRT is what hurts the overall industry. XRT was started on June 19, 2006 and the returns history indicates that this is on track to be a well performing risk adjusted source of returns. This places XRT in consideration for most individual investors. Fund information can be found on the SPDR website.

The PowerShares Dynamic Consumer Staples Sector Portfolio (NYSEMKT: PSL) is designed to match the Dynamic Consumer Staples Sector Index. Visit this link to obtain the most recent tear sheet   There are 60 stocks held in PSL and the top holding is Costco Warehouse (NASDAQ: COST) and the second position is Estee Lauder (NYSE: EL).  PSL also uses an equally weighted approach. However the returns are okay and it seems this will tend to be a middle-of-the-pack performer when compared to its peers. PSL may be more appealing to the risk adverse investor that is willing to accept small returns in exchange for lower downside risk to value. More facts and details can be seen on this webpage

The Market Vectors Retail ETF (NYSEMKT: RTH) follows the US Listed Retail 25 Stocks Index. This is a newcomer and was brought to the market on Dec. 20, 2011. Go to this link to get the latest snapshot.  The short track of returns reporting makes it difficult to get a sense of how RTH will behave in different market cycles. RTH holds only 25 stocks and Wal-Mart Stores (NYSE: WMT) represents 10.875% of the holdings. The second largest position is Amazon.com (NASDAQ: AMZN) with 7.95% there.

The short track record and concentration to fewer stocks makes RTH a riskier ETF than the other two covered here. Only those investors that can stand to take risks with capital that can be lost should consider taking a position. With the passage of time and documenting of performance, then the more risk adverse investor may consider RTH. A link to more information on RTH is found on http://www.vaneck.com/funds/RTH.aspx 

Consumer product companies that are well entrenched in their respective marketplace have always been attractive holdings for institutional investors. Now with the explosive growth of ETFs in general, finding access to passive based strategies is compounded by new entrants that seem to be brought to market on a regular basis. Sifting through all of these possibilities will take some time and the average investor is well advised to consider all the facts and risks associated with these popular strategies. The three presented represent different segments of the risk/reward graph. 


Jeffrey L. (Jeff) Stouffer is an Investment Advisor Representative and manages the Alexandria VA office of Kingsview Asset Management. As a practicing financial advisor serving the needs of individuals and small businesses, he believes in using a wide range of investment strategies, including alternative investments. All strategies are client centric and unique. He can be reached at jeff.stouffer@kingsviewassetmanagement.com. He has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.

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