Protecting Your Purchasing Power

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

I just read Bill Grosss's column in the Financial Times today, Feb. 27. He writes about a common theme nowadays: currency wars. It's evident that there is a global trend towards currency debasement. Most G10 central banks are printing paper money, and hence re-inflating real assets in nominal terms. As a matter of fact, nominal currency depreciation might be one of the main factors behind the 35% price appreciation in the S&P 500's ETF (NYSEMKT: SPY) since January 2010.

The ways to play this trend are many. In my view, the smartest way to play currency debasement is through investing in companies that can price their goods or services above the ongoing rate of inflation. Besides, those companies should sell their products regardless the state of the economy. It's not just food companies that are going to protect you from inflation. Tobacco, Alcohol, and Pharmaceutical are sectors that are going to defend you too. On top of great inflation protection, companies operating in those sectors will usually provide a reasonable cash dividend yield. That said, all those three sectors are very dependent on government taxes and regulations. Hence, the best thing you can do to defend your savings is building a diversified portfolio with different consumer goods companies operating globally. If you don’t have a huge portfolio you can do so through Exchange Traded Funds.

The Funds.

There are many funds trading in on the market that you could buy, but what's the correct one? In principle, you need a diversified fund within the consumer goods space. My favorite one is the iShares S&P Global Consumer Staples Index Fund (NYSEMKT: KXI). The fund seeks results that correspond to the price and yield performance of the S&P Global Consumer Staples Index. I think this ETF is superior to the Consumer Staples Select Sector SPDR Fund (NYSEMKT: XLP). Both funds include cosmetic and personal care, beverages, tobacco and food products that operate all around the world. The main difference is that KXI's main holdings are just better companies. One of the main reasons for this is that XLP does not include alcoholic beverage companies in its portfolio, and some alcoholic beverage companies are among the most efficient high growth companies in the world.

KXI's top 10 holdings are all names I have written about in this blog, and most of them are my favorites. Actually Nestle, which I described as the perfect consumer goods enterprise, is the main holding (7.78% of the fund), followed by Procter & Gamble, Coca-Cola, Wal-Mart, PepsiCo, British American Tobacco, Diageo, AB InBev and Altria. All those companies own great brands, and its businesses are protected by high barriers to entry. Nestle in particular is the best non-alcohol consumer goods company in the world, while AB InBev is by far the world's most efficient cash flow machine. KXI's cash dividend yield is not high at 2.85%, but it's always growing. The fund trades at x1 Net Asset Value (NAV) and 2013 x18 P/E. Best of all, more than 62% of the fund's assets are in the foods and beverage space, which is the sector that can replicate inflation more accurately. The total expense ratio (how much iShares is charging you to keep the fund going) is relatively low at 0.48%.

XLP is also a good fund and trades at a similar valuation level (x1 NAV and 2013 17.5 P/E), although it has a much lower expense ratio (at 0.18%) and pays a slightly higher cash dividend yield (at 2.98%). The main difference is that its positions are more concentrated and the fund does not include global great companies such as Nestle, AB InBe,v or Diageo within its top holdings. The top 4 holdings (Procter and Gamble, Philip Morris, Coca-Cola and Wal-Mart) concentrate 43% of total assets and the fund includes only 44 names versus +100 for KXI. If the point of holding ETFs is cheap diversification, then there is no point to holding a concentrated ETF.

If you are trying to defend your savings from inflation, your savings account or investing in high graded bonds are not the place to be right now. Extremely low rates of interest (a 10 year US treasury yields just 1.90%) will kill the purchasing power of the money you hold in your account. One way to be protected is holding well managed companies with strong and long lasting businesses and, hence, pricing power. A cheap way to do so is buying diversified funds (ETFs) that invest in industries with all those characteristics. KXI seems like a plausible alternative.


martinzaldua has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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