Consumer staples ETFs struggled heavily in recent times as these failed to attract enough investor attention. Concerns including food deflation, competitive environment, tightening U.S. Presidential election and uncertainty over rate hike dragged the sector down in the past few months. In this scenario, an improving domestic economic scenario and strong consumer confidence that can offset the above mentioned concerns will decide the fate of these ETFs in the days ahead.

Concerns Surrounding Consumer Staples

Among others, food deflation was one of the key headwinds for the consumer staples sector. Oversupply of some food products such as meat, poultry and dairy had a negative impact on prices in the sector. It is also speculated that the price wars between companies will erode profits, leading to declining margins in the near term. Some of these companies are also getting affected by rising competition due to the growth of low-cost, emerging-market production.

Separately, a slowdown in demand in emerging markets, which constitutes one of the largest consumer bases, also had a negative impact on the sector. While nations like Brazil and Mexico are facing economic slowdown, the Middle East, Russia and Ukraine are witnessing continued political and civil unrest. Also, the strengthening the U.S. dollar against the majority of emerging market currencies is hurting consumer staples companies. Moreover, heavy spending on marketing and advertising are also putting pressure on profit margins of companies from this domain (read: Follow Goldman's Call on Dollar with These ETFs).

Meanwhile, market uncertainties as a result of rate hike concerns and anticipation of a close fight in the upcoming U.S. Presidential election are also posing threats for the sector. Though the Fed kept the key interest rate unchanged in its last month’s meeting, there is a high possibility of a December hike. The U.S. Presidential election is also adding to market uncertainty, the heat of which is likely to be faced by all sectors including consumer staples.

Improving U.S. Economy

An improving U.S. economy looks to be the only hope for the sector. Though the economy witnessed sluggish growth in the first half, it is expected to post an impressive rebound in the second half of this year, which may have a positive impact on consumer staples. After a slump in August, the ISM Manufacturing Index rose 2.1 percentage points to 51.5 last month, indicating that manufacturing activity has entered into expanding territory. Strong growth in new orders and production led the gains last month (read: ETFs & Stocks to Play as U.S. Manufacturing Grows).

Moreover, the ISM Services Index increased from 51.4% in August to 57.1% in September, which was also more than the consensus estimate of 52.8%. The reading showed that service sector activity in the U.S. was the best in eleven months. Separately, the Consumer Confidence Index rose from 101.8 in August to 104.1 last month, hitting the highest level since Aug 2007, as per the Conference Board. The two other indexes that seek to track consumers’ sentiments related to the present economic environment and in the days ahead also registered significant gains (read: Consumer Confidence Hits 9-Year High: ETF Winners).

Consumer Staples ETFs to Watch

Despite suffering heavily over the past few months, consumer staples ETFs still have the potential to turn around in the days ahead on the back of an improving domestic economic scenario. Moreover, investors may also try to take advantage of the favorable valuations of these ETFs.

Here we have highlighted three popular consumer staples ETFs that are poised to be on investors’ radar in the near future. These ETFs also carry a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: A Guide to Consumer Staples ETF Investing).

Consumer Staples Select Sector SPDR ETF (XLP Quick QuoteXLP - Free Report)

XLP is an ETF that seeks investment results corresponding to the S&P Consumer Staples Select Sector Index. This fund consists of 38 stocks of consumer staples companies, with around 63% of its assets allocated to the top 10 holdings. The product is slightly tilted toward food & staples retailing, which has a 22.4% share, closely followed by household products (20.8%) and beverages (20.2%). XLP is the largest and most popular ETF in this space with an AUM of over $8.9 billion and an average trading volume of nearly 11 million shares a day. It is a low choice in the domain with an expense ratio of 0.14%.

Vanguard Consumer Staples ETF (VDC Quick QuoteVDC - Free Report)

This fund tracks the performance of the MSCI US Investable Market Consumer Staples 25/50 Index and holds100 stocks in its portfolio. It invests nearly 58% of its assets in the top ten holdings. Sector-wise, packaged foods & meats occupies the top spot with 19.3% of its assets allocated to it. Household products, soft drinks and tobacco also have double digit allocations. It is quite popular with an AUM of $3.4 billion and an impressive average trading volume of nearly 131,000 shares a day. It is the cheapest option in this space with an expense ratio of 0.10%.

First Trust Consumer Staples AlphaDEX ETF (FXG Quick QuoteFXG - Free Report)

The product seeks to follow the performance of StrataQuant Consumer Staples Index. FXG is made up of 41 consumer staples securities and is pretty well spread out across components with none of the securities holding more than 5% of the assets. The product is slightly tilted toward food products, which has a 54.9% share, followed by food & staples retailing (16.5%) and household products (11.3%). FXG has an AUM of over $2.5 billion and a solid average trading volume of nearly 310,000 shares a day. It is slightly expensive with an expense ratio of 0.62%.

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