35.8% is the lowest gross margin the company has ever reported, judging from the data from roic.ai that goes back to 1986!įurthermore, consumers are increasingly switching to private label brands, as their wallet gets squeezed from inflation. labor), logistics (supply-chain), and commodity costs (energy, raw material inputs). Clorox's FY2022 gross margins fell 780 basis points to 35.8% on the back of higher manufacturing (i.e. More importantly, profit margins, and hence earnings growth, is under pressure from soaring inflationary pressures.įor example, take the recent earnings release from Clorox ( CLX). First, as we mentioned above, valuations are ~20x now vs. Unfortunately, future returns may be harder to come by.

This level of valuation was only exceeded in the late 90s, before the dot-com crash took it much lower.įigure 6 - Consumer Staples sector valuations ()įurthermore, we can see that the XLP's strong 10-year performance of 10.4% is really a combination of the low starting valuation (P/Es were in the low teens after the Great Financial Crisis in 2008/2009), and expanding profit margins leading to earnings growth (Figure 7).įigure 7 - Consumer Staples sector profit margins () Earnings Headwind From Inflation On a forward basis, the consumer staples sector is trading at ~20x P/E, which is high historically. While the XLP ETF has delivered fine historical performance, my main concern regarding the fund is the valuation of the underlying securities. The XLP ETF is a low-cost fund, with gross expense ratio of only 0.10%. The distribution is paid quarterly and the latest distribution amount of $0.5129 / share was paid on June 24, 2022.įigure 5 - XLP Distribution history (Seeking Alpha) Fees The distribution has been on an upwards trend with a 6% 5-Yr CAGR (Figure 5). Its distribution amount is variable and is dependent on the underlying securities. The XLP ETF pays an above market current yield of 2.5% vs. The XLP has a 0.58 beta to the market.įigure 4 - XLP risk metrics () Distribution & Yield the S&P 500 at 14.0% Stdev and a 20.0% drawdown respectively (Figure 4). However, the XLP does have significantly lower risk metrics, with 10-Yr Standard deviation (Stdev) of returns at 12.0% and max drawdown of 13.6% vs. the S&P 500 which is down 16.1%.įigure 3 - XLP historical returns () This is lower than the S&P's returns of 12.4%, 11.8%, and 13.1% in the same time frames. The XLP ETF has had decent historical returns, with 3/5/10 year annual returns of 9.2%, 8.9%, and 10.4% respectively (Figure 3).

The top 10 holdings make up 70% of the fund.įigure 2 - XLP top 10 holdings () Returns The fund is dominated by four companies: Procter & Gamble ( PG), Coca-Cola ( KO), PepsiCo ( PEP), and Costco ( COST), which collectively make up 46% of the fund (Figure 2). Its sub-industry allocation is shown in Figure 1.įigure 1 - XLP sub-industry breakdown () Portfolio HoldingsĪs the name suggests, the fund is made up of companies in the consumer staples sector. The index includes companies that are identified as Consumer Staples companies as defined by the Global Industry Classification Standard ('GICS') and is market cap weighted (larger companies have a larger weight). The Consumer Staples Select Sector Fund aims to provide returns that correspond to the Consumer Staples Select Sector Index, which is effectively the Consumer Staples sector of the S&P 500 Index. The Consumer Staples Select Sector Fund is a quick and easy way for investors to get exposure to companies in the consumer staples sector.

Therefore, I am recommending a hold on this ETF. Furthermore, there are increasing signs of earnings headwind from inflation. While the XLP ETF's long-term historical performance has been good, I am concerned about the valuations in the consumer staples sector in general. With market volatility top of mind, some investors may be attracted by defensive sector funds like the Consumer Staples Select Sector Fund ( NYSEARCA: NYSEARCA: XLP).

Staples my time manager