When You Play Defense With Consumer Staples, Which ETF Should You Own? Funds From State Street and First Trust Offer a Stark Choice.

The State Street Consumer Staples Select Sector SPDR ETF (XLP 0.39%) provides low-cost exposure to broad U.S. staples, whereas the First Trust Nasdaq Food & Beverage ETF (FTXG 0.60%) targets a narrower slice of the industry with a focus on smart-beta selection criteria.

Both the State Street fund and the First Trust fund seek to capture the defensive qualities of the consumer staples sector, which often serves as a portfolio anchor during periods of market turbulence.

However, they go about it very differently. The State Street fund tracks a market-cap-weighted index of S&P 500 staples, while the First Trust fund seeks to track a different index, the Nasdaq U.S. Smart Food & Beverage Index, which uses factors such as volatility and growth to overweight or underweight components.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The State Street fund is significantly more affordable for long-term investors, sporting an expense ratio of 0.08%. This is a fraction of the 0.6% charged by the First Trust fund. While the First Trust fund provides a slightly higher trailing-12-month dividend yield of 2.7% compared to 2.6% for the State Street fund, the 0.52 percentage-point cost difference remains a substantial factor for investors to consider.

Performance & risk comparison

What's inside

The State Street Consumer Staples Select Sector SPDR ETF concentrates heavily on the consumer defensive sector at 99%, with a minor 1% allocation to consumer cyclical stocks. Its largest positions among its 35 holdings include Walmart (WMT 0.80%) at 10.83%, Costco Wholesale (COST 1.29%) at 9.1%, and Procter & Gamble (PG 0.12%) at 7.1%. This fund launched in 1998 and paid $2.18 per share over the trailing 12 months.

In contrast, the First Trust Nasdaq Food & Beverage ETF is narrower, focusing on consumer defensive at 94%, basic materials at 4%, and industrials at 2%. Its largest positions among its 31 holdings include Archer-Daniels-Midland (ADM 1.83%) at 9.9%, Mondelez International (MDLZ 1.22%) at 8.5%, and The Kraft-Heinz Company (KHC 1.62%) at 8.3%. This fund launched in 2016 and paid $0.61 per share over the trailing 12 months.

Which fund is the better buy?

For a fund that has been around for a decade, the First Trust Nasdaq Food & Beverage ETF has a disappointing track record. Its performance since inception has been a negative 3.13% return. It also has negative 5-year (-1.04%) and 3-year (-2.3%) returns, too. But for a roaring rally during the pandemic when consumer staples were in high demand, FTXG has few periods of returns that an investor would be pleased with. Clearly, few investors are happy with the fund’s performance, given its assets under management have slid to just over $22 million. This creates a real risk of closure by the fund’s sponsor, which investors have to treat as a sale for tax purposes. A rule of thumb is that ETFs need $150 million in assets under management to be viable in terms of costs and income for the sponsors.

By sticking with a simpler approach of just tracking a consumer staples index rather than using factors like First Trust, the State Street fund has given better results over the 3-year (7.39%), 5-year (5.97%), and 10-year 7.47%) time frames.

When you’re playing defense with consumer staples, you also want lower costs to help mitigate the damage to your portfolio. State Street’s XLP gives you that, and coupled with its sizeable assets under management, makes it the hands-down choice to make here.

For more guidance on ETF investing, check out the full guide at this link.