Best & Worst ETFs & Mutual Funds: Consumer Staples Sector

The Consumer Staples sector ranks first out of the ten sectors as detailed in my Sector Rankings for ETFs and Mutual Funds report. It gets my Attractive rating, which is based on an aggregation of ratings of eight ETFs and eight mutual funds in the Consumer Staples sector as of October 3, 2013. Prior reports on the best & worst ETFs and mutual funds in every sector are here.

Figures 1 and 2 rank all 8 ETFs and all 8 mutual funds in the sector that meet our liquidity standards.  Not all Consumer Staples sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 23 to 118), which creates drastically different investment implications and ratings. The best ETFs and mutual funds allocate more value to Attractive-or-better-rated stocks than the worst ETFs and mutual funds, which allocate too much value to Neutral-or-worse-rated stocks.

To identify the best and avoid the worst ETFs and mutual funds within the Consumer Staples sector, investors need a predictive rating based on (1) stocks ratings of the holdings and (2) the all-in expensesof each ETF and mutual fund. Investors need not rely on backward-looking ratings. My fund rating methodology is detailed here.

Investors seeking exposure to the Consumer Staples sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2.

Get my ratings on all ETFs and mutual funds in this sector on my free mutual fund and ETF screener.

* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity.

Guggenheim S&P Equal Weight Consumer Staples ETF (RHS) is excluded from Figure 1 because its total net assets (TNA) are below $100 million and does not meet our liquidity standards.

* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.

ICON Consumer Staples Fund (ICLEX) is excluded from Figure 2 because its total net assets (TNA) are below $100 million and do not meet our liquidity standards.

Vanguard Consumer Staples ETF (VDC) is my top-rated Consumer Staples ETF and Vanguard Consumer Staples Index Fund (VCSAX) is my top-rated Consumer Staples mutual fund. Both earn my Attractive rating.

PowerShares S&P SmallCap Consumer Staples Portfolio (PSCC) is my worst-rated Consumer Staples ETF and Fidelity Select Portfolios: Construction and Housing Portfolio (FSHOX) is my worst-rated Consumer Staples mutual fund. Both earn my Dangerous rating.

Figure 3 shows that 39 out of the 207 stocks (over 45% of the market value) in Consumer Staples ETFs and mutual funds get an Attractive-or-better rating. However, only three out of nine Consumer Staples ETFs (83% of total net assets) and one out of nine Consumer Staples mutual funds (less than 20% of total net assets) get an Attractive-or-better rating.

The takeaways are: mutual fund managers allocate too much capital to low-quality stocks and consumers are putting their money into the best ETFs.

As detailed in “Cheap Funds Dupe Investors”, the fund industry offers many cheap funds but very few funds with high-quality stocks, or with what I call good portfolio management.

Investors need to tread carefully when considering Consumer Staples ETFs and mutual funds, as less than a quarter of all of these funds receive and Attractive or better rating.  Only three ETFs and one Consumer Staples mutual fund in the Consumer Staples sector allocate enough value to Attractive-or-better-rated stocks to earn an Attractive rating.

The Clorox Company (CLX) is one of my favorite stocks held by Consumer Staples ETFs and mutual funds and earns my Very Attractive rating.  Clorox has grown after tax profit (NOPAT), compounded annually, by 5% over the past 15 years.  The company has also increased economic earnings in 8 of the past 10 years by maintaining a return on invested capital (ROIC) of at least 10% in the same timeframe.  At ~$83/share CLX trades at a price to economic book value of only 1.1.  This valuation means the market expect that Clorox will only grow its NOPAT by 10% over the remainder of its corporate life. This scenario seems too pessimistic for a company with a history of such strong and consistent growth.  CLX is a great stock with strong growth prospects and a cheap valuation.

Bunge Ltd. (BG) is one of my least favorite stocks held by Consumer Staples ETFs and mutual funds and earns my Dangerous rating. Bunge is a food processing company that made two large acquisitions of margarine manufacturers in 2008 and 2009, but has yet to see a return on their investments.  Economic earnings have been negative for the past four years.  Return on invested capital (ROIC), starting at 14% in 2008, has declined to 4% in 2012, below the weighted average cost of capital (WACC) of 6%.  At ~78/share, the stock looks expensive to me. The cash flow expectations in the current valuation are for 10% compounded annual growth in NOPAT for 9 years. Those expectations seem awfully high for a company in the food processing business. Declining profits and high expectations for future profits make BG a stock to avoid.

121 stocks of the 3000+ I cover are classified as Consumer Staples stocks, but due to style drift, Consumer Staples ETFs and mutual funds hold 207 stocks.

Figures 4 and 5 show the rating landscape of all Consumer Staples ETFs and mutual funds.

My Sector Rankings for ETFs and Mutual Funds report ranks all sectors and highlights those that offer the best investments.

Review my full list of ratings and rankings along with reports on all 9 ETFs and 9 mutual funds in the Consumer Staples sector.

Jared Melnyk contributed to this report.

Disclosure: David Trainer and Jared Melnyk receive no compensation to write about any specific stock, sector or theme.