XLP vs. VDC: Are Lower Fees Better Than Broader Exposure?

The Vanguard Consumer Staples ETF (NYSEMKT:VDC) and the State Street Consumer Staples Select Sector SPDR ETF (NYSEMKT:XLP) both provide U.S. consumer staples exposure. However, XLP is slightly cheaper and offers a higher yield, while VDC holds more stocks and has delivered better five-year returns.

Both funds aim to track the consumer staples sector, offering investors defensive exposure through household names. This comparison examines fees, performance, risk, portfolio composition, and liquidity for both funds.

Snapshot (cost & size)

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

XLP is marginally more affordable in terms of fees and may appeal to income-focused investors due to its higher dividend yield, while VDC remains competitive in terms of cost and offers a slightly lower payout.

Performance & risk comparison

What's inside

State Street Consumer Staples Select Sector SPDR ETF (XLP) tracks a concentrated slice of the U.S. consumer staples sector, holding 36 stocks with a pure 100% allocation to consumer defensive companies. Its portfolio is led by Walmart (NASDAQ:WMT) at 11.9%, Costco Wholesale (NASDAQ:COST) at 9.2%, and Procter & Gamble (NYSE:PG) at 7.8%. With a fund age of 27 years, XLP provides investors with targeted exposure to industry giants and household staples, while minimizing exposure to other sectors.

The Vanguard Consumer Staples ETF (VDC) takes a broader approach, spreading assets across 105 holdings. Its sector mix is 98% consumer defensive, with a minor 1% in consumer cyclical and a sliver in industrials. Top positions include Walmart at 14.2%, Costco Wholesale at 13.0%, and The Procter & Gamble at 11.2%. This slightly wider scope may appeal to those seeking incremental diversification within the staples sector.

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What this means for investors

Both VDC and XLP offer consumer defensive sector exposure, but XLP’s lower expense ratio and higher yield may appeal to cost- and income-focused investors, while VDC’s broader portfolio and stronger five-year total return could suit those seeking more diversification within the consumer staples sector.

The holdings in each of these funds, as well as their sector allocations, are almost identical, making it very difficult to distinguish between them in terms of each fund's specific holdings. However, XLP offers investors a lower expense ratio, a higher dividend yield, and a slightly lower beta, meaning the ETF will be marginally less volatile than VDC. Those factors could be enough to tip the scales in favor of XLP.

That said, with only 36 stocks, XLP is rather concentrated compared to VDC's 100-plus holdings. That could end up mattering, considering the largest holdings are identical. If those larger companies struggle, the breadth of VDC could ultimately become a differentiator for investors' returns.

When deciding between these two funds, it comes down to the broader portfolio of VDC and whether that is a sufficient factor to outweigh the lower fee and higher dividend yield of XLP.

Glossary

ETF (Exchange-Traded Fund): An investment fund traded on stock exchanges, holding a basket of assets like stocks or bonds.
Expense ratio: The annual fee, as a percentage of assets, that a fund charges its investors.
Dividend yield: Annual dividends paid by a fund or stock, expressed as a percentage of its current price.
Total return: The investment's price change plus all dividends and distributions, assuming those payouts are reinvested.
Consumer staples sector: Industry segment focused on essential products like food, beverages, and household goods.
Consumer defensive: Companies providing essential goods and services that remain in demand regardless of economic conditions.
Consumer cyclical: Companies whose sales and profits are sensitive to economic cycles, such as retailers or automakers.
Max drawdown: The largest observed loss from a fund's peak value to its lowest point over a period.
Beta: A measure of a fund's volatility compared to the overall market, typically the S&P 500.
AUM (Assets Under Management): The total market value of assets that a fund manages on behalf of investors.
Sector allocation: The percentage of a fund's assets invested in different industry sectors.
Liquidity: How easily an asset or fund can be bought or sold without affecting its price.

Jeff Santoro has positions in Costco Wholesale. The Motley Fool has positions in and recommends Costco Wholesale and Walmart. The Motley Fool has a disclosure policy.