XLP vs. IYK: Which is the Better Consumer Staples ETF?

The Consumer Staples Select Sector SPDR Fund (NYSEMKT:XLP) stands out for its lower cost, higher yield, pure sector focus, and much deeper liquidity compared to the iShares U.S. Consumer Staples ETF (NYSEMKT:IYK), though IYK offers broader diversification, including a slight tilt towards healthcare.

Both funds target the U.S. consumer staples sector, but XLP tracks the S&P 500’s staples stocks with a pure-play approach, while IYK spreads its net a bit wider by including some healthcare and basic materials names.

This comparison helps clarify which of these two sector ETFs may appeal more to investors, depending on their priorities.

Snapshot (cost & size)

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

XLP is notably more affordable, charging just 0.08% in annual fees versus IYK’s 0.38%, and also offers a higher dividend yield at 2.7% compared to IYK’s 2.4%.

This may appeal to cost-conscious investors who also want a little more income.

Performance & risk comparison

What's inside

The Consumer Staples Select Sector SPDR FUND (XLP) delivers exposure to 37 of the largest U.S. consumer staples companies, focusing exclusively on household products, food, beverage, tobacco, and personal care.

Its top holdings as of the latest data are Walmart (NYSE:WMT), Costco Wholesale (NASDAQ:COST), and Procter & Gamble (NYSE:PG).

The ETF is nearly 27 years old, offering long-term sector representation for investors seeking stability and predictability in this defensive corner of the market.

Meanwhile, the iShares U.S. Consumer Staples ETF (IYK) holds 55 stocks, with approximately 86% of its assets allocated to the consumer defensive sector, 11% to healthcare, and 2% to basic materials.

Its biggest positions include Procter & Gamble (NYSE:PG), Coca-Cola (NYSE:KO), and Philip Morris International (NYSE:PM).

This subtle tilt toward healthcare may offer a bit more diversification, but also means IYK is less of a pure-play consumer staples ETF than XLP.

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

Foolish take

Since 2000, IYK has delivered total returns of 724% compared to 633% for the S&P 500 and 501% for XLP.

However, over a more recent time frame, the two ETFs have been outperformed by the S&P 500, as their lack of technology stock exposure left them unable to match the index's tech-powered results.

While IYK has slightly outperformed XLP over the last decade as well, I find myself more interested in XLP.

Despite seven of the ETF's top ten holdings being the same, Walmart and Costco account for 21% of XLP's portfolio and are its top two holdings. Meanwhile, IYK has no exposure to either of these juggernauts.

Furthermore, Procter & Gamble, Coca-Cola, Philip Morris International, and PepsiCo (NASDAQ:PEP) equal 45% of IYK's portfolio as the fund's top four positions.

Although these are all tremendous businesses in their own right, I trust the compounding abilities of Walmart and Costco more. I'm also not as interested in IYK's slight exposure to healthcare if I were to buy one of these ETFs.

With a slightly higher dividend yield and a much lower expense ratio, I'd still lean towards XLP, despite IYK's long-term outperformance. Anchored by its Walmart and Costco holdings, I think the future might be a little kinder to XLP.

Glossary

Expense ratio: The annual fee, as a percentage of assets, that a fund charges its shareholders.
Dividend yield: Annual dividends paid by a fund or stock, expressed as a percentage of its current price.
Beta: A measure of an investment'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.
Max drawdown: The largest percentage drop from a fund's peak value to its lowest point over a specific period.
ETF (Exchange-Traded Fund): An investment fund traded on stock exchanges, holding a basket of assets like stocks or bonds.
Consumer staples: Companies that produce essential products such as food, beverages, and household goods, considered non-cyclical.
Sector ETF: An ETF that focuses on a specific industry or sector of the economy, like consumer staples or healthcare.
Pure-play: An investment focused exclusively on a single industry or sector, with minimal exposure to others.
Liquidity: How easily an asset can be bought or sold in the market without affecting its price.
Diversification: Spreading investments across different assets or sectors to reduce risk.
Total return: The investment's price change plus all dividends and distributions, assuming those payouts are reinvested.

Josh Kohn-Lindquist has positions in Coca-Cola and Costco Wholesale. The Motley Fool has positions in and recommends Costco Wholesale and Walmart. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.