The State Street Consumer Staples ETF Offers Sharper Focus and Lower Costs Than The iShares US Consumer Staples ETF

The main differences between the State Street Consumer Staples Select Sector SPDR ETF (NYSEMKT:XLP) (XLP) and iShares US Consumer Staples ETF (NYSEMKT:IYK) (IYK) come down to cost, sector purity, and size, with XLP offering lower expenses, higher liquidity, and a sharper focus on consumer staples.

Both ETFs target U.S. consumer staples stocks, but the comparison between XLP and IYK reveals important distinctions in portfolio composition, fees, and sector emphasis. Investors weighing these funds may want to consider whether a more focused approach or a broader sector mix aligns better with their goals.

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 charges 0.08% annually compared to IYK's 0.38%, though XLP offers a slightly higher dividend yield of 2.7% versus IYK's 2.4%.

Performance & risk comparison

What's inside

XLP is tightly focused, with 37 holdings dedicated entirely to consumer defensive companies, and has been around for 27 years. Its largest positions are in Walmart, Costco Wholesale, and Procter & Gamble, reflecting a pure-play approach to the sector. The fund’s concentration means it closely tracks the performance of household products, food, beverages, and personal care giants.

IYK, by contrast, spreads its 55 holdings across a broader mix, including consumer defensive (86%), healthcare (12%), and a small basic materials stake. Top names like Procter & Gamble, Coca-Cola, and Philip Morris International anchor the portfolio, but the inclusion of healthcare adds a layer of diversification that could appeal to those seeking more than just consumer staples exposure.

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Foolish take

Both XLP and IYK market themselves as consumer staples ETFs. However, despite that designation, the two funds take different approaches.

XLP appears to emphasize direct retailing more. As previously mentioned, Walmart and Costco are its top two holdings, stocks IYK does not own at all.

In contrast, IYK focuses almost exclusively on producers, despite being ostensibly a more diversified portfolio with the health care and materials designations on some of its stocks. Its only retail-related holding, CVS Health, now derives most of its revenue from its health care benefits and health services segments.

Also, IYK has consistently delivered higher returns. Over the last five years, it earned about $80 more for every $1,000 invested and experienced lower losses over the last year. That would indicate that investors can justify paying IYK’s higher ETF expense ratio.

Finally, investors should note comparisons to the S&P 500. Despite positive returns, investors should remember that the SPDR S&P 500 ETF Trust (SPY) delivered over 21% returns during the last year and averaged more than 17% yearly returns during the previous five years, outpacing both of the consumer staples funds.

It is worth nothing that both fund's dividend yields exceed the less than 1.2% yield of the S&P 500. Still, considering SPY's overall returns, a desire for dividend-driven income is likely the best reason to own either of these consumer staples funds at this time.

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, expressed as a percentage, that a fund charges its shareholders.
Assets under management (AUM): The total market value of all assets managed by a fund.
Dividend yield: Annual dividends paid by a fund or stock, expressed as a percentage of its price.
Beta: A measure of a fund’s volatility relative to the overall market, typically the S&P 500.
Max drawdown: The largest percentage drop from a fund’s peak value to its lowest point over a specific period.
Sector purity: The degree to which a fund invests exclusively in a specific sector, without including other industries.
Consumer defensive: Companies that produce essential goods like food, beverages, and household products, often resilient during economic downturns.
Portfolio composition: The mix of different assets, sectors, or holdings within a fund.
Pure-play: A fund or company focused exclusively on a single industry or sector.
Diversification: Spreading investments across various assets or sectors to reduce risk.
Holdings: The individual stocks, bonds, or other assets owned by a fund.

Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Walmart. The Motley Fool recommends CVS Health and Philip Morris International. The Motley Fool has a disclosure policy.