Invesco RHS ETF: Consumer Staples Dashboard For April

Shopping basket full of variety of grocery products, food and drink on yellow background.

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This monthly article series shows a dashboard with aggregate industry metrics in consumer staples. It is also a review of sector ETFs like the Consumer Staples Select Sector SPDR ETF (XLP) and the Invesco S&P 500 Equal Weight Consumer Staples ETF (NYSEARCA:RHS), whose holdings are used to calculate these metrics.

Shortcut

The next two paragraphs in italic describe the dashboard methodology. They are necessary for new readers to understand the metrics. If you are used to this series or if you are short of time, you can skip them and go to the charts.

Base Metrics

I calculate the median value of five fundamental ratios for each industry: Earnings Yield (“EY”), Sales Yield (“SY”), Free Cash Flow Yield (“FY”), Return on Equity (“ROE”), Gross Margin (“GM”). The reference universe includes large companies in the U.S. stock market. The five base metrics are calculated on trailing 12 months. For all of them, higher is better. EY, SY and FY are medians of the inverse of Price/Earnings, Price/Sales and Price/Free Cash Flow. They are better for statistical studies than price-to-something ratios, which are unusable or non available when the “something” is close to zero or negative (for example, companies with negative earnings). I also look at two momentum metrics for each group: the median monthly return (RetM) and the median annual return (RetY).

I prefer medians to averages because a median splits a set in a good half and a bad half. A capital-weighted average is skewed by extreme values and the largest companies. My metrics are designed for stock-picking rather than index investing.

Value and Quality Scores

I calculate historical baselines for all metrics. They are noted respectively EYh, SYh, FYh, ROEh, GMh, and they are calculated as the averages on a look-back period of 11 years. For example, the value of EYh for food in the table below is the 11-year average of the median Earnings Yield in food companies.

The Value Score (“VS”) is defined as the average difference in % between the three valuation ratios (EY, SY, FY) and their baselines (EYh, SYh, FYh). The same way, the Quality Score (“QS”) is the average difference between the two quality ratios (ROE, GM) and their baselines (ROEh, GMh).

The scores are in percentage points. VS may be interpreted as the percentage of undervaluation or overvaluation relative to the baseline (positive is good, negative is bad). This interpretation must be taken with caution: the baseline is an arbitrary reference, not a supposed fair value. The formula assumes that the three valuation metrics are of equal importance.

Current data

The next table shows the metrics and scores as of last week’s closing. Columns stand for all the data named and defined above.

VS

QS

EY

SY

FY

ROE

GM

EYh

SYh

FYh

ROEh

GMh

RetM

RetY

Staple/Food Retail

-36.98

10.55

0.0258

1.6036

0.0161

21.01

20.79

0.0441

1.9471

0.0334

16.28

22.59

8.32%

10.09%

Food

-27.72

-3.49

0.0374

0.5222

0.0153

14.82

32.43

0.0464

0.6937

0.0251

15.30

33.73

8.46%

5.13%

Beverage

-12.42

-13.19

0.0316

0.2753

0.0143

23.49

41.87

0.0374

0.2694

0.0188

24.65

53.47

11.01%

2.69%

Household prod.

-3.39

11.19

0.0524

1.0785

0.0190

21.26

39.72

0.0439

0.8704

0.0408

17.00

40.83

-2.38%

-22.48%

Personal care

-16.43

20.93

0.0327

0.3570

0.0187

27.16

63.37

0.0389

0.4625

0.0209

21.49

54.86

6.04%

-8.99%

Tobacco

35.32

100*

0.0640

0.7017

0.0207

203.71

51.95

0.0593

0.4548

0.0144

24.97

52.82

8.30%

10.63%

*Capped to 100 for convenience

Value And Quality chart

The next chart plots the Value and Quality Scores by industry (higher is better).

Value and quality in consumer staples

Value and quality in consumer staples (Chart: author; data: Portfolio123)

Evolution since last month

The value score has improved in household products and deteriorated in other industries, the most in tobacco (which stays far above the baseline though).

Value and quality variation

Value and quality variation (Chart: author; data: Portfolio123)

Momentum

The next chart plots momentum data.

Momentum in consumer staples

Momentum in consumer staples (Chart: author; data: Portfolio123)

Interpretation

The tobacco industry is far above the baseline in both value and quality scores. It is, by a wide margin, the most attractive subsector relative to 11-year averages in value and quality metrics. A note of caution about sample size: there are only five tobacco companies in my reference universe. Household products are very close to the historical baseline in quality and have a good quality score. Personal care products are moderately overvalued (by about 16%), but a good quality score may justify it. The beverage industry is also slightly overvalued, and in this case quality is below the baseline. Food and staple/food retail are overvalued by more than 20% and quality doesn’t justify it.

Fast facts on RHS

Invesco S&P 500 Equal Weight Consumer Staples ETF has been tracking the S&P 500 Equal Weight Consumer Staples Index since 11/01/2006. It has a total expense ratio of 0.40%, which is significantly more expensive than XLP (0.12%). It has slightly outperformed the consumer staples benchmark XLP since inception. The difference is only 58 bps in annualized return.

Total Return

Annual Return

Max Drawdown

RHS

404.31%

11.06%

-35.78%

XLP

362.32%

10.44%

-33.45%

The fund holds 32 stocks, with a target weight on rebalancing of 3.125%. As of writing, the largest holding is Lamb Weston Holdings Inc. (LW) with 3.74%. The top 10 holdings have an aggregate weight about 33%. As a consequence, exposure to risk related to individual companies is low. This contrasts with the capital-weighted ETF XLP, whose top 10 holdings weigh 71% of asset value, the top 3 representing 37%.

RHS is significantly cheaper than XLP regarding the usual valuation ratios, as reported in the next table.

RHS

XLP

Price / Earnings TTM

22.21

25.6

Price / Book

3.75

5.81

Price / Sales

1.45

1.77

Price / Cash Flow

14.78

17.05

Data: Fidelity

In summary, RHS is a good instrument for investors seeking exposure to consumer staples and avoid concentration in the largest companies. It is a better value play than the capital-weighted index, but past performance since inception is very close to it. Liquidity makes XLP a better choice for tactical allocation and trading.

Dashboard List

I use the first table to calculate value and quality scores. It may also be used in a stock-picking process to check how companies stand among their peers. For example, the EY column tells us that a food company with an earnings yield above 0.0374 (or price/earnings below 26.74) is in the better half of the industry regarding this metric. A Dashboard List is sent every month to Quantitative Risk & Value subscribers with the most profitable companies standing in the better half among their peers regarding the three valuation metrics at the same time. The list below was sent to subscribers several weeks ago based on data available at this time.

USNA

USANA Health Sciences Inc.

SAFM

Sanderson Farms Inc.

TSN

Tyson Foods Inc.

TAP

Molson Coors Beverage Company

WBA

Walgreens Boots Alliance Inc.

VGR

Vector Group Ltd.

EPC

Edgewell Personal Care Co.

It is a rotating list with a statistical bias toward excess returns on the long-term, not the result of an analysis of each stock.

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