RCD - Vanguard's Consumer Staples ETF Is A Low-Cost SWAN Fund

Summary

• The Vanguard Consumer Staples ETF is a relatively low-cost (0.10% fees) sleep well at night ("SWAN") fund that can be a shelter-in-the-storm during times of economic & market volatility.
• That's because the relatively un-glamorous yet defensive-oriented consumer staples companies make non-discretionary products that consumers require in good times and bad.
• In addition, companies that make consumer staples products can typically pass much (if not all) of inflationary costs right on through to the consumer.
• Today, I'll take a closer look at the VDC ETF - which has top-holdings such as Procter & Gamble, Coke, Pepsi, Costco, and Walmart.
• The VDC ETF has a solid 10-year average annual return of 10.1% and currently has a 30-day SEC yield of 2.30%.

Over the past year, and during the 2022 bear-market, the Vanguard Consumer Staples ETF ( VDC ) significantly outperformed the broad market averages as measured by the Vanguard S&P 500 ETF ( VOO ) and Nasdaq-100 ( QQQ ), while staying relatively even with the DJIA ETF ( DIA ). Indeed, as the right side of the graphic below shows, prior to the YTD market rally, the outperformance of the VDC ETF was even more pronounced. That's because consumer staples companies are relatively defensive stocks that deliver relatively stable (or growing...) revenue, cash flow, and income even during times of economic challenges and market volatility. That being the case, investors should consider allocating some capital to the sector in order to smooth out portfolio performance during market volatility. Today, I'll take a closer look at the VDC ETF to see if it might be a good fit in your portfolio.

Investment Thesis

As mentioned in this article's bullets, companies that make consumer staples products continue to sell products that consumers need no matter what the state of the economy: toothbrushes & toothpaste, home cleaning supplies, feminine hygiene products, makeup & personal grooming products, and products designed for basic home-health - consumers continue to buy all of these products even when inflation hits and the economy slows down. In fact, demand remains so strong that consumer products companies are typically able to pass-through inflation-related costs straight-through to consumers in order to maintain healthy margins. That being the case, and the fact that inflation is still high, today I'll take a closer look at the VDC ETF to see if it makes sense for you to allocate some capital to the fund.

Top-10 Holdings

The top-10 holdings in the VDC ETF (as of January 31st) are shown below and were taken directly from the Vanguard VDC ETF homepage , where you can find more detailed information on this fund. The top-10 holdings equate to what I consider to be a relatively concentrated ~61% of the entire fund of 101 companies:

The #1 holding is Procter & Gamble ( PG ) with a relatively large 12.3% weight. P&G released fiscal Q2 earnings in mid-January that were relatively in-line with consensus estimates. A 10% increase in prices were able to mitigate a 6% decline in volume. P&G maintained its guidance for diluted EPS growth in the range of in-line to +4% versus fiscal 2022 EPS of $5.81.

During the quarter, P&G was able to continue its long-term track record of returning cash to shareholders. Overall, P&G paid out $4.2 billion of cash to shareholders in the form of ~$2.2 billion of dividend payments and $2 billion of common stock repurchases.

P&G is a global powerhouse with products in 170+ countries in 10-different product categories. The company makes globally popular brands like Gillette razors, Cascade, Always, Oral-B, and Tide - among many others. P&G has raised the dividend for 66 straight years - that's longer than the #2 holding, The Coca-Cola Company's ( KO ) 61 years .

PepsiCo, Inc. ( PEP ) is the #3 holding with an 8.2% weight. Pepsi is another strong global brand that makes and sells various beverages & snack foods. Pepsi owns the Frito-Lay, Quaker Foods, Tropicana, and Gatorade brands. The company's Q4 FY22 earnings report was a beat on both the top- and bottom-lines as revenue of $28 billion (+10.9% yoy) beat by $1.18 billion. On the heels of the strong results, PEP increased the dividend by 10%.

PepsiCo trades with a forward P/E of 24.3x and yields 2.61%. The stock is up 5.7% over the past year.

The #5 holding with a 7.3% weight is Walmart Inc. ( WMT ). WMT's earnings are due out on Tuesday. Walmart is having labor challenges, and as a result recently announced it was reducing its pharmacy hours . Meantime, the company is reducing costs by closing down "tech hubs" in Austin, Carlsbad, and Portland in order to consolidate tech operations in San Bruno, California and Bentonville, Arkansas.

Last quarter (Q3), Walmart delivered a relatively strong report and the stock popped 6% higher:

As can be seen in the graphic, revenue growth was strong, but gross profit market was 89 basis points lower yoy. However, during the quarter, WMT generated $3.6 billion of free-cash-flow, paid out $4.6 billion in dividends, and bought back $8.7 billion worth of its shares. The stock is up 4.4% over the past year and currently yields 1.53%.

Tobacco company Altria Group, Inc. ( MO ) is the #8 holding with a 3.3% weight. MO pays a $3.76/share annual dividend and currently yields 7.8%.

The top-10 holdings are rounded out by Colgate-Palmolive Company ( CL ). Morgan Stanley recently upgraded Colgate to a " top-pick " in the household products category. Morgan Stanley has an $82 price target on the stock, which currently trades at $74.52 and yields 2.52%.

From an overall portfolio perspective within the consumer staples sector, the VDC ETF is most highly exposed to the soft-drinks, household products, packaged foods & meats, and super-center stores sub-sectors:

Performance

As mentioned earlier, the VDC ETF has a solid long-term performance track-record:

The following graphic compares the 3-year total returns of VDC ETF with three of its peers: the SPDR Consumer Staples ETF ( XLP ), the Fidelity MSCI Consumer Staples ETF ( FSTA ), and the Invesco S&P500 Equal-Weight Consumer Staples ETF ( RCD ):

As can be seen, the VDC ETF leads the "group of four" - all of which have relatively performed in line with each other, with the possible exception of the laggard XLP ETF, which is - of course - the one I own.

Summary & Conclusions

The consumer ETFs - led by Vanguard Consumer Staples ETF - performed their "defensive" duty during the 2022 bear-market and helped to give investors some portfolio ballast during an otherwise terrible year for the broad market indexes. On a long-term basis, the VDC ETF has been a very solid and steady equity - delivering a modicum of income while delivering an average overall annual return of 10%+. For investors that don't already have big positions in some of the individual holdings in the portfolio (i.e., like P&G, Walmart, etc.), and who don't already hold a consumer staples fund in the portfolio, Vanguard Consumer Staples ETF is a BUY. That said, with the current market volatility, I advise investors not to go "all-in" at once, but rather to establish a starter position and add to it over time, perhaps over 3-6 months, in order to take advantage of market weakness.

I'll end with a 10-year total returns comparison of the VDC ETF versus the broad market averages in order to demonstrate the importance of having a much larger allocation to the S&P 500, DIA, and QQQ as compared to the consumer staples sector:

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