With fears of a recession rising, many investors are looking for a safe haven to allocate their capital into. Does the iShares Global Consumer Staples ETF (ASX: IXI) fit the bill?
Exchange-traded funds, or ETFs, are investment funds that are listed on a securities exchange and provide exposure to a range of shares or assets with a single purchase. ETFs can be ‘managed funds’ or ‘index funds’, or in other words, active or passive.
The Australian Finance Podcast episode below explains ETFs, index funds and managed funds in more detail:
Why Consumer Staples?
When a recession hits, the first action many people take is to cut their spending. This affects all businesses, but there are some expenses that are harder to cut than others. Consumer discretionary spending is relatively simple to cut, for example holding out on buying a new car or purchasing new clothes. In contrast, consumer staples are, well, staples.
Staples are the sort of products that you need, regardless of a recession, and it can be difficult to reduce spending in this category by any material amount. That’s why businesses in the consumer staples industry are often sought after in the lead up to, or during, a recession. These businesses produce essential products, for example food and household items.
iShares Global Consumer Staples ETF
The iShares Global Consumer Staples ETF, or IXI ETF, is designed to make investing in the consumer staples industry easy. The ETF aims to track the performance of the S&P Global 1200 Consumer Staples Sector Capped Index.
It achieves this by investing in 110 holdings (companies and cash) including the likes of Procter & Gamble Co (NYSE: PG) and Walmart Inc (NYSE: WMT). Most of the companies in the ETF are based in the US (51%) but the ETF covers nine countries in total, including the UK, Switzerland, Japan and France.
All of the companies in the portfolio are deemed consumer staples companies. So, do they actually perform well during a recession?
Well, the ETF listed in 2006, shortly before the GFC. Since then, IXI has returned 9.35% per year despite the S&P 500 falling around 50% during the recession. Over the last five years, returns have been even higher at 12.67% per year.
The above returns include dividends, which are paid semi-annually. The current trailing dividend yield is 2.02%.
Fees & Risks
The IXI ETF charges a management fee of 0.47%, which is higher than a lot of other index-tracking ETFs.
One obvious risk is the fact that all of the companies are consumer staples companies, and most are based in the US. As this is an industry-specific ETF, it would be more appropriately used as a tactical component of a portfolio.
Although the ETF has performed well since 2006, there is no guarantee that it will continue to perform well in recessions, and in a downturn, you would still expect this ETF to fall.
The performance of the IXI ETF is appealing and there are some high-quality names in the portfolio. While I do see the management fee as a downside, this is still an ETF worth considering if you’re concerned about the impact a recession would have on your portfolio.
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Disclosure: At the time of writing, Max has no financial interest in any of the companies mentioned.