ETF Talk: Trade War Winners

If you’ve been following the news at all lately, you’ll know that headlines are focused, front and center, on President Trump’s tariffs and trade wars with Mexico, Canada and China.

The effects have, overall, been negative for the broader market, and I, myself, have made strong condemnations of these tariffs (i.e., taxes), as U.S. companies usually pass such additional costs on to their customers by raising their prices. Higher prices mean higher inflation, and higher inflation means more constrained and more restricted economic activity. Hence, the recent downward trend across the broader market.

So, what to do when life gives you proverbial lemons? Well, believe it or not, there are some trade war winners, and today, we’ll be looking at one of them: Vanguard Consumer Staples Index Fund ETF Shares (VDC).

VDC is an exchange-traded fund in the consumer staples sector. The fund is made up of companies that produce everyday household goods and essential personal items that many of us utilize, as well as food, beverages and tobacco companies. It tracks the investment performance of the MSCI US Investable Market Consumer Staples 25/50 Index, a benchmark of large-, mid- and small-cap U.S. stocks in the consumer staples sector.

While tariffs hurt companies that sell desired, but not strictly necessary products (aka, “discretionary”), those selling essential products (aka, “non-discretionary”) are in a more favorable position. For VDC, which holds companies that produce essential products, this has meant buoyancy in the fund’s price and a long-term trend that looks bullish. After all, eating, brushing our teeth and cleaning our houses are necessities of life.

The fund has net assets of $9.05 billion and a low expense ratio of 0.09%. It also provides a nice 2.2% yield. It is down 1.39% over the last month, down 0.98% over the last three months and up 3.12% year to date.

VDC has a basket of 103 stocks. Top holdings include familiar big names, such as Costco (COST), Walmart (WMT), Proctor & Gamble (PG), Coca-Cola Co. (KO), Philip Morris, International (PM), PepsiCo Inc. (PEP), Colgate-Palmolive (CL) and Target Corp. (TGT).

Chart courtesy of Stockcharts.com.

As the chart above shows, VDC is on an upward trend. Though the broader market has taken a downward turn, consumer staples remain strong. VDC has crushed other consumer staples funds, like Consumer Discretionary Select Sector SPDR ETF (XLY), and hit a 52-week high of $226.63 in February. It continues to hover in the $220s so far this month. What has VDC got that makes it so strong?

It all comes down to demand in sensitive economic times. The fund that owns the companies selling essential (and sometimes what we perceive to be essential) products wins. With strong holdings like Walmart and Costco, the largest holdings in the fund, and big gains in Philip Morris, this ETF is likely to continue not only weathering the current economic storm but beating out other funds.

Be aware, however, that all sectors go through cycles. Investors should always do their due diligence before adding any stock, fund or ETF to their portfolio.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.