ETF Expert

Health Care ETFs have outperformed the broader market over the last month. They’ve been competitive over the previous 3 months. Even though I have not been a buyer of diversified health care funds, I recognize the possibility of “value” there.

Consumer Staples ETFs are another story altogether. Granted, the segment has the reputation for “Steady Eddie” returns. And those who wish to avoid the volatility associated with economically sensitive sectors (e.g., energy, technology, consumer discretionary, etc.) often journey to the relative quietude of Coca Cola, P&G and Kraft.

Here’s the dilemma. There’s really no way that the corporations responsible for toilet paper, peanut butter and toothpaste can avoid passing along some of the higher costs to consumers. Food prices have rocketed. And surging energy prices adversely affect the manufacturing process.

Nevertheless, all of the major Consumer Staples ETFs have set new 52-week highs. They’ve hit the bull’s eye… in spite of the broader S&P 500 SPDR Trust’s (SPY) inability to do the same. In fact, the S&P 500 has yet to fully recover the ground lost since Libya’s uprising began (February 18).

Here in earnings season, the most common estimate for the S&P 500 is 11% growth in year-over-year earnings. The double-digit percentages sound fabulous, until you strip out energy and materials. (Each is supposed to add approximately 25%.)

What about consumer staples? Well, it is projected to grow at a stable clip of 4.2%. However, even if the overwhelming majority of “Pepsicos” and “Kimberly Clarks” beat the Street, they’re bound to guide lower due to soaring input costs. None of that would seem to favor a sector that is spitting into the wind as it reaches new peaks.

Higher oil, Middle East unrest, an ongoing Japanese disaster, Portugal debt woes and political struggles stateside… the scary backdrop hasn’t really beaten the bull. It has only kept the U.S. market in a trading range.

Still, investors have been pouring money back into equities. What are gun shy fund managers to do? Many are turning to historically tranquil sectors.

Of course, trading ranges don’t last forever. Money managers will have to see enough evidence of earnings improvement and economic acceleration to justify pushing cyclical sectors higher. Otherwise, they’ll wait for ugly duckling moments to buy summer sell-offs.

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