VCSAX: Consumer Staples Don’t Get Much Better Than This

By | November 20, 2015

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Summary Low expense ratio with great long term returns. High yield for some volatility protection. Good sector diversification and strong holdings. Mutual funds are a good way to improve an investor’s risk adjusted return. Investing in consumer staples is not only a good way to diversify, but also helps with downside risk when the market takes a tumble. The fund I will be looking at is the Consumer Staples Index Fund Admiral Shares (MUTF: VCSAX ) which seeks to track the performance of the MSCI US Investable Market Consumer Staples 25/50 Index. This index has performed well over the last decade and comes with a decent dividend yield Yield This index has a distribution yield of 2.47%. If you’re looking for a high yield portfolio and seeking to invest in consumer staples, VCSAX is a great fit. Even without needing an income from your portfolio this has been a good investment showing an annual return of 10.39% over the past ten years. A lot of this can be attributed to consumer staples not taking the same hit the S&P took in 2008. Expense Ratio The expense ratio for VCSAX is .12% which is fine for being a passively managed mutual fund. I’m in favor of going the passively managed route for the consumer staples sector. With the Lipper peer average expense ratio being 1.51% it’s not worth the trouble of trying to beat an index. This is a top percentile performing index compared to competitors; When you don’t have to pay a high expense ratio – don’t! Diversification Index is well diversified and attempts to fully replicate its benchmark. The benchmark makes investments in the consumer staples market and should tend to be less sensitive to economic cycles. There is high correlation with the S&P and an investor should expect a lot of volatility if this is a large portion of their portfolio. Here are a list of the top ten holdings: There are 100 holdings and 56% of the weight is in the top ten. Even though this fund has performed very well, I would still like to see more diversification. I would make this a small portion of my portfolio for a more balanced return in the event of another big hit taken by the market. On the bright side, many of the companies in the top ten have been around for a while and shown they can shift strategies when needed. Procter & Gamble (NYSE: PG ) has been around since 1837 and has changed strategies many times. If there was ever a company to bet on surviving, this wouldn’t be a bad choice. PG has shown a long track record of a rising dividend which will help in a down market. The growth has been iffy lately but PG is making many changes and investing in the future. During an earnings calls management said they had many new products coming out. With the billions they are spending on R&D, if some of the proprietary technologies are successful there may be some serious company growth down the road. If I were to pick a single consumer staples company for my portfolio, Procter & Gamble is an easy choice for a long investment. Performance The following graphs show a major upside to consumer staples over the last decade: Over the past five years VCSAX and the S&P 500 have shown a strong correlation, as I would suspect. Looking at the ten year range there is a large difference. During a market crash a consumer staples index is going to take a punch but people are still going to make purchases. There will be some cutbacks, but nothing like there will be on the market as a whole. The other reason for the index to show lower losses is the high yield which will help protect returns during a down market. Conclusion When it comes to a consumer staples index VCSAX is as good as they come. The low expense ratio is really nice to see and helps with staying close in returns to the benchmark: In addition to having a good five year annual return of 14.54%, there has also been a great ten year return of 10.39%. With the crash in 2008, many investments reacted like the S&P 500 and it really diminished returns over the last decade. Consumer staples is a great way to reduce portfolio risk when it comes to the market taking a dive. Scalper1 News

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