Food might be a consumer staple, but does that mean a food ETF can serve up winning numbers? Maybe not.
In the world of food, you have a lot of choices. You can head to the grocery store to pick up the raw ingredients for a gourmet meal, or you can buy a frozen pizza to heat up. Grab a meal from a fast-food franchise just off the highway, hit up the buffet at your local salad bar, or dine in a five-star restaurant. In theory, this seems like an ideal situation for any food ETF.
Food, in some fashion or another, falls into the category of consumer staples. Whether the economy is in shambles or experiencing record job growth and household spending, we always need food. Sure, that might mean rice and beans and canned soup in bad times, or plates of fresh fruit and aged cheeses in the good times.
Like any other sector, consumer staples includes both individual stocks and ETFs, as well as all the other investment options you would expect. In that sense, a food ETF is no different than, say, a renewable energy ETF or a financial sector ETF. But just as you would with any other investment, you have to do your homework before you bite into one of these ETFs.
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Is there a recipe for a delicious food ETF addition to your portfolio?
Generally speaking, the consumer staples sector is a great place to find stocks that don’t jump around too much. Indeed, the staples provide a valuable role as defensive assets in times of economic uncertainty. Consumer staples stocks with reasonably low-risk profiles also present opportunities for investors who want to hedge the higher-risk elements of their portfolios.
There’s also room to grow. Food represents a reasonable 14% of American consumer spending, but it ranges between 30% and 70% in emerging market countries. Despite all of this, however, investing in a food ETF might not be your best bet.
For one thing, there aren’t very many ETFs that focus exclusively on the food industry. There’s the Invesco Dynamic Leisure and Entertainment ETF (PEJ), but along with restaurants such as Chipotle (CMG), the ETF holdings also include hotels, amusement parks, and movie theaters. As you can imagine, a decline in discretionary spending could have a significant impact on this ETF.
On the other hand, about 80% of the holdings in the Invesco Dynamic Food and Beverage ETF (PBJ) are comprised of packaged food and meat companies, soft drink companies, and restaurants. Restaurants do face some pressures depending on economic conditions, but again, packaged foods and possibly soft drinks are a necessity.
If you expand your criteria to include agricultural ETFs, you might include the Market Vectors Agribusiness Fund (MOO), which provides exposure to companies that derive at least 50% of their revenues from agricultural businesses.
Among its holdings, you’ll find various companies such as farm equipment, seed and fertilizer, animal health, and food transport and processing businesses. Monsanto (MON), Potash Corp. (POT), and Deere (DE) are the top three holdings for the fund.
Another food ETF is the PowerShares DB Agriculture Fund (DBA). This ETF offers direct exposure to a basket of 15 agricultural commodity futures covering cattle, hogs, wheat, corn, soybeans, sugar, cocoa, coffee, and more.
There might be a better option
If your portfolio is short on consumer staples, individual stocks might be better investing choices than a food ETF. For example, Sysco Corporation (SYY) is the largest wholesale food distributor in the United States and is expanding internationally. According to estimates, the company has a 16% market share of total food delivery within the United States.
Sysco has an economic moat due to its large scale and entrenched distribution infrastructure, which gives it a cost advantage over most competitors. Thanks to this stability, this Dividend King has raised its dividend every year since it went public, and we expect it to continue to grow in the years to come.
Similarly, New Jersey-based B&G Foods (BGS) is an American food manufacturer that sells familiar shelf-stable and frozen foods in the U.S., Canada, and Puerto Rico. In business since 1889, the company sells 50 well-known and popular food brands, including Cream of Wheat, Green Giant Vegetables, Ortega, Dash, Accent, Crock-Pot, and others.
As a seller of food, the ultimate consumer staple, the company has generated stable earnings from which to pay a generous dividend.
Including companies that provide the basics of life in your portfolio makes sense.
Do you hold any food or food-related ETFs in your portfolio? How do they perform for you?