What is the consumer staples sector?

When many investors first begin building an investment portfolio, they inadvertently veer toward the consumer staples sector. Consumer staples are companies that produce and sell essential products that people use daily, regardless of economic conditions. These companies tend to represent more stable investments, as consumers don't slow their spending on these products when tough economic times hit. 

Investing in the consumer staples sector can provide you with some stability for your portfolio but come with drawbacks. Before investing in consumer staples, read about some essential products that make up the sector and how these investments have traditionally performed. 

Overview of the consumer staples sector

The top consumer staple stocks within the sector are issued by companies that produce and sell products that are considered essential and in demand regardless of economic conditions. These companies tend to have stable and predictable earnings because demand for their products is relatively constant, regardless of economic conditions. This means they usually show less volatility, which can be ideal for long-term investors. 

The importance of the consumer staples sector lies in its ability to provide investors with stability and consistency. In times of economic uncertainty, consumers prioritize spending on essential products rather than discretionary items. Some discretionary items include electronics, luxury apparel and other entertainment items. When the overall economy is doing poorly, consumer discretionary stocks tend to decrease in value while consumer staples remain more stable. You can learn more about the top consumer discretionary stocks here. 

This stability and ubiquitous need make the consumer staples sector relatively resilient to economic downturns. Consumer staples stocks are a popular choice for investors looking for defensive stocks that can provide a steady income stream and protect their portfolios during periods of market volatility. However, these stocks come from companies already established within their respective industries, limiting their potential for growth from the time you invest. 

Using a single purchase, you can use a consumer staples index fund, mutual fund or ETF to invest in various consumer staples.

An exchange-traded fund (or ETF) is a collection of stocks that trade together as a single unit, usually to mimic the overall performance of a particular index or consumer sector. Some examples of ETFs geared toward consumer staples include the Invesco DWA Consumer Staples Momentum ETF and the Vanguard Consumer Staples Index Fund ETF. You can also invest in an ETF that tracks the performance of international consumer goods, including the Global X MSCI China Consumer Staples ETF.

Consumer staples sector historical performance

The consumer staples sector is an important part of the stock market and the global economy, providing stability and consistency to investors and playing a key role in meeting buyers' basic needs around the globe. Historically, the consumer staples sector has been considered a defensive sector, which means that stocks in this sector typically lose less value than the overall market during recessions and depressions. 

According to data from S&P 500 series of index funds, the consumer staples sector has returned an average of 6.56% per year over the past 10 years. This is lower than the overall return of the S&P total market index fund, which returned 9.54% annually on average for the last 10 years. However, these stocks remained more consistent during the last year of economic uncertainty, returning an average of -0.45% compared to the S&P 500's total return of -4.58%. This difference illustrates the benefit of holding your investment funds in consumer staples during periods of negative growth. 

What makes up the consumer staples sector? 

What is consumer staples sector? The consumer staples sector divides into multiple sub-sectors depending on the products the company produces. Here are some of the largest subdivisions of the consumer sector and some of the major players in each industry.

• Food and beverage: Perhaps the most well-known classification of consumer goods, customers will always purchase food and beverage products, regardless of whether the overall economy is doing well or poorly. This sub-sector includes companies that produce and sell food and beverage products, such as packaged foods, snacks, sodas and alcoholic beverages. Some major consumer staple providers in the food and beverage sector include The Coca-Cola Company NYSE: KO and The Kraft Heinz Company NASDAQ: KHC.
• Household, health and cleaning products: Nearly as essential as food and beverage manufacturers, people tend to purchase household supplies, paper products and cleaning-related items throughout the year. This sub-sector includes companies that manufacture toothpaste, commercial bleach, detergent, bandages and more. Some major companies involved in this sub-sector include Proctor & Gamble NYSE: PG, Colgate-Palmolive NYSE: CL and Johnson and Johnson NYSE: JNJ.
• Personal care products: This sub-sector includes companies that produce products people use daily for personal hygiene and cosmetic purposes. Companies in this sector make products like makeup, skincare, soap, deodorant, razors and shaving cream. Some examples of large consumer staple producers in this sector include Estée Lauder Companies NYSE: EL and Unilever LON: ULVR.
• Tobacco: While not as essential as food or dental floss, tobacco products are still strong consumer staples for which people tend to make room in their budgets. Companies in this sector produce and distribute products like chewing tobacco, cigarettes and cigars. Some examples of major companies in this sub-sector include the Altria Group, Inc. NYSE: MO and Philip Morris International Inc. NYSE: PM.

Why invest in the consumer staples sector? 

Investing in the consumer staples sector has several potential benefits for you and your portfolio, including the following. 

• Higher stability: Consumer staples are essential goods that people need daily, making this sector less susceptible to economic fluctuations. During economic downturns, consumers may cut back on discretionary spending but still need to buy essential items. This makes the consumer staples sector a relatively stable and resilient investment option, which can be appealing if you're investing with a long-term focus on a goal like retirement.
• More predictable dividend payments: Many companies in the consumer staples sector pay consistent and predictable dividends to their investors. Dividend payments can provide a regular source of income, which can be especially valuable during economic uncertainty.
• More opportunities for long-term, consistent growth: The demand for essential consumer goods is likely to remain high over the long term, providing long-term growth potential for investors. Additionally, some consumer staples companies invest in innovation and expand their product portfolios, which can provide additional growth opportunities.

How to research the consumer staples sector 

Ready to dig into the consumer staples sector on your own? Use the following steps to research major companies you want to add to your portfolio. 

Take a look at major companies producing essential products

Start by making a list of the companies that operate in the consumer staples sector or viewing a pre-compiled list like this one by MarketBeat. Look for the companies that produce and distribute essential consumer goods that you believe will be continued staples. 

Review financial iInformation

After identifying a few essential companies you should invest in, narrow your search by reviewing financial information. Look up the financial statements and reports of the companies you have identified. Pay attention to revenue, profit margins and market capitalization metrics, which can give you an idea of the company's financial performance and position in the sector. MarketBeat's stock profiles can be an excellent place to start exploring financials. 

Analyze industry trends and stay informed

Look for news articles and reports that discuss trends and developments in the consumer staples sector. This can include changing consumer preferences, regulatory changes, and technological advancements that may impact the industry. Keeping tabs on these fundamental developments can help inform your investment entry and exit points. 

Researching the consumer staples sector requires ongoing investigation and a long-term eye toward investments. Consider consulting with a financial professional before choosing how to invest in the consumer staples market. 

Regulatory landscape

As an investor, it’s crucial that you understand and monitor the changing landscape of the regulatory secretary. While consumer staples companies may not often have to meet as many regulatory requirements as companies in the pharmaceutical or healthcare industries, consumer staple products are still bound by local and federal laws to ensure the safety of products intended for human consumption. 

The most obvious example of regulatory framework in play within the consumer staples sector is within the food product sphere. Food safety regulations aim to prevent foodborne illnesses by setting standards for food processing, storage and transportation. The Nutrition Labeling and Education Act (NLEA) of 1990 put a series of regulations in place for food manufacturers, requiring them to list information about ingredients, serving size and calorie of their products. 

Companies in the consumer staple sector are responsible for funding and undergoing all FDA requirements needed to ensure that products are accurately labeled and safe. While regular testing and oversight is an essential protection for consumers, investors should seek out companies with a consistent history of adherence to labeling and product quality guidelines. 

Investors in the consumer staples sector will also want to be aware of changing regulations related to environmental, social and governance (ESG) principles. ESG regulations refer to the rules and guidelines set by governments and regulatory bodies to encourage companies to consider and report on their environmental, social, and governance practices. These regulations are designed to promote responsible and sustainable business practices, which may set investors up to select investments primed for long-term success. 

As consumer demand grows for ESG compliant companies, more investors are performing fundamental analysis to determine viability in a changing consumer world. This is especially important for investors looking to invest in companies producing alcohol or nicotine products, which have been at the forefront of changing regulations. If your choose to invest in these sectors, monitor your investments closely to determine what impact regulation changes will have on your portfolio stability. 

Investment opportunities and challenges

The ubiquity of the consumer staples sector provides a wealth of opportunities for investors, especially those looking to add a level of stability to their portfolio. Some of the opportunities and market trends that have caught investor attention lately include the following. 

• Growth in health and wellness sector: The growing awareness of health and wellness has led to increased demand for healthier food and beverage products. Investors can capitalize on this trend by supporting companies that offer such products, including consumer staples like United Natural Foods, Inc. NYSE: UNFI that strive to offer primarily organic products. 
• Plant-based and alternative proteins: Related to the increase in demand for health-focused products, the increasing popularity of plant-based and alternative protein products reflects a shift in consumer preferences. Consumers are demanding more than a healthy alternative to meat — they also expect products to contain all of the macro and micronutrients typically supplied by meat and dairy products. Companies offering these options may see significant growth opportunities in coming years.
• Digital transformation: The adoption of e-commerce and digital marketing in the consumer staples sector continues to grow. Investors can explore companies that embrace technology to enhance customer engagement and distribution, and may even want to add a few retail options that focus solely on an online consumer experience to their portfolios. 

Risks within the consumer staples sector are varied, and require dynamic investor attention to manage and mitigate. 

• Regulatory risks: The consumer staples sector is subject to various regulations that can impact product development, marketing and supply chain operations. For example, findings on aspartame from the European Food Safety Authority has affected the formula of popular beverages like Diet Coke sold in Europe, and may affect availability in the future. Investors need to stay updated on regulatory changes that might increase compliance costs or restrict certain products.
• Supply chain disruptions: Coming to prominence in the tech industry’s microchip shortage, supply chain disruptions are also a common concern in the consumer staple industry. Before investing in a consumer staples supplier, research their background and identify limitations that may affect product creation cost. 

Supplying everyday items around the world 

The consumer staples sector is a varied micro-economy that covers a diverse range of companies. While this sector might appeal to investors due to consistent demand, evolving consumer preferences are key in determining which companies will thrive and which are not viable for long-term holds. As an investor, you may want to focus on consumer staples offering enhanced ESG guidance or a plan for future sustainability — two of the top consumer demands in this sector. 

Should you invest in the consumer staples sector?

While consumer staples provide a wealth of benefits, they also have drawbacks. These stocks' ubiquitous nature and dividend payments may cause them to be overvalued, limiting your potential for long-term growth opportunities. You can mitigate the risk of individual losses in the sector by investing in a consumer staples ETF, which offers an easy route to diversified sector exposure.