Investing only in Consumer Staples ETF (VDC)??

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Houston101
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Investing only in Consumer Staples ETF (VDC)??

Post by Houston101 » Sat Jun 25, 2011 11:26 am

What would be the disadvantage of investing in consumer staples ETF only ?

It is dull, boring & has consistent returns.

Any thoughts?

pkcrafter
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Post by pkcrafter » Sat Jun 25, 2011 11:34 am

Lack of diversification, mainly.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

yobria
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Post by yobria » Sat Jun 25, 2011 11:55 am

Would work if you have inside information about this sector the market doesn't.

Otherwise no reason to think it's mispriced vs other sectors, so might as well own them all.

Nick

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Houston101
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Post by Houston101 » Sat Jun 25, 2011 2:05 pm

pkcrafter wrote:Lack of diversification, mainly.


Paul
Of course, but who cares if it works. I am just not sure if there is any sector specific risk that I am not considering?

lazyday
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Re: Investing only in Consumer Staples ETF (VDC)??

Post by lazyday » Sat Jun 25, 2011 2:26 pm

Houston101 wrote:It is dull, boring & has consistent returns.
It has had consistent returns. Might not in the future.

To be honest, I like Consumer Staples, and Health Care sectors. But there's risk when overweighting a sector, because the future will have surprises. Overweighting to 100% is very risky. Sectors fall out of favor and can be priced lower, and/or their economic performance can suffer compared to the rest of the market.

To reduce risk, theory says to hold enough fixed income. Such as intermediate term or short term Treasury bonds, TIPS, I bonds, or CDs with low early withdrawal penalties.

I also would avoid tilting to small or value. Not all agree, but I think that such tilts increase risk.

It is also important to diversify, such as by holding both Total US market and Total International Stock Market. They might perform differently. Even if they both fall together in a crash, they might not fall exactly the same speed, and they might recover at very different rates.

For myself--I'm not comfortable suggesting this to others--I invest in stocks I consider to be resilient, with steady, consistent or growing earnings. I use individual stocks, which can be risky and isn't recommended by many, but if I were using mutual funds, I might use for US, an equal proportion each of VG Dividend Growth, VG Dividend Appreciation, Bridgeway Blue Chip index, SSGA Staples ETF, SSGA Health Care ETF. And for foreign, I'd use VG Total International Stock Market. And I would hold that portfolio even if it underperformed the market.
This combination does not stand up to academic scrutiny. Theory would say it is inferior to simply holding the market TSM and TISM. But compared to something like 100% Consumer Staples, it's probably much more sensible.

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SVariance1
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Post by SVariance1 » Sat Jun 25, 2011 4:18 pm

If it is cheap, then putting some in it might not be a bad idea, depending on what is in it. I would not put my entire portfolio in it. You will certainly lag in up markets but should do better in down markets relative to the broad equity market. I like the defensive nature of staples, especially in this environment.
Mike

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