State Street Consumer Staples Select Sector SPDR ETF

XLP

Market cap $17.7B

Market sentiment appears overly defensive in certain areas, suggesting potential mispricing in risk assets. The analysis highlights top-tier BDCs, focusing on dividend yields, price/NAV, leverage, and credit quality. Main Street Capital (MAIN), Capital Southwest (CSWC), and Ares Capital (ARCC) offer strong yields with varying risk profiles.

Consumer staples stocks enter 2026 with deeply reset expectations, compressed valuations, and high short interest, creating an asymmetric risk/reward setup. Sector earnings estimates and guidance have been cut for two years, with 2026 forecasts now extremely modest and management teams aiming to avoid further downgrades. Policy support via tax refunds and the 2026 FIFA World Cup are likely to provide incremental demand, especially in food, beverages, and household staples.

Sector investing — it's a typical strategy for advisors if their clients are looking beyond broad market exposure by targeting a specific sector. The concept is fairly straightforward, but implementing the strategy is not as simple as it sounds.

Consumer staples stocks have gotten off to their best start to a calendar year this century in 2026. But that means the sector is trading at a price-to-earnings multiple higher than it's been in nearly 30 years.

The S&P 500 is still trading near all-time highs, but the consumer staples sector is outperforming by 13 percentage points year to date. History shows that this is an anomaly that's likely to correct itself with a sharp pullback in the S&P 500.

The consumer staples sector exists because people need to eat, clean, and maintain routines regardless of what the economy does.

2026 began on a volatile note, with January shaped by rising geopolitical complexities and renewed trade tensions. However, market volatility and investor nervousness intensified in February, driven largely by the so-called “AI scare” trade.

XLP has nearly doubled FTXG's price return within the last 12 months. FTXG has lagged compared to XLP in both recent returns and five-year growth.

RSPS carries a higher expense ratio than XLP but delivers a slightly better one-year total return. Both ETFs are fully concentrated in the consumer defensive sector.

Dividend stocks and defensive sectors have dramatically outperformed as investors flee AI-vulnerable and AI-spending industries, but valuations now appear stretched. Consumer staples and energy sectors trade at historically high forward P/E multiples, often exceeding the S&P 500, despite lower long-term earnings growth prospects. Materials and industrials have also become extended, with valuations reflecting significant future earnings already priced in, especially given AI infrastructure spending.