XLP vs. IYK: A Value Investor's Checklist for Consumer Staples Exposure

For value investors, the choice between consumer staples ETFs often comes down to structural advantages that compound over time. The State Street Consumer Staples Select Sector SPDR ETF (XLP) builds its case on three fundamental pillars: a rock-bottom expense ratio, immense scale, and a concentrated, pure-play portfolio. These factors create a durable margin of safety and operational efficiency that its competitor, the iShares US Consumer Staples ETF (IYK), cannot match.

The cost advantage is stark and material. XLP charges an expense ratio of 0.08%, a fraction of IYK's 0.38%. In a sector known for steady, low-volatility returns, this fee differential is a direct compounding margin of safety. Over decades, the savings from this 0.30% spread can significantly outpace the modest dividend yield differences, making XLP the clear choice for cost-sensitive, long-term capital preservation.

This efficiency is amplified by scale. XLP manages $14.7 billion in assets, dwarfing IYK's $1.2 billion. This deep liquidity provides operational stability, tight bid-ask spreads, and the ability to handle large investor flows without significant market impact. It also reflects a market consensus on the fund's structure, which is a form of validation for its pure-play approach.

The pure-play focus is the third pillar. XLP tracks the Consumer Staples Select Sector Index, delivering 100% allocation to consumer defensive companies with a concentrated portfolio of just 36 holdings. This means capital is deployed directly into the sector's largest, most durable businesses-companies like Walmart, Costco, and Procter & Gamble that have proven resilience through economic cycles. In contrast, IYK's broader mandate includes a 12% tilt toward healthcare and basic materials, diluting its core sector exposure and introducing a level of diversification that is not a pure-play value strategy.

The bottom line is one of structural superiority. XLP's combination of ultra-low cost, massive scale, and concentrated sector focus creates a vehicle optimized for the long-term, compounding goals of value investing. While IYK has delivered slightly stronger recent returns, that performance comes at the price of higher fees and a less focused portfolio. For an investor seeking a pure, efficient, and scalable exposure to the defensive power of consumer staples, XLP's structural foundation is built to last.

Portfolio Economics: The Weight of Concentration and Business Quality

The construction of a fund dictates its exposure to the compounding power of high-quality businesses. In the consumer staples space, the choice between XLP and IYK reveals a fundamental trade-off between pure defensive focus and sector breadth. XLP's portfolio is a concentrated bet on the defensive staples sector, with its top 10 holdings representing 62% of assets. This focus ensures all holdings are in the defensive staples sector, amplifying exposure to companies with durable pricing power and scale advantages. Its top three holdings-Walmart, Costco, and Procter & Gamble-account for over a quarter of assets, creating a powerful tilt toward giants that can navigate economic cycles with relative ease.

IYK's portfolio, by contrast, introduces a 12% tilt toward healthcare and 2% toward basic materials, broadening its sector exposure but diluting its defensive purity. This structure means the fund holds companies with less predictable cash flows and different growth drivers, moving it away from a pure-play defensive strategy. While both funds are concentrated, with the top 10 holdings representing 65% of assets in IYK, the inclusion of non-staples sectors introduces a different risk and return profile. The bottom line is that XLP's construction is a more focused vehicle for capturing the defensive, compounding qualities of the staples sector, while IYK's broader mandate trades some purity for a slightly more diversified consumer-related exposure.

Valuation and Defensive Resilience in a Changing Macro Landscape

The consumer staples sector is facing a structural challenge in a market environment that is increasingly risk-on. The equal-weight benchmark for the sector has dropped to record lows relative to the equal-weight S&P 500, a stark signal that investors are abandoning one of the most traditional defensive trades. This is the opposite of what typically happens during periods of uncertainty. Instead, capital is flowing toward companies with operating leverage and earnings momentum, leaving little for the sector known for predictable demand and steady cash flows. The setup is consistent with a robust bull market where confidence in economic data and corporate earnings remains high.

Against this backdrop, the valuation of the sector's leading ETF, XLP, appears premium. It trades at a Price/Earnings ratio of 19.64 and a Price/Book ratio of 4.20. This suggests the market is paying up for the highest-quality, most durable companies within the sector. The premium may be justified by the defensive characteristics of its holdings, but it leaves little margin for error if the risk-on sentiment shifts.

Both major consumer staples ETFs exhibit the low volatility that defines their defensive profile. XLP has a beta of 0.53, meaning it is less than half as sensitive to broad market swings. IYK, while slightly more volatile, still carries a beta of 0.74. This defensive resilience is a core attribute, but it is currently being tested. In a market where every other sector is in an uptrend, the sector's underperformance indicates that its traditional role as a safe haven is being sidelined.

The bottom line is that the sector's defensive appeal is being challenged by a powerful risk-on narrative. For funds like XLP and IYK to deliver steady, compounding returns, they must rely on the inherent stability of their holdings rather than a macro rotation into defensives. Their premium valuations demand flawless execution and minimal earnings volatility, a high bar in any environment but particularly one where the market is actively seeking higher-risk, higher-reward opportunities.

The Value Investor's Checklist: Applying Buffett/Munger Principles

For a value investor, the choice between two consumer staples ETFs is a study in the application of core principles. The goal is to identify the vehicle that best embodies a durable competitive advantage, offers a sufficient margin of safety, and possesses favorable business economics-all while being managed by a competent steward. In this case, the comparison between XLP and IYK reveals a clear winner on most counts.

The margin of safety is a critical starting point. It is defined by cost, liquidity, and the quality of the underlying assets. Here, XLP is decisively superior. Its 0.08% expense ratio is a fraction of IYK's 0.38%, a difference that compounds over decades. More importantly, XLP's $14.7 billion in assets under management provides deep liquidity, ensuring tight bid-ask spreads and minimal market impact for large trades. IYK's $1.2 billion AUM is a fraction of that size, introducing a tangible liquidity premium for the investor. This structural advantage in cost and scale is a foundational margin of safety.

The durable competitive advantage is concentrated in the portfolio's composition. XLP is a pure-play, tracking the Consumer Staples Select Sector Index of the S&P 500. This means its capital is concentrated in the sector's largest, most dominant companies: Walmart, Costco, and Procter & Gamble. These are the true economic moats-companies with pricing power, brand loyalty, and vast distribution networks that can defend their market share through economic cycles. IYK, by contrast, holds 55 stocks and includes a 12% tilt toward healthcare. This dilution of focus spreads capital across a broader, less homogeneous group of businesses, some of which may not possess the same depth of competitive advantage as the pure staples giants.

Business economics are more predictable in a homogeneous portfolio. XLP's holdings are all in consumer staples, a sector known for its defensive, non-cyclical cash flows. The business models are relatively straightforward: sell essential goods. IYK's inclusion of healthcare introduces more variable business models, regulatory risks, and patent cliffs, adding a layer of complexity and uncertainty to the fund's overall cash flow profile. For a value investor seeking predictability, XLP's pure focus is a distinct advantage.

Management quality, in the passive context, is about the index provider's discipline and the fund's structure. Both are passively managed, so the "management" is the index provider. XLP's index is more focused and concentrated, aligning with the value investor's preference for capital in a few, high-quality businesses. IYK's index is broader, which may appeal to those seeking diversification but works against the principle of concentrated ownership in a few exceptional companies.

The bottom line is that XLP is the superior vehicle for a value investor. It offers a wider margin of safety through lower cost and greater liquidity, concentrates capital in the sector's most durable competitive advantages, and provides a more homogeneous, predictable business model. While IYK has delivered slightly stronger recent returns, the performance gap is not sufficient to justify its higher fee, smaller size, and diluted portfolio. For those applying the Buffett/Munger framework, the choice is clear: XLP is the more efficient and focused instrument for capturing the value in consumer staples.

Catalysts and Risks: The Long-Term Compounding Thesis

The long-term case for these consumer staples ETFs hinges on a single, powerful dynamic: the market's appetite for safety. For XLP, the catalyst is a return to defensive rotation, where its top holdings-Walmart and Costco-can leverage their essential-demand moats to deliver compounding returns. For IYK, the primary risk is the continued erosion of its defensive premium, as investors show no appetite for traditional safe-havens, pressuring its higher-fee structure and diluting its core thesis.

XLP's compounding engine is built on two pillars: its concentrated, high-quality holdings and its cost advantage. The fund's massive $15.1 billion in assets under management provides immense stability and liquidity, allowing it to hold a pure-play portfolio of the largest U.S. consumer staples. Its top holdings, Walmart and Costco, are uniquely positioned for a more cautious consumer environment. As the economy shows signs of cooling, with consumers becoming more cautious and spending shifting toward essentials, these giants can defend market share and pricing power. A sustained outperformance of these top holdings in a low-growth or recessionary backdrop would validate XLP's premium valuation and justify its low 0.08% expense ratio and higher yield.

IYK's long-term thesis faces a more fundamental challenge. The fund's structure-its slight tilt toward healthcare and basic materials-already dilutes its defensive purity. More critically, the market is actively abandoning the consumer staples sector as a safe haven. The equal-weight consumer staples benchmark has dropped to record lows relative to the equal-weight S&P 500, a clear signal that investors are leaning into risk. This trend undermines the core rationale for owning a defensive ETF. If this rotation persists into 2026, IYK's higher 0.38% expense ratio becomes a more significant drag, and its smaller $1.3 billion AUM makes it more susceptible to large institutional flows that could distort its pure-play intent.

The bottom line is a divergence in structural resilience. XLP's massive size and pure focus provide a durable platform for compounding if the market eventually seeks safety. IYK's smaller scale and broader mandate make it more vulnerable to both market sentiment and its own higher costs. The catalyst for XLP is a shift in investor behavior; the risk for IYK is that the current trend of risk-on rotation continues, leaving it with a defensive premium that no one is willing to pay.