Consumer Staples – Kai Enhanced Sector Portfolio

Jul 15, 2019 | Factor Investment, Machine Learning, Portfolio Models and Optimization

The Consumer Staples sector (also known as the Consumer Defensive sector) includes companies that produce items such as food, beverages and non-durable household and personal products. Think of them as products that are an essential part of most consumers’ monthly budgets.

This differs from the Consumer Discretionary sector, which involve purchases such as entertainment and dining out. Unlike Consumer Staples, Consumer Discretionary is subject to wide swings in consumer demand that generally follow changes in the larger economy. For Consumer Staples, everyone needs toilet paper, even in a recession.

Why is this important? With the US currently engaged in a trade war and news that the Federal Reserve will likely cut interest rates, investing in Consumer Staples is riding a high –related ETFs are at a 52-week high1. This is because the sector has traditionally acted as a safe haven amid political and economic turmoil. Stocks in these sectors generally outperform during periods of low growth and high uncertainty.

One example of an ETF doing well is the Consumer Staples Select Sector SPDR Fund (XLP), which has seen a 15.1% gain over the past year (the S&P 500 return was 3.8%).

Given that success, we decided to beat it.

The Kai-ESP is a portfolio that gives full sector exposure and concentrates on the stocks with the highest potential. We built our portfolio based on established trading strategies but augmented with Machine Learning algorithms.

Stocks are selected based on K Scores – stock ratings that are rooted in fundamental rule-based factor investing, and enhanced using machine learning. Stocks ratings take into consideration new information and are updated daily. To seek maximum risk-adjusted returns the portfolio strategy is rebalanced and asset allocation is optimized for both holdings and weights.

This quantamental approach works across sectors and allows us to capture the best growth cycle of any sector.

For this scenario we built our portfolio using K Scores of 9, and rebalanced every month. As previously mentioned, we used the XLP ETF as the benchmark for our analysis.

The average holding in our portfolio over this period was 12 companies. Below are some of the top holdings and their proportions:

Kroger Co.3.37
Costco Wholesale Corporation3.22
Avon Products, Inc.3.14
Monster Beverage Corporation2.91
Archer-Daniels-Midland Company2.83
Rite Aid Corporation2.74

By looking at the graph below, we see that the Kai-ESP over time has outperformed the XLP ETF.

If you want to see the full-fact sheet with our latest data, please click the button below.

We enjoy disrupting the industry, especially with a strong sector. You should consider our Kai-ESP for Health Care or Kai-ESP for Technology. Watch our blog as we release them. To learn more about Kavout’s other portfolio offerings, please visit our model portfolio pageContact us to learn more about how you can incorporate our AI and Machine Learning technology into your business.

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