Understanding Consumer Staples and Consumer Discretionary in Investment

If you are investing in unit trusts (or mutual funds) or Investment-linked Policies (ILP), you would notice the terms “Consumer Staples” and “Consumer Discretionary” under Sector allocations when reading the fund factsheet.

What are Consumer Staples?

Consumer staples are essential products that include typical products such as foods & beverage, household goods, and hygiene products; but the category also includes such items as alcohol and tobacco. These goods are those products that people are unable—or unwilling—to cut out of their budgets regardless of their financial situation.

Investopedia
Image for illustrative purpose only.

What are Consumer Discretionary?

Consumer discretionary is a term for classifying goods and services that are considered non-essential by consumers, but desirable if their available income is sufficient to purchase them. Examples of consumer discretionary products can include durable goods, high-end apparel, entertainment, leisure activities, and automobiles.

Investopedia
Image for illustrative purpose only.

Hence, the key difference is in demand:

  • Consumer Staples are essentials that we will buy regardless of how the economy is doing
  • Consumer Discretionary are items or services we would only buy when the economy is well and we can afford to spend

How does knowing this influence your investment decision?

If you are an investor who seeks stability and lower risk, you would consider a fund that has a strong allocation in Consumer Staples, as you can be assured the fund would do reasonably well despite the economic situation.

If you are an investor who would take risks, you are likely to have less allocation in Consumer Staples and more in Consumer Discretionary. Yet, you would also evaluate if it is a good time to have a strong allocation in Consumer Discretionary, especially in the current pandemic where:

  • Entertainments like cinema are running at less than 10% of normal operations
  • Integrated resorts have been badly hit the past few months. Yet, on the other hand, there are campaigns to encourage local tourism.
  • Malls selling high-end apparels are seeing low footfall, yet some are slashing prices to encourage buying.
Extracted from Aberdeen Standard Pacific Equity Fund factsheet (dated 30 June 2020) to illustrate an example: heavier weightage in Consumer Discretionary (10.5%) compared to Consumer Staples (4.9%) could indicate the fund is higher risk.

These are some factors to consider before getting into Consumer Discretionary. Many mutual funds/unit trusts would have an allocation in Consumer Discretionary, though the percentage allocation would vary.

Read more:

Investors See Buying Opportunities in Tech Healthcare and Consumer Staples (dated Mar 27, 2020)

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