XLP Trading Strategies: Consumer Staples Backtest

ByOddmund Groette Trading strategies

We have presented many XLP trading strategies over the years, and this is for a reason. The headline of this article, is XLP good for trading, deserves a big “yes”. This article argues that XLP (consumer staples) is an underappreciated trading vehicle, yet very few traders trade it.  We believe this is mostly due to a lack of volatility and that XLP is one of the least sexy instruments out there. But in trading, boring is normally good.

XLP is good for trading because it has few “sudden moves”, is very mean revertive, it has potentially many profitable short strategies, and it offers diversification because it moves differently than many of the other stock ETFs, thus providing a hedge.

Many traders gravitate towards high-volatility stocks. Traders need volatility, but you also need to make sure you don’t risk ruin. The ETF with the ticker code XLP is not a widely used trading vehicle, to our knowledge, but still offers good opportunities for profits while avoiding huge swings in your equity. This article argues why XLP is good for trading.

Consumer staples trading strategies

Since we started this blog back in 2012, we have written hundreds of trading strategies that work.

What is the ETF with ticker code XLP?

XLP is the ticker code for Consumer Staples Select Sector SPDR Fund and tracks the biggest consumer staples in the S&P 500. All the holdings can be labeled as large-caps and low volatility. The prospectus says the aim is to provide exposure to retailing, beverage, food, tobacco, and personal products.

Balancing is done quarterly. Currently, the ten biggest components include Procter&Gamble (PG), Coca-Cola (KO), Pepsi (PEP), Wal-Mart (WMT), Costco (COST), Mondelez (MDLZ), Philip Morris (PM), Altria (MO), Colgate (CL), and Estee-Lauder (EL).

Why would anyone trade something as boring as these names? The names are not exactly the most debated stocks and they are certainly among the least volatile in the market. We can safely say these stocks are among the most boring in the S&P 500.

But that is precisely why you should have a look at XLP:

Why XLP is a great tool to make trading strategies

XLP is great mainly because of three reasons:

XLP goes its own way and is very good for trading

QQQ and SPY are highly correlated, but XLP correlates less. The reason is most likely twofold: XLP is often a “safe haven”, and due to changes in interest levels it might go opposite directions than for example growth stocks on Nasdaq.

Short trading strategies work well on XLP

We trade three different strategies on the short side in XLP. The value of having short strategies is invaluable due to diversification.

The backtest of our three short strategies looks like this (100 000 compounded – log scale):

XLP trading strategy

The backtest shows 418 trades with an average gain before slippage and commissions of about 0.4%. The win ratio is 75%, but the average winner is smaller than the average loser. The profit factor is 2.35.

The annual and monthly returns look like this:

XLP trading strategies

The best of the three short strategies has this equity curve:

Consumer strategy backtest

Low volatility means a low chance of ruin (probably)

The short strategies are mean-reversion and mean reversion typically have a negatively skewed profit distribution, ie. many small winners and a few big losers that might wipe out any previous gains.

However, because the XLP consists of low volatile cashflow generative companies, the strategy has not produced (yet, at least) very big losers.

Yes, the average loser is bigger than the average winner, but only by 0.75% vs 0.88%.

The profit distribution looks like this:

XLP trading strategy trading rules

Read more about mean reversion strategies in these two articles:

All of the three short strategies will later be published as a monthly edge in our subscription service:

We have already published two Trading Edges in XLP on the long side (per June 2021).

Other sector trading strategies

We have covered all the different subsectors in the S&P 500:

Free XLP trading strategies: Is XLP good for trading?

We have additionally published over 60 free trading strategies Three of those 60+ are in XLP and published between 2013-2017:

XLP and the consumer staples might be boring as hell, but they are excellent trading vehicles. XLP trading strategies are the low-hanging fruit. Is XLP good for trading? Definitely yes!

FAQ:

– What is XLP, and why is it considered good for trading?

XLP refers to the Consumer Staples Select Sector SPDR Fund, an ETF tracking major consumer staples in the S&P 500. It is considered good for trading due to its low volatility, mean-reverting nature, potential for profitable short strategies, and its role as a diversification tool.

– Why do many traders overlook XLP for trading?

XLP is often overlooked by traders due to its perceived lack of volatility and its association with less exciting sectors. However, this article argues that in trading, “boring” can be advantageous, and XLP offers profitable opportunities.

– What are some consumer staples trading strategies for XLP discussed in the article?

The article presents several trading strategies for XLP, including the Rubber Band Trading Strategy, Internal Bar Strength Trading Strategy, and strategies for trading consumer stocks based on daily performance.

I’ve got an Msc from Heriot-Watt University, Edinburgh (1996), in addition a to a business administration degree the Norwegian School of Management (BI – 1994). Did my mandatory military service in between.

After university, I worked two years as an auditor (1996-1998).

I co-founded Aksjeforum.com in 1998/99 - one of the first websites about trading and investing in Norway. It was later acquired by Digi.no in 2001.

I have written 4 books about trading (in Norwegian). One of them has sold 30,000 copies, a record for a financial book in Norway.

From 2001 until 2018 full-time independent prop trader (Series 7 in 2001) and investor.

2018-today: Investor, writer, analyst.

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