Got $500? Vanguard Consumer Staples ETF Could Be the Smartest Buy Today

The economy is in a peculiar state right now, with consumers increasingly shopping at stores known for offering low prices. It's why Walmart (NASDAQ: WMT) and its everyday low-price model is doing better than Target (NYSE: TGT) and its more upscale approach. If you are looking to invest some cash today, even if it's just $500, it might be smart to take a more conservative approach.

Vanguard Consumer Staples ETF (NYSEMKT: VDC) is a convenient and cost-effective way to invest in a diversified portfolio of companies that sell essential goods and services. Here's what you need to know.

What does Vanguard Consumer Staples ETF do?

As its name implies, Vanguard Consumer Staples ETF invests in companies that operate in the consumer staples sector. The use of Walmart as an example above was purposeful, since that retailer is the No. 1 holding in the exchange-traded fund (ETF). Rounding out the top five are Costco (NASDAQ: COST), Procter & Gamble (NYSE: PG), Coca-Cola (NYSE: KO), and PepsiCo (NASDAQ: PEP). All are giants in the consumer staples sector.

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Interestingly, four of the five are also Dividend Kings, having increased their dividends for at least 50 consecutive years. And the one that isn't, Costco, has raised its dividend annually for over two decades. This is important because it highlights how reliable consumer staples businesses tend to be (more on this below).

Technically, Vanguard Consumer Staples ETF tracks the MSCI US Investable Market Consumer Staples 25/50 Index. That sounds fancy, but it really isn't. The "25/50" in the name is about diversification. No more than 25% of assets in one stock, and stocks worth 5% of assets can't make up more than 50% of the ETF's total assets. So, by design, it is a diversified way to invest in consumer staples stocks. There are over 100 holdings in the ETF spread across 11 different consumer staples sub-sectors.

While no investment can completely protect you from a deep bear market, Vanguard Consumer Staples ETF has a history of outperforming during difficult market periods. The very modest 0.09% expense ratio, meanwhile, makes it a low-cost way to add a little safety to your portfolio. That could be a smart move with the S&P 500 index (SNPINDEX: ^GSPC) still trading near all-time highs and heavily focused on a small number of technology giants.

What's so special about consumer staples stocks?

There's nothing particularly special about Vanguard Consumer Staples ETF, though it does have very low costs. What's special is the sector in which it invests. That's why a $500 investment, which will net you approximately two shares, is particularly attractive today.

Consumer staples companies produce and sell essential items that typically have modest costs associated with them relative to their benefits. Think food, beverages, toiletries, and over-the-counter healthcare products. You aren't about to stop buying toothpaste or deodorant because the stock market is in a tailspin. Even a deep recession wouldn't stop you from buying food.

The companies here also tend to have very loyal customers, with the Coke versus Pepsi dichotomy a great example of this dynamic. Sure, you could buy the store brand cola, but if you prefer the name brand, it is an affordable luxury that you're likely to stick with, even during tough times.

You could try to cherry-pick consumer staples companies, but that would require a lot of legwork. It would also likely mean focusing all of your cash on just a small number of companies, which wouldn't provide you with the diversification that is built into Vanguard Consumer Staples ETF's portfolio. Thus, a smart move if you want to quickly add this defensive sector to your portfolio is to go with an ETF like Vanguard Consumer Staples ETF.

Don't bet the house; a little can go a long way

What you shouldn't do is sell everything you own and invest it all into Vanguard Consumer Staples ETF. It is only a smart move to buy this ETF if you are using it as a way to add some safety to the mix, a relief valve in case there's a recession. If that's how you view the ETF, it could make a fine addition to your portfolio, whether you're investing $500 or $5,000.

Reuben Gregg Brewer has positions in PepsiCo and Procter & Gamble. The Motley Fool has positions in and recommends Costco Wholesale, Target, and Walmart. The Motley Fool has a disclosure policy.