Time to Load Up on Consumer Staples ETFs?

2026 began on a volatile note, with January shaped by rising geopolitical complexities and renewed trade tensions. However, market volatility and investor nervousness intensified in February, driven largely by the so-called “AI scare” trade.

Since the start of this month, the S&P 500 has fallen about 2%. The CBOE Volatility Index has risen around 34% since the start of February and has added about 23% over the past week, a clear sign that volatility and investor nervousness are intensifying.

As uncertainty rises, a defensive tilt is becoming increasingly important. Even aggressive investors may benefit from allocating selectively to traditionally defensive sectors. This is where consumer staples funds stand out, offering resilience alongside steady returns. Reflecting this defensive appeal, the S&P 500 Consumer Staples Index has gained 9.97% over the past year and 15.58% this year so far.

The Case for Increasing Consumer Staples ETF Exposure

Increasing exposure to consumer staples funds can help add balance and stability to portfolios, an important consideration as market volatility looms. In the current economic environment, the sector offers a compelling mix of downside protection during market pullbacks and steady participation when markets move higher.

Rising U.S. debt levels, persistent geopolitical tensions and growing fatigue around the AI trade have heightened investor nervousness, fueling a broader risk-off shift, which benefits consumer staples stocks, as these companies manufacture everyday necessities such as food, beverages and household items.

Below, we outline several reasons why consumer staples funds present a compelling investment case.

Mounting Debt Risks Keep Investors on Edge

Increasing U.S. national debt could create an income problem for investors, benefiting consumer staples stocks. Concerns over U.S. debt levels can add pressure to investor and consumer confidence, making investors risk-averse and curtailing discretionary spending.

The Congressional Budget Office (CBO) projects federal debt held by the public to climb to $56 trillion or 120% of GDP by 2036, from about $31 trillion currently. The CBO also projects the budget deficit to widen from $1.9 trillion in fiscal 2026 to $3.1 trillion by 2036 (Read: ETFs Worth Watching as Debt Pressures Continue to Build).

AI Trade Goes From Euphoria to Exhaustion

The “software-mageddon” sell-off earlier this month, followed by continued weakness across several sectors exposed to AI-related disruption, has intensified investor anxiety around artificial intelligence. Beneath the surface, the dominant market theme has become a “sell first, ask questions later” response to any segment linked to an AI-driven headline.

Long-Term Slump in Consumer Confidence

Per the Conference Board, the Consumer Confidence Index fell to 84.5 in January, marking a decline of 9.7 points from its December level. The Present Situation Index, which reflects consumers’ views on current business and labor market conditions, witnessed a similar trend, falling 9.9 points to 113.7 in January.

The Conference Board’s Expectations Index, which reflects consumers’ short-term outlook on income, business and conditions of the labor market, dropped to 65.1, remaining below 80, which typically signals a recession ahead.

However, preliminary results from the University of Michigan's Surveys of Consumers showed a modest improvement in sentiment in February. The Index of Consumer Sentiment rose 1.6% from January to 57.3 this month, while the Current Economic Conditions index climbed 5.2% to 58.3. Despite these gains, both measures remain well below the year-ago levels, each down 11.4% on a year-over-year basis.

ETFs to Consider

Investors can consider Consumer Staples Select Sector SPDR Fund XLP, Vanguard Consumer Staples ETF VDC, iShares U.S. Consumer Staples ETF IYK, Fidelity MSCI Consumer Staples Index ETF FSTA and Invesco S&P 500 Equal Weight Consumer Staples ETF RSPS.

With a one-month average trading volume of 24.24 million shares, XLP is the most liquid option, ideal for active trading strategies. However, implementing an active strategy in the current landscape may not be the most effective approach.

XLP has also gathered an asset base of $17.26 billion, the largest among the other options. Regarding annual fees, FSTA and XLP are the cheapest options, charging 0.08%, making them more suitable for long-term investing.

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This article originally published on Zacks Investment Research (zacks.com).

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