The Consumer Staples Select Sector SPDR (XLP) is an exchange-traded fund (ETF) that mirrors the price action of the S&P Consumer Staples Index. This index consists of a diverse group of 37 different stocks -- primarily retail stores and companies that supply many of the products that these stores sell.

Although there are 37 companies in the index, discount retailing giant Wal-Mart Stores (WMT) accounted for greater than 22% of the fund's value as of the end of June 2003. Meanwhile, Procter and Gamble (PG) and Coca Cola (KO) were also major holdings in the fund, with each accounting for more than 10% of its total value. In total, these three firms make up greater than 43% of the fund.

Although the fund holds a number of major retail-related stocks, you might be surprised to learn that the correlation between XLP and the Retail HOLDR (RTH) is not even 70%. In fact, this is lower than the relationship with the Dow Jones Industrials Average (INDU, 9801.12), which has a correlation coefficient of 76% with XLP. This means that XLP tends to move in tandem with the Dow more than it does with the Retail HOLDR.

As you can see, although the correlation is positive between the retail sector and XLP, there is certainly a difference. In addition, there is also a substantial difference between the broad stock market -- and even more so, the Nasdaq -- and XLP. For investors looking to diversify their portfolios away from technology stocks and the broader market as a whole, this makes XLP a valuable fund keep in mind. True, if the overall stock market tumbles, then so will XLP. However, it is not likely to fall by the same degree.

XLP's component stocks can be broken down into two major sectors. One is the retail store sector, which is represented heavily by Wal-Mart and Walgreen (WAG). These companies will do best in a strong economy, as store sales will tend to increase. However, some of the fund's other components are more defensive in nature. For example, Gillette (G) will continue to sell razor blades regardless of the state of the economy (although their more expensive products may underperform when things are bad). Meanwhile, Coca Cola, which has been much maligned by analysts because it is so fully priced, will also sell its products regardless of economic conditions. Cigarette giant Altria Group (MO) -- formerly known as Phillip Morris --- also tends to rise when times are tough. I guess their products are used more heavily during periods of general malaise in the economy. This may be less so now that Altria no longer owns Miller Brewing Company.