When the economy or stock market corrects and heads into a bear market territory, some industries remain unaffected or even thrive as consumer behavior changes.Sectors that seem to weather a downward turn include healthcare, information technology, consumer staples, and utilities. These six exchange-traded funds (ETFs) may provide downside protection when a recessionary period looms.
Key Takeaways
- Investors can use exchange-traded funds (ETFs) to diversify their portfolios.
- Sectors that weather an economic downturn include healthcare, information technology, consumer staples, and utilities.
- An ETF is passively managed and includes a basket of stocks.
1. The Consumer Staples Select Sector SPDR ETF (XLP)
- Purpose: XLP tracks the performance of the Consumer Staples Select Sector Index
- Total assets: $14.2 billion (as of April 26, 2024)
- Inception date: December 16, 1998
- Average daily volume: 4.5 million
- Dividend yield: 2.56%
- Expense ratio: 0.09%
- Top three holdings:
- The Procter & Gamble Co. (PG): 14.58%
- The Coca-Cola Co. (COST): 12.43%
- Walmart Inc. (WMT): 9.89%
Individuals continue to purchase household items during market downturns. Since products like soap and toilet paper are always in demand, they're consideredconsumer staples.
2. The iShares US Healthcare Providers (IHF)
- Purpose: IHF tracks the performance of the Dow Jones U.S. Select Health Care Providers Index
- Total assets: $799.5 billion (as of April 26, 2024)
- Inception date: May 1, 2006
- Average daily volume: 56,915
- Dividend yield: 1.14%
- Expense ratio: 0.40%
- Top three holdings:
- UnitedHealth Group, Inc. (UNH): 23.90%
- Elevance Health Inc. (ELV): 14.46%
- Cigna Corp. (CI): 9.61%
Healthcare is a sector that generally fares well during recessionary periods. Individuals commonly seek medical services during a downturn as health insurance commonly pays for a portion of out-of-pocket healthcare costs.
3. The Vanguard Dividend Appreciation ETF (VIG)
- Purpose: VIG includes U.S. firms that have increased dividend payments for the past 10 years.
- Total assets: $93.7 billion (as of March 31, 2024)
- Inception date: April 21, 2006
- Average daily volume: 587,454
- Dividend yield: 1.72%
- Expense ratio: 0.06%
- Top three holdings:
- Microsoft Corp. (MSFT): 4.02%
- Apple Inc. (AAPL): 3.68%
- Broadcom Inc. (AVGO): 3.35%
The types of companies included in this fund commonly possess healthy balance sheets and generate strong cash flows. Therefore, they’re likely to weather downturns.
4. The Utilities Select Sector SPDR ETF (XLU)
- Purpose: XLU tracks the performance of the Utilities Select Sector Index
- Total assets: $12 billion (as of April 29, 2024)
- Inception date: December 16, 1998
- Average daily volume: 23.4 million
- Dividend yield: 3.47%
- Expense ratio: 0.09%
- Top three holdings:
- NextEra Energy, Inc. (NEE): 13.91%
- Southern Comp (SO): 8.16%
- Duke Energy Corp. (DUK): 7.66%
When anticipating a recession, utility companies commonly deploy strategies to cut costs by reducing operating expenses and optimizing capital efficiency. As of April 2024, the debt-to-equity ratios for NextEra, Southern Co, and Duke were 1.64, 2.01, and 1.64, respectively.
5. The Invesco Food & Beverage ETF (PBJ)
- Purpose: PBJ tracks the performance of the Dynamic Food & Beverage Intellidex Index.
- Total assets: $128.5 million (As of April 30, 2024)
- Inception date:June 23, 2005
- Average daily volume: 17,909
- Dividend yield: 0.60%
- Expense ratio: 0.57%
- Top three holdings:
- Kroger Comp (KR): 5.37%
- Kraft Heinz Co (KHC): 5.04%
- Constellation Brands Inc (STZ): 4.94%
Food and beverage products can be seen as consumer staples. Companies like Coca-Cola and Pepsico, part of this ETF, weathered the 2007–2008 Great Recession, and the COVID-19 crisis by deploying strategies that included corporate philanthropy and government partnerships to maintain a firm global presence.
6. The Vanguard Consumer Staples ETF (VDC)
- Purpose: VDC tracks the performance of the MSCI US Investable Market Index/Consumer Staples 25/50.
- Total assets: $9.7 billion (As of March 31, 2024)
- Inception date: Jan. 26, 2004
- Average daily volume: 141,000
- Dividend yield: 1.72%
- Expense ratio: 0.10%
- Top three holdings:
- The Procter & Gamble Co. (PG): 12.00%
- Costco Wholesale Corp. (COST): 10.03%
- Walmart (WMT): 7.95%
Alongside the producers of consumer staples, companies that stock and sell these products also tend to remain stable during an economic downturn. Walmart and Costco rank in the top five of the National Retail Federation survey for 2024.
When Have Global Recessions Occurred?
The Great Recession of 2008-2009 and the economic downturn during the COVID-19 Pandemic are two recessionary periods in the last several decades.
How Do Government Policies Combat Recessionary Periods?
During a recession, the government may lower tax rates or increase spending to encourage demand and spur economic activity using fiscal policies.
Which Sectors Are Most Affected by a Recession?
Sectors and their stocks most affected by an economic downturn include airlines, automobile manufacturers, and hotels.
The Bottom Line
Industries that fare better during recessions supply essentials like utilities, health care, consumer staples, and technology. An ETF gives individuals an opportunity to invest in a sector-based fund with holdings that have proven to weather economic downturns.
FAQs
And ETFs that invest in sturdy, stable stocks with a history of weathering downturns are great options in any portfolio, as they provide capital appreciation when most other stocks are down. Here are two ETFs that have proven to be fairly recession-proof.
Which ETF is the safest? ›
Vanguard S&P 500 ETF
Exchange-traded funds (ETFs) are one of the safer types of investments out there, as they require less effort than investing in individual stocks while also increasing diversification.
What is the best recession proof stock? ›
The Best Recession Stocks of May 2024
- Merck & Company, Inc. (MRK) Dividend Yield. ...
- PepsiCo, Inc. (PEP) ...
- Becton, Dickinson and Company (BDX) Dividend Yield. ...
- CMS Energy Corporation (CMS) Dividend Yield. ...
- Xcel Energy Inc. (XEL) ...
- Ameren Corporation (AEE) Dividend Yield. ...
- Amgen Inc. (AMGN) ...
- Thermo Fisher Scientific Inc. (TMO)
Funds 1-5
- Vanguard S&P 500 ETF (VOO -0.64%) ...
- Vanguard High Dividend Yield ETF (VYM -1.11%) ...
- Vanguard Real Estate ETF (VNQ -1.2%) ...
- iShares Core S&P Total U.S. Stock Market ETF (ITOT -0.73%) ...
- Consumer Staples Select Sector SPDR Fund (XLP -0.65%)
9 Best ETFs to Buy for a Recession
| ETF | Expense Ratio |
|---|
| Vanguard Long-Term Treasury ETF (VGLT) | 0.04% |
| The Consumer Staples Select Sector SPDR Fund (XLP) | 0.1% |
| The Utilities Select Sector SPDR Fund (XLU) | 0.1% |
| The Health Care Select Sector SPDR Fund (XLV) | 0.1% |
5 more rowsJun 21, 2023
Investors often gravitate toward Treasurys as a safe haven during recessions, as these are considered risk-free instruments. That's because they are backed by the U.S. government, which is deemed able to ensure that the principal and interest are repaid.
What is the number 1 ETF to buy? ›
Top sector ETFs
| Fund (ticker) | YTD performance | Expense ratio |
|---|
| Vanguard Information Technology ETF (VGT) | 4.8 percent | 0.10 percent |
| Financial Select Sector SPDR Fund (XLF) | 8.8 percent | 0.09 percent |
| Energy Select Sector SPDR Fund (XLE) | 15.9 percent | 0.09 percent |
| Industrial Select Sector SPDR Fund (XLI) | 8.7 percent | 0.09 percent |
1. VanEck Semiconductor ETF
- 10-year return: 24.37%
- Assets under management: $10.9B.
- Expense ratio: 0.35%
- As of date: November 30, 2023.
Low-risk ETFs like Invesco S&P 500 High Dividend Low Volatility ETF SPHD, Simplify Tail Risk Strategy ETF CYA, Cambria Tail Risk ETF TAIL and AGF U.S. Market Neutral Anti-Beta Fund BTAL could be compelling choices. These ETFs are designed for investors who prioritize capital preservation over high returns.
What stocks do worst in a recession? ›
Equity Sectors
On the negative side, energy and infrastructure stocks have been the hardest-hit in recent recessions. Companies in these sectors are acutely sensitive to swings in demand. Financials stocks also can suffer during recessions because of a rising default rate and shrinking net interest margins.
Many investors turn to stocks in companies that sell consumer staples like health care, food and beverages, and personal hygiene products. These businesses typically remain profitable during recessions and their share prices tend to better resist stock market sell-offs.
Is Coca-Cola recession proof? ›
Coca-Cola Co.
(NYSE:KO) is one of the most popular recession-proof stocks in the U.S., with an attractive dividend payout history. The Dividend Aristocrat pays $1.84 in dividends annually, yielding 3.09% on its current price.
What ETF has the best 10 year return? ›
Best ETFs 10 Years
| Symbol | ETF Name | 10y Chg 5-23-24 |
|---|
| SOXX | iShares Semiconductor ETF | 901% |
| PSI | Invesco Semiconductors ETF | 813% |
| META | Roundhill Ball Metaverse ETF | 696% |
| XSD | SPDR S&P Semiconductor ETF | 664% |
17 more rows5 Best ETFs by 5-year return as of May 2024
| Ticker | Fund name | 5-year return |
|---|
| SMH | VanEck Semiconductor ETF | 31.19% |
| SOXX | iShares Semiconductor ETF | 26.35% |
| XLK | Technology Select Sector SPDR Fund | 21.30% |
| IYW | iShares U.S. Technology ETF | 20.70% |
1 more rowMay 21, 2024
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.
What happens if ETF collapses? ›
As with traditional investment funds, ETFs have to place their underlying investments with a custodian. The fund provider cannot be both the fund manager, and the "guardian" of the assets. So if an ETF provider goes bankrupt, your investments are not gone cause they will still be kept by the custodian.
Can you lose your investment in ETF? ›
Portfolio Risks
4 If you buy into a leveraged ETF you are amplifying how much you can lose if the investment crashes. 1 You can also easily mess up your asset allocation with each additional trade that you make, thus increasing your overall market risk.
What trade is recession proof? ›
Both residential and commercial cleaning services are often considered to be recession proof businesses because they provide essential services that individuals and companies need regardless of economic conditions.
Do ETFs pass through losses? ›
Currency ETFs do not generate capital gains or losses, but rather ordinary income or losses. This means that losses on the sale of shares in these ETFs produce ordinary losses that can be used to offset ordinary income, such as wages and bank interest.
