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 an ETF that goes up when the market goes down? ›
What is an inverse ETF? An inverse ETF is set up so that its price rises (or falls) when the price of its target asset falls (or rises). This means the ETF performs inversely to the asset it's tracking. For example, an inverse ETF may be based on the S&P 500 index and designed to rise as the index falls in value.
What is the best recession proof stock? ›
The best recession stocks include consumer staples, utilities and healthcare companies, all of which produce goods and services that consumers can't do without, no matter how bad the economy gets.
Is a recession a good time to buy ETFs? ›
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.
What is the best ETF to invest in? ›
5 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 row6 days ago
7 Best ETFs to Buy Now
| ETF | Expense Ratio | Year-to-date Performance |
|---|
| Global X Copper Miners ETF (COPX) | 0.65% | 26.2% |
| YieldMax NVDA Option Income Strategy ETF (NVDY) | 1.01% | 12.9% |
| iShares Semiconductor ETF (SOXX) | 0.35% | 14.9% |
| Simplify Interest Rate Hedge ETF (PFIX) | 0.50% | 22.9% |
3 more rowsMay 7, 2024
3 Top ETFs for a Diversified Stock Portfolio
- SPDR S&P 500 ETF Trust. The SPDR S&P 500 ETF Trust (SPY 0.66%) mirrors the S&P 500 Index, encompassing 500 of the largest U.S. corporations. ...
- Invesco QQQ Trust. ...
- iShares Russell 2000 ETF.
1. VanEck Semiconductor ETF. The VanEck Semiconductor ETF (SMH) tracks a market-cap-weighted index of 25 of the largest U.S.-listed semiconductors companies. Midcap companies and foreign companies listed in the U.S. can also be included in the index.
What is the 3 day rule in stocks? ›
The 3-Day Rule in stock trading refers to the settlement rule that requires the finalization of a transaction within three business days after the trade date. This rule impacts how payments and orders are processed, requiring traders to have funds or credit in their accounts to cover purchases by the settlement date.
Since the job of most ETFs is to track an index, we can assess an ETF's efficiency by weighing the fee rate the fund charges against how well it “tracks”—or replicates the performance of—its index. ETFs that charge low fees and track their indexes tightly are highly efficient and do their job well.
How do you know if an ETF is overpriced? ›
The price-to-earnings (P/E) ratio of an ETF measures the collective price of an ETF's holdings relative to their respective earnings. A high P/E ratio indicates that the ETF is overvalued.
How to make money recession-proof? ›
Recessions can also push you to reexamine your finances, develop passive income streams, and consult financial advisers to make sure your assets are safe.
- Cut living expenses. ...
- Build an emergency fund. ...
- Develop new skills. ...
- Speak with a financial adviser. ...
- Create passive income sources. ...
- Start a business. ...
- Consumer staples. ...
- Bonds.
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.
What gets cheaper during a recession? ›
Because a decline in disposable income affects prices, the prices of essentials, such as food and utilities, often stay the same. In contrast, things considered to be wants instead of needs, such as travel and entertainment, may be more likely to get cheaper.
Is my money safe in an ETF? ›
Summary. ETFs are not less safe than other types of investments, like stocks or bonds. In many ways, ETFs are actually safer, for instance thanks to their inherent diversification. And by choosing the right mix of ETFs, you can control the market risk to match your needs.
Is it possible for an ETF to fail? ›
ETFs may close due to lack of investor interest or poor returns. For investors, the easiest way to exit an ETF investment is to sell it on the open market. Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF.
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.
Can an ETF lose all its value? ›
"Leveraged and inverse funds generally aren't meant to be held for longer than a day, and some types of leveraged and inverse ETFs tend to lose the majority of their value over time," Emily says.
