As summer winds down, the market’s attention is focused on whether or not the Federal Reserve can successfully navigate a “soft landing” for the economy.
Earlier in August, a disappointing employment report caused a brief panic among investors, but more recent inflation and retail sales data have reignited a risk-on sentiment.
However, all eyes are now on the Fed’s September meeting, where CME FedWatch data suggests a roughly 70% probability of a 25-basis-point, or 0.25%, rate cut. Should this happen, it would mark the Fed’s first interest rate cut in over four years.
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“However, this time around the Fed must be careful not to cut rates too quickly,” argues Mark Andraos, partner and wealth advisor at Regency Wealth Management. “Lower rates lead to increased borrowing; increased borrowing leads to increased spending; increased spending may lead to higher inflation, which is what had initially prompted the Fed to begin their aggressive rate hike campaign in early 2022.”
But what if the Fed fails to engineer this soft landing? The result could be a “hard landing,” leading to a recession — a period of notable economic slowdown.
“Some economists note two consecutive quarters of negative gross domestic product (GDP) growth as a potential indicator of a recession,” Andraos notes. “This, however, is not the official definition — the National Bureau of Economic Research takes into account several economic factors, including the depth and the duration of decline.”
A recession typically poses challenges for most investments, especially equities. “Lower economic activity can lead to layoffs as companies try to control expenses in the face of fading revenue, while lesser demand paired with higher unemployment means lower sales,” says Dan Tolomay, chief investment officer at Trust Company of the South. “As economic activity slows, companies’ prospects dim, and stock prices follow downward.”
However, some assets are better equipped to weather the storm — in other words, these are defensively oriented investments with structural characteristics that make them recession-resistant.
“High-quality bonds like U.S. Treasurys tend to perform better when stocks are declining,” Tolomay says. “Within the equity market, defensive sectors like consumer staples, health care and utilities may hold up better as demand for their products and services remains more consistent even in a downturn.”
Here’s a look at nine exchange-traded funds, or ETFs, that could outperform during a recession.
| ETF | Expense ratio |
| iShares 20+ Year Treasury Bond ETF (ticker: TLT) | 0.15% |
| iShares 0-3 Month Treasury Bond ETF (SGOV) | 0.09% |
| iShares U.S. Treasury Bond ETF (GOVT) | 0.05% |
| Utilities Select Sector SPDR Fund (XLU) | 0.09% |
| Vanguard Consumer Staples ETF (VDC) | 0.10% |
| iShares Global Healthcare ETF (IXJ) | 0.41% |
| Invesco S&P 500 Low Volatility ETF (SPLV) | 0.25% |
| Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) | 0.30% |
| ProShares S&P 500 Dividend Aristocrats ETF (NOBL) | 0.35% |
iShares 20+ Year Treasury Bond ETF (TLT)
“Typically, during a recession, the Federal Reserve looks to cut interest rates to stimulate economic growth, as low interest rates encourage borrowing,” Andraos says. “In a falling interest rate environment, longer duration bonds tend to outperform as yields and bond prices are inversely related.”
The bond ETF to buy for this role is TLT, which tracks Treasurys with more than 20 years remaining until maturity. This ETF possesses a high 16.6-year duration. All else being equal, a 100-basis-point cut in rates could cause TLT to gain 16.6% in net asset value. TLT carries a 0.15% expense ratio.
iShares 0-3 Month Treasury Bond ETF (SGOV)
If you don’t fancy predicting interest rate movements, a far safer Treasury ETF to consider is SGOV. This ETF tracks Treasury bills (T-bills) with one to three months remaining in maturity. Because short-term interest rates are high right now, investors are currently earning a 5.3% yield to maturity.
However, should interest rates be cut in September, SGOV’s yield to maturity would likely fall in lockstep as the ETF’s portfolio rolls over to newer issued T-bills at lower rates. Still, SGOV’s lack of market risk and ironclad credit quality make it a simple and effective way to shield a portfolio from a correction.
iShares U.S. Treasury Bond ETF (GOVT)
If you want to keep your Treasury holdings simple, consider a one-size-fits-all ETF like GOVT. This ETF tracks a portfolio of roughly 200 Treasurys ranging from one to 30 years in maturity. Overall, it averages out to an intermediate yield to maturity of 4% and a duration of six years.
The main benefits of GOVT are its comprehensiveness and affordability. The methodology used by its benchmark, the ICE U.S. Treasury Core Bond Index, gives you broad exposure to the overall U.S. Treasury market, while a 0.05% expense ratio keeps costs low and is competitive with the cheapest bond ETFs.
Utilities Select Sector SPDR Fund (XLU)
“Utilities are considered defensive stocks because they operate in regulated markets, exhibit low price volatility and their services are essential, making them less vulnerable to economic downturns,” says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors.
An easy way to access utility stocks is via XLU, which tracks 31 of the largest ones found in the S&P 500 for a 0.09% expense ratio and an above-average 2.9% 30-day SEC yield. “The sector benefits from the ‘flight to safety’ phenomenon as investors shift away from riskier or cyclical assets,” Schulman notes.
Vanguard Consumer Staples ETF (VDC)
“Consumer staple stocks tend to hold up better than cyclical or growth-dependent businesses during recessions because these companies sell products that people need regardless of the economic climate — think toilet paper, toothpaste, food and basic household items,” Schulman says.
For a 0.1% expense ratio, VDC holds blue-chip companies such as Procter & Gamble Co. (PG), Coca-Cola Co. (KO) and Walmart Inc. (WMT). “Many consumer staples have built strong brands over decades that can help maintain sales volumes and pricing power even when budgets are tight,” Schulman says.
iShares Global Healthcare ETF (IXJ)
“Many health care companies offer essential goods and services, from pharmaceuticals to medical devices, which are non-discretionary expenses for consumers,” Schulman explains. “The aging population in the U.S. (and most other developed countries) also contributes to sustained demand.”
Health care investors can diversify globally via IXJ, which offers exposure to the industries present in Switzerland, Denmark and the U.K. for a 0.41% expense ratio. Notable holdings in IXJ include Eli Lilly & Co. (LLY), Novo Nordisk (NOVO.B), Johnson & Johnson (JNJ) and UnitedHealth Group Inc. (UNH).
Invesco S&P 500 Low Volatility ETF (SPLV)
“SPLV owns the 100 stocks in the S&P 500 with the lowest one-year trailing volatility,” says Nick Kalivas, head of factor and core equity ETF product strategy at Invesco. “Stocks are weighted by the inverse of volatility, so the stocks with the lowest volatility receive the highest weight.”
As a result, SPLV’s portfolio features higher allocations to all three of the defensive sectors — utilities, health care and consumer staples. “Since its inception, SPLV had about 20% less risk than the S&P 500 based on standard deviation, a lower beta of 0.65 and down capture ratio of 61%,” Kalivas notes.
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
“SPHD selects the 50 stocks in the S&P 500 with the highest yield and lowest one-year trailing volatility,” Kalivas explains. “Stocks are weighted by dividend yield, and the holdings are subject to the constraint of no more than 10 names per sector, a sector cap of 25% and single-stock cap of 3%.”
Alongside SPLV, SPHD pays monthly distributions, with a 30-day SEC yield currently hitting 4.2%. “Since its October 2012 inception, SPHD’s 12-month distribution yield had grown at over a 5% annualized rate through July 2024,” Kalivas notes. This has helped the ETF’s dividends stay ahead of inflation.
ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
The companies in SPHD may pay high yields and have lower volatility, but there’s no guarantee that they won’t cut dividends. If you want more assurance in this dimension, consider NOBL. This ETF holds equally weighted stocks from the S&P 500 selected for a 25-year streak of consecutive dividend growth.
By holding NOBL, investors can be reassured that the underlying companies owned are of a high quality and have been able to withstand numerous periods of turmoil, including the dot-com bubble, the 2008 financial crisis and the March 2020 onset of COVID-19. NOBL charges a 0.35% expense ratio.
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Update 08/23/24: This story was previously published at an earlier date and has been updated with new information.
