There’s no shortage of macroeconomic factors that could rattle the stock market.
Currently, the landscape is dominated by the 2024 presidential election, escalating tensions in the Middle East, and a notable 50-basis-point interest rate cut by the Federal Reserve in response to inflation rates realigning with long-term targets.
“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.”
With these dynamics at play, it’s still too early to determine if the Fed will achieve its goal of a soft landing, which refers to the Fed’s strategy of slowing economic growth and controlling inflation without triggering a recession.
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If these efforts falter, however, the economy could face a hard landing — a technical term for a sharp and severe economic downturn that often leads to a recession.
“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.”
For those with a long investment horizon and high risk tolerance, the typical advice is to stay the course, as recessions are a natural part of the economic cycle. However, if your risk tolerance is lower, there are strategic ways to position your portfolio.
This can be achieved through investing in certain defensive-oriented exchange-traded funds (ETFs). These ETFs can help mitigate risk during economic downturns, providing a safe haven during turbulent times and helping you sleep better at night.
Here’s a look at nine ETFs that could outperform during a recession:
| ETF | Expense ratio |
| VanEck Durable High Dividend ETF (ticker: DURA) | 0.30% |
| iShares Global Utilities ETF (JXI) | 0.41% |
| iShares Global Healthcare ETF (IXJ) | 0.41% |
| iShares Global Consumer Staples ETF (KXI) | 0.41% |
| Vanguard Long-Term Treasury ETF (VGLT) | 0.04% |
| Pacer Trendpilot 100 ETF (PTNQ) | 0.65% |
| JPMorgan Hedged Equity Laddered Overlay ETF (HELO) | 0.50% |
| Invesco S&P 500 Low Volatility ETF (SPLV) | 0.25% |
| Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) | 0.30% |
VanEck Durable High Dividend ETF (DURA)
A recession generally spells headwinds for 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.”
One ETF that could hold up well under these circumstances is DURA. This ETF tracks the Morningstar U.S. Dividend Valuation Index, which tracks companies with high dividend yields, strong balance sheets and attractive valuations. This ETF features a higher-than-average weighting toward the defensive sectors: health care, consumer staples and utilities. DURA currently pays a 3.1% 30-day SEC yield.
iShares Global Utilities ETF (JXI)
“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. Historically, utility companies were known as “widow and orphans” stocks due to their lower volatility.
For utilities exposure, investors can buy JXI. This ETF tracks the S&P Global 1200 Utilities (Sector) Capped Index, which diversifies beyond the U.S. to also hold utilities from developed markets. This can help reduce the impact of disaster risks such as hurricanes that have pummeled the eastern seaboard recently. JXI charges a 0.41% expense ratio and pays a 2.7% 30-day SEC yield.
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.” For a globally diversified approach to health care investing, consider IXJ.
This ETF holds U.S. health care giants such as Eli Lilly & Co. (LLY), Johnson & Johnson (JNJ), Thermo Fisher Scientific Inc. (TMO) and UnitedHealth Group Inc. (UNH). However, it also holds many European giants, such as Novo Nordisk (NOVO-B.CO), AstraZeneca PLC (AZN), Roche Holding AG (ROG.SW) and Novartis AG (NOVN.SW). IXJ charges a 0.41% expense ratio and currently pays a 1.2% 30-day SEC yield.
iShares Global Consumer Staples ETF (KXI)
“Consumer staples 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. In the U.S., companies in this sector include Procter & Gamble Co. (PG), Coca-Cola Co. (KO) and Walmart Inc. (WMT).
However, the consumer staples sector doesn’t stop at just a handful of U.S. blue chips. Globally, these companies face stiff competition in the form of Nestle SA (OTC: NSRGY), Unilever PLC (UL) and L’Oreal SA (OR.PA). If you want to own these companies, the consumer staples ETF to opt for is KXI, which is globally diversified. As with JXI and IXJ, it charges a 0.41% expense ratio. KXI pays a 2.2% 30-day SEC yield.
Vanguard Long-Term Treasury ETF (VGLT)
“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.” This effect is especially potent for Treasury bonds, which — unlike their corporate counterparts — have no credit risk.
Investors can access long-term Treasury bonds cheaply via VGLT, which tracks the Bloomberg U.S. Long Treasury Index for a 0.04% expense ratio. The Treasury bonds held in VGLT possess an average duration of 15 years. All else being equal, a 100-basis-point cut in rates could cause VGLT to gain 15% in net asset value. Investors can currently expect a 4.5% 30-day SEC yield.
[READ: 7 Best Treasury ETFs to Buy Now]
Pacer Trendpilot 100 ETF (PTNQ)
ETFs tracking the Nasdaq-100 Index can deliver high growth potential but can be highly volatile during times of market turmoil. An alternative is PTNQ, which offers exposure to the Nasdaq-100 but with an “on/off” switch. “PTNQ is designed to capture the majority of the increase in the Nasdaq-100, while also placing an emphasis on managing downside risk,” says Sean O’Hara, president at Pacer ETFs Distributors.
This ETF alternates between exposure to the Nasdaq-100 index and Treasury bills (T-bills) based on the 200-day simple moving average (SMA), a technical indicator. Depending on the 200-day SMA signal, PTNQ can either be 100% invested in the Nasdaq-100, 100% in T-bills or split 50-50. “Historically, the 200 SMA has been a relatively effective indicator of longer-term trend changes,” O’Hara notes.
JPMorgan Hedged Equity Laddered Overlay ETF (HELO)
Another way investors can mitigate risk is via ETFs that hedge their downside exposure via options strategies. A great example is HELO, which uses a combination of call and put options to mitigate volatility. This ETF starts with a portfolio of large-cap stocks similar to the composition of the S&P 500, but then adds on a laddered options overlay as a “guardrail” to limit the range of outcomes.
HELO is the ETF version of JPMorgan Hedged Equity Fund (JHEQX), a mutual fund with a long-standing, five-star rating from Morningstar. As noted by Morningstar, JHEQX has historically reduced risk significantly without overtly compromising upside returns, offering protection during 2020 and 2022 bear markets while maintaining a better Sharpe ratio than the S&P 500. HELO charges a 0.5% expense ratio.
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.” This results in an overweight to all three defensive sectors — utilities, health care and consumer staples.
“SPLV exploits return math,” Kalivas explains. “By not falling as much during market sell-offs, it has less ground to make up to reach the prior high — in an extreme example, it takes a 100% return to make up for a 50% loss.” Unlike most equity ETFs, SPLV also pays its 1.9% 30-day SEC yield on a monthly basis. The ETF charges a 0.25% expense ratio and historically has had 20% less standard deviation than the S&P 500.
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%.” This ETF also pays monthly distributions and has a higher 4.1% 30-day SEC yield, making it great for income.
“Investors may be interested in dividend yield if the Federal Reserve continues to reduce interest rates,” Kalivas argues. “Historically, a falling three-month T-bill rate has coincided with declining growth in money market fund assets, which may cause investors to seek equity income as cash looks for a new home.” As with SPLV, utilities and consumer staples sector stocks make up a large portion of SPHD.
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9 Best ETFs to Buy for a Recession originally appeared on usnews.com
Update 10/28/24: This story was previously published at an earlier date and has been updated with new information.
