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
- The Consumer Staples Select Sector SPDR ETF (XLP)
- The iShares US Healthcare Providers (IHF)
- The Vanguard Dividend Appreciation ETF (VIG)
- The Utilities Select Sector SPDR ETF (XLU)
- The Invesco Food & Beverage ETF (PBJ)
- The Vanguard Consumer Staples ETF (VDC)
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 ETF to buy right now? ›
- Top 7 ETFs to buy now.
- Vanguard 500 ETF.
- Invesco QQQ Trust.
- Vanguard Growth ETF.
- iShares Core SP Small-Cap ETF.
- iShares Core Dividend Growth ETF.
- Vanguard Total Stock Market ETF.
- iShares Core MSCI Total International Stock ETF.
Recession stocks are defensive stocks that can sustain growth or limit losses during an economic downturn because their products or services are always in demand. The best recession stocks include consumer staples, utilities and healthcare stocks.
Where not to invest during a recession? ›
Most stocks and high-yield bonds tend to lose value in a recession, while lower-risk assets—such as gold and U.S. Treasuries—tend to appreciate. Within the stock market, shares of large companies with solid cash flows and dividends tend to outperform in downturns.
Are ETFs safe if the stock market crashes? ›
OCTT has a 10% buffer against the SPDR S&P 500 ETF Trust, which means if the S&P 500 falls 10% or less, the ETF should experience no loss. If the S&P 500 falls by more than 10%, the ETF should decline by only the amount above the 10% buffer.
Which ETF has the lowest risk? ›
Low Volatility ETF List
| Symbol Symbol | ETF Name ETF Name | ER ER |
|---|
| SPLV | Invesco S&P 500® Low Volatility ETF | 0.25% |
| EFAV | iShares MSCI EAFE Min Vol Factor ETF | 0.22% |
| EEMV | iShares MSCI Emerging Markets Min Vol Factor ETF | 0.25% |
| ACWV | iShares MSCI Global Min Vol Factor ETF | 0.20% |
4 more rowsThe Innovator Equity Defined Protection ETF TJUL is the world's first ETF to promise no losses to investors. This product seeks to track the return of the SPDR S&P 500 ETF Trust SPY, up to a cap of 16.6%, while buffering investors against 100% of losses over the outcome period of two years.
Can ETFs go to zero? ›
Yes, an inverse ETF can reach zero, particularly over long periods. Market volatility, compounding effects, and fund management concerns can exacerbate losses. To successfully manage possible risks, investors should be aware of the short-term nature of these securities and carefully monitor their holdings.
Which ETF gives the highest return? ›
6 Best Performing ETFs last 10 years in India
- Nippon India ETF Nifty 50 BeES. 102.38% 707.9%
- Nippon India ETF Gold BeES. 99.57% 467.4%
- Invesco India Gold ETF. 107.00% 288.0%
- UTI S&P BSE Sensex ETF. 95.56% 200.8%
- BHARAT 22 ETF. 161.65% 172.2%
- Nippon India ETF PSU Bank BeES.
Most Popular ETFs: Top 100 ETFs By Trading Volume
| Symbol | Name | Avg Daily Share Volume (3mo) |
|---|
| SPY | SPDR S&P 500 ETF Trust | 62,146,051 |
| SOXL | Direxion Daily Semiconductor Bull 3x Shares | 60,099,746 |
| TQQQ | ProShares UltraPro QQQ | 59,290,242 |
| XLF | Financial Select Sector SPDR Fund | 41,848,391 |
96 more rowsCompare the best growth ETFs
| FUND(TICKER) | EXPENSE RATIO | 10-YEAR RETURN AS OF JUNE 3 |
|---|
| Vanguard Growth ETF (VUG) | 0.04% | 15.07% |
| iShares Russell 1000 Growth ETF (IWF) | 0.19% | 15.78% |
| iShares S&P 500 Growth ETF (IVW) | 0.18% | 14.34% |
| Schwab U.S. Large-Cap Growth ETF (SCHG) | 0.04% | 15.95% |
3 more rowsCompanies in the business of providing tools and materials for home improvement, maintenance, and repair projects are likely to see stable or even increasing demand during a recession. So do many appliance repair service people. New home builders, though, do not get in on the action.
Where is my money safest during a recession? ›
Still, here are seven types of investments that could position your portfolio for resilience if recession is on your mind:
- Defensive sector stocks and funds.
- Dividend-paying large-cap stocks.
- Government bonds and top-rated corporate bonds.
- Treasury bonds.
- Gold.
- Real estate.
- Cash and cash equivalents.
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.
What happens to ETFs in a recession? ›
ETFs. Investment funds are a strategic option during a recession because they have built-in diversification, minimizing volatility compared to individual stocks. However, the fees can get expensive for certain types of actively managed funds.
Where is the safest place to put your money during a recession? ›
Cash equivalents include short-term, highly liquid assets with minimal risk, such as Treasury bills, money market funds and certificates of deposit. Money market funds and high-yield savings are also places to salt away cash in a downturn.
Which is better, sphd or schd? ›
Yields: SPHD has a higher yield of 4.97%, while SCHD has a lower but respectable yield of 3.77%. This difference is by design, as SPHD focuses on high-yielding dividend stocks, while SPHD focuses on companies with a history of paying dividends.
What is the best sector to invest in during a recession? ›
Seek Out Core Sector Stocks.
So if you want to insulate yourself during a recession partly with stocks, consider investing in the healthcare, utilities and consumer goods sectors. People are still going to spend money on medical care, household items, electricity and food, regardless of the state of the economy.
