Investors Shift Focus to Recession-Resistant ETFs Amid Economic Concerns
As economic uncertainties mount, analysts and investors are becoming increasingly alert to potential downturns. This anxiety heightened in late February 2023 when the 10-year Treasury yield dipped below that of a 3-month note, signaling an inverted yield curve. Historically, this has been a strong predictor of approaching recessions. Nevertheless, a recession won’t be officially recognized until there are at least two consecutive quarters of negative GDP growth, and some experts have previously mispredicted downturns, such as those anticipated for 2024.
In light of these developments, risk-averse investors might prefer defensive strategies that often accompany economic challenges. Exchange-traded funds (ETFs) present a viable option. These funds typically offer diversification across a spectrum of securities connected by a shared theme, thereby helping to mitigate investment risks.
Certain ETFs, specifically designed with defensive strategies, could prove particularly resilient during economic slowdowns. This article will discuss three such funds: one focusing on low-volatility stocks, another targeting the utility sector, and the last comprising a broad basket of consumer staples. Each may be worth considering if economic conditions deteriorate.
Reducing Downside Risk Through Low Volatility
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Factor investing has gained traction among retail investors, yet many tend to overlook volatility compared to more traditional factors like momentum and value. The iShares MSCI USA Min Vol Factor ETF (BATS: USMV), concentrating on low-volatility stocks, could augment safeguards against a recession. USMV tracks an index of large and mid-cap stocks exhibiting lower volatility than the overall U.S. market.
USMV provides investors access to about 185 U.S. firms, with roughly two-thirds representing significant sectors such as information technology, financials, health care, and consumer staples. Notably, no single stock accounted for more than 1.7% of the portfolio as of February 22, 2028.
This ETF aims to curtail downside risk by investing in stable companies with a track record of minimal share price fluctuations. However, this strategy can also limit potential upside. Year-to-date returns for the fund stood at 4.8% as of February 22, 2028, while the previous twelve months yielded returns of 16.1%. During periods of robust economic growth, investing in USMV may mean forgoing higher returns, but in a recession, a cautious strategy may be precisely what investors seek.
Affordable Access to Utilities with Strong Dividends
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During economic downturns, investors often turn to the utilities sector due to the consistent demand for essential services these companies provide. However, individual companies can encounter unique challenges, making diversification through an ETF like the Utilities Select Sector SPDR Fund (NYSEARCA: XLU) advantageous.
The utilities sector consists of a limited number of companies, but XLU offers broad exposure with 66 holdings as of February 22, 2025. Although the top five holdings represent approximately 40% of the total assets, XLU’s low expense ratio of 0.09% provides an economical entry point. Additionally, utility stocks typically offer attractive dividends, and XLU featured a dividend yield of 2.8% on the same date.
Comprehensive and Cost-Effective Consumer Staples Exposure
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The consumer staples sector is often resilient during economic downturns, as its companies provide essential products. However, many ETFs in this space tend to be heavily weighted towards large companies like Coca-Cola Co. (NYSE: KO), sometimes neglecting smaller firms. The Vanguard Consumer Staples ETF (NYSEARCA: VDC) maintains a balance, including over 100 securities while still emphasizing major players.
VDC also shares a low expense ratio of 0.09% per year, which can help keep costs down, especially in a recession when managing expenses is critical to investment success.
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