Best Exchange-Traded Funds to Buy During a Recession

Best Exchange-Traded Funds to Buy During a Recession
Traders work on the floor of the New York Stock Exchange in New York City on June 30, 2022. (Brendan McDermid/Reuters)

Fears of a recession have been front of mind recently for many investors, with some thinking we’re already in one.

Unfortunately, official confirmation of a recession often arrives long after the recession has ended. Prudent investors have been, or should already be, reevaluating their holdings to remove those investments that won’t do well and add others that will perform well during a recession.

Proactive advisers should be telling their clients to buy defensive ETFs in sectors that have historically outperformed the rest of the market during recessions because even during economic slowdowns some industries survive or even thrive. These are commonly industries where demand is inelastic to changes in prices and incomes and where consumer demand is relatively stable.

But because of the unique circumstances that the COVID-19 pandemic and public health-related lockdowns presented over the past few years, the ETFs that will do well in this recession may be somewhat different than in the past. That possibility, however, doesn’t necessarily mean a change of approach but a greater need for monitoring and reevaluation of each position.

For one, in the food and beverage industry, restaurants in particular have already seen closures and expect to struggle in the near term, but this also might present an opportunity for them to outperform once restrictions are fully lifted.

On the other hand, companies that specialize in online and remote services, including many tech companies, or companies that produce at-home alternatives to traditional goods and services, like home gym and exercise equipment, have seen business boom during this time and may continue to benefit.

Plus, businesses and consumers may be reluctant to return to pre-social distancing patterns of work, shopping, and lifestyle, while others may find that they simply prefer new ways of doing these things.

Companies that supply services that support online shopping and work arrangements, teleconferencing, and at-home substitutes for traditional services have huge opportunities right now.

Of course, companies that make essentials like consumer staples and food will always be in demand, even during recessions. Discount stores often do better during recessions because their products are cheaper. Likewise, health care stays in demand.

But investors must remember recessions typically last between 8 and 18 months.

Government agencies define recessions as when an economy has experienced negative GDP growth in two consecutive quarters. Health care, food, consumer staples, and basic transportation are examples of relatively inelastic industries that can perform well in recessions.

The following are some ETFs that may do better during the coming recession.

Food and Restaurants

People need food and can only cut spending on it by so much. Restaurants can be affected, and were especially by the pandemic, but we all need to eat, recession or not.
Invesco Dynamic Food & Beverage ETF (PBJ) is an ETF that offers targeted exposure to the consumer sector including a blend of both discretionary and staples. PBJ is linked to an index that utilizes quantitative analysis and stock screening to identify holdings. Its methodology makes the ETF more expensive but could appeal to investors seeking consistent alpha.

Freight and Logistics

Goods need to be moved, recession or not. While personal travel for vacations declines during recessions, there is still a need to move stuff to stock store shelves. Freight and logistics companies are often safe bets during recessions.

SPDR S&P Transportation ETF (XTN): XTN provides exposure to a benchmark of the transportation industry in the United States. This investment reaches multiple tiers of the economy since consumer goods and consumers are in constant need of transportation from one place to another. Rising gas prices can have an influence on the performance of the individual companies in this portfolio, but if it’s transportation you want, it’s transportation you’ll get.

Growing pressure on the supply chain has ignited rapid change across the economy. And as we’ve heard, the pandemic threw pressure on the supply chain (not to mention Ukraine and oil). But supply chain logistics companies are transforming and adopting new technology to meet the evolving demand. Leading logistics companies have the size and strength to expand, invest, and thrive in this changing landscape. The ProShares Supply Chain Logistics ETF (SUPL) offers a liquid and convenient way to invest in the supply chain logistics opportunity.

Health Care

Health Care Select Sector SPDR Fund (XLV): Health care investments tend to be relatively recession-proof because people can’t defer most health care spending. When you’re sick, you need to see a doctor and buy medicine. XLV is among the least expensive ways to gain access to health care companies and offers an appealing list of holdings as well.

Consumer Staples

Consumer staples are those things none of us can live without. The iShares U.S. Consumer Staples ETF (IYK) offers exposure to domestic consumer market focused on manufacturers of consumer goods excluding consumer services. This means a blend of different sectors including those things people need to live.

While this list is not all-inclusive it does provide insight into what investors will look for before and during a recession. Just remember to monitor and adjust as economic data and analysis are released and updated.

Steven Orlowski is a career financial advisor, Certified Financial Planner and a published author and journalist.
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