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.
