Best 5 ETFs to Hedge Against Recession

Apr 25, 2022 03:53 PM ET
Best 5 ETFs to Hedge Against Recession

Recession is not new to the US economy nor the global economy at large. In fact, this century alone has seen three major recessions. The first was at the turn of the century, in 2001, which was attributed to the dot-com bubble, and aggravated by the 9/11 terrorist attacks. The second was the Great Recession of 2008, caused by sub-prime mortgages in the American real estate sector. More recently, 2020 saw another depression caused by the Covid-19 pandemic. 

Markers of an impending recession

Recently, the yield curve of US Treasury bonds inverted, which means that the yield on the short-term (2-year) bonds surpassed that of the long-term (10-year) bonds. This has traditionally been a sign of an impending recession, usually materializing around 18 months after the yield curve inversion.

At the same time, Russia’s invasion of Ukraine has caused a shortage of vital resources like oil, owing to supply chain constraints. Though the US’s trade with both of these countries accounts for less than 0.05% of its total GDP, the shortage has caused heightened commodity prices and a sense of uncertainty in the stock market. 

To curb the resultant inflation, the Fed is currently effecting rate hikes. However, this will have a negative effect on the economy, possibly causing stagflation. The housing and stock markets are in a bubble, further warning of an impending economic downturn, to add insult to injury. 

Recession-proof ETFs for the cautious investor 

iShares US Healthcare providers ETF (IHF)

Naturally, even in times of economic turmoil, the healthcare industry is seldom adversely affected. Since it provides an essential service, even in times of rising commodity prices, this service will always be in demand. By investing in an ETF in this sector, you gain diversified exposure to a variety of healthcare stocks. 

The iShares US Healthcare Providers ETF contains a selection of US-based healthcare firms and industries stocks. With 125 stocks, major holdings include Johnson & Johnson, with an 8.8% stake, and UnitedHealth Group, which accounts for 7.5% of its portfolio. No other stock constitutes more than 5% of their total holdings. This means that any drastic downturn in anyone's stock does not significantly affect the ETF’s performance. Its expense ratio is also quite affordable, at only 0.43%. 

iShares MSCI Global Gold Miners

For many years, gold has been considered a safe haven in times of economic downturn. As inflation plagues the majority of the world, more people are looking to buy yellow metal, which drives up its price. This is a plus for gold miners, as it translates to bigger margins. 

The iShares Global Gold Miners invests in gold mining companies, giving you a lower-risk exposure to this industry. It consists of 40 stocks, among them some notable names in mining such as Newmont and Barrick Gold. Gold miners have been reporting steady profits in the past few years, as gold prices have been on the rise. Now, with the recession on the horizon, these prices could skyrocket even further, translating to yields for holders of this fund. What’s more, with an expense ratio of only 0.39%, you’re sure that expenses won’t significantly eat away at your profits.

Utilities Select Sector SPDR (XLU)

Another sector that tends to be immune to a dwindling economy is the utility sector. Therefore, investors tend to flock towards it when the stock market comes crashing. Of the several utility ETFs in existence, the XLU is a safe bet. It manages assets to the tune of $14.4 billion. Among these are 29 stocks from companies in the electric sector, water utility, and multi-utility firms. There are also independent power companies, those producing renewable energy, as well as gas producers.  

When it comes to portfolio allocation, electric utilities take the lion’s share with 63.1%, followed by multi utilities at 29.3%. Its expense ratio is a mere 0.10% annually.

Vanguard Consumer Staples ETF (VDC)

This is an ETF that consists of stocks from food and beverage industries, perishable household goods, hypermarkets, and consumer discount stores. Usually, it represents household goods that are essential for daily basic needs. Even when the economy is in turmoil, such goods will always be in demand, which speaks to why the ETF outperforms in times of crisis.

The fund contains 99 stocks, which are a healthy blend of household goods, soft drinks, packaged foods, as well as supermarkets and hypermarkets. Its annual expense ratio is 0.10%.

Vanguard Dividend Appreciation ETF (VIG)

This is an ETF that focuses on companies in the S&P Dividend Growers Index. These tend to be companies that have steadily increased the dividend payouts to their shareholders over a prolonged period of time. Investors turn to such companies during economic crises, as their stock prices tend to be less volatile. Such mature companies tend to put out significant yields even when economic conditions are not optimal. The sizable dividends they offer could serve as a hedge against losses for investors with interests in other struggling sectors.

What’s more, VIG has an expense ratio of 0.06%. It boasts a total AUM north of $66 billion. In its portfolio are a total of 267 stocks of companies that have stood the test of time. 

In a nutshell

There are several worrying headlines in the news, from the war in Europe to record-breaking inflation levels in the US. All signs are pointing to a recession in the works, especially after the US Treasury bonds yield curve inverted. Be that as it may, there are several sectors of the economy that tend to thrive even in periods of uncertainty. Such include healthcare, utilities, and household goods, just to mention a few. Investing in ETFs of these sectors is prudent for investors to hedge against recession-caused losses.



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