If you’re worried about the stock market correcting, or eventually heading into bear market territory, then you will want to consider the exchange traded funds (ETF) covered below. They will all give you more downside protection than the vast majority of ETFs throughout the ETF universe. However, there are some common misconceptions about these ETFs that you need to know about.
For your convenience, the ETFs belowhave been broken into two groups: top-tier and second-tier. We provide key data on each ETF and indicate its 2009 low following the market crash associated with the Great Recession compared to its 2008 top.
Key Takeaways
- Investors looking to weather a recession can use exchange-traded funds (ETFs) as one way to reduce risk through diversification.
- ETFs that specialize in consumer staples and non-cyclicals outperformed the broader market during the Great Recession and are likely to persevere in future downturns.
- Here, we look at just six of the best-performing ETFs as measured from their 2008 market highs to 2009 lows.
The Top-Tier
Top-tier ETFs are defined as having a large amount of assets under management and a great deal of liquidity in the market.
The Consumer Staples Select Sector SPDR ETF (XLP)
- Purpose: 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%
- April 2008 high (pre-crash): $28.49
- February 2009 low (bottom of market crash): $20.36
Analysis
XLF outperformed its peers on a relative basis in the selloff between 2008-09. It remains the most liquid and actively-traded consumer staples exchange traded fund.
The iShares US Healthcare Providers (IHF)
- Purpose: 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%
- April 2008 high: $49.69
- February 2009 low: $30.13
Analysis
IHF didn’t hold up exceptionally well during the last crisis, and it’s not likely to appreciate if there's another crisis. However, it’s likely to hold up better than last time since Baby Boomers are entering an age where they will require a great deal of healthcare-related products and services.
The Vanguard Dividend Appreciation ETF (VIG)
- 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%
- April 2008 high: $55.19
- February 2009 low: $33.18
Analysis
VIG didn’t hold up well during the last crisis. That might be the case in the future as well. On the other hand, this low-expense ETF tracks the performance of companies that have a record of increasing their dividends over time.
Companies such as these almost alwayspossess healthy balance sheets and generate strong cash flows. Therefore, they’re likely to weather the storm. The correct approach here would be to buy VIG on any dips, knowing it’s only a matter of time before these elite companies bounce back.
The 2nd Tier
Second-tier ETFs have somewhat lower liquidity and assets, with lower volumes and relatively more volatile stocks in their portfolios.
The Utilities Select Sector SPDR ETF (XLU)
- Purpose: 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%
- April 2008 high: $41.31
- February 2009 low: $25.35
Analysis
If you research “recession-proof ETFs” you will often find XLU on the list. But this is why you need to be careful with what you’re reading. As you can see, XLU didn’t hold up very well during the last crisis. That’s likely to be next during the next crisis as well. While utilities are generally seen as safe, the problem is that they’re leveraged. Therefore, when interest rates increase, their debts will become more expensive.
The debt-to-equity ratios for NextEra, Southern Co, and Duke are 1.64, 2.01, and 1.64, respectively. These aren’t terrible ratios, but they’re not comforting in a higher interest rate environment, either.
The Invesco Food & Beverage ETF (PBJ)
- Purpose: 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%
- April 2008 high: $16.82
- February 2009 low: $11.13
Analysis
A manageable decline during the worst of times. And PBJ invests in the best of the best in Food & Beverage. The only reason PBJ is on the Second-Tier list is because of the 0.57% expense ratio, which is marginally higher than the average ETF expense ratio of 0.47% in 2022. This heightened expense ratio will eat into your profits and accelerate losses.
The Vanguard Consumer Staples ETF (VDC)
- Purpose: 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%
- April 2008 high: $69.85
- February 2009 low: $49.53
Analysis
With this ETF offering a very low expense ratio and holding top-notch companies, you might be wondering why it’s on the Second-Tier list. That can be answered in one word: liquidity.
The Bottom Line
Consider the ETFs above for downside protection, especially those in the Top-Tier category. That said, if you’re really worried about the market faltering and you want downside protection, then the safest playwould be a move into cash. If the market falters, it will take place in a deflationary environment. If you’re in cash, then the value ofthat cash will increase (every dollar will go further).
The author, Dan Moskowitz does not own any of the ETFs or stocks mentioned in this article.
