Do ETFs do well in a recession?
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.
ETFs. Investment funds are a strategic option during a recession because they have built-in diversification, minimizing volatility compared to individual stocks. However, the fees can get expensive for certain types of actively managed funds.
Cash and Cash Equivalents
Cash equivalents include short-term, highly liquid assets with minimal risk, such as Treasury bills, money market funds and certificates of deposit. Money market funds and high-yield savings are also places to salt away cash in a downturn.
The best recession stocks include consumer staples, utilities and healthcare companies, all of which produce goods and services that consumers can't do without, no matter how bad the economy gets.
Options to consider include federal bond funds, municipal bond funds, taxable corporate funds, money market funds, dividend funds, utilities mutual funds, large-cap funds, and hedge funds.
| ETF | Expense Ratio |
|---|---|
| iShares 0-3 Month Treasury Bond ETF (SGOV) | 0.05% |
| Vanguard Long-Term Treasury ETF (VGLT) | 0.04% |
| The Consumer Staples Select Sector SPDR Fund (XLP) | 0.1% |
| The Utilities Select Sector SPDR Fund (XLU) | 0.1% |
As with traditional investment funds, ETFs have to place their underlying investments with a custodian. The fund provider cannot be both the fund manager, and the "guardian" of the assets. So if an ETF provider goes bankrupt, your investments are not gone cause they will still be kept by the custodian.
Most stocks and high-yield bonds tend to lose value in a recession, while lower-risk assets—such as gold and U.S. Treasuries—tend to appreciate.
Equity Sectors
On the negative side, energy and infrastructure stocks have been the hardest-hit in recent recessions. Companies in these sectors are acutely sensitive to swings in demand. Financials stocks also can suffer during recessions because of a rising default rate and shrinking net interest margins.
Healthy large cap stocks also tend to hold up relatively well during downturns. Investing in broad funds can help reduce recession risk through diversification. Bonds and dividend stocks can provide income to cushion investors against downturns.
Who makes money in a recession?
Companies in the business of providing tools and materials for home improvement, maintenance, and repair projects are likely to see stable or even increasing demand during a recession. So do many appliance repair service people.
Lower prices — A recession often hits after a long period of sky-high consumer prices. At the onset of a recession, these prices suddenly drop, balancing out previous long inflationary costs. As a result, people on fixed incomes can benefit from new, lower prices, including real estate sales.
You should consider buying economically resilient or defensive stocks before a recession. These include healthcare, consumer staples, utilities, and cost-conscious retail companies. Demand for the products and services provided by these companies tends to hold up relatively well during a recession.
- Cut living expenses. ...
- Build an emergency fund. ...
- Develop new skills. ...
- Speak with a financial adviser. ...
- Create passive income sources. ...
- Start a business. ...
- Consumer staples. ...
- Bonds.
Cash: Offers liquidity, allowing you to cover expenses or seize investment opportunities. Property: Can provide rental income and potential long-term appreciation, but selling might be difficult during an economic downturn.
Generally, money kept in a bank account is safe—even during a recession. However, depending on factors such as your balance amount and the type of account, your money might not be completely protected. For instance, Silicon Valley Bank likely had billions of dollars in uninsured deposits at the time of its collapse.
| Symbol | Name | 5-Year Return |
|---|---|---|
| IUS | Invesco RAFI Strategic US ETF | 14.75% |
| OEF | iShares S&P 100 ETF | 14.73% |
| SPHB | Invesco S&P 500® High Beta ETF | 14.58% |
| SPYG | SPDR Portfolio S&P 500 Growth ETF | 14.40% |
| Commodity ETFs | ||
|---|---|---|
| 2008 % Return | AUM (MM) | |
| iShares COMEX Gold Trust (IAU) | 5.42 | 1,896.305 |
| SPDR Gold Shares (GLD) | 2.99 | 21,691.122 |
| PowerShares DB Gold | 2.83 | 83.663 |
| Ticker | Fund name | 5-year return |
|---|---|---|
| SOXX | iShares Semiconductor ETF | 30.70% |
| XLK | Technology Select Sector SPDR Fund | 24.57% |
| IYW | iShares U.S. Technology ETF | 24.09% |
| FTEC | Fidelity MSCI Information Technology Index ETF | 22.79% |
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.
Why I don't invest in ETFs?
Low Liquidity
If an ETF is thinly traded, there can be problems getting out of the investment, depending on the size of your position relative to the average trading volume. The biggest sign of an illiquid investment is large spreads between the bid and the ask.
Leveraged ETF prices tend to decay over time, and triple leverage will tend to decay at a faster rate than 2x leverage. As a result, they can tend toward zero.
Contrary to investor expectations, several growth stocks including Apple Inc. (NASDAQ:AAPL), Amazon.com Inc (NASDAQ:AMZN), and Netflix Inc. (NASDAQ:NFLX) grew during the 2008 recession, so investors don't have to ignore growth stocks to be conservative.
For investors, “cash is king during a recession” sums up the advantages of keeping liquid assets on hand when the economy turns south. From weathering rough markets to going all-in on discounted investments, investors can leverage cash to improve their financial positions.
Many people who owned stocks that went down a lot would have been OK eventually, except they bought on margin and were ruined. The best performing investments during the Depression were government bonds (many corporations stopped paying interest on their bonds) and annuities.
