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Bet on Consumer Staples ETFs as Recession Fears Intensify

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Investors are grappling with recession concerns as the 2-year and 10-year Treasury yield curve saw inversion for a brief period of time in late trading on Mar 31. The yield on the 2-year Treasury stood at 2.337% whereas the 10-year Treasury declined to 2.331% at one point on the same day.

In this regard, Bespoke commented that during the inversion of the yield curve,“there has been a better than two-thirds chance of a recession at some point in the next year and a greater than 98% chance of a recession at some point in the next two years,” per a CNBC article.

Historical data suggests that inversion of the yield curve was observed 422 days prior to the 2001 recession, 571 days before the 2007-to-2009 recession and 163 days ahead of the 2020 recession, according to MUFG Securities.

In recessionary environments, stock screening can be a daunting task, given investors’ loss of risk appetite and an uncertain economic environment. However, a thorough analysis of the historical data highlights that several industries performed well during economic downturns.

Investors can bet on the non-cyclical consumer staples sector during an economic recession. This defensive sector has a low correlation factor with economic cycles.

During an economic slump, reduced spending power generally induces consumers to refrain from spending generously on discretionary items or buying luxurious products. Instead, consumers will always spend on essential purchases like food, beverages, household products, personal items, tobacco etc. The consumer staples sector is inclusive of items that are generally mandatory for daily requirements like food & beverages, non-durable household goods and consumer supercenters.

Research shows that consumer staples companies mostly outperform in times of market turbulence. Thus, the space generally acts as a safe haven for investors. Moreover, consumer staples stocks have more stable profit levels in a contracting economy.

Consumer Staples ETFs to Watch

Consumer staple goods mostly witness predictable and stable demand patterns, which help major players within the space to deliver steady earnings and dividend distributions. The companies within the consumer staples industry are actively involved in international operations. The global presence makes these companies less susceptible to the damaging impacts of a contracting economy.

Investors willing to park their money in stocks within the consumer staples sector should select companies with stable and strong balance sheets, low-debt levels and healthy cash flows.

Here we highlight certain ETFs that can be safe bets (see: all Consumer Staples ETFs here):

The Consumer Staples Select Sector SPDR Fund (XLP - Free Report)

The Consumer Staples Select Sector SPDR Fund seeks to provide investment results that, before expenses, generally correspond to the price and the yield performance of the Consumer Staples Select Sector Index. With an AUM of $15.32 billion, XLP has an expense ratio of 10 basis points (bps) (read: 5 Sectors & Its ETFs to Tap Outsized Dividend & Buyback Yield).

Vanguard Consumer Staples ETF (VDC - Free Report)

Vanguard Consumer Staples ETF seeks to track the performance of the MSCI US Investable Market Consumer Staples 25/50 Index. With an AUM of $6.79 billion, VDC has an expense ratio of 10 bps.

Fidelity MSCI Consumer Staples Index ETF (FSTA - Free Report)

Fidelity MSCI Consumer Staples Index ETF seeks to provide investment returns that correspond, before fees and expenses, generally to the performance of the MSCI USA IMI Consumer Staples Index. FSTA has an AUM of $1.03 billion and charges 8 bps as fees.

iShares U.S. Consumer Staples ETF (IYK - Free Report)

iShares U.S. Consumer Staples ETF seeks to track the investment results of an index composed of U.S. equities in the consumer staples sector. IYK has an AUM of $1.01 billion and charges 41 bps of fees.

First Trust Consumer Staples AlphaDEX Fund (FXG - Free Report)

First Trust Consumer Staples AlphaDEX Fund seeks investment results that generally correspond to the price and yield, before fees and expenses, of an equity index called the StrataQuant Consumer Staples Index. With an AUM of $401.1 million, FXG has an expense ratio of 64 bps.