With the persistent skyrocketing inflation and the Fed’s aggressive monetary policy, the U.S. economy is witnessing slow growth. The combination is pulling down the long-term rates and pushing up the short-term rates. This is especially true as the yield curve inversion between 10-year and 2-year rates has deepened to a level not seen since 2000. This signals that a recession is in the cards for many Wall Street strategists.

This compelled investors’ flight to defensive sectors like utilities, real estate, healthcare and consumer staples. ETFs from these sectors like Utilities Select Sector SPDR (XLU Quick QuoteXLU - Free Report) , Vanguard Real Estate ETF (VNQ Quick QuoteVNQ - Free Report) , iShares U.S. Healthcare Providers ETF (IHF Quick QuoteIHF - Free Report) , Invesco Dynamic Food & Beverage ETF (PBJ Quick QuotePBJ - Free Report) and Invesco Defensive Equity ETF look excellent choices.

Why Defensive Sectors?

Being a low-beta sector, utility is relatively protected from large swings (ups and downs) in the stock market and is thus considered a defensive investment or a safe haven amid economic or political turmoil. Real estate also acts as a safe haven in times of market turbulence and concurrently offers higher returns with their juicy yields.

Healthcare, which generally outperforms during periods of low growth and high uncertainty, garnered investors’ interest owing to its non-cyclical nature. The consumer staples sector also sees steady demand in the wake of an economic downturn on account of its low level of correlation with the economic cycles. It generally acts as a safe haven amid political and economic turmoil.

Yield Curve Flattening

The curve is flattening as investors are betting on deeper Federal Reserve rate hikes while at the same time, worrying about growthprospects in the world's biggest economy.

This is especially true as inflation turned hotter in the United States and roared to a level not seen in more than four decades, compelling the Fed to act more aggressively to rapid price increases throughout the economy. The consumer price index (CPI) climbed 9.1% year over year in June to a fresh 40-year high, up from an 8.6% jump in May (read: ETF Strategies to Navigate 40-Year High U.S. Inflation Levels).

In fact, the data raised bets that the central bank could increase rates by a historic 100 bps this month to battle the 40-year high inflation. According to the latest data from CME Group, traders are pricing in a nearly 80% probability of a full percentage-point rise at the coming meeting. An increase in interest rates means higher loan rates for consumers and businesses, including mortgages, credit cards and auto loans, thereby hurting consumer spending.

Additionally, the war in Ukraine and the new coronavirus restrictions in China intensified the risk of prolonged global supply-chain trouble, inducing sluggish economic growth.

ETFs in Focus

Utilities Select Sector SPDR (XLU Quick QuoteXLU - Free Report)

With an AUM of $16.1 billion, Utilities Select Sector SPDR seeks to provide exposure to companies from the electric utility, water utility, multi-utility, independent power and renewable electricity producers, and gas utility industries. XLU follows the Utilities Select Sector Index, holding 29 stocks in its basket. Electric utilities take the top spot among sectors at 63.7%, closely followed by multi utilities (30.6%).

Utilities Select Sector SPDR charges 10 bps of annual fees and sees a heavy volume of 18.2 million shares, on average. XLU has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Vanguard Real Estate ETF (VNQ Quick QuoteVNQ - Free Report)

Vanguard Real Estate ETF follows the MSCI US Investable Market Real Estate 25/50 Index and holds 171 stocks in its basket. Specialized REITs take the largest share at 37.3%, while residential REITs, retail REITs and industrial REITs round off the next three with double-digit exposure each. The expense ratio comes in at 0.12%.

Vanguard Real Estate ETF is the most popular and liquid ETF with an AUM of $38.5 billion and an average daily volume of 6.4 million shares a day. VNQ has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

iShares U.S. Healthcare Providers ETF (IHF Quick QuoteIHF - Free Report)

iShares U.S. Healthcare Providers ETF provides exposure to companies that offer health insurance, diagnostics and specialized treatment. IHF follows the Dow Jones U.S. Select Healthcare Providers Index (read: 5 Recession-Proof ETFs for Your Portfolio).

iShares U.S. Healthcare Providers ETF holds 71 securities in its basket and amassed $1.5 billion in its asset base. Volume is good at about 51,000 shares per day, on average. IHF charges 42 bps as annual fees and has a Zacks ETF Rank of 2 with a Medium risk outlook.

Invesco Dynamic Food & Beverage ETF (PBJ Quick QuotePBJ - Free Report)

Invesco Dynamic Food & Beverage ETF offers exposure to 32 stocks engaged in manufacturing, selling or distributing food and beverage products, agricultural products and products related to the development of new food technologies by tracking the Dynamic Food & Beverage Intellidex Index.

With an AUM of $286.5 million, Invesco Dynamic Food & Beverage ETF charges 63 bps worth of annual fees from investors and sees a moderate average daily volume of 146,000 shares. PBJ has a Zacks ETF Rank of 3 with a Medium risk outlook.

Invesco Defensive Equity ETF        

Invesco Defensive Equity ETF offers exposure to companies that are principally engaged in manufacturing, selling or distributing food and beverage products, agricultural products and products related to developing new food technologies. It tracks the Dynamic Food & Beverage Intellidex Index and holds 101 stocks in its basket (read: 3 Sector ETFs to Win Despite Soft Manufacturing Data).

Invesco Defensive Equity ETF accumulated $247.3 million in its asset base and saw a lower volume of 26,000 shares per day, on average. DEF charges 55 bps of fees per year and has a Zacks ETF Rank #3 with a Medium risk outlook.