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Invest in Defensive ETFs as Recession Fear Grows in 2023
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As the global economy is struggling with skyrocketing inflation, continued war in Ukraine and slowdown in China, a recession seems likely this year. Against such a backdrop, investors should stash their cash in some conventionally secure and recession-proof corners of the broad market.
The International Monetary Fund warned a third of the global economy will be in a recession given no signs of abatement of the ongoing conflict in Ukraine, spiraling inflation, higher interest rates and the surge in coronavirus infections in China. The year 2023 will be "tougher" than last year as the United States, European Union and China will see their economies slow down. Global growth is forecasted to fall from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023. This is the weakest growth since 2001, except for the global financial crisis and the acute phase of the COVID-19 pandemic (read: ETFs to Benefit as Inflation Drops to One-Year Low).
Wall Street Journal survey finds there is a 63% chance of recession this year. And a survey of economists and investors by the Federal Reserve Bank of Philadelphia shows the expectations that the gross domestic product will fall in three or four quarters are by far the highest since it started in 1968. Wall Street predicts the first half of the year will be choppy, with global markets suffering their biggest fall since the 2008 financial crisis last year.
Big banks are also expecting that an economic downturn is fast approaching. More than two-thirds of the economists at 23 large financial institutions that do business directly with the Federal Reserve are betting that the United States will have a recession in 2023.
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. While there are several options in the space, the ultra-popular XLU seems a good bet. With AUM of $16.3 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. It follows the Utilities Select Sector Index, holding 30 stocks in its basket. Electric utilities take the top spot in terms of sectors at 65.6%, closely followed by multi utilities (28.3%).
Utilities Select Sector SPDR charges 10 bps in annual fees and sees a heavy volume of around 11 million shares, on average. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: 5 Top-Ranked ETFs to Buy at Bargain Prices for 2023).
iShares U.S. Healthcare Providers ETF (IHF - Free Report)
Healthcare, which generally outperforms during periods of low growth and high uncertainty, will see huge investor interest due to its non-cyclical nature. The demand for healthcare services remains intact even in the deteriorating economic fundamentals. iShares U.S. Healthcare Providers ETF provides exposure to companies that offer health insurance, diagnostics and specialized treatment. It follows the Dow Jones U.S. Select Healthcare Providers Index.
iShares U.S. Healthcare Providers ETF holds 69 securities in its basket and has amassed $1.5 billion in its asset base. Volume is good at about 52,000 shares per day, on average. The product charges 39 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook.
The consumer staples sector is viewed as defensive as it includes a variety of items like food & beverages, non-durable household goods, hypermarkets and consumer supercenters that are essential for daily needs. These products see steady demand even during an economic downturn due to their low level of correlation with economic cycles. Invesco Dynamic Food & Beverage ETF offers exposure to 31 stocks engaged in the manufacture, sale, or distribution of 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 AUM of $368.6 million, Invesco Dynamic Food & Beverage ETF charges 63 bps in annual fees from investors and sees a moderate average daily volume of 66,000 shares. PBJ has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.
Dividend-paying securities are the major source of consistent income for investors when returns from the equity market are at risk. Dividend-focused products offer safety in the form of payouts while at the same time providing stability, as mature companies are less volatile to large swings in stock prices. This is because the companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis. Vanguard Dividend Appreciation ETF is the largest and the most popular ETF in the dividend space, with AUM of $65.4 billion and an average daily volume of 2 million shares (read: 5 Cheap Dividend ETFs to Buy and Hold for 2023).
Vanguard Dividend Appreciation ETF follows the S&P U.S. Dividend Growers Index, which is composed of companies that have a record of increasing dividends over time. It holds 289 securities in the basket and charges 6 bps in annual fees. The product has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.
Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility, elevated margins and a track record of stable or rising sales and earnings growth. These products thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings. iShares MSCI USA Quality Factor ETF provides exposure to large and mid-cap stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage) by tracking the MSCI USA Sector Neutral Quality Index.
iShares MSCI USA Quality Factor ETF holds 124 securities in its basket and trades in an average daily volume of 1 million shares. The ETF has AUM of $17.6 billion and charges 15 bps in annual fees.
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Invest in Defensive ETFs as Recession Fear Grows in 2023
As the global economy is struggling with skyrocketing inflation, continued war in Ukraine and slowdown in China, a recession seems likely this year. Against such a backdrop, investors should stash their cash in some conventionally secure and recession-proof corners of the broad market.
Utilities Select Sector SPDR (XLU - Free Report) , iShares U.S. Healthcare Providers ETF (IHF - Free Report) , Invesco Dynamic Food & Beverage ETF (PBJ - Free Report) , Vanguard Dividend Appreciation ETF (VIG - Free Report) and iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report) look like excellent choices amid recession warnings.
The International Monetary Fund warned a third of the global economy will be in a recession given no signs of abatement of the ongoing conflict in Ukraine, spiraling inflation, higher interest rates and the surge in coronavirus infections in China. The year 2023 will be "tougher" than last year as the United States, European Union and China will see their economies slow down. Global growth is forecasted to fall from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023. This is the weakest growth since 2001, except for the global financial crisis and the acute phase of the COVID-19 pandemic (read: ETFs to Benefit as Inflation Drops to One-Year Low).
Wall Street Journal survey finds there is a 63% chance of recession this year. And a survey of economists and investors by the Federal Reserve Bank of Philadelphia shows the expectations that the gross domestic product will fall in three or four quarters are by far the highest since it started in 1968. Wall Street predicts the first half of the year will be choppy, with global markets suffering their biggest fall since the 2008 financial crisis last year.
Big banks are also expecting that an economic downturn is fast approaching. More than two-thirds of the economists at 23 large financial institutions that do business directly with the Federal Reserve are betting that the United States will have a recession in 2023.
We have profiled the above-mentioned ETFs below:
Utilities Select Sector SPDR (XLU - Free Report)
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. While there are several options in the space, the ultra-popular XLU seems a good bet. With AUM of $16.3 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. It follows the Utilities Select Sector Index, holding 30 stocks in its basket. Electric utilities take the top spot in terms of sectors at 65.6%, closely followed by multi utilities (28.3%).
Utilities Select Sector SPDR charges 10 bps in annual fees and sees a heavy volume of around 11 million shares, on average. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: 5 Top-Ranked ETFs to Buy at Bargain Prices for 2023).
iShares U.S. Healthcare Providers ETF (IHF - Free Report)
Healthcare, which generally outperforms during periods of low growth and high uncertainty, will see huge investor interest due to its non-cyclical nature. The demand for healthcare services remains intact even in the deteriorating economic fundamentals. iShares U.S. Healthcare Providers ETF provides exposure to companies that offer health insurance, diagnostics and specialized treatment. It follows the Dow Jones U.S. Select Healthcare Providers Index.
iShares U.S. Healthcare Providers ETF holds 69 securities in its basket and has amassed $1.5 billion in its asset base. Volume is good at about 52,000 shares per day, on average. The product charges 39 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook.
Invesco Dynamic Food & Beverage ETF (PBJ - Free Report)
The consumer staples sector is viewed as defensive as it includes a variety of items like food & beverages, non-durable household goods, hypermarkets and consumer supercenters that are essential for daily needs. These products see steady demand even during an economic downturn due to their low level of correlation with economic cycles. Invesco Dynamic Food & Beverage ETF offers exposure to 31 stocks engaged in the manufacture, sale, or distribution of 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 AUM of $368.6 million, Invesco Dynamic Food & Beverage ETF charges 63 bps in annual fees from investors and sees a moderate average daily volume of 66,000 shares. PBJ has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.
Vanguard Dividend Appreciation ETF (VIG - Free Report)
Dividend-paying securities are the major source of consistent income for investors when returns from the equity market are at risk. Dividend-focused products offer safety in the form of payouts while at the same time providing stability, as mature companies are less volatile to large swings in stock prices. This is because the companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis. Vanguard Dividend Appreciation ETF is the largest and the most popular ETF in the dividend space, with AUM of $65.4 billion and an average daily volume of 2 million shares (read: 5 Cheap Dividend ETFs to Buy and Hold for 2023).
Vanguard Dividend Appreciation ETF follows the S&P U.S. Dividend Growers Index, which is composed of companies that have a record of increasing dividends over time. It holds 289 securities in the basket and charges 6 bps in annual fees. The product has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.
iShares MSCI USA Quality Factor ETF (QUAL - Free Report)
Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility, elevated margins and a track record of stable or rising sales and earnings growth. These products thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings. iShares MSCI USA Quality Factor ETF provides exposure to large and mid-cap stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage) by tracking the MSCI USA Sector Neutral Quality Index.
iShares MSCI USA Quality Factor ETF holds 124 securities in its basket and trades in an average daily volume of 1 million shares. The ETF has AUM of $17.6 billion and charges 15 bps in annual fees.