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3 Sector ETFs to Play as Recession Fears Are on the Rise
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Sudden collapse of Silicon Valley Bank and Signature Bank increased fears of recession among people. The ensuing banking crisis that followed did nothing to reduce the skepticism of the investors. The surprise decision of OPEC+ to cut oil production levels, along with decreasing oil inventories in the United States, pushed the probability of a recession higher on the spectrum.
There was a slew of economic data released last week. Per a Reuters article, with exports of goods declining, the U.S. trade deficit increased 2.7% to $70.5 billion. Imports and exports both slipped 1.5% and 2.7%, respectively, due to slowing domestic and global demands.
According to another Reuters article, reports of weak job openings and a deceleration in the activities of the service sector have tipped the scale in favor of a recession. U.S. manufacturing activities also slumped in March, which was the lowest in three years.
Any Chances of Avoiding a Recession?
Although not certain, the probability of a recession is increasing. However, the economy is showing some positive signs of a recovery too. Data released last week showed the inflation has slowed down in the country. This may boost economic growth as the Fed could raise interest rates less aggressively.
Thirteen service industries like entertainment and recreation, arts and public administration among others reported growth. U.S. housing sector saw a turnaround from its downtrend after reporting an increase in new home sales. (Read: ETFs to Watch With New Homes Sales on the Rise)
ETFs in Focus
Against this backdrop, below, we highlight a few sector ETFs that could be played as these are believed to be recession-proof.
Consumer Staples Sector
Consumer Staples Select Sector SPDR Fund (XLP - Free Report)
The sector includes food and beverages, household and personal products among other essential products used by a consumer. It is considered a defensive industry and may play its part in helping to withstand a recession. These products see steady demand even during an economic downturn due to their low level of correlation with economic cycles. Consumer Staples Select Sector SPDR Fund (XLP - Free Report) is the largest ETF fund in this sector with an asset base of $17.46 billion.
Companies like Procter & Gamble (PG - Free Report) , PepsiCo (PEP - Free Report) and Coca-Cola (KO - Free Report) take the top three spots in the fund with shares of 14.33%, 10.13% and 9.76%, respectively. Being large-cap stocks, they provide stability to investments in a volatile market. With 37 securities in its basket, XLP has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook. The fund has a dividend yield of 2.46%.
The healthcare sector is non-cyclical nature, providing a defensive tilt to the portfolio amid market turmoil. Further, the long-term fundamentals remain strong, given encouraging industry trends. Health Care Select Sector SPDR ETF (XLV - Free Report) has an asset base of $39.64 billion, making it the largest broad healthcare ETF fund in the market.
The fund has invested in sectors like pharmaceuticals and biotechnology, having holdings in companies such as Johnson & Johnson (JNJ - Free Report) , Eli Lilly (LLY - Free Report) and Pfizer (PFE - Free Report) , among others. The fund has 65 securities in its basket avoiding any concentration risk. XLV has a Zacks ETF Rank #1 (strong buy) with a Medium risk outlook.
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. 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. The fund has an asset base of $16.16 billion and charges an annual fee of 10 bps.
The fund has its assets allocated to electric, water and gas utilities with a tilt toward electric utilities having 65.33% weight. XLU has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
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3 Sector ETFs to Play as Recession Fears Are on the Rise
Sudden collapse of Silicon Valley Bank and Signature Bank increased fears of recession among people. The ensuing banking crisis that followed did nothing to reduce the skepticism of the investors. The surprise decision of OPEC+ to cut oil production levels, along with decreasing oil inventories in the United States, pushed the probability of a recession higher on the spectrum.
There was a slew of economic data released last week. Per a Reuters article, with exports of goods declining, the U.S. trade deficit increased 2.7% to $70.5 billion. Imports and exports both slipped 1.5% and 2.7%, respectively, due to slowing domestic and global demands.
According to another Reuters article, reports of weak job openings and a deceleration in the activities of the service sector have tipped the scale in favor of a recession. U.S. manufacturing activities also slumped in March, which was the lowest in three years.
Any Chances of Avoiding a Recession?
Although not certain, the probability of a recession is increasing. However, the economy is showing some positive signs of a recovery too. Data released last week showed the inflation has slowed down in the country. This may boost economic growth as the Fed could raise interest rates less aggressively.
Thirteen service industries like entertainment and recreation, arts and public administration among others reported growth. U.S. housing sector saw a turnaround from its downtrend after reporting an increase in new home sales. (Read: ETFs to Watch With New Homes Sales on the Rise)
ETFs in Focus
Against this backdrop, below, we highlight a few sector ETFs that could be played as these are believed to be recession-proof.
Consumer Staples Sector
Consumer Staples Select Sector SPDR Fund (XLP - Free Report)
The sector includes food and beverages, household and personal products among other essential products used by a consumer. It is considered a defensive industry and may play its part in helping to withstand a recession. These products see steady demand even during an economic downturn due to their low level of correlation with economic cycles. Consumer Staples Select Sector SPDR Fund (XLP - Free Report) is the largest ETF fund in this sector with an asset base of $17.46 billion.
Companies like Procter & Gamble (PG - Free Report) , PepsiCo (PEP - Free Report) and Coca-Cola (KO - Free Report) take the top three spots in the fund with shares of 14.33%, 10.13% and 9.76%, respectively. Being large-cap stocks, they provide stability to investments in a volatile market. With 37 securities in its basket, XLP has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook. The fund has a dividend yield of 2.46%.
Healthcare Sector
Health Care Select Sector SPDR ETF (XLV - Free Report)
The healthcare sector is non-cyclical nature, providing a defensive tilt to the portfolio amid market turmoil. Further, the long-term fundamentals remain strong, given encouraging industry trends. Health Care Select Sector SPDR ETF (XLV - Free Report) has an asset base of $39.64 billion, making it the largest broad healthcare ETF fund in the market.
The fund has invested in sectors like pharmaceuticals and biotechnology, having holdings in companies such as Johnson & Johnson (JNJ - Free Report) , Eli Lilly (LLY - Free Report) and Pfizer (PFE - Free Report) , among others. The fund has 65 securities in its basket avoiding any concentration risk. XLV has a Zacks ETF Rank #1 (strong buy) with a Medium risk outlook.
Utility Sector
Utilities Select Sector SPDR Fund (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. 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. The fund has an asset base of $16.16 billion and charges an annual fee of 10 bps.
The fund has its assets allocated to electric, water and gas utilities with a tilt toward electric utilities having 65.33% weight. XLU has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.