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Recession fears are once again playing foul on the stock market, making investors cautious about their investments. This has prompted investors to re-access their portfolios, leading to higher demand for safe and defensive assets.
As a result, we have highlighted five such zones and their popular ETFs where investors could stash their money amid the current turbulence. These include iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report) , Vanguard Value ETF (VTV - Free Report) , Invesco Defensive Equity ETF , Vanguard Dividend Appreciation ETF (VIG - Free Report) and Pacer US Cash Cows 100 ETF (COWZ - Free Report) .
Behind the Recession Fears
Worries of a recession have intensified with the latest batch of data pointing to a slowdown in the economy. U.S. manufacturing activity slumped to the lowest level in nearly three years in March as new orders plunged. The ISM's manufacturing PMI dipped to 46.3 last month, the lowest reading since May 2020, from 47.7 in February. This marks the fifth straight month that the PMI remained below the 50 threshold, which indicates a contraction in manufacturing. The weak trend is expected to continue further amid tightening credit conditions (read: 5 Best Performing Sector ETFs of Q1).
Meanwhile, growth in U.S. service sector activity also slowed more than expected in March as demand cooled, while a measure of prices paid by services businesses fell to the lowest in nearly three years. The ISM services PMI slid to 51.2 in March from 55.1 in February. A drop in the new orders growth was the major culprit. The slowdown in the world’s largest economic activities could push the global economy into recession.
The banking crisis in March added to the woes. The turmoil started following the collapse of Silicon Valley Bank, which is regarded as the biggest bank failure since the global financial crisis. Silvergate Capital Corp and Signature Bank followed suit. The failure of the banks has raised concerns that soaring interest rates are eroding balance sheets across the financial industry. Then, a steep fall in the share prices of Credit Suisse, the second-largest Swiss lender, and German giant Deutsche Bank (DB - Free Report) aggravated the concerns (read: ETF Winners & Losers from the Banking Crisis).
The International Monetary Fund warned that the risk of a recession has grown for advanced economies in the wake of bank failures in the United States and Europe and slashed its outlook for global growth this year. The agency projects the global economy to expand at 2.8% this year, down from the previous January estimate of 2.9%. In particular, about 90% of advanced economies are projected to see growth drop this year.
If this wasn’t enough, bond trading might be sending a recession warning. The daily fluctuations in two-year Treasury yields erupted last month into the widest in 40 years. The ICE BofA MOVE Index, which tracks expected swings in Treasuries as measured by one-month options, climbed in mid-March to its highest since 2008, opening the biggest gap between stock and bond volatility in 15 years as well. Even after the bank crisis eased, the gauge remains more than double its average over the past decade.
Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility, elevated margins, and a track 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 (read: Quality ETFs to Buy for Market-Beating Returns Amid Turmoil).
With AUM of $26.8 billion, iShares Edge 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 and holds 124 stocks in its basket. The ETF charges 15 bps in annual fees and trades in an average daily volume of 1.7 million shares.
Value stocks have proven to be outperformers over the long term and are less susceptible to trending markets. These stocks have strong fundamentals — earnings, dividends, book value and cash flow — that trade below their intrinsic value and are undervalued. These have the potential to deliver higher returns and exhibit lower volatility compared with their growth and blend counterparts.
Vanguard Value ETF targets the value segment of the broad U.S. stock market and follows the CRSP US Large Cap Value Index. It holds 338 stocks in its basket with AUM of $101.4 billion and charges 4 bps in annual fees. The ETF trades in volume of 2.2 million shares per day on average and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.
Defensive - Invesco Defensive Equity ETF
The defensive sectors like healthcare, consumer staples and utilities generally act as a safe haven during political and economic turmoil. Stocks in these sectors generally provide higher returns in troubled times.
Invesco Defensive Equity ETF offers exposure to companies that potentially have superior risk-return profiles during periods of stock market weakness while still offering the potential for gains during periods of market strength. It has amassed $237.6 million in its asset base and saw a lower volume of 16,000 shares per day, on average. DEF charges 54 bps of fees per year and has a Zacks ETF Rank #2 with a Medium risk outlook.
The dividend-paying securities are the major sources of consistent income for investors when returns from the equity market are at risk. This is especially true as these stocks offer the best of both these worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. The companies that offer dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.
While the dividend space has been crowded, ETFs with stocks having a strong history of dividend growth, like VIG, seem to be good picks. The ETF has AUM of $65.6 billion and trades in volume of 1.1 million shares a day on average. It charges 6 bps in annual fees and has a Zacks ETF Rank #1 with a Medium risk outlook (read: A Guide to the 10 Most-Popular Dividend ETFs).
Investing in a cash cow company ensures a consistent cash flow and has a large market share that results in sustained profit. This is because there won't be any other competition growing their market share, so the large market share is stable and can produce sustained profit numbers. Pacer US Cash Cows 100 ETF is a strategy-driven ETF that aims to provide capital appreciation over time by screening the Russell 2000 Index for the top 100 companies based on free cash flow yield. A high free cash flow yield indicates that a company is producing more cash than it needs to run the business and can invest in growth opportunities.
COWZ holds 101 stocks in its basket and has amassed $13.3 billion in its asset base. It trades in an average daily volume of 1.9 million shares and charges 49 bps in annual fees.
Bottom Line
These products could be worthwhile for low risk-tolerant investors and have the potential to outperform the broad market, especially if global growth fears continue to dampen sentiments.
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Forget Recession Fears, Invest in These Safe ETFs
Recession fears are once again playing foul on the stock market, making investors cautious about their investments. This has prompted investors to re-access their portfolios, leading to higher demand for safe and defensive assets.
As a result, we have highlighted five such zones and their popular ETFs where investors could stash their money amid the current turbulence. These include iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report) , Vanguard Value ETF (VTV - Free Report) , Invesco Defensive Equity ETF , Vanguard Dividend Appreciation ETF (VIG - Free Report) and Pacer US Cash Cows 100 ETF (COWZ - Free Report) .
Behind the Recession Fears
Worries of a recession have intensified with the latest batch of data pointing to a slowdown in the economy. U.S. manufacturing activity slumped to the lowest level in nearly three years in March as new orders plunged. The ISM's manufacturing PMI dipped to 46.3 last month, the lowest reading since May 2020, from 47.7 in February. This marks the fifth straight month that the PMI remained below the 50 threshold, which indicates a contraction in manufacturing. The weak trend is expected to continue further amid tightening credit conditions (read: 5 Best Performing Sector ETFs of Q1).
Meanwhile, growth in U.S. service sector activity also slowed more than expected in March as demand cooled, while a measure of prices paid by services businesses fell to the lowest in nearly three years. The ISM services PMI slid to 51.2 in March from 55.1 in February. A drop in the new orders growth was the major culprit. The slowdown in the world’s largest economic activities could push the global economy into recession.
The banking crisis in March added to the woes. The turmoil started following the collapse of Silicon Valley Bank, which is regarded as the biggest bank failure since the global financial crisis. Silvergate Capital Corp and Signature Bank followed suit. The failure of the banks has raised concerns that soaring interest rates are eroding balance sheets across the financial industry. Then, a steep fall in the share prices of Credit Suisse, the second-largest Swiss lender, and German giant Deutsche Bank (DB - Free Report) aggravated the concerns (read: ETF Winners & Losers from the Banking Crisis).
The International Monetary Fund warned that the risk of a recession has grown for advanced economies in the wake of bank failures in the United States and Europe and slashed its outlook for global growth this year. The agency projects the global economy to expand at 2.8% this year, down from the previous January estimate of 2.9%. In particular, about 90% of advanced economies are projected to see growth drop this year.
If this wasn’t enough, bond trading might be sending a recession warning. The daily fluctuations in two-year Treasury yields erupted last month into the widest in 40 years. The ICE BofA MOVE Index, which tracks expected swings in Treasuries as measured by one-month options, climbed in mid-March to its highest since 2008, opening the biggest gap between stock and bond volatility in 15 years as well. Even after the bank crisis eased, the gauge remains more than double its average over the past decade.
Let’s delve deep into the ETFs:
Quality - iShares Edge 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 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 (read: Quality ETFs to Buy for Market-Beating Returns Amid Turmoil).
With AUM of $26.8 billion, iShares Edge 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 and holds 124 stocks in its basket. The ETF charges 15 bps in annual fees and trades in an average daily volume of 1.7 million shares.
Value – Vanguard Value ETF (VTV - Free Report)
Value stocks have proven to be outperformers over the long term and are less susceptible to trending markets. These stocks have strong fundamentals — earnings, dividends, book value and cash flow — that trade below their intrinsic value and are undervalued. These have the potential to deliver higher returns and exhibit lower volatility compared with their growth and blend counterparts.
Vanguard Value ETF targets the value segment of the broad U.S. stock market and follows the CRSP US Large Cap Value Index. It holds 338 stocks in its basket with AUM of $101.4 billion and charges 4 bps in annual fees. The ETF trades in volume of 2.2 million shares per day on average and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.
Defensive - Invesco Defensive Equity ETF
The defensive sectors like healthcare, consumer staples and utilities generally act as a safe haven during political and economic turmoil. Stocks in these sectors generally provide higher returns in troubled times.
Invesco Defensive Equity ETF offers exposure to companies that potentially have superior risk-return profiles during periods of stock market weakness while still offering the potential for gains during periods of market strength. It has amassed $237.6 million in its asset base and saw a lower volume of 16,000 shares per day, on average. DEF charges 54 bps of fees per year and has a Zacks ETF Rank #2 with a Medium risk outlook.
Dividend - Vanguard Dividend Appreciation ETF (VIG - Free Report)
The dividend-paying securities are the major sources of consistent income for investors when returns from the equity market are at risk. This is especially true as these stocks offer the best of both these worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. The companies that offer dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.
While the dividend space has been crowded, ETFs with stocks having a strong history of dividend growth, like VIG, seem to be good picks. The ETF has AUM of $65.6 billion and trades in volume of 1.1 million shares a day on average. It charges 6 bps in annual fees and has a Zacks ETF Rank #1 with a Medium risk outlook (read: A Guide to the 10 Most-Popular Dividend ETFs).
Cash Cows - Pacer US Cash Cows 100 ETF (COWZ - Free Report)
Investing in a cash cow company ensures a consistent cash flow and has a large market share that results in sustained profit. This is because there won't be any other competition growing their market share, so the large market share is stable and can produce sustained profit numbers. Pacer US Cash Cows 100 ETF is a strategy-driven ETF that aims to provide capital appreciation over time by screening the Russell 2000 Index for the top 100 companies based on free cash flow yield. A high free cash flow yield indicates that a company is producing more cash than it needs to run the business and can invest in growth opportunities.
COWZ holds 101 stocks in its basket and has amassed $13.3 billion in its asset base. It trades in an average daily volume of 1.9 million shares and charges 49 bps in annual fees.
Bottom Line
These products could be worthwhile for low risk-tolerant investors and have the potential to outperform the broad market, especially if global growth fears continue to dampen sentiments.