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By now, we all know that the U.S. economy is going through a crisis triggered by its regional banking sector that started in early March. The failures of Silicon Valley Bank and Signature Bank were the epicenter of the crisis, which hit the entire space hard.
Economists at Goldman Sachs increased their probability of the U.S. economy falling into recession in the next 12 months by 10 percentage points from 25% to 35% due to the regional banking distress, the client note showed in mid-March, as quoted on Fxstreet.com.
The U.S. economy had a chance of facing a soft landing this year due to rapid Fed rate hikes in the past year. International Monetary Fund projected in February that the U.S. economy will likely slow this year and a soft landing is expected.
“Recession risks have increased,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, as quoted on Bloomberg. U.S. service gauge declined more than expected as demand moderated. Private payrolls increased 145,000 in March, below all estimates.
Against this backdrop, below, we highlight a few ETF areas that could be played as these are believed to be recession-proof.
Amid any recession, healthy companies that have produced consistent earnings strength appear to be great bets.
Investors should note that the flagship ETF ZECP from Zacks Investment Management has been built on the core methodology the firm is known for: earnings estimate revision research. Through a proprietary process, a diversified blend of the largest and most liquid companies is selected for ZECP according to their earnings history through full market cycles.
The quantitative screens are combined with the qualitative finding of the portfolio manager based on an analysis of financial statement filing consistency, profitability, earnings stability in recessionary periods, valuation, and improving fundamentals. The actively-managed fund charges 55 bps in fees.
Investors believe that “cash is king” in a potential economic downturn. ETFs that hold cash-rich companies are likely to see a lot of interest from investors. In other words, cash-rich companies are known for continuous positive cash flows, reflecting their inherent strength.
The underlying Pacer US Cash Cows 100 Index of the COWZ uses an objective, rules-based methodology to provide exposure to large and mid-capitalization U.S. companies with high free cash flow yields. The fund charges 49 bps in fees.
“Vice” stocks such as alcohol, gaming, and cannabis perform better even in a recession as these sectors have a low correlation with the overall market. This is because people drink, smoke, and gamble in both good times and bad, making vice or sin stocks fairly recession-proof. Historical evidence on the performance supports sin stocks’ higher alpha, per an article on Business Insider.
Vice ETF puts 35.7% weight in gambling, followed by 28.6% weight in alcohol and 16.7% weight in tobacco. About 80% of stocks hail from North America. The fund charges 99 bps in fees.
Utilities – Invesco Water Resources ETF (PHO - Free Report)
Water stocks should be in good shape as demand for utilities remains unchanged in any economic slowdown. The underlying NASDAQ OMX U.S. Water Index tracks the performance of U.S. exchange-listed companies that create products designed to conserve and purify water for homes, businesses and industries. The fund charges 59 bps in fees.
Healthcare – Health Care Select Sector SPDR ETF (XLV - Free Report)
The healthcare sector is non-cyclical in nature, providing a defensive tilt to the portfolio amid market turmoil. Further, the long-term fundamentals remain strong, given encouraging industry trends.
The underlying Health Care Select Sector Index includes companies from the following industries: pharmaceuticals; health care providers & services; health care equipment & supplies; biotechnology; life sciences tools & services; and health care technology. The fund charges 10 bps.
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Fearing a US Recession? 5 ETF Areas to Tap
By now, we all know that the U.S. economy is going through a crisis triggered by its regional banking sector that started in early March. The failures of Silicon Valley Bank and Signature Bank were the epicenter of the crisis, which hit the entire space hard.
Economists at Goldman Sachs increased their probability of the U.S. economy falling into recession in the next 12 months by 10 percentage points from 25% to 35% due to the regional banking distress, the client note showed in mid-March, as quoted on Fxstreet.com.
The U.S. economy had a chance of facing a soft landing this year due to rapid Fed rate hikes in the past year. International Monetary Fund projected in February that the U.S. economy will likely slow this year and a soft landing is expected.
“Recession risks have increased,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, as quoted on Bloomberg. U.S. service gauge declined more than expected as demand moderated. Private payrolls increased 145,000 in March, below all estimates.
Against this backdrop, below, we highlight a few ETF areas that could be played as these are believed to be recession-proof.
ETFs in Focus
Earnings Strength – Zacks Earnings Consistent Portfolio ETF (ZECP - Free Report)
Amid any recession, healthy companies that have produced consistent earnings strength appear to be great bets.
Investors should note that the flagship ETF ZECP from Zacks Investment Management has been built on the core methodology the firm is known for: earnings estimate revision research. Through a proprietary process, a diversified blend of the largest and most liquid companies is selected for ZECP according to their earnings history through full market cycles.
The quantitative screens are combined with the qualitative finding of the portfolio manager based on an analysis of financial statement filing consistency, profitability, earnings stability in recessionary periods, valuation, and improving fundamentals. The actively-managed fund charges 55 bps in fees.
Cash Strength – Pacer Us Cash Cows 100 ETF (COWZ)
Investors believe that “cash is king” in a potential economic downturn. ETFs that hold cash-rich companies are likely to see a lot of interest from investors. In other words, cash-rich companies are known for continuous positive cash flows, reflecting their inherent strength.
The underlying Pacer US Cash Cows 100 Index of the COWZ uses an objective, rules-based methodology to provide exposure to large and mid-capitalization U.S. companies with high free cash flow yields. The fund charges 49 bps in fees.
Sin Sectors – AdvisorShares Vice ETF (VICE - Free Report)
“Vice” stocks such as alcohol, gaming, and cannabis perform better even in a recession as these sectors have a low correlation with the overall market. This is because people drink, smoke, and gamble in both good times and bad, making vice or sin stocks fairly recession-proof. Historical evidence on the performance supports sin stocks’ higher alpha, per an article on Business Insider.
Vice ETF puts 35.7% weight in gambling, followed by 28.6% weight in alcohol and 16.7% weight in tobacco. About 80% of stocks hail from North America. The fund charges 99 bps in fees.
Utilities – Invesco Water Resources ETF (PHO - Free Report)
Water stocks should be in good shape as demand for utilities remains unchanged in any economic slowdown. The underlying NASDAQ OMX U.S. Water Index tracks the performance of U.S. exchange-listed companies that create products designed to conserve and purify water for homes, businesses and industries. The fund charges 59 bps in fees.
Healthcare – Health Care Select Sector SPDR ETF (XLV - Free Report)
The healthcare sector is non-cyclical in nature, providing a defensive tilt to the portfolio amid market turmoil. Further, the long-term fundamentals remain strong, given encouraging industry trends.
The underlying Health Care Select Sector Index includes companies from the following industries: pharmaceuticals; health care providers & services; health care equipment & supplies; biotechnology; life sciences tools & services; and health care technology. The fund charges 10 bps.