4 “Recession Proof” ETFs

by on August 9, 2012 | Updated August 27, 2012 | ETFs Mentioned:

The clouds of uncertainty looming over the global economy since the most recent financial meltdown have yet to scatter completely. In fact, growing debt-drama in the eurozone coupled with a painfully sluggish recovery at home has led many to believe that another recession should not be ruled out of the realm of possibilities. With central banks on both sides of the Atlantic ocean feeling the pressure to step up their fiscal-firepower to ensure stability, it’s no wonder that many investors have growing doubts over the health of the world’s financial markets [see also Simple (But Effective) Safe Haven ETFdb Portfolio].

History has taught us that when volatility strikes on Wall Street, virtually no asset class is safe enough to completely weather a financial storm. Nonetheless, prudent investors have reaped the benefits of a truly well-diversified portfolio when the stuff does hit the fan. Spreading out exposure across high growth corners of the market is essential for those looking to generate worthwhile capital gains, although balancing your portfolio with defensive holdings is perhaps even more vital over the long-haul [see also How To Hedge For A Market Correction With ETFs].

While no company or sector is completely impervious to economic downturns, there are certainly ones that are more resilient and capable of weathering hard times. Although for most businesses a recession undoubtedly means bad news, there are some industries which can hold their ground and even thrive when times get tough.

Below we outline four “recession proof” ETFs which can help bring relative stability to your portfolio and potentially improve risk-adjusted returns when markets turn sour:

1. iShares Dow Jones US Health Care Providers Index Fund (IHF)

Many investors regard the health care sector as a safe haven in times of equity market turbulence, and the same holds true for recessions. The thesis behind this idea is fairly straightforward: generally speaking, when people get sick they require health care services regardless of economic conditions. IHF focuses primarily on giant and large cap U.S. health care providers. The underlying portfolio is a bit top-heavy as the top ten holdings account for nearly two-thirds of total assets [see also Baby Boomers ETFdb Portfolio].

2. PowerShares Dynamic Food & Beverage (PBJ)

Everyday items that we consume, especially foods and beverages, have fairly inelastic demand, meaning we will continue to buy them as long as they are in stock and regardless of how well the market is doing. PBJ holds a portfolio of 40 U.S. Consumer Staples Equities; the underlying basket of holdings is selected based on a variety of criteria, including fundamental growth, stock valuation and risk factors. This ETF offers exposure to a number of international behemoths like Yum Brands, McDonald’s, Monsanto and Kraft Foods, all of which are fundamentally defensive companies capable of holding their ground during the grim part of the economic cycle [see also Doomsday Special: 7 Hard Asset Investments You Can Hold In Your Hand].

3. State Street Utilities Select Sector SPDR (XLU)

Utilities are known for exhibiting low volatility and low correlation with broader markets; this corner of the market has limited upside potential in times of prosperity, although it also tends to hold its ground quite well when conditions for other industries turn sour. Utilities companies are also known for having a consistent track record of dividends, which makes them very attractive in times when chasing after capital gains is too risky. XLU is the cheapest offering in the Utilities Equities ETFdb Category, further increasing the appeal to cost-conscious investors who are looking to fortify their portfolio.

4. Vanguard Consumer Staples ETF (VDC)

Household non-durable goods and tobacco are two things we have a hard time cutting back on regardless of prevailing economic conditions. From toilet paper to toothpaste, the consumer staples sector thrives of consistent demand for everyday goods during all market cycles. VDC is the cheapest offering in the space and offers exposure to over 100 well-known brand names like Procter & Gamble, Philip Morris International, Coca-Cola and Wal-Mart [see also 101 ETF Lessons Every Investor Should Learn].

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Disclosure: No positions at time of writing.