With an ETF, you get exposure to a basket of stocks or bonds. Many investors favor ETFs because they make it easy to build a diversified portfolio. A recession is marked by job loss, lower consumer spending, and declining company sales. The right fund in your portfolio may not only offer much-needed protection in a recession but also provide you with extra income.
What you need to know before investing in ETFs in a recession
There's an ETF for every investor’s taste. A fund that pays dividends can help you meet some expenses if you lose your job. You could also reinvest the dividend, and a recession could see some stocks available at a bargain.
A major factor to consider when choosing ETFs is the expense ratio, the annual fee the fund charges you for investing in it. The lower the fee, the better.
Another important factor is the type of investments the fund is offering. You need select a fund that gives exposure to sectors that are known to be resilient even in a recession. These are sectors where consumers will continue to spend money, regardless of what they're earning. If you choose a debt-related fund, it should give you exposure to low-risk debt securities.
What are the best ETFs to buy before a recession?
In a recession, people still need to eat and stay keep the lights on. Therefore, funds that give exposure to the consumer stables and utility sectors may offer protection. For debt funds, an ETF that holds U.S. Treasury bonds can give your portfolio a much-needed shield in a recession. Some of the best ETFs for a recession are the following:
- The Consumer Staples Select Sector SPDR ETF (XLP).
- The Utilities Select Sector SPDR ETF (XLU).
- The iShares 1-3 Year Treasury Bond ETF (SHY).
The Consumer Staples Select Sector SPDR ETF (XLP) gives exposure to Procter & Gamble
The XLP fund, which tracks the consumer staples sector of the S&P 500, has Procter & Gamble, Coca-Cola, PepsiCo, Costco, and Walmart as some top holdings. The fund charges an expense ratio of 0.10 percent and offers a dividend yield of 2.39 percent.
The Utilities Select Sector SPDR ETF (XLU) offers a 2.7 percent dividend yield
The XLU fund tracks the utilities sector of the S&P 500, and its biggest holdings are NextEra Energy, Duke Energy Corporation, and Southern Company. It has an expense ratio of 0.10 percent and pays a dividend yield of 2.73 percent.
The iShares 1-3 Year Treasury Bond ETF (SHY) charges a 0.15 percent expense ratio
The SHY fund invests in U.S. government bonds with maturities of between one and three years. U.S. Treasury bonds are among the lowest-risk debt securities you can get on the market. The fund has an annual fee of 0.15 percent and a monthly dividend distribution schedule.