5 “Recession Proof” ETFs

By ETFDatabase | August 09, 2012 AAA

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 . 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 generateworthwhilecapital gains, although balancing your portfolio with defensive holdings is perhaps even more vital over the long-haul .

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 mostbusinessesa recessionundoubtedlymeans bad news, there are some industries which can hold their ground and even thrive when times get tough.

Below we outline five recession proof ETFs which can help bring relative stability to your portfolio and potentially improve risk-adjustedreturns 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.

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 defensivecompaniescapable of holding their ground during the grim part of the economic cycle.

3. Global X Waste Management ETF (WSTE)

Following up from the last idea, people generate trash every single day. This means that demand for waste disposal, processing and recyclingcompaniesis fairly inelastic; let's face it, someone throws away ourgarbageregardless of economic condition. WSTE offers exposure to the waste management space of the industrials sectorwhichis perhaps one of the least-cyclical industries in that corner of the market. The underlying portfolio is split 90/10 between developed and emerging market equities respectively; top allocations by country go to the United States, Australia and China .

4. 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-consciousinvestors who are looking to fortify their portfolio.

5. 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 .

Follow me on Twitter@SBojinov

Disclosure: No positions at time of writing.

comments powered by Disqus
Related Analysis
  1. Fed Expected to Clarify Course - Ahead of Wall Street
    Stock Analysis

    Fed Expected to Clarify Course - Ahead of Wall Street

  2. Semiconductors Remain Key for IoT - Industry Outlook
    Stock Analysis

    Semiconductors Remain Key for IoT - Industry Outlook

  3. Bull of the Day: Tyler Tech (TYL) - Bull of the Day
    Stock Analysis

    Bull of the Day: Tyler Tech (TYL) - Bull of the Day

  4. Bear of the Day: Randgold (GOLD) - Bear of the Day
    Stock Analysis

    Bear of the Day: Randgold (GOLD) - Bear of the Day

  5. JPMorgan Chase & Co., Other Financial Stocks Strong During Market Retreat
    Stock Analysis

    JPMorgan Chase & Co., Other Financial Stocks Strong During Market Retreat

Trading Center