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3 ETFs for a Recession

This trio of Silver medalists may weather an economic downturn better than most.

Ryan Jackson: As the book closes on 2022, investors will remember it as a difficult year. But encouraging inflation data has sparked optimism recently, and stocks and bonds look poised to close the year on a higher note after a stretch that has left most investors with the blues. While markets have built momentum, there may be more trouble on the horizon. Reining in inflation without stunting economic growth is a fine needle for the Federal Reserve to thread. If their efforts to cool the economy prove heavy-handed, a recession could loom in 2023 and beyond. That doesn’t mean investors should run for the hills. The economy and markets don’t always move in lockstep and trying to time their ebbs and flows rarely leads to positive results. Instead, here are three ETFs that may be able to weather a recession better than most.

3 ETFs for a Recession

These exchange-traded funds earn Morningstar Analyst Ratings of Silver.

  1. WisdomTree US LargeCap Dividend ETF (DLN)
  2. iShares MSCI Global Min Vol Factor ETF (ACWV)
  3. Vanguard Intermediate-Term Treasury ETF (VGIT)

Let’s start with the U.S. stock fund whose clever contrarian approach and high-quality portfolio earn it a Morningstar Analyst Rating of Silver—WisdomTree US LargeCap Dividend ETF, which trades under the ticker DLN. This index fund absorbs about 300 of the market’s largest dividend-payers and weights them by their projected dividends. Stocks with the best quality and momentum characteristics receive a 50% weight boost, and a series of constraints helps the fund avoid concentration. Dividend stocks tend to be stable operators that have demonstrated their ability to return cash to shareholders, and dividend weighting emphasizes the portfolio’s cheaper holdings, which creates nice balance with the fund’s quality component. Quality stocks’ financial health should help them navigate recessions well, but they usually don’t come cheap. By weighting stocks by their dividends, a fundamental measure of size, this fund limits its exposure to stocks whose valuations may be inflated. This fund showed what it can do in 2022. It beat the Russell 1000 Value Index by about 4 percentage points from the start of January through Dec. 14, and with an expense ratio of 0.28%, this fund is a good low-cost bet to build on its solid track record.

The next ETF expands its reach past the U.S. borders: Silver-rated iShares MSCI Global Min Vol Factor ETF, ticker ACWV. This fund uses an optimizer to select and weight stocks from the MSCI ACWI Index. Its number-one objective is minimizing volatility. The fund sweeps in some of the world’s most stable stocks, but it also considers how companies behave relative to one another. So, it can own volatile stocks if they tend to zig when the rest of the portfolio zags. Several constraints dial back risk in this portfolio. too. The 10 largest holdings constituted only 13% of the portfolio at the end of November, and no sector represented more than one fifth of the portfolio. Investors should expect this risk-conscious fund to trail the MSCI ACWI in market rallies, but it has demonstrated its ability to hold up better in market downturns, like when it led its parent index by about 6.5 percentage points for the year to date through Dec. 14. In a recession, it’s reasonable to expect the worst. This fund is built for it.

Investors seeking stability have flocked to government bonds in 2022. Over the first 11 months of the year, investors poured nearly $25 billion into the intermediate-term government-bond category. One of the best options in this space should battle on economic downturn as well as any. That would be Vanguard Intermediate-Term Treasury ETF, ticker VGIT. This fund takes a cut-and-dried approach. It builds a market-value-weighted portfolio of U.S. Treasury bonds with three to 10 years remaining to maturity. Market-value weighting makes sense in the U.S. Treasury market, which closely reflects inflation and interest-rate expectations. But this fund’s real advantage lies in its low cost. Its 0.04% expense ratio is a much lower hurdle than that of many of its peers. That helped it beat over 75% of its peer group for the year to date through November even in a difficult year for Treasuries. Since Treasury bonds are backed by the full faith and credit of the U.S. government, this fund avoids credit risk, a risk dimension that can spell trouble in a recession. This fund has shown its mettle in tough times before and should be ready to do it again.

Watch “3 Great ETFs for 2023 and Beyond” for more from this series.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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