Best ETFs for a Recession
Best ETFs for a Recession
Here's a look at nine ETFs that could outperform during a recession:
ETF
ProShares Short S&P500 ETF (ticker: SH)
Utilities Select Sector SPDR Fund (XLU)
Health Care Select Sector SPDR Fund (XLV)
Consumer Staples Select Sector SPDR Fund (XLP)
iShares 20+ Year Treasury Bond ETF (TLT)
BondBloxx Bloomberg Twenty Year Target Duration US Treasury ETF (XTWY)
BondBloxx Bloomberg Six Month Target Duration US Treasury ETF (XHLF)
Invesco Equal Weight 0-30 Year Treasury ETF (GOVI)
SPDR Bridgewater All Weather ETF (ALLW)
ETF
ProShares Short S&P500 ETF (ticker: SH)
Utilities Select Sector SPDR Fund (XLU)
Health Care Select Sector SPDR Fund (XLV)
Consumer Staples Select Sector SPDR Fund (XLP)
iShares 20+ Year Treasury Bond ETF (TLT)
BondBloxx Bloomberg Twenty Year Target Duration US Treasury ETF (XTWY)
BondBloxx Bloomberg Six Month Target Duration US Treasury ETF (XHLF)
Invesco Equal Weight 0-30 Year Treasury ETF (GOVI)
SPDR Bridgewater All Weather ETF (ALLW)
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ProShares Short S&P500 ETF (SH)
In general, stocks tend to fare poorly during a recession. "Lower economic activity can lead to layoffs as companies try to control expenses in the face of fading revenue, while lesser demand paired with higher unemployment means lower sales," says Dan Tolomay, chief investment officer at Trust Company of the South. "As economic activity slows, companies' prospects dim, and stock prices follow downward."
One way to hedge against such a downturn is via inverse ETFs like SH. This ETF uses derivatives called swaps to deliver a daily return corresponding to the inverse (-1x) of the S&P 500. Unlike some other inverse ETFs, SH does not employ leverage, making it less volatile on a day-to-day basis. However, it does charge a high 0.89% expense ratio, which will eat into long-term returns.
In general, stocks tend to fare poorly during a recession. "Lower economic activity can lead to layoffs as companies try to control expenses in the face of fading revenue, while lesser demand paired with higher unemployment means lower sales," says Dan Tolomay, chief investment officer at Trust Company of the South. "As economic activity slows, companies' prospects dim, and stock prices follow downward."
One way to hedge against such a downturn is via inverse ETFs like SH. This ETF uses derivatives called swaps to deliver a daily return corresponding to the inverse (-1x) of the S&P 500. Unlike some other inverse ETFs, SH does not employ leverage, making it less volatile on a day-to-day basis. However, it does charge a high 0.89% expense ratio, which will eat into long-term returns.
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Utilities Select Sector SPDR Fund (XLU)
"Utilities are considered defensive stocks because they operate in regulated markets, exhibit low price volatility and their services are essential, making them less vulnerable to economic downturns," says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors. Many utility stocks also pay above-average dividend yields, which can buoy returns in down markets.
XLU tracks the Utilities Select Sector Index, which draws its holdings from the S&P 500. This ensures a baseline level of quality and limits its exposure to more stable large caps. The ETF's portfolio features electric, water, gas, renewable and diversified utility companies. Right now, investors can expect a higher-than-average 2.9% 30-day SEC yield and a low 0.08% expense ratio.
"Utilities are considered defensive stocks because they operate in regulated markets, exhibit low price volatility and their services are essential, making them less vulnerable to economic downturns," says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors. Many utility stocks also pay above-average dividend yields, which can buoy returns in down markets.
XLU tracks the Utilities Select Sector Index, which draws its holdings from the S&P 500. This ensures a baseline level of quality and limits its exposure to more stable large caps. The ETF's portfolio features electric, water, gas, renewable and diversified utility companies. Right now, investors can expect a higher-than-average 2.9% 30-day SEC yield and a low 0.08% expense ratio.
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Health Care Select Sector SPDR Fund (XLV)
"Many health care companies offer essential goods and services, from pharmaceuticals to medical devices, which are non-discretionary expenses for consumers," Schulman explains. "The aging population in the U.S. (and most other developed countries) also contributes to sustained demand." The health care counterpart to XLU is XLV, which tracks the Health Care Select Sector Index.
As with XLU, XLV only owns the health care companies present in the S&P 500, which are predominantly large-cap stocks screened for earnings quality. The ETF spans 61 companies involved in pharmaceuticals, biotech, medical devices, insurance and health care services. XLV currently pays a 1.6% 30-day SEC yield and charges a 0.08% expense ratio, the same as XLU.
"Many health care companies offer essential goods and services, from pharmaceuticals to medical devices, which are non-discretionary expenses for consumers," Schulman explains. "The aging population in the U.S. (and most other developed countries) also contributes to sustained demand." The health care counterpart to XLU is XLV, which tracks the Health Care Select Sector Index.
As with XLU, XLV only owns the health care companies present in the S&P 500, which are predominantly large-cap stocks screened for earnings quality. The ETF spans 61 companies involved in pharmaceuticals, biotech, medical devices, insurance and health care services. XLV currently pays a 1.6% 30-day SEC yield and charges a 0.08% expense ratio, the same as XLU.
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Consumer Staples Select Sector SPDR Fund (XLP)
"Consumer staples stocks tend to hold up better than cyclical or growth-dependent businesses during recessions because these companies sell products that people need regardless of the economic climate – think toilet paper, toothpaste, food and basic household items," Schulman says. The ETF to buy here is XLP, which tracks the Consumer Staples Select Sector Index for a 0.08% expense ratio.
The top holdings of XLP represent a resilient group of time-tested, brand-name stalwarts – names like Procter & Gamble Co. (PG), Coca-Cola Co. (KO) and Walmart Inc. (WMT). In fact, all three of these stocks are also so-called Dividend Kings, having increased cash dividends for more than 50 consecutive years. Unsurprisingly, XLP also doubles as a decent dividend ETF, with an above-average 2.7% 30-day SEC yield.
"Consumer staples stocks tend to hold up better than cyclical or growth-dependent businesses during recessions because these companies sell products that people need regardless of the economic climate – think toilet paper, toothpaste, food and basic household items," Schulman says. The ETF to buy here is XLP, which tracks the Consumer Staples Select Sector Index for a 0.08% expense ratio.
The top holdings of XLP represent a resilient group of time-tested, brand-name stalwarts – names like Procter & Gamble Co. (PG), Coca-Cola Co. (KO) and Walmart Inc. (WMT). In fact, all three of these stocks are also so-called Dividend Kings, having increased cash dividends for more than 50 consecutive years. Unsurprisingly, XLP also doubles as a decent dividend ETF, with an above-average 2.7% 30-day SEC yield.
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iShares 20+ Year Treasury Bond ETF (TLT)
"Typically, during a recession, the Federal Reserve looks to cut interest rates to stimulate economic growth, as low interest rates encourage borrowing," Andraos says. "In a falling-interest-rate environment, longer-duration bonds tend to outperform, as yields and bond prices are inversely related." For affordable exposure to long-duration bonds, consider TLT at a 0.15% expense ratio.
This ETF tracks the ICE US Treasury 20+ Year Bond Index, giving it an effective duration of 16.2 years. All else being equal, a 1% decline in long-term yields could see TLT's net asset value soar by 16.2%. Until this happens, TLT investors can earn a 4.6% 30-day SEC yield. In addition, the high volatility of TLT makes it a potent underlying asset for selling covered calls, which can deliver even more income potential.
"Typically, during a recession, the Federal Reserve looks to cut interest rates to stimulate economic growth, as low interest rates encourage borrowing," Andraos says. "In a falling-interest-rate environment, longer-duration bonds tend to outperform, as yields and bond prices are inversely related." For affordable exposure to long-duration bonds, consider TLT at a 0.15% expense ratio.
This ETF tracks the ICE US Treasury 20+ Year Bond Index, giving it an effective duration of 16.2 years. All else being equal, a 1% decline in long-term yields could see TLT's net asset value soar by 16.2%. Until this happens, TLT investors can earn a 4.6% 30-day SEC yield. In addition, the high volatility of TLT makes it a potent underlying asset for selling covered calls, which can deliver even more income potential.
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BondBloxx Bloomberg Twenty Year Target Duration US Treasury ETF (XTWY)
"Investors anticipating an economic slowdown or recession should consider lengthening the duration of their portfolios with long-dated U.S. Treasurys," Bianco explains. "Our longest duration bond ETF, XTWY, would likely benefit the most in performance during a broad economic downturn, as investors increase their demand for perceived safe haven U.S. government securities."
XTWY tracks the Bloomberg US Treasury Twenty Year Duration Index. It currently has a 19.9-year duration and pays a 4.5% 30-day SEC yield. However, it is slightly cheaper compared to TLT with a 0.125% expense ratio. As with all Treasury ETFs, the average credit quality of the XTWY portfolio is rated "AA1," which reflects the low likelihood of the U.S. government defaulting on its debt obligations.
"Investors anticipating an economic slowdown or recession should consider lengthening the duration of their portfolios with long-dated U.S. Treasurys," Bianco explains. "Our longest duration bond ETF, XTWY, would likely benefit the most in performance during a broad economic downturn, as investors increase their demand for perceived safe haven U.S. government securities."
XTWY tracks the Bloomberg US Treasury Twenty Year Duration Index. It currently has a 19.9-year duration and pays a 4.5% 30-day SEC yield. However, it is slightly cheaper compared to TLT with a 0.125% expense ratio. As with all Treasury ETFs, the average credit quality of the XTWY portfolio is rated "AA1," which reflects the low likelihood of the U.S. government defaulting on its debt obligations.
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BondBloxx Bloomberg Six Month Target Duration US Treasury ETF (XHLF)
"Estimates now are that the Fed could resume interest rate cuts as soon as June, although Chairman (Jerome) Powell recently indicated that he is in no rush to resume easing, reflecting continued economic strength coupled with elevated levels of uncertainty," Bianco says. "Nonetheless, we expect continued heightened volatility as investors ride the roller coaster of presidential orders, initiatives and reversals."
Investors looking to keep cash safe for a potential dip-buying opportunity can use XHLF as a substitute for money market mutual funds. This ETF tracks the Bloomberg US Treasury Six Month Duration Index, which is effectively insulated from interest rate volatility due to its low duration. The price of this ETF doesn't fluctuate much, making it very low-risk. Right now, it pays a decent 4.2% 30-day SEC yield.
"Estimates now are that the Fed could resume interest rate cuts as soon as June, although Chairman (Jerome) Powell recently indicated that he is in no rush to resume easing, reflecting continued economic strength coupled with elevated levels of uncertainty," Bianco says. "Nonetheless, we expect continued heightened volatility as investors ride the roller coaster of presidential orders, initiatives and reversals."
Investors looking to keep cash safe for a potential dip-buying opportunity can use XHLF as a substitute for money market mutual funds. This ETF tracks the Bloomberg US Treasury Six Month Duration Index, which is effectively insulated from interest rate volatility due to its low duration. The price of this ETF doesn't fluctuate much, making it very low-risk. Right now, it pays a decent 4.2% 30-day SEC yield.
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Invesco Equal Weight 0-30 Year Treasury ETF (GOVI)
"Traditional market-cap-weighted Treasury ETFs tend to skew heavily toward shorter-duration bonds, since the U.S. government issues a larger volume of short-term Treasurys," says Jason Bloom, head of fixed income and alternatives ETF product strategy at Invesco. "GOVI, on the other hand, allocates evenly across different maturities, reducing concentration risk in certain segments of the yield curve."
Unlike TLT, GOVI offers broad exposure across the entire Treasury yield curve, making it a more diversified, balanced alternative. "GOVI can serve as a strategic hedge against economic slowdowns, offering diversification benefits relative to risk assets, while maintaining moderate duration exposure without extreme rate volatility," Bloom explains. The ETF pays a 4.3% 30-day SEC yield.
"Traditional market-cap-weighted Treasury ETFs tend to skew heavily toward shorter-duration bonds, since the U.S. government issues a larger volume of short-term Treasurys," says Jason Bloom, head of fixed income and alternatives ETF product strategy at Invesco. "GOVI, on the other hand, allocates evenly across different maturities, reducing concentration risk in certain segments of the yield curve."
Unlike TLT, GOVI offers broad exposure across the entire Treasury yield curve, making it a more diversified, balanced alternative. "GOVI can serve as a strategic hedge against economic slowdowns, offering diversification benefits relative to risk assets, while maintaining moderate duration exposure without extreme rate volatility," Bloom explains. The ETF pays a 4.3% 30-day SEC yield.
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SPDR Bridgewater All Weather ETF (ALLW)
If you want to stay the course through any economic cycle, ALLW is the all-in-one, multi-asset allocation ETF to own. The ETF is based on Bridgewater Associates' "All Weather" hedge fund, founded by Ray Dalio. Dalio pioneered the risk parity approach – a strategy that allocates assets based on their contribution to overall portfolio volatility rather than traditional fixed-weight allocations.
ALLW is tactically spread across four key asset classes: Treasury inflation-protected securities (TIPS), nominal bonds, global equities and commodities. Whether the economy is in expansion or recession, the portfolio is designed to deliver a steady long-term return. The ETF also uses futures contracts for exposure to some assets, making it inherently leveraged. ALLW charges an expense ratio of 0.85%.
If you want to stay the course through any economic cycle, ALLW is the all-in-one, multi-asset allocation ETF to own. The ETF is based on Bridgewater Associates' "All Weather" hedge fund, founded by Ray Dalio. Dalio pioneered the risk parity approach – a strategy that allocates assets based on their contribution to overall portfolio volatility rather than traditional fixed-weight allocations.
ALLW is tactically spread across four key asset classes: Treasury inflation-protected securities (TIPS), nominal bonds, global equities and commodities. Whether the economy is in expansion or recession, the portfolio is designed to deliver a steady long-term return. The ETF also uses futures contracts for exposure to some assets, making it inherently leveraged. ALLW charges an expense ratio of 0.85%.