Investing in recession-proof mutual funds is one strategy to consider when the economic outlook seems uncertain. Sector funds – mutual funds that concentrate holdings on a specific stock market sector or industry – may be an obvious choice. "Sector funds allow investors to take targeted bets on the appreciation potential of a particular industry category," says Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Michigan. The reason? Certain sectors have historically performed better in different types of environments, he says. For example, mutual funds targeting defensive sectors such as consumer staples and utilities may be a safe play in the early stages of a recession as consumers shift away from discretionary spending. If you're interested in building a portfolio of mutual funds that can withstand a recession, consider these seven sector fund options.
Consumer Staples Select Sector SPDR Fund
The Consumer Staples Select Sector SPDR Fund (XLP) combines a low expense ratio of 0.13% with exposure to some of the top consumer staples sector brands, including Procter & Gamble (PG) and Walmart (WMT). Ernie Burns, president and CEO of Burns Estate Planning & Wealth Advisors, says sector funds like XLP could be a good choice since people still need to purchase food, household goods and personal products when the economy is experiencing a rough patch. "Consumer staples are one of the steadiest sectors of the market," Burns says, pointing out that overall returns have remained consistent over the last three decades. Consumer staples funds may not beat the market, but they can provide consistent performance in a recession's early stages.
Fidelity MSCI Health Care Index ETF
The Fidelity MSCI Health Care Index exchange-traded fund (FHLC) tracks the performance of the MSCI USA IMI Health Care Index, which invests in small-, mid- and large-cap companies in the health care sector. UnitedHealth Group (UNH) and Pfizer (PFE) are among the sector fund's top holdings. As recession-proof mutual funds go, health care could prove to be a solid buy. "Health care is a defensively oriented sector," says Charles Self, chief investment officer and chief operating officer at iSectors in Appleton, Wisconsin, since demand for things like medications and health care services is less economically sensitive in a recession. FHLC could offer stable returns during periods of contraction, matching its underlying index. It's also affordable, with an expense ratio of 0.08%.
Aberdeen Standard Gold ETF Trust
Gold and other precious metals have historically proven popular among investors during recessionary periods. For example, when stock indexes see declines in the early stages of a recession, gold prices often see a corresponding increase. SGOL (SGOL) is an ETF that aims to deliver performance that tracks the price of gold bullion. This fund is designed to be a cost-efficient way for investors to invest in gold, without having to take physical ownership of it or bear the costs associated with storing gold. Performance-wise, the Aberdeen Standard Gold ETF has a track record of positive returns and ended 2019 up 17.99%. With an expense ratio of 0.17%, this precious metals sector ETF could be a good fit for recession-proofing.
Vanguard Utilities ETF
Investing in the utilities sector is another defensive move to consider if you're concerned about the impacts of a recession on your portfolio. Consumers need to keep the lights on and the water running. The Vanguard Utilities ETF (VPU) is an index fund that attempts to track the performance of the MSCI USA IMI Utilities 25/50 Index. This fund offers exposure to some of the top utilities players, including Duke Energy (DUK) and Dominion Energy (D). VPU performed exceptionally well in 2019, returning 24.92% to investors, and like other Vanguard funds, it has a low expense ratio of 0.1%. With a yield of 3.15%, this utility sector fund could also be a good fit if you're looking for income generation.
Invesco QQQ Trust
QQQ (QQQ) could be a good recession-proof mutual fund pick if you're looking for exposure to the biggest tech companies. Technology sector funds can become dark horses during a recession. For example, the pandemic increased demand for tech that made remote work easier, giving the sector a boost. There's continued opportunity for innovative firms to fill in remaining technology gaps, says David Louton, finance professor at Bryant University. "Technology companies in general are poised to do well, especially those whose products provide practical solutions or increased efficiencies." Microsoft (MSFT) and Amazon.com (AMZN) are top holdings. The Invesco QQQ Trust has continued to perform well, despite first-quarter stock market volatility. The fund's expense ratio is 0.2%.
Fidelity Select Telecommunications Portfolio
Telecommunications is another sector that tends to remain stable during a recession, similar to utilities. And with the recent boom in remote work related to the pandemic, the telecom sector may continue to be bolstered by strong demand for services. FSTCX (FSTCX) is a capital-appreciation fund that invests in some of the largest telecom companies, including Verizon (VZ) and AT&T (T). While the Fidelity Select Telecommunications Portfolio does pay out dividends, the fund's primary focus is on growth. Over the long term, investing in telecoms could pay off if more companies adopt remote-work policies for employees. Telecommunication providers that have begun the shift to 5G – meaning fifth generation tech – may prove to be the standouts. FSTCX (FSTCX) has an expense ratio of 0.18%.
Vanguard Real Estate ETF
Real estate sector funds can offer some insulation against potentially negative recessionary impacts since property investments tend to have lower overall correlation with the stock market than other sectors. The key is choosing recession-proof mutual funds that hold a diversified portfolio of properties at a reasonable cost. VNQ (VNQ) measures up on both counts, with an expense ratio of 0.12% and an investment strategy that seeks to track the performance of the MSCI US IMI Real Estate 25/50 Index. The Vanguard Real Estate ETF offers exposure to top real estate investment trusts such as American Tower Corp. (AMT) and AvalonBay Communities (AVB), as well as the Vanguard Real Estate II Index (VRTPX).
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