The newly minted bear market has the potential to steer the market into a recession, and that’s raising difficult questions for investors looking to allocate their assets.
A recent survey published by the Financial Times and the Chicago Booth School of Business says that 70% of academic economists believe the U.S. will see a recession in 2023.
Arguments can be made for alternative and fixed income exposures, among others, but equities are the largest piece of most portfolios.
Typically, the best sectors for such conditions are consumer staples, health care and utilities. The Select Sector SPDR family includes the world’s largest sector ETFs. The $37.1 billion Health Care Select Sector SPDR Fund (XLV), the $14.8 billion Consumer Staples Select Sector SPDR Fund (XLP) and the $15.5 billion Utilities Select Sector SPDR Fund (XLU) cover each of the previously mentioned sectors. All three are down between 7% and 14% year to date but are still outperforming the SPDR S&P 500 ETF Trust (SPY), which is down more than 20%, by a wide margin.
These ETFs make sense as they represent areas consumers are likely to prioritize. Health care needs don’t change relative to the economy for the most part, and the consumer staples include companies that produce or sell food and toiletries, another set of needs that doesn’t tend to change too much relative to the shifts in the economy. The same goes for utilities, as those are needs that don’t tend to fluctuate much.
Dividend stocks are another category that is often highlighted in recessions, as they offer the possibility of income in addition to price appreciation. The $725 million Global X SuperDividend ETF (SDIV) is down 30% over the past 12 months, while the iShares MSCI ACWI ETF (ACWI) is down more than 16% during the same time period. However, given that data does not indicate we are currently in a recession, just headed toward one, that performance could shift once it begins. Also, consider that SDIV is a global fund.
The situation is a little different when one looks at the $20 billion SPDR S&P Dividend ETF (SDY). It has outperformed SPY significantly both over the year-to-date and 12-month periods. SDY has fallen less than 9% year to date and only 4.28% over the 12-month period. For reference, SPY is down 21.04% and 10.92% over those respective time periods. While SDIV is global in scope, SDY is focused on the U.S.
Gold is often referred to as a store of value, but investing in physical gold or gold futures can come with other things to consider. For example, neither offers dividends, and futures in particular come with roll costs. However, gold miner stocks are equities that offer indirect exposure to the metal.
The nearly $12 billion VanEck Gold Miners ETF (GDX) is the oldest and largest to cover the space and offers exposure to 56 gold miner stocks selected at a global level. It’s down 4.56% year to date, while ACWI is down more than 20%.
And of course there are natural resources ETFs, which we explored in more depth recently. Equities associated with commodities have performed fairly well in 2022 relative to the broad equity markets, and as noted, they can offer an appealing alternative to futures-based or physical funds.
There’s also the argument for water ETFs. The largest is the $1.5 billion Invesco Water Resources ETF (PHO). Not only is water literally necessary for life, it’s increasingly scarce, raising the importance of companies that conserve and purify it. The fund is down dramatically year to date, more than 26%, but it could offer opportunities going forward, especially since drought conditions are near record levels in the U.S.
Recessions can be over quickly, as we saw with the pandemic-related recession that basically began in February 2020 and ended in April. But they can also last for years, so it might help to tweak one’s allocations to include some equity exposures that offer more than just your average stock.
A necessary sector, a little extra oomph from income or exposure to a valued natural resource could add a little differentiation to a standard portfolio allocation during such periods.
Contact Heather Bell at [email protected]