Do you have a lower risk tolerance? If so, you’re not alone. The ups and downs of equity investing can indeed be volatile and anxiety-inducing, particularly for those concerned about the possibility of an impending recession.
In Canada, a recession is typically defined as a significant decline in economic activity spread across the economy, lasting more than a few months. This downturn is often visible in GDP, real income, employment, industrial production, and wholesale-retail sales.
During recessions, markets can be unpredictable, with heightened volatility and increased risk of loss. Generally, there’s a downturn in stock prices as investors’ confidence wanes and corporate profits decline.
If you’re looking to reduce risk in your portfolio while remaining invested, especially in the face of a potential recession, defensive exchange-traded funds (ETFs) could be exactly what you need.
These ETFs are designed to offer more stability during turbulent times, targeting sectors or strategies that tend to be less affected by broad market downturns.
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Money market ETFs
For parking cash in an investment portfolio, I prefer using an ETF like BMO Money Market Fund ETF Series (TSX: ZMMK). This ETF holds a portfolio of high-quality, short-maturity, fixed-income instruments tailored to pay competitive interest and stay insulated from market volatility.
Right now, the ETF holds an assortment of Treasury bills, banker’s acceptances, and commercial paper that all mature in less than a year, so rising interest rates won’t hurt it. In fact, thanks to high interest rates, ZMMK is currently paying an annualized 4.93% yield as of December 1, 2023.
For cost-conscious investors, BMO Global Asset Management is also waiving some fees on ZMMK, bringing its expense ratio down from 0.28% to 0.14% at present. All in all, I think this ETF is an excellent way to keep cash safe while earning monthly interest payments.
Low-volatility ETFs
For those looking to stay invested in stocks, a good way to minimize ups and downs is via BMO Low Volatility Canadian Equity ETF (TSX: ZLB). This ETF selects Canadian stocks for historically lower sensitivity to the broader market and less volatile ups and downs in their share price.
Historically, ZLB has seen lower highs but higher lows compared to the broader TSX. This has helped it minimize losses and outperform the market in the past, meaning that historically, investors were able to minimize risk without cutting into returns — a win-win situation!
ZLB’s low-volatility stock portfolio also differs significantly from the TSX. Its top holdings consist of companies from defensive sectors, such as consumer staples and utilities, which historically have outperformed during a recession. Investors can expect a 0.39% expense ratio.
