I’ve said it before and I’ll say it again: the best exchange-traded fund (ETF) to wait out a recession with is the one you can stick to, even when it’s underwater. Staying the course with the plan you made during the good times is almost always the right move.
That said, some ETFs are built specifically to handle economic slowdowns better than others. For this article, we’ll define a recession as a broad-based, prolonged economic contraction where GDP falls, unemployment rises, and consumer spending pulls back. During these times, corporate profits typically fall, stock prices tumble, and riskier assets take a beating.
The hard part is timing, because recession-friendly ETFs often lag behind during bull markets. So, while they’re not ideal for all seasons, they can be great tools for conservative investors or those looking to hedge part of their portfolio. Here are two to consider.
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Low-volatility stocks
In investing, “beta” measures how much a stock moves relative to the overall market. The market has a beta of one. So, a stock with a beta below one moves less than the market. These are known as low-volatility or low-beta stocks.
Low-volatility stocks tend to come from defensive sectors. These are industries with non-cyclical, inelastic demand for the goods and services people still buy in tough times. Think utilities, healthcare, and consumer staples like groceries and personal care products.
In Canada, a great way to invest in this style is through BMO Low Volatility Canadian Equity ETF (TSX: ZLB). This ETF screens for stocks with historically lower price volatility and tilts toward companies in those recession-resilient sectors.
It comes with a 0.39% management expense ratio (MER), pays a 2.13% dividend yield, and rebalances automatically so you don’t have to do anything except hold it.
Long-term government bonds
The Canadian government issues bonds regularly to finance everything from infrastructure to healthcare. Investors can buy these bonds based on maturity: short (under three years), medium (three to 10 years), or long term (+10 years).
Long-term bonds, often called federal treasury bonds, are sensitive to interest rate changes. When interest rates rise, long bonds drop sharply in value. But in a recession, the opposite usually happens. Central banks tend to cut interest rates to stimulate the economy, which pushes bond prices higher, especially long-duration ones.
That’s why long-term bonds are often used by professionals as a hedge against stock market declines. If stocks tank and interest rates fall, long bonds can cushion your portfolio.
One TSX-listed fund that does this well is BMO Long Federal Bond Index ETF (TSX: ZFL). It holds only long-term Canadian federal bonds, charges a 0.22% MER, and currently yields around 3.3%, paid out monthly.
The Foolish takeaway
ZLB and ZFL won’t make your portfolio bulletproof, but they can help take the sting out of a recession. Just remember: whatever strategy you choose, the key is consistency. Don’t panic, don’t guess the bottom, and don’t stop investing.
