ETFs are instruments that investors can use to navigate through any market environment, including a recession. With the market off to a decent start to 2023, some of last year’s recessionary fears have subsided. However, there’s no guarantee that the market is out of the woods yet and on its way to a “soft landing.” Many economists still think that we could be in for a recession at some point in 2023, even if it’s just a mild one, due to rising interest rates and cooling consumer demand. At the beginning of January, The Wall Street Journal surveyed economists from 23 major financial institutions, and more than two-thirds predicted a recession in 2023.
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Whether we have a recession or not, it’s never a bad idea to be prepared for a downturn and to add some defensiveness to your portfolio. With that in mind, here are three ETFs that investors can use to weather any economic storm on the horizon.
JPMorgan Equity Premium Income ETF (JEPI)
The JPMorgan Equity Premium Income ETF is well-suited to weather a recession. Adding an ETF with a double-digit dividend yield adds some serious ballast to your portfolio. Furthermore, JEPI is designed to mitigate volatility. JEPI “generates income through a combination of selling options and investing in U.S. large cap stocks, seeking to deliver a monthly income stream from associated option premiums and stock dividends.”
The JP Morgan Equity Premium Income ETF also seeks to create a diversified and low-volatility portfolio that delivers “a significant portion” of the returns of the S&P 500 without as much volatility. JEPI does this by investing up to 20% of its assets into ELNs (exchange-linked notes) and selling covered-call options against them.
These maneuvers help to mitigate volatility and downside. This worked well in a challenging environment last year, as JEPI fell just 3.5% versus the S&P 500‘s decline of 18%. However, this approach could limit some of JEPI’s upside in a bull market. This is why JEPI should be part of a balanced portfolio.
JEPI is a well-diversified fund that skews towards defensive large-cap U.S. dividend stocks. JEPI’s top holdings include financial companies like Progressive, Travelers, and US Bancorp. Health insurance giant UnitedHealth is also represented, as are drugmakers like AbbVie and Bristol Myers. Consumer staples mainstays like Coca-Cola and Hershey have a home in the top 10 as well.
These are all stocks in more defensive sectors that won’t be under as much pressure in a recession as sectors like technology or consumer discretionary. All told, JEPI has 116 positions, and these top 10 holdings make up just 16.9% of the fund.
JEPI has a dividend yield of 11.5%, and it pays this dividend on a monthly basis. Additionally, it features an expense ratio of 0.35%, a higher expense ratio than that of the ETFs discussed below. However, it is a reasonable price for a fund requiring this degree of active management.
JEPI has a neutral ETF Smart Score of 7 out of 10. Blogger sentiment is bullish, while crowd wisdom is very positive. Also, hedge fund involvement is trending up.
With its double-digit dividend yield, defensive holdings, and strategy geared towards reducing volatility, JEPI is well-positioned for whatever the economy throws at it.
Consumer Staples Select Sector SPDR Fund (XLP)
Consumer staples aren’t always the most exciting part of the market, but they are fairly resilient and recession-resistant. Unlike consumer discretionary items, consumer staples are things that consumers buy on a routine basis, like food, drinks, and even tobacco products. These goods are more “needs” than “wants,” meaning that demand is somewhat inelastic.
The Consumer Staples Select Sector SPDR ETF is an offering from State Street Corporation. XLP gives investors exposure to the consumer staples segment of the S&P 500. XLP’s top holding is Procter & Gamble. Other top holdings include soft drink behemoths Coca-Cola and Pepsi and tobacco giants like Altria and Philip Morris. Going down the top 10, you’ll see familiar consumer mainstays like Walmart, Costco, Mondelez, Colgate-Palmolive and Estee-Lauder.
Consumers will continue to hunt for bargains at Walmart and Costco during a recession. Further, smokers probably won’t stop smoking just because of a downturn and are unlikely to trade down from their favorite brands. Similarly, consumers who drink soda are unlikely to give up Coke or Pepsi just because of a downturn. XLP outperformed the market last year with a minimal loss of just 0.8% versus declines of 18% and 33.5% for the S&P 500 and Nasdaq, respectively.
Meanwhile, XLP isn’t as diversified as JEPI. It holds 35 stocks in total, and the top 10 positions make up nearly 70% of the fund.
Positively, XLP has a low expense ratio of just 0.1%, and the ETF yields 2.5%, further adding to its defensiveness.
XLP has a neutral ETF smart score of 7 out of 10. Blogger sentiment is neutral, while crowd wisdom is very negative. The analyst consensus is that XLP is a Moderate Buy, with an average price target of $80.35, indicating upside potential of 10.2%.
Health Care Select Sector SPDR ETF (XLV)
Like XLP, the Health Care Select Sector SPDR ETF is an offering from State Street. As you can guess from the name, XLV stock is specifically focused on the healthcare sector of the S&P 500. Healthcare has traditionally been thought of as a defensive sector because spending on healthcare is largely uncorrelated with the broader economy. As such, XLV fell just 2% last year, vastly outperforming the S&P 500.
Like XLP, XLV offers a low expense ratio of 0.1%. It also pays a dividend which currently yields 1.5%.
XLV is a large ETF with $40.6 billion in assets under management. It’s more diversified than XLP, with 66 holdings, and XLV’s top 10 holdings make up 54% of the fund.
The top holding is health insurer UnitedHealth, and the rest of the top 10 is essentially a who’s who of large-cap pharmaceutical stocks such as Johnson & Johnson, Merck, Eli Lilly, AbbVie, and Pfizer. Major medical equipment makers like Thermo Fisher Scientific and Danaher are also in there.
XLV has a neutral ETF Smart Score of 7 out of 10. Additionally, analysts view XLV as a Moderate Buy, and the average analyst price target of $151.29 indicates potential upside of 13.6%. Conversely, crowd wisdom and news sentiment are both very negative.
The Takeaway
At this point, it’s unclear if there will be a recession in 2023, but it doesn’t hurt to add some defensive positioning to your portfolio in case we experience one.
These three ETFs can help investors fortify their portfolios with defensive names. JEPI is my favorite of the three, thanks to its massive dividend yield, diversified mix of defensive holdings, and novel strategy, but all three should be able to hold up well in the event of an economic downturn.
