Recession Fears Looming? Secure Your Portfolio With These ETFs

Barchart · 03/11 16:52

President Trump's reciprocal tariffs have weakened U.S. consumer and business sentiment, as consumers grow uncertain about the 'chaotic' U.S. policy, according to Reuters.

Global growth concerns have resurfaced as weak U.S. economic data and rising trade tensions weigh on investor confidence. Market sentiment is clearly shifting from last year’s highs when the S&P 500 gained about 24%. The index started 2025 strong, rising 4.6% through mid-February, but has since reversed course, falling about 6.6%.

Additionally, recession fears are gaining traction as factors threatening U.S. economic stability, such as declining consumer confidence, investment uncertainty, sluggish growth and persistent inflationary pressures, continue to persist.

A recession doesn’t need to occur for portfolios to take a hit, as rising probability alone can trigger investor panic, leading to widespread sell-offs as investors will try to book their profits, ultimately driving the market lower. Even so, the possibility of a potential downturn is enough to push risk-averse investors toward defensive assets.

Economic Uncertainty Sparks Fresh Recession Worries

According to Forbes, multiple indicators suggest that the U.S. recession risk may be higher than anticipated. The Atlanta Federal Reserve’s model recently projected a potential economic contraction in Q1 2025. While the model is volatile and may shift with new data, it currently signals declining growth in Q1.

Per Morgan Stanley, as quoted on Reuters, U.S. tariffs on China, Mexico and Canada could reduce U.S. economic growth by 0.7 to 1.1 percentage points in the coming quarters. However, for now, Trump has postponed some tariffs on Mexico and Canada for one month, highlighting the uncertainty surrounding tariff policies.

A major driver of rising recession fears is the decline in U.S. consumer spending in January, the first in nearly two years, raising concerns of weak growth or even a contraction this quarter, according to Reuters. Per Forbes, a drop in consumer spending could also drag down the GDP, as consumer spending accounts for about two-thirds of U.S. economic growth.

According to CNBC, U.S. companies will bear the brunt of the tariffs, which they will pass on to the consumer by raising prices, adding further financial strain on consumers.

While this mix of signals may not be enough to predict a 2025 recession, the risks are mounting. Prominent economist Barry Eichengreen, a Professor of Economics at Berkeley University, shares this view, warning that the United States could slip into a recession by 2025-end if current economic policies and political deadlock continue.

Market Reactions Won’t Sway Trump’s Policies

According to BCA Research, as quoted on Yahoo Finance, President Trump is unlikely to back down for the sake of investors unless stocks approach bear market territory. The firm suggests that stocks could fall another 15% before he alters his stance, which would push the S&P 500 about 20% below its mid-February peak, to the technical bear market territory.

President Trump himself stated that he isn’t focused on the markets when asked if his decision to pause tariffs on many products from Canada and Mexico for one month was influenced by the stock market, as quoted on CNBC.

ETFs in Focus

Below, we highlight a few ETF areas that investors could use to navigate the uncertain environment in a better way to protect themselves from the potential headwinds in the economy.

Investing in these sectors not only shields investor portfolios from downside risks and safeguards investments during market distress but also offers gains when the broader market trends upward. These sectors provide dual benefits, protecting portfolios during market downturns and offering gains when the market trends upward.

Despite the low odds of the U.S. economy falling into a recession, investors can take a cautious approach by increasing their exposure to these funds.

Quality ETFs

Amid market uncertainty, quality investing emerges as a strategic response as a potential buffer against potential headwinds. This approach prioritizes identifying firms with robust fundamentals, consistent earnings and lasting competitive strengths. Investing in such high-quality companies can mitigate volatility for investors.

Investors can look at funds like iShares MSCI USA Quality Factor ETF QUAL, Invesco S&P 500 Quality ETF SPHQ, JPMorgan U.S. Quality Factor ETF JQUA and SPDR MSCI USA StrategicFactors ETF QUS.

Consumer Staples ETFs

The potential slowdown in the economy could benefit consumer staple stocks, as these companies manufacture everyday necessities such as food, beverages and household items. Additionally, surging household debt levels could burn a significant hole in consumers’ pockets and prove to be a positive for these funds.

Funds like Consumer Staples Select Sector SPDR Fund XLP, Vanguard Consumer Staples ETF VDC, iShares U.S. Consumer Staples ETF IYK and Invesco S&P 500 Equal Weight Consumer Staples ETF RSPS can be beneficial.

Healthcare ETFs

The healthcare sector is non-cyclical, providing a defensive tilt to the portfolio amid market turmoil. Further, the long-term fundamentals remain strong, given encouraging industry trends.

Investors can look at funds like Health Care Select Sector SPDR Fund XLV, Vanguard Health Care ETF VHT, iShares Global Healthcare ETF IXJ and iShares U.S. Healthcare ETF IYH.

Utility ETFs

As a low-beta sector, utilities are relatively shielded from market volatility, making them a defensive investment and a safe haven during economic turmoil. Investors often turn to utilities during downturns due to the steady demand for these companies' services.

Investors should gain from funds like Utilities Select Sector SPDR Fund XLU, Vanguard Utilities ETF VPU, Fidelity MSCI Utilities Index ETF FUTY and iShares U.S. Utilities ETF IDU.

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