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7 of the Best ETFs to Buy for a Slowing Economy

Kent Thune

Investors wanting to stay ahead of the curve are wise to begin looking at the best exchange-traded funds to buy for a slowing economy. The best ETFs can help protect and diversify your portfolio.

While the economy can be considered healthy on many counts, the GDP trend is clearly down. Depending upon which report you believe, the U.S. economy grew by about 3% in 2018. Growth was 4.2% in the second quarter of 2018, 3.4% in the third quarter and a 2.2% in the fourth quarter. The Federal Reserve expects GDP growth of 2.1% this year and 1.9% in 2020.

The bottom line is that the economy is still growing but the pace of growth appears to be slowing. Now is not likely the best time to invest for recession, but it is a good time to tap down on risk while continuing to maintain exposure to the market. In different words, don’t jump out of your stock funds and pile into cash. Just stay invested in a smarter way.

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To make smarter moves for a slowing economy, these are the best ETFs to consider holding now:

Best ETFs to Buy for a Slowing Economy: SPDR S&P 500 (SPY)

Best ETFs to Buy for a Slowing Economy: SPDR S&P 500 (SPY)

Expenses: 0.0945%, or $9.45 for every $10,000 invested

Long-term investors are wise to hold a low-cost stock fund like the SPDR S&P 500 (NYSEARCA:SPY), no matter what the economy and markets are doing.

SPY is an outstanding core holding to build upon in your portfolio because of its primary quality as a diversified stock fund. But this same diversification is a key quality to look for in a fund when uncertainty abounds in the market.

Since SPY tracks the S&P 500, you’ll get exposure to approximately 500 of the largest U.S. companies, as measured (and weighted) by market cap. This means top holdings include mega-caps like Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN).

Healthcare Select Sector SPDR (XLV)

Best ETFs to Buy for a Slowing Economy: Healthcare Select Sector SPDR (XLV)

Expenses: 0.13%

The healthcare sector can be a smart defensive play when the economy is weakening, and the Healthcare Select Sector SPDR (NYSEARCA:XLV) is just what the doctor ordered for this condition.

No matter what the economy is doing, consumers still go to the doctor and fill their drug prescriptions. For this reason, healthcare stocks can hold up better than a broad market stock index when the investor herd begins to shift into risk-off mode.

XLV gives investors a diversified basket of health stocks, primarily large U.S. names like Johnson & Johnson (NYSE:JNJ), UnitedHealth Group (NYSE:UNH) and Pfizer (NYSE:PFE).

Utilities Select Sector SPDR (XLU)

Best ETFs to Buy for a Slowing Economy: Utilities Select Sector SPDR (XLU)

Expenses: 0.13%

In addition to healthcare, the utilities sector is known for its defensive qualities, which makes an ETF like the Utilities Select Sector SPDR (NYSEARCA:XLU) a smart choice in a slowing economy.

Utilities stocks are value-oriented investments, which tend to perform better than growth stocks as the economy gets closer to recession, especially when stocks enter a bear market.

When the investor herd begins to turn away from the market risk of growth stocks, they like to buy the solid, dividend-producing stocks like XLU top holdings NextEra Energy (NYSE:NEE), Duke Energy (NYSE:DUK) and Dominion Energy (NYSE:D).

Consumer Select Sector SPDR (XLP)

Best ETFs to Buy for a Slowing Economy: Consumer Select Sector SPDR (XLP)

Expenses: 0.13%

Investors wanting broad exposure to defensive stocks will like what they see in the Consumer Select Sector SPDR (NYSEARCA:XLP).

XLP tracks the Consumer Staples Select Sector index, which means it’s full of defensive stocks in consumer industries and products such as beverages, household goods, food, and tobacco. Top holdings include Proctor & Gamble (NYSE:PG), Coca-Cola Company (NYSE:KO) and PepsiCo (NASDAQ:PEP).

XLP can compliment other defensive stock funds investing in the healthcare and utilities sectors because there is very little overlap with these sectors.

SPDR Gold Shares (GLD)

Best ETFs to Buy for a Slowing Economy: SPDR Gold Shares (GLD)

Expenses: 0.4%

Investors wanting to build a defensive portfolio in anticipation of market volatility or a bear market may want to consider adding a low-cost precious metals fund like SPDR Gold Shares (NYSEARCA:GLD).

Unlike mutual funds that invest in gold and other precious metals, GLD does not invest in mining stocks; it simply tracks the price of gold bullion, less expenses.

Funds that track the price of gold can be great diversification tools because gold price movements have very little correlation with stock prices. Investors wanting to add GLD, or other funds with narrow concentrations in one sector or asset type, are wise to allocate 10% or less of their portfolio so they can receive the benefits of diversification without adding unnecessary market risk.

iShares MSCI Emerging Markets (EEM)

Best ETFs to Buy for a Slowing Economy: iShares MSCI Emerging Markets (EEM)

Expenses: 0.67%

A slowing U.S. economy does not by default mean that economies elsewhere in the world are in trouble. If you want to diversify away from U.S. stocks, one of the best ETFs to do the job is the iShares MSCI Emerging Markets (NYSEARCA:EEM).

EEM tracks the MSCI Emerging Markets Index, which consists of large- and mid-cap stocks, with the greatest concentration of exposure to emerging and developed Asia, including China, South Korea, Taiwan and India.

Most of the holdings in the EEM portfolio are large-caps like Tencent Holdings (OTCMKTS:TCEHY), Alibaba (NYSE:BABA) and Taiwan Semiconductor Manufacturing (NYSE:TSM).

iShares Core U.S. Aggregate Bond (AGG)

Best ETFs to Buy for a Slowing Economy: iShares Core U.S. Aggregate Bond

Expenses: 0.06%

A slowing economy typically coincides with moderating or falling interest rates, which means bond prices can move higher. A cheap, diversified bond fund like the iShares Core U.S. Aggregate Bond Fund (NYSEARCA:AGG) is one of the best ETFs in this environment.

AGG tracks the Bloomberg Barclays U.S. Aggregate Bond Index, which consists of over 7,000 bond securities, ranging from Treasuries to corporate bonds and municipal bonds of all maturities.

Although long-term bonds can see higher price gains during recession, a slowing economy can be more challenging to navigate, which is why diversification is key for bond holdings, as well as stocks, in this environment.

As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. However, he holds SPY, XLV, XLP, GLD, and AGG in some client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.

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