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Prolonged Shutdown Raises Recession Risk: ETFs to Consider

Sweta Killa

With the government shutdown now in its fourth week (the longest ever) and 800,000 federal workers on furlough, the risk of recession has increased significantly. The shutdown occurred due to lack of progress in passing a spending bill, wherein Trump demanded funding for $5.6 billion for a border wall that is being opposed by the Democrats (read: Longest U.S. Government Shutdown: Likely ETF Winners & Losers).

This is especially true as it has started to hurt the economy with the average pay loss being $5,000 for 800,000 federal employees. This has resulted in lower consumer spending and investment. Additionally, U.S. tax refunds and mortgage applications have been delayed, hampering the housing sector. Public companies are struggling to get approval to raise capital, the Women, Infants, and Children nutrition program went unfunded, and the Food and Drug Administration delayed approval of drugs and medical devices.

The Trump administration has doubled the cost of the government shutdown. It now projects the closure will subtract 0.1 percentage point from growth every week compared with the previous projection of 0.1 percentage point reduction every two weeks. Jamie Dimon, the CEO of J.P. Morgan Chase believes that the partial shutdown could wipe out growth from the world's biggest economy if it continues through the first quarter of the year.

Apart from the shutdown, U.S.-China trade tensions and global growth worries added to fears of recession. Additionally, growth in the world’s biggest economy has started to slow down as gauges of manufacturing and consumer sentiment have fallen in the recent weeks.

Deutsche Bank warns that the combination of the U.S.-China trade war and government shutdown may result in recession as soon as this year. According to a new survey of chief executives from the Conference Board, the possibility of a global recession ranks as the top concern on the minds of corporate leaders as they head into 2019. Analysts surveyed by Bloomberg put the risk of a U.S. recession at the highest in more than six years. They see a 25% chance of a slump in the next 12 months, up from 20% in the December survey.

In such a backdrop, investors should stash their cash in some conventionally secure and recession proof corners of the broad market. Below, we have highlighted a few ETFs from these areas:


In difficult market environments, gold is considered a great store of value and hedge against market turmoil. With AUM of $33.2 billion, the ultra-popular GLD tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. It charges 40 bps in fees per year from investors and trades in heavy volume of nearly 8 million shares a day. The fund has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: A Pack of ETFs to Buy for 2019).

iShares 20+ Year Treasury Bond ETF TLT

Though the fund was out of investors’ favor due to rising yields last year and has an unfavorable Zacks ETF Rank #5 (Strong Sell) with a High risk outlook, the recession risk has brought back some lure. This is because the products tracking the long end of the yield curve often provide a safe haven. TLT provides exposure to long-term Treasury bonds by tracking the ICE U.S. Treasury 20+ Year Bond Index. It is one of the most popular and liquid ETFs in the bond space with AUM of $9.3 billion and average daily volume of 8.9 million shares. Expense ratio comes in at 0.15% (read: Will 2019 See a Bull Market for Bond ETFs?).

Utilities Select Sector SPDR XLU

Being the low-beta sector, utility is relatively protected from large swings (ups and downs) in the stock market and is thus considered a defensive investment or safe haven amid economic or political turmoil. While there are several options in the space, the ultra-popular XLU seems a good bet. With AUM of $8.4 billion, it provides exposure to a small basket of 29 securities by tracking the Utilities Select Sector Index. The product charges 13 bps in annual fees and sees heavy volume of around 19 million shares on average. XLU has a Zacks ETF Rank #3 with a Medium risk outlook (read: Biggest ETF Stories of 2018 Worth Watching in 2019).

iShares U.S. Healthcare Providers ETF IHF

Healthcare generally outperforms during periods of low growth and high uncertainty. The demand for healthcare services remains intact even in the deteriorating economic fundamentals. IHF follows the Dow Jones U.S. Select Healthcare Providers Index with exposure to companies that provide health insurance, diagnostics and specialized treatment. In total, the fund holds 45 securities in its basket and has amassed $863.6 million in its asset base. Volume is good at about 116,000 shares per day on average. The product charges 43 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

Consumer Staples Select Sector SPDR Fund XLP

The consumer staples sector is also viewed as defensive as it includes a variety of items like food & beverages, non-durable household goods, hypermarkets and consumer supercenters that are essential for daily needs. These products see steady demand even during an economic downturn due to their low level of correlation with economic cycles. This is the most-popular consumer staples ETF with AUM of $9.6 billion and follows the Consumer Staples Select Sector Index. It holds about 33 securities in its basket and charges 13 bps in fees per year from investors. The fund trades in heavy volume of nearly 18.2 million shares a day and has a Zacks ETF Rank #3 with a Medium risk outlook.

Vanguard Dividend Appreciation ETF VIG

Dividend paying securities are the major source of consistent income for investors to create wealth when returns from the equity market are at risk. Dividend-focused products offer safety in the form of payouts while at the same time providing stability as mature companies are less volatile to large swings in stock prices. This is because the companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis (read: 5 Market-Beating Dividend ETFs of 2018).

VIG is the largest and most popular ETF in the dividend space with AUM of $30 billion and average daily volume of about 1.1 million shares. The fund follows the Nasdaq US Dividend Achievers Select Index, which is composed of high-quality stocks that have a record of raising dividends every year. It holds 182 securities in the basket and charges 8 bps in annual fees. The product has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

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