Any investor can make money during good times when the market is rolling. But what sets the best investors apart is their ability to make money during downturns, or not lose money at all. Investors must think long-term across the business cycle when choosing stocks or exchange-traded funds (ETFs), as one bad year can wipe out three to five years of strong returns.
One of the most difficult investment environments is during a recession, when economic activity shrinks and investors tend to take a wait-and-see approach. But based on 30 years of market data, this ETF can help you weather the storm.
Investors with a long-term horizon should be prepared for volatility, especially in some high-growth stocks. However, it will also help your overall portfolio—and probably your sanity—with exposure to some defensive industries that perform well in recessions, and maybe even lead to some reliable passive income.
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Historically, consumer staples have been the strongest sectors during recessions. These companies produce products that consumers consider essential in their budgets. Remember, consumer spending accounts for almost 70% of U.S. gross domestic product (GDP). Essential items include toothpaste, food, and medicine—things consumers need every day and simply cannot be put on hold.
While returns in consumer staples may not be as high as in sectors such as artificial intelligence during a bull market, historical data proves that they tend to perform strongly in recessions. Consumer staples have outperformed all other sectors in the 12 months before and after the recession began in 1990, according to data compiled by Bloomberg and iFAST. This includes the recession of the early 1990s, the dot-com bubble, the Great Recession and the COVID-19 pandemic.
In the 12 months before the recession, consumer staples had an average return of 14%. In the 12 months after the recession began, the industry’s average return was 10%.
this Consumer Staples Select Sector SPDR Fund(NYSE: XLP) The fund was launched in 1998. More than 31% of the fund is invested in consumer goods distribution and retail stocks, nearly 20% in beverages, 18.5% in food, more than 17% in household products, and nearly 10% in tobacco. The fund holds many stocks that one might expect a consumer staples ETF to hold. Here are the fund’s top five holdings by weight.
Walmart — 11.05%
costco wholesale — 9.33%
Procter & Gamble — 8.18%
Coca Cola — 6.62%
Philip Morris International — 5.77%
Although returns have been modest since inception, the fund also boasts a strong trailing 12-month dividend yield of 2.71% and a strong track record of paying and growing dividends over 25 years.
XLP Dividend Chart
XLP dividend data provided by YCharts
Now, since long-term returns aren’t that great, investors don’t need to put all their money into consumer staples. In fact, if you do this, you could essentially lose money if your returns don’t keep pace with inflation. Investors should allocate some of their money to ETFs like XLP and increase allocations as they near retirement, focusing on preserving their money rather than growing it as they age.
ETFs may also be a good place to park your money if you’re worried about clearly frothy market conditions like today’s and are reluctant to put your money in them. S&P 500 Index The index focuses heavily on the “Big Seven” and a handful of other high-flying AI stocks. Ultimately, when thinking about portfolio construction, long-term investors can strike a balance by allocating the majority of their capital to growth sectors while also allocating some to defensive sectors.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions and recommendations at Costco Wholesale and Walmart. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.
The Safest Dividend ETFs During a Recession—Based on 30 Years of Market Data Originally published by The Motley Fool
