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Bearish Investors Can Seek Refuge in Recession-Resistant ETFs

By: MarketBeat

March 03, 2025 at 12:00 PM EST

Analysts and investors began to brace for a souring economic environment as the 10-year Treasury yield fell below that of a 3-month note in late February—an inverted yield curve, typically seen as a key indicator of an upcoming recession. Of course, a recession will only be confirmed after at least two-quarters of negative GDP growth, and it is possible that the yield indicator will be incorrect. After all, many analysts predicted a recession in 2024, but it never materialized.

Still, the prospect of a potential downturn is enough to send more risk-averse investors running toward defensive plays. In this case, exchange-traded funds (ETFs) already represent a strong option. These funds tend to diversify across a range of securities typically linked by a common theme or focus, often minimizing risk at the same time.

Some ETFs are particularly recession-resistant due to their defensive strategies. Three such funds—one focused on low-volatility stocks, one targeting the utility sector, and one with a broad basket of consumer staples names—may be worth considering if the economic environment worsens.

Minimize Volatility to Reduce Downside Risk

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Factor investing remains a popular strategy among retail investors, although many overlook volatility compared to more popular factors like momentum and value. But the iShares MSCI USA Min Vol Factor ETF (BATS: USMV), with its focus on limited-volatility equities, could just shore up defenses against a recession. USMV tracks an index of large- and mid-cap stocks with lower volatility than the broader U.S. market.

Investors in USMV access a portfolio of about 185 U.S. firms, roughly two-thirds of which are major players in the information technology, financials, health care, and consumer staples sectors. Assets are well-distributed, with no single name occupying as much as 1.7% of the portfolio as of February 22, 2028.

USMV aims to limit downside risk by focusing on stable companies with a history of minimal share price shifts. However, this also means that upside potential is similarly capped. Year-to-date, as of February 22, 2028, the fund has returned 4.8%, while in the 12-month period ending on that date, it posted returns of 16.1%. In booming economic periods, investing in USMV might mean giving up the potential for gains—but in a recession, investors may be looking for a cautious strategy just like this funds.

Affordable, Broad Access to Utilities and Dividends

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Investors commonly flock to the utilities sector during a downturn, thanks to the consistent demand for these companies' services. That said, individual companies still face unique risks, particularly during a recession, and diversification through an ETF like the Utilities Select Sector SPDR Fund (NYSEARCA: XLU) provides it.

Utilities is a small sector in terms of the number of names, and XLU holds a relatively broad swath of them, with 66 holdings as of February 22, 2025. Although the portfolio is concentrated in a few stocks—the top five holdings occupied about 40% of invested assets as of that date—XLU's low expense ratio of 0.09% makes it a cheap and effective way of accessing the space. Further, utility names often have attractive dividends, and XLU capitalizes on that with a dividend yield of 2.8% as of the date above.

Inexpensive and Varied Consumer Staples Exposure

[content-module:Forecast|NYSEARCA:VDC]

Consumer staples is another sector that may be resistant to a recession, as companies in this space provide goods vital to everyday life. One issue many investors experience with ETFs targeting consumer staples, however, is a heavy weighting toward major companies like Coca-Cola Co. (NYSE: KO) at the expense of smaller firms. The Vanguard Consumer Staples ETF (NYSEARCA: VDC) manages to respect the sway of Coca-Cola and a handful of other massive consumer staples names while still holding more than 100 different securities. Investors can thus turn to this fund for a balanced approach to the sector that still prioritizes some of the largest players.

Another key benefit to VDC is its low expense ratio. Like XLU, VDC has a fee of just 0.09% per year. This can help to keep investor costs to a minimum during a recession or any other time when every dollar can make a difference in investment outcomes.

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Bearish Investors Can Seek Refuge in Recession-Resistant ETFs

Minimize Volatility to Reduce Downside Risk

Affordable, Broad Access to Utilities and Dividends

Inexpensive and Varied Consumer Staples Exposure

Where Should You Invest $1,000 Right Now?

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