ETF News

Investors have likely been hearing the word “recession” in the headlines over and over for the last few months, if not the last few years. It was bound to happen, with the markets soaring higher and higher, and even a pandemic not getting in the way of growth.

But it all has to end sometime. While recessions don’t last forever, they can still take a dramatic toll on the economy of world markets. And yet another phrase has started to float around lately, and it’s causing some portfolio managers to question where to invest.

What is a “mild” recession?

While you might be familiar with what a recession might be, what on this good green earth is a “mild” recession? Let’s first remember what a recession actually is. In this case, there is a temporary economic decline, and it affects everything from trade and industrial activity to, of course, consumer spending. It’s usually identified when there is a fall in gross domestic product (GDP) that lasts for two consecutive quarters.

So what about a mild recession? There could still be a drop over two quarters and in the same areas, but perhaps not as drastic a one. For example, the Great Recession was severe, with GDP falling 4.3% between the fourth quarter of 2007 to the second quarter of 2009. This was the worst fall since World War II.

As for a mild recession, financial services company Fitch Ratings predicts something similar to what Americans experienced back in 1990. The GDP forecast for a mild recession, which should occur in mid-2023, would reach just 1.7%, down from 2.9%. Furthermore, we’ve already seen two consecutive quarters of negative GDP growth, which as mentioned shows signs of an economy in trouble.

What makes the recession mild is that the GDP may not fall so low, and the recession may not last so long. For instance, back in 1990 the recession lasted from July 1990 to March 1991. That’s just 10 months of negative performance, compared to the Great Recession’s 18 months.

Don’t panic!

That’s the key takeaway here. In fact, even if we were to enter a Great Recession once more, long-term investors shouldn’t necessarily worry. As you can see from looking back at basically any ETF around during the Great Recession, those funds have rebounded and then some.

However, if you’re looking for safety, then it’s important to look at sectors that will remain essential even in the case of a recession, including a mild recession, as these sectors are the most likely to recover the fastest. In this case, I would recommend investing in the essential services of infrastructure and healthcare.

2 ETFs to consider for a mild recession

With that in mind, two ETFs for consideration include the Global X U.S. Infrastructure Development ETF (PAVE) and Health Care Select Sector SPDR Fund (XLV).

PAVE holds $3.55 billion assets under management (AUM) as of writing, with a management expense ratio (MER) at 0.47%. The fund invests in securities from companies supporting infrastructure development around the world. 

About 70% of its holdings are in the industrial space, with about 21% in basic materials. So here we have essential holdings that will remain essential no matter what happens within the next year. Since coming on the market in 2017 shares have increased 89%, although they are currently down 5.5% year-to-date.

As for XLV, the ETF holds $39.86 billion in AUM, with an MER of 0.10%. Here investors get exposure to large-cap healthcare securities located in the United States. But what investors might really find interesting here is that while you get access to the essential services of health care, you may also see growth from the industry as well.

XLV invests in pharmaceuticals, equipment, providers and services. However it also invests in biotech, life sciences and other healthcare technology, so after a recession there is greater potential for a major rebound should investors seek out growth from these companies once more. And with shares down just 3.7% year-to-date, that could signal a relatively quick rebound. Meanwhile, the ETF is up 650% since coming on the market in 1998. That’s a compound annual growth rate (CAGR) of 8.79% at writing.

Disclaimer: This article is limited to the dissemination of general information pertaining to investment strategies and financial planning and does not constitute an offer to issue or sell, or a solicitation of an offer to subscribe, buy, or acquire an interest in, any securities, financial instruments or other services, nor does it constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment.