6 ETFs that are Recession-Proof

If you’re worried about the stock market correcting, or eventually heading into bear market territory, then you will want to consider the exchange-traded funds (ETF) covered below. They will all give you more downside protection than the vast majority of ETFs throughout the ETF universe. However, there are some common misconceptions about these ETFs that you need to know about.

For your convenience, the ETFs below have been broken into two groups: Top-Tier and Second-Tier.

Purpose: Tracks the performance of the Consumer Staples Select Sector Index.

Total Assets: $8.14 billion (as of 4/15/15)

Inception Date: Dec. 16, 1998

Average Daily Volume: 7.4 million

Dividend: 2.55%

Expenses: 0.15%

Top 3 Holdings:

The Procter & Gamble Co. (PG): 12.43%

The Coca-Cola Co. (KO): 8.76%

Wal-Mart Stores Inc. (WMT): 6.97%

April 2008 High (pre-crash): $28.49

February 2009 Low (bottom of market crash): $20.36

Analysis: A loss is a loss, but XLP held up extremely well relative to its peers during the most difficult time. (For more, see: The Consumer Staples XLP ETF.)

Purpose: Tracks the performance of the Dow Jones U.S. Select Health Care Providers Index.

Total Assets: $819.16 million

Inception Date: May 1, 2006

Average Daily Volume: 54,280

Dividend: 0.16%

Expenses: 0.45%

Top 3 Holdings:

UnitedHealth Group, Inc. (UNH): 13.97%

Express Scripts Holding Co. (ESRX): 9.46%

Anthem, Inc. (ANTM): 6.91%

April 2008 High: $49.69

February 2009 Low: $30.13

Analysis: IHF didn’t hold up exceptionally well during the last crisis, and it’s not likely to appreciate if there's another crisis. However, it’s likely to hold up better than last time since Baby Boomers are entering an age where they will require a great deal of healthcare-related products and services. (For more, see: Invest in Healthcare Providers with this ETF.)

Purpose: Tracks the performance of the NASDAQ US Dividend Achievers Select Index.

Total Assets: $20.76 billion

Inception Date: April 21, 2006

Average Daily Volume: 879,500

Dividend: 2.13%

Expenses: 0.10%

Top 3 Holdings:

Johnson & Johnson (JNJ): 3.99%

Wal-Mart Stores Inc.: 3.99%

The Procter & Gamble Co.: 3.91%

April 2008 High: $55.19

February 2009 Low: $33.18

Analysis: VIG didn’t hold up well during the last crisis. That might be the case in the future as well. On the other hand, this low-expense ETF tracks the performance of companies that have a record of increasing their dividends over time. Companies such as these almost always possess healthy balance sheets and generate strong cash flow. Therefore, they’re likely to weather the storm. The correct approach here would be to buy VIG on any dips, knowing it’s only a matter of time before these elite companies bounce back. (For more, see: Traders Look to Dividend Funds.)

Purpose: Tracks the performance of the Utilities Select Sector Index.

Total Assets: $6.38 billion

Inception Date: Dec. 16, 1998

Average Daily Volume: 13.2 million

Dividend Yield: 3.43%

Expense Ratio: 0.15%

Top 3 Holdings:

Duke Energy Corp. (DUK): 9.11%

NextEra Energy, Inc. (NEE): 8.33%

Southern Co. (SO): 7.26%

April 2008 High: $41.31

February 2009 Low: $25.35

Analysis: If you research “recession proof ETFs” you will often find XLU on the list. But this is why you need to be careful with what you’re reading. As you can see, XLU didn’t hold up very well during the last crisis. That’s likely to be next during the next crisis as well. While utilities are generally seen as safe, the problem is that they’re leveraged. Therefore, when interest rates increase, their debts will become more expensive. The debt-to-equity ratios for Duke, NextEra Energy, and Southern Co. are 1.04, 1.44, and 1.17, respectively. These aren’t terrible ratios, but they’re not comforting in a higher interest rate environment, either. (For more, see: Is it Time for Low Volatility Funds?)

Purpose: Tracks the performance of the Dynamic Food & Beverage Intellidex Index.

Total Assets: $266.83 million

Inception Date: June 23, 2005

Average Daily Volume: 91,133

Dividend: 1.28%

Expenses: 0.61%

Top 3 Holdings:

Kraft Foods Group, Inc. (KRFT): 6.53%

The Kroger Co. (KR): 5.08%

General Mills, Inc. (GIS): 5.06%

April 2008 High: $16.82

February 2009 Low: $11.13

Analysis: A manageable decline during the worst of times. And PBJ invests in the best of the best in Food & Beverage. The only reason PBJ is on the Second-Tier list is because of the 0.61% expense ratio, which is marginally higher than the average ETF expense ratio of 0.46%. This heightened expense ratio will eat into your profits and accelerate losses. (For more, see: When is the Right Time for Food and Beverage Stocks?)

Purpose: Tracks the performance of the MSCI US Investable Market Index/Consumer Staples 25/50.

Total Assets: $2.52 billion

Inception Date: Jan. 26, 2004

Average Daily Volume: 114,462

Dividend: 1.90%

Expenses: 0.12%

Top 3 Holdings:

The Procter & Gamble Co.: 10.92%

The Coca-Cola Co.: 7.73%

Pepsico, Inc. (PEP): 6.87%

April 2008 High: $69.85

February 2009 Low: $49.53

Analysis: With this ETF offering a very low expense ratio and holding top-notch companies, you might be wondering why it’s on the Second-Tier list. That can be answered in one word: liquidity. (For more, see: Consumer Staples Defend against Volatility.)

Consider the ETFs above for downside protection, especially those in the Top-Tier category. That said, if you’re really worried about the market faltering and you want downside protection, then the safest play would be a move into cash. If the market falters, it will take place in a deflationary environment. If you’re in cash, then the value of that cash will increase (every dollar will go further). (For more, see: 4 ETF Strategies For A Down Market and Top 5 Recession Stocks.)

Dan Moskowitz does not own any of the ETFs or stocks mentioned in this article.