2 great ETFs for navigating a global recession

Kongkon Gogoi  |   20th Apr 2023 | 2 min read

Investing during a recessionary climate can be nerve-wracking. However, having a long-term horizon and maintaining a well-diversified portfolio should help investors weather an economic downturn. Additionally, investors can potentially increase diversification and portfolio resilience by including dividend and consumer defensive stock exchange-traded funds, or ETFs, exposure in their portfolios. Dividend-focused ETFs invest in companies that tend to be stable operators, having demonstrated their ability to return cash to shareholders. Typically, thanks to their sound financial health, these companies can be often perceived as safe havens during periods of economic uncertainty, as they tend to generate enough excess cash flow to pay regular dividends, and dividend income can provide a cushion against downside risk. On the other hand, consumer defensive ETFs generally invest in companies operating in segments of the economy where the impact of the economic cycles may be less. For example, utilities, healthcare, and critical infrastructure companies generally produce and offer essential products and services that tend to exhibit persistent demand regardless of the economic cycle, and as such, they can be perceived to provide protection from a recessionary environment. Here are two ETFs that are likely to increase portfolio diversification and resiliency if a recession looms.

2 ETFs for navigating global recession

These exchange-traded funds earn Morningstar Analyst Ratings of Bronze:
  1. Vanguard Australian Shares High Yield ETF (VHY)
  2. Vanguard Global Infrastructure ETF (VBLD)
ETFs for a global recession

Vanguard Australian Shares High Yield ETF

Let’s start with the Bronze-rated Vanguard Australian Shares High Yield ETF, ticker VHY. A forward-looking approach that seeks to identify above-average dividend-paying stocks and a highly competitive fee of 0.25% annually are two features of this product that underpin our positive view of the strategy. Instead of choosing stocks based on their historical distribution records, the underlying FTSE Australia High Dividend Index selects stocks based on their one-year consensus forecast dividend yields, giving it the edge over other ETF peers that follow an approach that focuses on the historical dividend track record of companies to build the underlying portfolio. The portfolio consists primarily of large-cap companies with higher dividend forecasts selected from the largest 200 companies (by market capitalization) listed on the ASX. This approach introduces some level of sector and industry skew in the strategy’s portfolio but doesn’t make its portfolio anymore riskier than the broader market as represented by the S&P ASX 200 Index. A sensible forward-looking approach to higher-dividend-paying stocks, together with a low fee, provides a solid case for VHY for those seeking a higher-than-market dividend yield.

Vanguard Global Infrastructure ETF

Our next ETF to highlight is the Bronze-rated Vanguard Global Infrastructure ETF, ticker VBLD. For the perceived low correlation with traditional equity and traditional buffer against inflation, investors have increasingly taken global infrastructure exposure for portfolio diversification in recent years. VBLD fully replicates the FTSE Developed Core Infrastructure Index portfolio for an attractive fee of 0.47% annually. This approach yields a portfolio that captures the large- and mid-cap representation of infrastructure stocks from across 20 developed markets. The underlying index defines infrastructure stocks as those with at least 65% of revenue from “core infrastructure activities," including development, ownership, operation, and management of transport, energy, and telecommunications infrastructure. FTSE Index’s weighting is tilted to conventional electricity and railroads—subsectors with moderate sensitivity to the business cycle. FTSE works with LPX Group, an alternative equity products specialist, to perform the necessary fundamental research to determine whether stocks meet the investment criteria. Vanguard Global Infrastructure ETF presents a solid value proposition considering its price advantage, liquidity, portfolio diversification, and a track record of effective implementation.

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