Wall Street is debating whether a recession or a significant downturn could be on the horizon for the US and the global economy. Recently, Goldman Sachs suggested that the odds of such an event occurring in the US in 2023 had increased to 35%. The investment bank also expressed growing worries about the European economy amid the prolonging of the war in Ukraine.
The broad technical definition of a recession is when an economy has two consecutive quarters of negative growth in its gross domestic product (GDP). However, economists also consider several other factors when estimating prolonged contraction risks, such as real income levels, employment, and industrial production.
Meanwhile, the National Bureau of Economic Research (NBER) suggests:
“A recession is a period between a peak of economic activity and its subsequent trough, or lowest point. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief.”
Aware of the risks that such an event could impose on stocks, seasoned investors have already begun allocating parts of their portfolios accordingly.
Today’s article introduces two exchange-traded funds (ETFs) that could do well if the economy contracts considerably.
1. Invesco Dynamic Pharmaceuticals ETF
- Current Price: $80.55
- 52-week range: $72.25 - $83.23
- Dividend Yield: 0.88%
- Expense ratio: 0.58% per year
Health care stocks and the broader pharmaceutical industry are typically regarded as recession-proof. For instance, recent academic research highlights that the US pharma industry is a global leader. Over the past decade, the sector has grown close to 6% annually worldwide.
Our first fund, the Invesco Dynamic Pharmaceuticals ETF (NYSE:PJP), currently invests in 28 pharmaceuticals companies stateside. In addition to research and development (R&D), these names manufacture, distribute or sell a wide range of drugs or therapies. The fund started trading in June 2005.
PJP tracks the returns of the Dynamic Pharmaceutical Intellidex Index, which is rebalanced and reconstituted quarterly. The top 10 stocks in the fund comprise over half of the fund’s total $338.9 million in net assets. They include:
Eli Lilly (NYSE:LLY), Pfizer (NYSE:PFE), AbbVie (NYSE:ABBV), Johnson & Johnson (NYSE:JNJ), Amgen (NASDAQ:AMGN), and Merck (NYSE:MRK). Many of these names have steady earnings growth regardless of the state of the economy.
The ETF is down 0.7% year-to-date but returned 1.6% in the past 12 months. PJP hit a record high in August 2021, after which it came under significant pressure.
As a result, the fund saw a 52-week low about a month ago, during February. Since then, investors have hit the ‘buy’ button on PJP, sending the fund up close to 12%.
Forward P/E and P/B ratios are 13.15x and 3.59x, respectively. Readers who want to take advantage of the sector’s rotation could favor such defensive pharma names. They should research PJP further.
2. Vanguard Consumer Staples Index Fund ETF
- Current Price: $197.05
- 52-week range: $176.43 - $202.54
- Dividend yield: 2.07%
- Expense ratio: 0.10% per year
Recent research by Charles Schwab states:
“While it’s unlikely that we’ll experience 1970s-style stagflation, the risk of a recession has increased. This argues for leaning into defensive sectors, such as Health Care, Utilities, and Consumer Staples.”
Our second fund, the Vanguard Consumer Staples Index Fund ETF (NYSE:VDC), provides exposure to US stocks in the consumer staples sector, such as food, personal hygiene products, or household items. The fund started trading in January 2004.
VDC, which tracks the MSCI US Investable Market Consumer Staples 25/50 Index, currently has 99 holdings. With regard to sub-sectors, we see Household Products (21.00%), Soft Drinks (19.70%) Packaged Foods & Meats (17.00%), Hypermarkets & Super Centers (15.50%), among others.
Over 62% of net assets of $7.9 billion are in the top 10 stocks, making it a top-heavy fund. Leading holdings in the portfolio include Procter & Gamble (NYSE:PG), Coca-Cola (NYSE:KO), Costco Wholesale (NASDAQ:COST), PepsiCo (NASDAQ:PEP), and Walmart (NYSE:WMT).
VDC has lost 1.4% of its value since the start of the year. However, it is still up 10.1% in the past 12 months and hit a record high in early January.
P/E and P/B ratios currently stand at 24.8x and 4.9x, respectively. Buy-and-hold investors who are not concerned with daily price swings could consider buying the dip in VDC, a low-expense fund.