In this article, we discuss 10 best defensive ETFs to buy amid recession fears. If you want to see more ETFs as defensive plays amid recession, click 5 Best Defensive ETFs to Buy Amid Recession Fears.
Investors are right to be concerned about a slowing economy and soaring inflation, which could likely slip into recession soon. According to Gargi Chaudhuri, the head of BlackRock’s iShares investment strategy for the Americas, exchange traded funds tracking “quality companies with strong balance sheets and pricing power” should be on the radar of investors as a defensive play amid the currently volatile market. She believes that the Fed’s tightening monetary policy is already priced into the market, but the rates are likely to come down.
The stock market is buzzing with the looming risk of recession. In May, a team of Goldman Sachs analysts headed by Jan Hatzius disclosed that the US macro environment has become riskier over the past month. However, domestic consumer spending remains strong, and the investment firm believes that the Federal Reserve could achieve a soft landing.
Investors are anxious to protect their money, and they are gravitating towards defensive ETFs. Total money poured into defensive ETFs, with exposure to companies offering consumer staples, healthcare, utilities, real estate, precious metals, and commodities, equaled $50 billion in 2022 through April, surpassing the $42 billion inflows for defensive ETFs during the entirety of 2021. This figure is likely on its way to exceed the $75 billion invested in the group in 2020 as well.
Defensive exchange traded funds offer a modicum of stability amid recession and overall stock market volatility. Some of the top holdings of defensive ETFs include The Procter & Gamble Company (NYSE:PG), The Coca-Cola Company (NYSE:KO), and Philip Morris International Inc. (NYSE:PM).
Our Methodology
We explored ETFs that offer exposure to defensive sectors in the economy, such as consumer staples, healthcare, utilities, and commodities, for a well-rounded outlook of some of the top exchange traded funds listed on US exchanges. We have also discussed the prominent holdings of the ETFs to provide better insight to potential investors.
Best Defensive ETFs to Buy Amid Recession Fears
10. Invesco S&P 500 Equal Weight Consumer Staples ETF (NYSE:RHS)
Invesco S&P 500 Equal Weight Consumer Staples ETF (NYSE:RHS) tracks the investment returns of the S&P 500 Equal Weight Consumer Staples Index. The fund offers a distribution rate of 1.65% as of June 8, with an average market capitalization of $84.5 million. The total expense ratio is 0.40%. The ETF primarily invests in large and mid-cap value and blend stocks. Invesco S&P 500 Equal Weight Consumer Staples ETF (NYSE:RHS) has a largely concentrated portfolio, with only 33 securities.
One of the most prominent holdings of Invesco S&P 500 Equal Weight Consumer Staples ETF (NYSE:RHS) is Philip Morris International Inc. (NYSE:PM), the American tobacco company working to deliver a smoke-free future. The company posted on April 21 its Q1 results, reporting earnings per share of $1.56, beating market consensus estimates by $0.07. The revenue of $7.75 billion also outperformed analysts’ predictions by $315.53 million. On May 11, the company signed a $16 billion deal to purchase the Swedish tobacco giant, Swedish Match AB (publ) (OTC:SWMAY).
According to the first quarter database of Insider Monkey, 55 hedge funds held long positions in Philip Morris International Inc. (NYSE:PM), up from 47 funds in the prior quarter. Rajiv Jain’s GQG Partners held the leading position in the company, comprising approximately 30 million shares worth $2.8 billion.
Broyhill Asset Management mentioned Philip Morris International Inc. (NYSE:PM) in its Q2 2021 investor letter. Here is what the firm had to say:
“Philip Morris (PM) shook off the prospects of a ban on menthol and a potential cap on nicotine and gained 23%. We shared our thoughts on these regulations during the quarter, which are available here.
‘PM Valuation. PM is up ~ 15% YTD and would have the most to gain under a nicotine cap. A cap would likely accelerate conversion to iQOS, which is 100% incremental for PM (PM also has zero exposure to combustible cigarettes in the U.S. and licenses its IQOS product for MO to distribute domestically). As such, the decline in PM was much more muted, with the stock hitting new 52 week highs a day after the Biden headline, driven by yesterday’s earnings release. It didn’t take long for investors to shift their attention back to fundamentals and the fundamentals here are best in class. In short, results beat estimates across the board (a recurring theme here), and management raised guidance for the full year (another recurring theme). IQOS continued to deliver impressive growth, recording continued market share gains on the heels of continued user acquisition growth, up 1.5M to 19.1M total users. Importantly, IQOS now represents nearly 30% of PM net revenues (management expects “smoke-free” products to represent more than half of their business by 2025, which should make the ESG folks happy), which is driving top-line growth and margin expansion. Hard to believe that they have created a product with higher margins than combustible cigarettes!! We expect PM operating margins to increase by 100bps – 200bps annually as IQOS continues to gain share. The stock trades at ~ 15x today or 2/3 of the market’s multiple for a business likely to generate $35B in cash flow – or 25% of the market cap – in just the next three years. Over the last decade, shares have traded at an average multiple of 18x and within a range of ~ 14x – 22x (+/-1 standard deviation). The stock yields 5.1% at the current price, and we expect management to resume share purchases in the back half of this year.’”
9. Fidelity MSCI Utilities Index ETF (NYSE:FUTY)
Fidelity MSCI Utilities Index ETF (NYSE:FUTY) seeks to replicate the performance of the MSCI USA IMI Utilities Index, which represents the utilities sector in the United States’ equity market. The fund is passively managed and consists of 67 long holdings, with the top 10 stocks comprising 53.57% of the total portfolio. 90% of the stocks are a blend of large and mid-cap names.
One of the top holdings of Fidelity MSCI Utilities Index ETF (NYSE:FUTY) is American Electric Power Company, Inc. (NASDAQ:AEP), an electric public utility holding company that serves retail and wholesale customers in the United States. Credit Suisse analyst Nicholas Campanella on April 25 initiated coverage of American Electric Power Company, Inc. (NASDAQ:AEP) with an Outperform rating and a $113 price target. The company offers a diversified operating portfolio of regulated electric utilities and regulated T&D operations, catering to about 5.5 million customers in 11 states, noted the analyst. He thinks investors should focus on American Electric Power Company, Inc. (NASDAQ:AEP)’s strategic divestiture of underearning, low-multiple assets.
Among the hedge funds tracked by Insider Monkey, billionaire Israel Englander’s Millennium Management is the leading position holder in American Electric Power Company, Inc. (NASDAQ:AEP), with 1.20 million shares worth about $120 million. Overall, 33 hedge funds were bullish on the stock at the end of Q1 2022.
In addition to The Procter & Gamble Company (NYSE:PG), The Coca-Cola Company (NYSE:KO), and Philip Morris International Inc. (NYSE:PM), American Electric Power Company, Inc. (NASDAQ:AEP) is on the radar of elite investors as a defensive play amid recession fears.
Here is what ClearBridge Investments Value Equity has to say about American Electric Power Company, Inc. (NASDAQ:AEP) in its Q1 2022 investor letter:
“About 5% of the portfolio is in transitioning power companies, typically migrating from coal to renewables. We have been active in encouraging these transitions and added a new position in American Electric Power (NASDAQ:AEP). AEP has the fastest planned renewable energy ramp in the U.S., with plans to both shrink coal and grow renewables by 50% each by 2030. This would drive an 80% emissions reduction, while supporting high single-digit earnings growth at a double-digit return.”
8. Vanguard Consumer Staples Fund (NYSE:VDC)
Vanguard Consumer Staples Fund (NYSE:VDC) aims to track the performance of a benchmark index that measures the investment return of stocks in the consumer staples sector. The fund is passively managed and uses a full-replication strategy, offering an expense ratio of 0.10% as of December 2021. The portfolio consists of 99 stocks, primarily belonging to consumer staples segments like Household Products, Hypermarkets & Super Centers, Packaged Foods & Meats, Soft Drinks, and Tobacco.
Costco Wholesale Corporation (NASDAQ:COST) is one of the top holdings of Vanguard Consumer Staples Fund (NYSE:VDC). The company operates a network of membership warehouses and retail chains, providing branded and private-label products in several merchandise categories.
On June 9, Atlantic Equities analyst Daniela Nedialkova observed that Costco Wholesale Corporation (NASDAQ:COST) continues to report “strong comp momentum”, which should offset gross margin headwinds. As per the analyst, Costco Wholesale Corporation (NASDAQ:COST)’s “unique” business model, with stable membership income and an affluent customer base, makes it more robust amid inflationary challenges. The analyst expects volatility in the retail sector to remain high in the short-term and recommends any pullback in Costco Wholesale Corporation (NASDAQ:COST) shares as an opportunity to add or build positions. She reaffirmed an Overweight rating on the stock with a $615 price target.
Among the hedge funds tracked by Insider Monkey, Costco Wholesale Corporation (NASDAQ:COST) was part of 61 public stock portfolios at the end of Q1 2022, compared to 57 in the earlier quarter. Ken Fisher’s Fisher Asset Management is the leading stakeholder of the company, with 4.2 million shares worth $2.4 billion.
Here is what ClearBridge Investments Sustainability Leaders Strategy has to say about Costco Wholesale Corporation (NASDAQ:COST) in its Q4 2021 investor letter:
“Portfolio gains were led by a diverse group of contributors. Also in consumer discretionary, Costco, which operates a chain of membership-only big-box retail stores, continues to impress as it takes to share and becomes more relevant for the consumer even as the world opens up.”
7. Invesco Defensive Equity ETF (NYSE:DEF)
Invesco Defensive Equity ETF (NYSE:DEF) tracks the returns of the Invesco Defensive Equity Index, offering a distribution rate of 1.17% as of June 8. The portfolio is concentrated with investments in the healthcare, industrials, consumer staples, consumer discretionary, and financial sectors. The fund invests in 102 equities.
The biggest holding of Invesco Defensive Equity ETF (NYSE:DEF) is Corteva, Inc. (NYSE:CTVA), an American agriculture business that operates through two segments – Seed and Crop Protection. On June 1, Barclays analyst Benjamin Theurer initiated coverage of Corteva, Inc. (NYSE:CTVA) with an Overweight rating and a $71 price target. The analyst started coverage of five fertilizer and agriculture supply names and he predicts supply/demand tightness even beyond 2023, which bodes well for the sector regardless of recent outperformance against core indexes.
Among the hedge funds tracked by Insider Monkey, 39 funds were bullish on Corteva, Inc. (NYSE:CTVA) at the end of March 2022, compared to 42 funds in the earlier quarter. Jeffrey Smith’s Starboard Value LP is the leading stakeholder of the company, with almost 6 million shares worth $344.6 million.
Here is what Aristotle Capital Management Value Equity has to say about Corteva, Inc. (NYSE:CTVA) in its Q1 2022 investor letter:
“Corteva Agriscience, one of the world’s largest seed and crop protection companies, was a primary contributor for the quarter. Due to its respected brand and the value-added benefits of its patented seeds and crop protection solutions for farmers, Corteva has been able to more than offset input cost inflation with sustainable price increases. In addition, the company’s ongoing mix shift to higher-margin, premium products, a catalyst we previously identified, is aiding both sales and profit growth. Shares were likely also buoyed by the rise in crop prices. Market participants, perhaps eager to chase short-term trends, poured into the sector. At Aristotle Capital, we look past such gyrations and, as long-term investors, do not attempt to predict short-term changes in commodity prices. We remain excited about what we view to be high-quality characteristics and fundamental improvements that permeate Corteva’s business, not the least of which include its pricing power.”
6. VanEck Future of Food ETF (NYSE:YUMY)
VanEck Future of Food ETF (NYSE:YUMY) is an actively-managed ETF that invests in firms specializing in agri-food technology, food innovation, sustainable agriculture practices, and food products and services. The fund has 50 securities in its portfolio, offering an expense ratio of 0.69% and total net assets of $3.1 million.
Bunge Limited (NYSE:BG) is one of the largest holdings in VanEck Future of Food ETF (NYSE:YUMY)’s portfolio. Bunge Limited (NYSE:BG) caters to customers worldwide, operating through Agribusiness, Refined and Specialty Oils, Milling, and Sugar and Bioenergy segments. On April 28, Credit Suisse analyst Robert Moskow raised the price target on Bunge Limited (NYSE:BG) to $140 from $120 after a “strong” Q1 report. The analyst reiterated an Outperform rating on the stock.
Among the hedge funds tracked by Insider Monkey, 55 funds were long Bunge Limited (NYSE:BG) at the end of Q1 2022, up from 38 funds in the preceding quarter. Israel Englander’s Millennium Management held the largest position in the company, with 1.65 million shares worth $183.6 million.
Like The Procter & Gamble Company (NYSE:PG), The Coca-Cola Company (NYSE:KO), and Philip Morris International Inc. (NYSE:PM), Bunge Limited (NYSE:BG) is a notable defensive stock that elite hedge funds are monitoring.
Here is what Old West Investment Management has to say about Bunge Limited (NYSE:BG) in its Q1 2022 investor letter:
“Bunge (pronounced BUN-GEE) Ltd (NYSE:BG) is one of the biggest agribusinesses and food companies in the world. There are four worldwide companies that dominate the sector, the others being Archer-Daniels-Midland Cargill, and Dreyfuss. One of our favorite ways to screen for new ideas is following insider buying. When I saw the Form 4 filed by new Bunge CEO Greg Heckman, his purchase of $9 million of BG stock intrigued me. My initial thought was the company gave him the stock as a signing bonus. I contacted BG Investor Relations and asked whether it was a signing bonus or did Heckman actually write a check for $9 million. IR assured me it was his own hard-earned money that he invested in the company he was about to run.
Heckman was a long time executive at Conagra Foods who obviously sensed opportunity at BG. One of his first moves as CEO was to move the company’s HQ from New York to St. Louis, right in the middle of America’s breadbasket. BG had been plagued for years with poor decisions by underperforming management. Heckman’s decision to move to St. Louis was indicative of a no-nonsense style and he would commence cutting expenses and selling non-core assets…” (Click here to see the full text)
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Disclosure: None. 10 Best Defensive ETFs to Buy Amid Recession Fears is originally published on Insider Monkey.
