Recession Proof your Portfolio with these ETFs

January 14, 2008

SAN DIEGO (ETFguide.com) - An economic slowdown shouldn’t necessarily spell disaster for your portfolio. Plenty of money making opportunities exist.

When a recession strikes, defensive investors have historically flocked to value stocks or dividend paying companies in stable industry sectors. Some of these same areas may provide a reliable source of income, stability and even growth during an economic downturn.

Here’s a few ideas to recession proof your portfolio using exchange-traded funds (ETFs):

Consumer Staples

It’s a common mistake to confuse consumer staples with consumer discretionary, but they are far from the same. Consumer staples (Ticker: XLP) is the more defensive sector because it’s less affected by an economic slowdown. During a recession do people wear less deodorant? Do they wash less laundry? Do they drink less soda? Probably not.

Top holdings in XLP include Proctor & Gamble, Kraft Foods, Clorox and Walgreen. You get to own these stalwarts along with thirty or so other top staples within the S&P 500.

Mega Cap Stocks

When times get rough, stability can be found in large well capitalized conglomerates. One such ETF is the Vanguard MegaCap 300 ETF (Ticker: MGC). It includes three hundred of the largest U.S. stocks by market size. Top three holdings are ExxonMobil, General Electric, and Mircosoft.

Health Care

Even though this sector has underperformed over the past few years, it could be a safe haven during a recession. Regardless of the what the economy does, people still get sick. S&P health care stocks have an average P/E ratio of 15, which is roughly in line with the S&P 500 index. Health care stocks have traditionally traded at a premium to the S&P.

Many health care ETFs are dominated by pharmaceuticals stocks, but can also provide exposure important areas such as hospital services, medical suppliers and life science research.

Top domestic health care ETFs include the Select Sector SPDRs (Ticker: XLV), iShares Dow Jones U.S. Healthcare Sector Index Fund (Ticker: IYH) and the Vanguard Health Care ETF (Ticker: VHT). All of these funds follow market capitalization weighted indexes.

For healthcare ETFs that use a screened or quantitative stock selection methodology and weight holdings according fundamentals, check out the PowerShares Dynamic Healthcare Services Portfolio Fund (Ticker: PTJ) and the WisdomTree International Health Care Sector Fund (Ticker: DBR).

Utilities

This sector is traditionally defensive. People don’t necessarily use less electricity, water, or heat during an economic slowdown. As such, utilities can do well even when things are bad.

According to AltaVista Independent Research, S&P Utilities have been in the midst of a multi-year bull run but still carry a dividend yield in the vicinity of 3 percent. The New York-based analyst estimates 2008 earnings per share to grow by a respectable 8 percent. Top domestic utilities ETFs include Select Sector Utilities (Ticker: XLU),  iShares Dow Jones U.S. Utilities (Ticker: IDU) and the Vanguard Utilities ETF (Ticker: VDU).

If you want funds with a global or international orientation, check out the iShares S&P Global Utilities Index Fund (Ticker: JXI) or the WisdomTree International Utilities Sector Fund (Ticker: DBU).

Gold

During times of economic turbulence people like to own tangible assets. During the 1970s, gold prices jumped from $43 an ounce to over $500 an ounce. Today, the market dynamics aren’t necessarily identical to the 70’s, but similarities abound. Inflationary pressure and a declining U.S. Dollar are making gold an attractive hedge.

The streetTRACKS Gold Shares (Ticker: GLD) offers convenient exposure to gold without the hassle of storing and insuring the physical asset. The trust’s gold bars are held in a secure London vault and the share price of GLD reflects 1/10th the price of one ounce of gold bullion. Over the past three months, GLD has traded between $74 to $88 per share.

Another way to play gold is through mining stocks. The Market Vectors Gold Miners ETF (Ticker: GDX) and SPDRs S&P Metals and Mining ETF (Ticker: XME) offer exposure to publicly traded companies that explore and mine precious metals. The advantage of owning gold stocks via an ETF is a lower capital gains tax rate versus investing directly in gold. Remember: Investments in gold bullion are taxed as a collectible at a maximum 28 percent rate, which is higher than the 15 percent long-term tax rate for stocks.