A recession is a significant decline in economic activity that lasts for a sustained period of time. More specifically, a recession is typically defined as two consecutive quarters of negative economic growth, as measured by a country’s Gross Domestic Product (GDP).
During a recession, businesses may experience a decline in sales and revenue, which can lead to layoffs and higher levels of unemployment. Consumers may also cut back on their spending, which can further slow economic activity.
Recessions can be caused by a variety of factors, including financial crises, changes in government policies, or shifts in consumer behavior. While recessions are a normal part of the economic cycle, they can have significant impacts on individuals and businesses, and governments and central banks often take steps to try to mitigate the effects of recessions and promote economic recovery.
Industries that can do well in a recession and an ETF to Consider
There are a few industries that tend to be more resistant to economic downturns and can be considered recession-proof. Some of these industries include:
Healthcare industry: The healthcare industry tends to be relatively immune to economic fluctuations because people need medical attention regardless of the state of the economy. According to the Bureau of Labor Statistics, the healthcare industry added 380,000 jobs in 2020 despite the COVID-19 pandemic, and it is projected to continue growing in the coming years.
The iShares Global Healthcare ETF (IXJ) is a diversified ETF that tracks the performance of the global healthcare sector. The fund invests in companies involved in pharmaceuticals, biotechnology, medical devices, and healthcare services. The strategy is to provide investors with exposure to the global healthcare industry and to capture the growth potential of the sector.
Education industry: Like healthcare, the education industry is also recession-proof because people continue to value education and training even in difficult economic times. In fact, during the Great Recession of 2008-2009, college enrollment rates increased as more people sought to acquire new skills and qualifications to make themselves more employable.
The Global X Education ETF (EDUT) is a thematic ETF that invests in companies involved in the education industry. This includes companies that provide educational content, online learning platforms, and educational technology. The strategy is to provide investors with exposure to the growth potential of the education industry.
Food and beverage industry: People still need to eat and drink, even during a recession. While high-end restaurants may suffer during tough times, fast food and casual dining establishments tend to do relatively well. According to the National Restaurant Association, the restaurant industry has been growing steadily over the past decade, and is projected to continue growing in the coming years.
The Invesco Dynamic Food & Beverage ETF (PBJ) is a thematic ETF that invests in companies involved in the food and beverage industry. The fund uses a quantitative methodology to select companies with strong growth potential and attractive valuation metrics. The strategy is to provide investors with exposure to the food and beverage industry and to capture the growth potential of the sector.
Utilities industry: Utilities such as electricity, water, and gas are essential services that people can’t do without, even during tough economic times. These industries tend to be stable and reliable sources of employment.
The Utilities Select Sector SPDR Fund (XLU) is an ETF that tracks the performance of the utilities sector. The fund invests in companies that provide electricity, gas, and water services. The strategy is to provide investors with exposure to the utilities sector and to capture the stability and income potential of the sector.
Government industry: While not strictly an industry, government jobs tend to be relatively stable during economic downturns because government services are essential and tend to be less sensitive to economic fluctuations. For example, during the Great Recession of 2008-2009, the federal government added more than 200,000 jobs.
The iShares U.S. Government Bond ETF (GOVT) is an ETF that tracks the performance of U.S. government bonds. The fund invests in a diversified portfolio of U.S. government bonds with varying maturities. The strategy is to provide investors with exposure to the safety and stability of U.S. government bonds.
Overall, these industries tend to be more resistant to economic downturns because they provide essential services that people need regardless of the state of the economy.