ETFs to Secure Your Portfolio Amid Potential Economic Fluctuations
With the Fed adopting a dovish stance and increasing estimates of a 75-basis point rate cut in 2024, investors are exhibiting bullish sentiments. The optimistic investor outlook is evident from the 12.16% surge in the S&P 500 Index from the start of November till Dec 21. However, even with a promising future, the economy faces some headwinds.
The possibility of a mild recession in early 2024, along with rising fears of an economic slowdown and significant debt levels cast a pall over the economy’s outlook.
Early 2024 Recession Estimates
Amid conflicting market projections regarding a potential 2024 recession, the economy remains under pressure due to the compounding effects of prior financial tightening. Given the market's strong reliance on investor sentiment, even the slightest suggestion of a recession could trigger a significant downturn in stock prices.
Deutsche Bank forecasts a modest U.S. recession in the initial half of 2024, according to Reuters. According to JP Morgan, the likelihood of a recession persists, with its projection of the S&P concluding the year at 4,200. Meanwhile, Goldman Sachs estimates a remote likelihood of a recession.
While market projections suggest the potential for an economic downturn in the first half of 2024, there's an expectation of economic growth toward the latter part of the following year.
Mounting Household Debt
Over the course of this year, there has been a notable escalation in household debt within the markets. According to Federal Reserve Bank of New York, the cumulative household debt surged to $17.29 trillion, driven by surge in mortgage, credit card, and student loan balances, reaching $12.14 trillion, $1.08 trillion, and $1.6 trillion, respectively. Additionally, auto loan balances rose to $1.6 trillion.
Rising levels of debt increases the probability of consumer defaults, resulting in consumer spending taking a hit. With increasing estimates of a government slowdown, reduced consumer spending can cause further headwinds for the economy.
Sluggish Consumer Demand to Fuel a Slowdown
According to Reuters, both companies and investors continue to make preparations for an anticipated slowdown driven by muted consumer demand. Per Deutsche Bank, as quoted on the Reuters article, based on insights gathered in November from 150 earnings calls during the third-quarter reporting season, companies generally described demand as moderately weak.
Walmart’s WMT statement in early December indicates that the retailer observed a shift in consumer behaviour, turning more careful. According to Reuters, in its most recent earnings transcript, discount chain Dollar General DG reported a decrease in gross profit and foresees potential constraints in customer spending in 2024, especially in discretionary space.
Additionally, surveys by the Institute for Supply Management (ISM) indicate moderating consumer spending.
ETFs in Focus
Below, we highlight a few ETFs areas that investors could use to navigate the uncertain environment in a better way to protect themselves from the potential headwinds in the economy.
Investors can increase their exposure to these funds to safeguard their portfolios amid expected increase in market volatility.
Quality ETFs
Amid market uncertainty, quality investing emerges as a strategic response as a potential buffer against the potential headwinds. This approach prioritizes identifying firms with robust fundamentals, consistent earnings and lasting competitive strengths. Investing in such high-quality companies can mitigate volatility for investors.
Investors can look at funds like iShares MSCI USA Quality Factor ETF QUAL, Invesco S&P 500® Quality ETF SPHQ, JPMorgan U.S. Quality Factor ETF JQUA and SPDR MSCI USA StrategicFactors ETF QUS (See: High-Quality ETFs for Long-Term Investors).
Consumer Staples ETFs
The potential slowdown in the economy could benefit consumer staple stocks, as these companies manufacture everyday necessities such as food, beverages and household items. Additionally, surging household debt levels could burn a significant hole in consumers’ pockets and prove to be a positive factor for these funds.
Funds like Consumer Staples Select Sector SPDR Fund XLP, Vanguard Consumer Staples ETF VDC, iShares U.S. Consumer Staples ETF IYK and Invesco S&P 500 Equal Weight Consumer Staples ETF RSPS can be beneficial.
Healthcare ETFs
The healthcare sector is non-cyclical nature, providing a defensive tilt to the portfolio amid market turmoil. Further, the long-term fundamentals remain strong, given encouraging industry trends.
Investors can look at funds like Health Care Select Sector SPDR Fund XLV, Vanguard Health Care ETF VHT, iShares Global Healthcare ETF IXJ and iShares U.S. Healthcare ETF IYH.
Utility ETFs
Being a low-beta sector, utility is relatively protected from large swings (ups and downs) in the stock market and is thus, considered a defensive investment or a safe haven amid economic turmoil.
Investors should gain from funds like Utilities Select Sector SPDR Fund XLU, Vanguard Utilities ETF VPU, Fidelity MSCI Utilities Index ETF FUTY and iShares U.S. Utilities ETF IDU.
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Walmart Inc. (WMT) : Free Stock Analysis Report
Dollar General Corporation (DG) : Free Stock Analysis Report
Consumer Staples Select Sector SPDR ETF (XLP): ETF Research Reports
Health Care Select Sector SPDR ETF (XLV): ETF Research Reports
iShares U.S. Healthcare ETF (IYH): ETF Research Reports
Vanguard Health Care ETF (VHT): ETF Research Reports
Utilities Select Sector SPDR ETF (XLU): ETF Research Reports
Vanguard Utilities ETF (VPU): ETF Research Reports
iShares MSCI USA Quality Factor ETF (QUAL): ETF Research Reports
Invesco S&P 500 Quality ETF (SPHQ): ETF Research Reports
Vanguard Consumer Staples ETF (VDC): ETF Research Reports
iShares U.S. Consumer Staples ETF (IYK): ETF Research Reports
Fidelity MSCI Utilities Index ETF (FUTY): ETF Research Reports
iShares U.S. Utilities ETF (IDU): ETF Research Reports
SPDR MSCI USA StrategicFactors ETF (QUS): ETF Research Reports
iShares Global Healthcare ETF (IXJ): ETF Research Reports
JPMorgan U.S. Quality Factor ETF (JQUA): ETF Research Reports
Invesco S&P 500 Equal Weight Consumer Staples ETF (RSPS): ETF Research Reports
