If you are an investor who is securing profits and is buying up dividend ETFs to weather a possible downturn instead, it’s not a bad idea to look back at the past and see which ones have outperformed. Dividend ETFs like the State Street Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP | XLP Price Prediction), State Street Health Care Select Sector SPDR ETF (NYSEARCA:XLV), and iShares TIPS Bond ETF (NYSEARCA:TIP) have managed to hold themselves together much better during previous recessions.
They could do even better in a future recession as investors pour into under-appreciated defensive assets. Investors have piled into tech stocks to the point where they constitute a plurality of their portfolios, if not the large majority. When a downturn hits the market, a rotation out of tech is likely. All that excess liquidity may end up making its way to the following 3 ETFs.
State Street Consumer Staples Select Sector SPDR ETF (XLP)
The State Street Consumer Staples Select Sector SPDR ETF tracks the S&P 500 Consumer Staples Select Sector Index. It invests in companies that sell everyday necessities like food, beverages, household goods, and personal care products.
Consumer staples are known to be stable, with demand being inelastic. It makes sense why XLP is more secure during downturns, as people rarely cut back on essential necessities during recessions. Even if a terrible recession hits, the companies that form the underlying index will be among the first in line to receive money from people’s unemployment benefits.
XLP has 40 holdings with the biggest one being Walmart (NASDAQ:WMT) at 11.64%, followed by Costco (NASDAQ:COST) at 9.08%, and Procter & Gamble (NYSE:PG) at 7.67%. The ETF comes with a 2.66% dividend yield and a low expense ratio of 0.08%, or $8 per $10,000.
State Street Health Care Select Sector SPDR ETF (XLV)
The Health Care Select Sector SPDR ETF provides an easy way for investors to buy a basket of stocks in the U.S. health care industry. It tracks the performance of the Health Care Select Sector Index, which includes large health care companies from the S&P 500. The ETF holds these stocks in proportion to their market size (market-cap weighted) and aims to match the index’s returns before fees.
Health care is a “defensive” sector because demand for medical care, drugs, and treatments doesn’t drop much during economic slowdowns. People still need healthcare regardless of job losses or market crashes. Plus, well-established drugs that are prescribed for indefinite periods can be similar to annuities for companies since people often end up consuming them for decades.
All of this helped XLV outperform the S&P 500 during 2008 and bounce back much faster. It has also done quite well in the past year, too. It is up 12%, and that is just 0.2% below what the SPY has gained. If you include the 1.58% dividend yield, it is ahead.
XLV’s expense ratio is 0.08%, or $8 per $10,000.
iShares TIPS Bond ETF (TIP)
The iShares TIPS Bond ETF gives you exposure to U.S. Treasury Inflation-Protected Securities (commonly known as TIPS). It tracks the ICE U.S. Treasury Inflation Linked Bond Index.
In essence, TIP offers investors a sophisticated hedge against the erosive effects of rising prices, backed by the full faith and credit of the U.S. government, all within the convenient and liquid structure of an exchange-traded fund.
And in a downturn, it can be a great asset, especially if you face a “stagflation” scenario. Inflation has been coming down in the recent past, but it is still unclear just how long inflation will stay low, as interest rates are being cut again in parallel with record tariffs. Moreover, inflation reports have been canceled for October, with November data coming in delayed.
The dividend yield here is 3.29%, with a monthly payout frequency. This dividend yield goes up and down with inflation.
The expense ratio is 0.18%, or $18 per $10,000.
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