How should you tweak your portfolio to brace for a recession? What should you do to cope with a bear market?
Those are questions lots of shareholders are asking themselves these days. Especially as it pertains to their retirement savings.
After all, the broad market is down 19.22% so far this year, going into Wednesday. Inflation is up. Interest rates are up. Bears are prowling, and a recession seems to be moments away.
Every $100,000 in, say, an S&P 500 index fund inside your retirement accounts on Jan. 1 has lost $19,200, plus fees, this year. That stings. And officially a recession has not even arrived yet.
Recession Safeguard
What can you do? Most stocks and the vast majority of diversified stock funds are in the compost pit.
But financial advisors nonetheless point out funds that individual investors ought to consider as safe havens from current market tumult and any coming recession.
Several focus on commodities, which generally benefit from inflation.
Some are even in positive territory for the year. And some have produced yields much higher than you'd get by parking your money in cash or cash equivalents.
Even if you can't earn price appreciation from funds amid this bear market, eye-opening yield is a decent consolation prize.
How Much Recession Protection?
Other total return winners this year include funds that short segments of the market that have tumbled.
But before looking at specific funds recommended by advisors, think about how much of your portfolio you should shift into defensive names. "Generally, not more than 20% of your portfolio should be there," said Brian Stivers, founder of Stivers Financial Services.
Why? So you don't miss out on the start of the inevitable rally. Rebounds tend to begin with unexpected, sharp jumps by the market. Money that you're protecting in safe haven investments is unlikely to skyrocket when the rest of the market takes off. "Getting out of the broad market makes it harder to recover losses you've incurred," Stivers said.
Another consideration: since these are defensive strategies, bear in mind that they are likely to continue to thrive only so long as inflation rises, the broad market retreats and a recession looms or finally arrives.
That said, here are the defensive funds advisors recommend. Performance and trailing 12-month (TTM) yield data per Morningstar Direct, going into Wednesday.
Commodity-Focused ETFs
Aberdeen Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (BCD). How this fund shields you from a recession and inflation: This "is a solid commodity fund," Stivers said. And amid inflation, commodities rise in value. Stivers added, "It's been around a while. (Inception was March 30, 2017.) It has a history, so you can see how it has responded during different market environments. And they diversify into different types of commodities."
- Total assets: $281.7 million.
- Fund actively seeks exposure to the Bloomberg Commodity Index 3 Month Forward Total Return.
- Its top three sector weights as of March 31 were energy, 33%; agriculture, 27%; and precious metals, 18%.
- Year-to-date total return: 11.71%.
- 3-year avg. annual return: 16.1%.
- TTM yield: 7.09%.
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC). How this fund protects you from inflation and recession: It invests "in commodity-linked futures and other financial instruments that provide economic exposure to a diverse group of the world's most heavily traded commodities," said Maxim Manturov, head of investment advice at Freedom Finance Europe, a unit of Nevada-based Freedom Holding. Bear in mind that futures contracts are leveraged. Leverage, or the ability to put up only a fraction of the contracts, can magnify profits, Manturov says. But bear in mind that it is also possible for you to sustain losses much bigger than your out-of-pocket initial investment.
- Total assets: $7.8 billion.
- The fund aims to exceed the performance of DBIQ Optimum Yield Diversified Commodity Index Excess Return.
- Top futures sector weights as of March 31 were energy, 57%; agriculture, 23%; and metals, 20%.
- Year-to-date total return: 20.24%.
- 3-year avg. annual return: 16.3%.
- TTM yield: 39.64%.
Fund That Shorts
ProShares Short QQQ (PSQ). What makes this fund a hedge against a bear market and recession: It bets against the popular QQQ ETF by providing inverse exposure to the tech-stock-heavy Nasdaq-100 index. The fund shorts QQQ through derivatives such as swap agreements and futures contracts, says advisor Jeffrey Stouffer, principal at RIA firm Mercantile Advisors. Heavy trading leads to a relatively high 0.95% expense ratio, he says. And this fund is built to outperform only so long as the growth-oriented tech stocks stall or decline, Stouffer warns.
Also, any shareholder considering this fund should weigh the fact that the fund resets holdings and compounds returns daily. The result? If the QQQ goes down, say, 10% in a month, PSQ will not necessarily rise 10%.
Over the past three years, for example, the fund's average annual gain was -19.48% vs. a positive 14.65% for QQQ itself. Why weren't the returns mirror images of each other? "Investors must understand that they won't necessarily get a return over a given holding period that is the arithmetic inverse of the underlying index's return for that period," said Aniket Ullal, head of ETF data and analytics for CFRA Research.
- Total assets: $1.4 billion.
- PSQ provides inverse exposure to the popular QQQ ETF.
- Top sector weights as of March 31 were information technology, 50%; consumer discretionary, 17%; and communication services, 17%.
- Year-to-date total return: 30.024%.
- 3-year avg. annual return: -19.48%.
- TTM yield: 0.0%.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively managed funds that outperform.
