In this article, we discuss 10 best defensive ETFs to buy amid recession fears.
Investors are right to be concerned about a slowing economy and soaring inflation, which could likely slip into recession soon. According to Gargi Chaudhuri, the head of BlackRock’s iShares investment strategy for the Americas, exchange traded funds tracking “quality companies with strong balance sheets and pricing power” should be on the radar of investors as a defensive play amid the currently volatile market. She believes that the Fed’s tightening monetary policy is already priced into the market, but the rates are likely to come down.
The stock market is buzzing with the looming risk of recession. In May, a team of Goldman Sachs analysts headed by Jan Hatzius disclosed that the US macro environment has become riskier over the past month. However, domestic consumer spending remains strong, and the investment firm believes that the Federal Reserve could achieve a soft landing.
Investors are anxious to protect their money, and they are gravitating towards defensive ETFs. Total money poured into defensive ETFs, with exposure to companies offering consumer staples, healthcare, utilities, real estate, precious metals, and commodities, equaled $50 billion in 2022 through April, surpassing the $42 billion inflows for defensive ETFs during the entirety of 2021. This figure is likely on its way to exceed the $75 billion invested in the group in 2020 as well.
Defensive exchange traded funds offer a modicum of stability amid recession and overall stock market volatility. Some of the top holdings of defensive ETFs include The Procter & Gamble Company (NYSE:PG), The Coca-Cola Company (NYSE:KO), and Philip Morris International Inc. (NYSE:PM).
Our Methodology
We explored ETFs that offer exposure to defensive sectors in the economy, such as consumer staples, healthcare, utilities, and commodities, for a well-rounded outlook of some of the top exchange traded funds listed on US exchanges. We have also discussed the prominent holdings of the ETFs to provide better insight to potential investors.
Best Defensive ETFs to Buy Amid Recession Fears
10. Invesco S&P 500 Equal Weight Consumer Staples ETF (NYSE:RHS)
Invesco S&P 500 Equal Weight Consumer Staples ETF (NYSE:RHS) tracks the investment returns of the S&P 500 Equal Weight Consumer Staples Index. The fund offers a distribution rate of 1.65% as of June 8, with an average market capitalization of $84.5 million. The total expense ratio is 0.40%. The ETF primarily invests in large and mid-cap value and blend stocks. Invesco S&P 500 Equal Weight Consumer Staples ETF (NYSE:RHS) has a largely concentrated portfolio, with only 33 securities.
One of the most prominent holdings of Invesco S&P 500 Equal Weight Consumer Staples ETF (NYSE:RHS) is Philip Morris International Inc. (NYSE:PM), the American tobacco company working to deliver a smoke-free future. The company posted on April 21 its Q1 results, reporting earnings per share of $1.56, beating market consensus estimates by $0.07. The revenue of $7.75 billion also outperformed analysts’ predictions by $315.53 million. On May 11, the company signed a $16 billion deal to purchase the Swedish tobacco giant, Swedish Match AB (publ) (OTC:SWMAY).
According to the first quarter database of Insider Monkey, 55 hedge funds held long positions in Philip Morris International Inc. (NYSE:PM), up from 47 funds in the prior quarter. Rajiv Jain’s GQG Partners held the leading position in the company, comprising approximately 30 million shares worth $2.8 billion.
Broyhill Asset Management mentioned Philip Morris International Inc. (NYSE:PM) in its Q2 2021 investor letter. Here is what the firm had to say:
“Philip Morris (PM) shook off the prospects of a ban on menthol and a potential cap on nicotine and gained 23%. We shared our thoughts on these regulations during the quarter, which are available here.
‘PM Valuation. PM is up ~ 15% YTD and would have the most to gain under a nicotine cap. A cap would likely accelerate conversion to iQOS, which is 100% incremental for PM (PM also has zero exposure to combustible cigarettes in the U.S. and licenses its IQOS product for MO to distribute domestically). As such, the decline in PM was much more muted, with the stock hitting new 52 week highs a day after the Biden headline, driven by yesterday’s earnings release. It didn’t take long for investors to shift their attention back to fundamentals and the fundamentals here are best in class. In short, results beat estimates across the board (a recurring theme here), and management raised guidance for the full year (another recurring theme). IQOS continued to deliver impressive growth, recording continued market share gains on the heels of continued user acquisition growth, up 1.5M to 19.1M total users. Importantly, IQOS now represents nearly 30% of PM net revenues (management expects “smoke-free” products to represent more than half of their business by 2025, which should make the ESG folks happy), which is driving top-line growth and margin expansion. Hard to believe that they have created a product with higher margins than combustible cigarettes!! We expect PM operating margins to increase by 100bps – 200bps annually as IQOS continues to gain share. The stock trades at ~ 15x today or 2/3 of the market’s multiple for a business likely to generate $35B in cash flow – or 25% of the market cap – in just the next three years. Over the last decade, shares have traded at an average multiple of 18x and within a range of ~ 14x – 22x (+/-1 standard deviation). The stock yields 5.1% at the current price, and we expect management to resume share purchases in the back half of this year.’”
9. Fidelity MSCI Utilities Index ETF (NYSE:FUTY)
Fidelity MSCI Utilities Index ETF (NYSE:FUTY) seeks to replicate the performance of the MSCI USA IMI Utilities Index, which represents the utilities sector in the United States’ equity market. The fund is passively managed and consists of 67 long holdings, with the top 10 stocks comprising 53.57% of the total portfolio. 90% of the stocks are a blend of large and mid-cap names.
One of the top holdings of Fidelity MSCI Utilities Index ETF (NYSE:FUTY) is American Electric Power Company, Inc. (NASDAQ:AEP), an electric public utility holding company that serves retail and wholesale customers in the United States. Credit Suisse analyst Nicholas Campanella on April 25 initiated coverage of American Electric Power Company, Inc. (NASDAQ:AEP) with an Outperform rating and a $113 price target. The company offers a diversified operating portfolio of regulated electric utilities and regulated T&D operations, catering to about 5.5 million customers in 11 states, noted the analyst. He thinks investors should focus on American Electric Power Company, Inc. (NASDAQ:AEP)’s strategic divestiture of underearning, low-multiple assets.
Among the hedge funds tracked by Insider Monkey, billionaire Israel Englander’s Millennium Management is the leading position holder in American Electric Power Company, Inc. (NASDAQ:AEP), with 1.20 million shares worth about $120 million. Overall, 33 hedge funds were bullish on the stock at the end of Q1 2022.
In addition to The Procter & Gamble Company (NYSE:PG), The Coca-Cola Company (NYSE:KO), and Philip Morris International Inc. (NYSE:PM), American Electric Power Company, Inc. (NASDAQ:AEP) is on the radar of elite investors as a defensive play amid recession fears.
Here is what ClearBridge Investments Value Equity has to say about American Electric Power Company, Inc. (NASDAQ:AEP) in its Q1 2022 investor letter:
“About 5% of the portfolio is in transitioning power companies, typically migrating from coal to renewables. We have been active in encouraging these transitions and added a new position in American Electric Power (NASDAQ:AEP). AEP has the fastest planned renewable energy ramp in the U.S., with plans to both shrink coal and grow renewables by 50% each by 2030. This would drive an 80% emissions reduction, while supporting high single-digit earnings growth at a double-digit return.”
8. Vanguard Consumer Staples Fund (NYSE:VDC)
Vanguard Consumer Staples Fund (NYSE:VDC) aims to track the performance of a benchmark index that measures the investment return of stocks in the consumer staples sector. The fund is passively managed and uses a full-replication strategy, offering an expense ratio of 0.10% as of December 2021. The portfolio consists of 99 stocks, primarily belonging to consumer staples segments like Household Products, Hypermarkets & Super Centers, Packaged Foods & Meats, Soft Drinks, and Tobacco.
Costco Wholesale Corporation (NASDAQ:COST) is one of the top holdings of Vanguard Consumer Staples Fund (NYSE:VDC). The company operates a network of membership warehouses and retail chains, providing branded and private-label products in several merchandise categories.
On June 9, Atlantic Equities analyst Daniela Nedialkova observed that Costco Wholesale Corporation (NASDAQ:COST) continues to report “strong comp momentum”, which should offset gross margin headwinds. As per the analyst, Costco Wholesale Corporation (NASDAQ:COST)’s “unique” business model, with stable membership income and an affluent customer base, makes it more robust amid inflationary challenges. The analyst expects volatility in the retail sector to remain high in the short-term and recommends any pullback in Costco Wholesale Corporation (NASDAQ:COST) shares as an opportunity to add or build positions. She reaffirmed an Overweight rating on the stock with a $615 price target.
Among the hedge funds tracked by Insider Monkey, Costco Wholesale Corporation (NASDAQ:COST) was part of 61 public stock portfolios at the end of Q1 2022, compared to 57 in the earlier quarter. Ken Fisher’s Fisher Asset Management is the leading stakeholder of the company, with 4.2 million shares worth $2.4 billion.
Here is what ClearBridge Investments Sustainability Leaders Strategy has to say about Costco Wholesale Corporation (NASDAQ:COST) in its Q4 2021 investor letter:
“Portfolio gains were led by a diverse group of contributors. Also in consumer discretionary, Costco, which operates a chain of membership-only big-box retail stores, continues to impress as it takes to share and becomes more relevant for the consumer even as the world opens up.”
7. Invesco Defensive Equity ETF (NYSE:DEF)
Invesco Defensive Equity ETF (NYSE:DEF) tracks the returns of the Invesco Defensive Equity Index, offering a distribution rate of 1.17% as of June 8. The portfolio is concentrated with investments in the healthcare, industrials, consumer staples, consumer discretionary, and financial sectors. The fund invests in 102 equities.
The biggest holding of Invesco Defensive Equity ETF (NYSE:DEF) is Corteva, Inc. (NYSE:CTVA), an American agriculture business that operates through two segments – Seed and Crop Protection. On June 1, Barclays analyst Benjamin Theurer initiated coverage of Corteva, Inc. (NYSE:CTVA) with an Overweight rating and a $71 price target. The analyst started coverage of five fertilizer and agriculture supply names and he predicts supply/demand tightness even beyond 2023, which bodes well for the sector regardless of recent outperformance against core indexes.
Among the hedge funds tracked by Insider Monkey, 39 funds were bullish on Corteva, Inc. (NYSE:CTVA) at the end of March 2022, compared to 42 funds in the earlier quarter. Jeffrey Smith’s Starboard Value LP is the leading stakeholder of the company, with almost 6 million shares worth $344.6 million.
Here is what Aristotle Capital Management Value Equity has to say about Corteva, Inc. (NYSE:CTVA) in its Q1 2022 investor letter:
“Corteva Agriscience, one of the world’s largest seed and crop protection companies, was a primary contributor for the quarter. Due to its respected brand and the value-added benefits of its patented seeds and crop protection solutions for farmers, Corteva has been able to more than offset input cost inflation with sustainable price increases. In addition, the company’s ongoing mix shift to higher-margin, premium products, a catalyst we previously identified, is aiding both sales and profit growth. Shares were likely also buoyed by the rise in crop prices. Market participants, perhaps eager to chase short-term trends, poured into the sector. At Aristotle Capital, we look past such gyrations and, as long-term investors, do not attempt to predict short-term changes in commodity prices. We remain excited about what we view to be high-quality characteristics and fundamental improvements that permeate Corteva’s business, not the least of which include its pricing power.”
6. VanEck Future of Food ETF (NYSE:YUMY)
VanEck Future of Food ETF (NYSE:YUMY) is an actively-managed ETF that invests in firms specializing in agri-food technology, food innovation, sustainable agriculture practices, and food products and services. The fund has 50 securities in its portfolio, offering an expense ratio of 0.69% and total net assets of $3.1 million.
Bunge Limited (NYSE:BG) is one of the largest holdings in VanEck Future of Food ETF (NYSE:YUMY)’s portfolio. Bunge Limited (NYSE:BG) caters to customers worldwide, operating through Agribusiness, Refined and Specialty Oils, Milling, and Sugar and Bioenergy segments. On April 28, Credit Suisse analyst Robert Moskow raised the price target on Bunge Limited (NYSE:BG) to $140 from $120 after a “strong” Q1 report. The analyst reiterated an Outperform rating on the stock.
Among the hedge funds tracked by Insider Monkey, 55 funds were long Bunge Limited (NYSE:BG) at the end of Q1 2022, up from 38 funds in the preceding quarter. Israel Englander’s Millennium Management held the largest position in the company, with 1.65 million shares worth $183.6 million.
Like The Procter & Gamble Company (NYSE:PG), The Coca-Cola Company (NYSE:KO), and Philip Morris International Inc. (NYSE:PM), Bunge Limited (NYSE:BG) is a notable defensive stock that elite hedge funds are monitoring.
Here is what Old West Investment Management has to say about Bunge Limited (NYSE:BG) in its Q1 2022 investor letter:
“Bunge (pronounced BUN-GEE) Ltd (NYSE:BG) is one of the biggest agribusinesses and food companies in the world. There are four worldwide companies that dominate the sector, the others being Archer-Daniels-Midland Cargill, and Dreyfuss. One of our favorite ways to screen for new ideas is following insider buying. When I saw the Form 4 filed by new Bunge CEO Greg Heckman, his purchase of $9 million of BG stock intrigued me. My initial thought was the company gave him the stock as a signing bonus. I contacted BG Investor Relations and asked whether it was a signing bonus or did Heckman actually write a check for $9 million. IR assured me it was his own hard-earned money that he invested in the company he was about to run.
Heckman was a long time executive at Conagra Foods who obviously sensed opportunity at BG. One of his first moves as CEO was to move the company’s HQ from New York to St. Louis, right in the middle of America’s breadbasket. BG had been plagued for years with poor decisions by underperforming management. Heckman’s decision to move to St. Louis was indicative of a no-nonsense style and he would commence cutting expenses and selling non-core assets…” (Click here to see the full text)
5. VegTech Plant-based Innovation & Climate ETF (NYSE:EATV)
VegTech Plant-based Innovation & Climate ETF (NYSE:EATV) is an actively managed exchange traded fund that offers exposure to the emerging global plant-based foods and materials theme through innovative VegTech companies. The fund was established at the end of December 2021, and has net assets of $4.5 million and an expense ratio of 0.75%. The portfolio consists of 43 securities.
The biggest holding of VegTech Plant-based Innovation & Climate ETF (NYSE:EATV) is Ingredion Incorporated (NYSE:INGR), an Illinois-based company that offers sweetener products, food-grade and industrial starches, biomaterials, and nutrition ingredients. The ETF owns a $430,000 stake in Ingredion Incorporated (NYSE:INGR), representing 9.53% of the total securities.
On May 23, Ingredion Incorporated (NYSE:INGR) declared a $0.65 per share quarterly dividend, in line with previous. The dividend is distributable on July 26, to shareholders of record on July 1. As of June 9, the company delivers a dividend yield of 2.85%. The company posted on May 5 its Q1 results, reporting earnings per share of $1.95 and a revenue of $1.89 billion, above Street consensus estimates by $0.14 and $125 million, respectively.
According to Insider Monkey’s Q1 data, Ingredion Incorporated (NYSE:INGR) was part of 26 public hedge fund portfolios, with collective stakes amounting to $386.4 million. Donald Yacktman’s Yacktman Asset Management is the leading stakeholder of the company, with 2.3 million shares worth $207.85 million.
4. Utilities Select Sector SPDR Fund (NYSE:XLU)
Utilities Select Sector SPDR Fund (NYSE:XLU) aims to provide investment results that track the price and yield performance of the Utilities Select Sector Index. As of June 8, the fund offers an expense ratio of 0.10% and assets under management of $16.4 billion, as well as a distribution yield of 2.73%. The ETF provides exposure to companies from the electric utility, water utility, multi-utility, independent power and renewable electricity, and gas utility sectors. The portfolio is fairly concentrated, with only 29 holdings.
NextEra Energy, Inc. (NYSE:NEE), a provider of electric power to retail and wholesale customers in North America, occupies the top position in Utilities Select Sector SPDR Fund (NYSE:XLU)’s portfolio, representing 14.89% of the total holdings. It is also the biggest equity in the underlying index.
On April 25, Credit Suisse analyst Nicholas Campanella initiated coverage of NextEra Energy, Inc. (NYSE:NEE) with an Outperform rating and an $87 price target. According to the analyst, NextEra Energy, Inc. (NYSE:NEE) is a robust U.S. utility and renewable developer based in Florida and is a “battleground stock in the wider renewable supply chain debate”. Despite short-term supply constraints, NextEra Energy, Inc. (NYSE:NEE) remains positioned to perform well amid an inflationary macro backdrop versus peers owing to its size and scale, noted the analyst, who sees the stock as fundamentally attractive.
In Q1 2022, 64 funds were bullish on NextEra Energy, Inc. (NYSE:NEE), up from 55 funds in the prior quarter. According to Insider Monkey’s data, Ken Fisher’s Fisher Asset Management is the largest stakeholder of the company, with 15.6 million shares worth $1.3 billion.
3. iShares Global Consumer Staples ETF (NYSE:KXI)
iShares Global Consumer Staples ETF (NYSE:KXI) seeks to track the investment results of an index comprising global securities in the consumer staples sector. The fund’s net assets as of June 8 exceed $1 billion, and it offers a 30-day SEC yield of 1.98%, with a semi-annual distribution frequency. iShares Global Consumer Staples ETF (NYSE:KXI) charges a management fee of 0.43% and has a portfolio consisting of 92 stocks.
The biggest holding of iShares Global Consumer Staples ETF (NYSE:KXI) is The Procter & Gamble Company (NYSE:PG), an American multinational branded consumer packaged goods giant. 2022 marks the 66th year that The Procter & Gamble Company (NYSE:PG) has raised its dividend consecutively and the 132nd consistent year that the company has declared a dividend since its incorporation in 1890. It is a reliable dividend king and one of the most prominent defensive plays amid recession fears. The company on April 12 declared a $0.9133 per share quarterly dividend, a 5% increase from its prior dividend of $0.8698. The dividend was distributed to shareholders on May 16.
According to Insider Monkey’s database, The Procter & Gamble Company (NYSE:PG) was found in 72 hedge fund portfolios at the end of Q1 2022, compared to 67 a quarter earlier. Rajiv Jain’s GQG Partners was the leading shareholder of the company Q1, with stakes worth over $1.5 billion.
2. First Trust Nasdaq Food & Beverage ETF (NASDAQ:FTXG)
First Trust Nasdaq Food & Beverage ETF (NASDAQ:FTXG) seeks to track the investment results of the Nasdaq US Smart Food & Beverage Index, which consists of the 30 most liquid food and beverage companies from the NASDAQ US Benchmark Index. The securities in the fund’s portfolio are weighted based on volatility, value, and growth prospects. Total net assets of First Trust Nasdaq Food & Beverage ETF (NASDAQ:FTXG) amount to approximately $843 million and the expense ratio came in at 0.60%.
First Trust Nasdaq Food & Beverage ETF (NASDAQ:FTXG) owns 855,804 shares of Archer-Daniels-Midland Company (NYSE:ADM), worth $75.8 million, representing about 9% of the total holdings. Archer-Daniels-Midland Company (NYSE:ADM) is an American multinational food processing and agricultural commodities corporation.
On April 27, Baird analyst Ben Kallo raised the price target on Archer-Daniels-Midland Company (NYSE:ADM) to $108 from $73 and maintained an Outperform rating on the shares. The analyst observed that Q1 results were very good and the solid performance will contribute towards achieving its 2025 target of $6.00-$7.00 earnings per share. He said that Archer-Daniels-Midland Company (NYSE:ADM) is a beneficiary of the dislocation across the agriculture supply chain.
According to Insider Monkey’s Q1 data, 42 hedge funds were long Archer-Daniels-Midland Company (NYSE:ADM), compared to 41 funds in the last quarter. Ric Dillon’s Diamond Hill Capital is the leading shareholder of the company, with 4.75 million shares worth $429.15 million.
1. iShares US Consumer Staples ETF (NYSE:IYK)
iShares US Consumer Staples ETF (NYSE:IYK) tracks the investment results of the Russell 1000 Consumer Staples RIC 22.5/45 Capped Index, exposing investors to a broad range of consumer goods, including food, automobiles, and household products. The net assets of iShares US Consumer Staples ETF (NYSE:IYK) as of June 8 were $1.35 billion, with a 30-day SEC yield of 2.11% and an expense ratio of 0.41%. The portfolio consists of 54 domestic securities.
One of the top holdings of iShares US Consumer Staples ETF (NYSE:IYK) is The Coca-Cola Company (NYSE:KO), the American multinational beverage giant. The Coca-Cola Company (NYSE:KO) is one of the most reliable dividend kings, with 2022 marking the 57th consecutive annual dividend increase by the company. On April 27, the company declared a quarterly dividend of $0.44 per share, in line with previous. The dividend is payable on July 1, to shareholders of record as of June 15.
Warren Buffett’s Berkshire Hathaway is the biggest position holder in The Coca-Cola Company (NYSE:KO), with 400 million shares worth $24.7 billion. Overall, 64 hedge funds were bullish on the stock at the end of March 2022.
You can also take a look at 10 Best Value ETFs to Invest in Now and 10 Dividend Stocks Better Than Cryptocurrencies.
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Disclosure: None. 10 Best Defensive ETFs to Buy Amid Recession Fears is originally published on Insider Monkey.
