Bryan Armour: John F. Kennedy once said, “The best time to repair the roof is when the sun is shining.” The sun isn’t currently shining on US stocks, but we’re not in the middle of a horrible storm yet either.
On April 8, the Morningstar US Large-Mid Index had sunk nearly 20% off its Feb. 19 high, and the next day, tariff talks softened, leading to a big day for stocks and settling some nerves about an impending bear market. It’s unclear where stocks go from here, but things could get worse.
Morningstar senior US economist, Preston Caldwell, called the tariffs, “a self-inflicted economic catastrophe,” and raised the odds of a recession over the next year to 40% to 50%.
For investors, a 15-year bull market with a couple hiccups in 2020 and 2022 has made some investors complacent, potentially building up risk, given the security of the market since 2009. So while the sun may not be shining, there’s still time to fix your roof. Now is a great time to add durability to your portfolio, and I’ll give you three ETFs to help you do it.
3 ETFs for a Recession
- iShares MSCI USA Minimum Volatility ETF USMV
- iShares US Treasury Bond ETF GOVT
- SPDR Gold MiniShares ETF GLDM
Silver-rated iShares MSCI USA Minimum Volatility ETF USMV is a well-designed low-volatility strategy whose ability to weather drawdown should continue to drive a stellar risk/reward profile.
Most low-volatility ETFs look at each stock independently, resulting in a portfolio of similar companies with shared risks. USMV plays defense at the portfolio level, looking for the optimal set of low-volatility companies based on how they interact with one another. For example, the portfolio can pull in some more-volatile stocks if they tend to zig when the rest of the portfolio zags. The portfolio better diversifies risk than others that simply filter on trailing volatility of returns.
Performance has delivered on the ETF’s promise so far. USMV’s return volatility registered 26% lower than the Morningstar US Market Index over the past three years, and its maximum drawdown was 7 percentage points shallower than that benchmark. This ETF even beat its category index over the past decade on a risk-adjusted basis, making it a worthwhile ETF in any market environment.
My next ETF adds some insurance without necessarily giving up expected returns. iShares US Treasury Bond ETF, ticker GOVT, benefits from little credit risk as the economy slows down. The outlook for US stocks started the year lower than normal, and that expectation has only fallen. Morningstar’s Multi-Asset Research team predicted 5.6% 10-year nominal returns for US stocks and 4.9% 10-year nominal returns for US aggregate bonds (a slightly more credit-risky portfolio than GOVT).
In a recession scenario, investors need ballast in their portfolios. Credit risk hurts when markets significantly decline, while interest-rate risk can add to returns if the government cuts interest rates to stimulate the economy. GOVT limits the former and has a moderate dose of the latter thanks to holding Treasuries of varying maturities.
GOVT adds security to a stock portfolio because it can earn positive returns if stocks fall. GOVT investors get about 200 Treasury bonds for just a 5-basis-point fee, making GOVT a welcome diversifier for stock investors.
Like Treasuries, gold acts as a safe-haven when risk ratchets higher. The last ETF on my list, SPDR Gold MiniShares ETF, ticker GLDM, can diversify stock and bond portfolios because of its uncorrelated risks. Alone, gold is a speculative asset that can be risky, but adding a slug of gold to a traditional portfolio can enhance its resiliency. Historically, gold returns have been uncorrelated to stock and bond returns. In a recession, gold benefits from a flight to safety by investors, which can drive prices higher.
Of all the ETFs on my list, GLDM is most susceptible to JFK’s thinking. It’s up over 35% in the past year, and the best time to buy it would have been a year ago. But this is a diversifier investors can hang on to as a strategic allocation, making it a worthwhile addition for the long run.
Why GLDM over other gold ETFs? All gold ETFs basically hold the same thing, so a portfolio manager can’t add value here. It comes down to costs and GLDM offers the best combination of liquidity and low fees. GLDM holds $14 billion in net assets and trades millions of shares per day, such that trading in and out of it won’t be costly for buy-and-hold investors. And GLDM has one of the lowest fees among gold ETFs at 10 basis points, so investors don’t have to pay extra for the same gold exposure.
I hope these picks help you weather whatever comes next for stocks. Share your thoughts with me on X at @mstararmour, and make sure to tune into Morningstar’s ETF coverage at morningstar.com/topics/etfs. Stay curious. Stay invested. See you next time.
Watch 3 Great Growth ETFs for 2025 for more from Bryan Armour.
Source: 3 ETFs for a Recession
