Coronavirus Panic To Send Economy Into Recession: ETF Picks

Given the coronavirus pandemic, market participants forecast global recession. This is especially true as the fast spreading novel coronavirus has taken a toll on economic activities worldwide, leading to suspension of professional sports games, cancelation of major events, conferences and conventions, prohibition of mass gatherings, travel bans and half-empty restaurants.

Also, the contagion has led to a bloodbath in the global stock market and put an end to the longest-ever 11-year U.S. bull market. Notably, U.S. stocks saw their worst decline since 1987 on Mar 16. The S&P 500 and Nasdaq are down more than 25% from the record highs reached on Feb 19 while the Dow Jones is down more than 28% from its Feb 12 level.

According to S&P Global (NYSE:SPGI) and a number of analysts, the coronavirus outbreak has increased the chances of a recession. Notably, Morgan Stanley (NYSE:MS) predicts global economy to slip into a recession triggered by the fast-spreading coronavirus (COVID-19) with growth dipping to 0.9% year-on-year in 2020, which will be deeper than 2001 (read: ETF Strategies to Follow Amid the Coronavirus Crisis).

Efforts of central banks across the globe to protect the economy from the fallout of the deadly coronavirus are unlikely to save the situation. The Trump administration has proposed an emergency stimulus package of $1 trillion, which includes direct payments to Americans and loans and help for small businesses. The Fed announced a surprise rate cut last weekend to near zero. The central bank will also buy at least $500 billion in Treasury securities and at least $200 billion in mortgage-backed securities in the coming months to help ease growing liquidity problem in financial markets.

The Bank of Japan joined the Fed to address the rapidly mounting economic shock of the coronavirus pandemic. It will expand its purchases of stocks, bonds and other assets and provide zero interest, one-year loans to companies running short of cash to help the economy weather the impact of the virus outbreak. New Zealand’s central bank slashed its benchmark interest rate by 75 basis points and the Reserve Bank of Australia, which cut its cash rate earlier this month, said it will boost liquidity in short-term funding markets. The Bank of Korea also cut rates by 50 bps.

Amid such backdrop, investors should stash their cash in some conventionally secure and recession proof corners of the broad market. Below, we have highlighted a few ETFs from these sectors:

Consumer Staples Select Sector SPDR Fund XLP

The consumer staples sector is viewed as defensive as it includes a variety of items like food & beverages, non-durable household goods, hypermarkets and consumer supercenters that are essential for daily needs. These products see steady demand even during an economic downturn due to their low level of correlation with economic cycles. This is the most-popular consumer staples ETF with AUM of $14.2 billion and follows the Consumer Staples Select Sector Index. It holds about 33 securities in its basket and charges 13 bps in fees per year from investors. The fund trades in heavy volume of nearly 13.1 million shares a day and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Tackle Market Gyrations With Buffett's Style of ETF Investing).

iShares U.S. Healthcare Providers ETF IHF

Healthcare, which generally outperforms during periods of low growth and high uncertainty, garnered investors’ interest due its non-cyclical nature. The demand for healthcare services remains intact even in deteriorating economic fundamentals. IHF follows the Dow Jones U.S. Select Healthcare Providers Index with exposure to companies that provide health insurance, diagnostics and specialized treatment. The fund holds 47 securities in its basket and has amassed $897.9 million in its asset base. Volume is good at about 84,000 shares per day on average. The product charges 43 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook (read: Beat Virus With 2 Sector ETFs & Stocks That Survived 2008 Crisis).

Amplify BlackSwan Growth & Treasury Core ETF (NS:SWAN)

This ETF seeks uncapped exposure to the S&P 500, while buffering against the possibility of significant losses. Approximately 90% of the fund will be invested in U.S. Treasury securities, while approximately 10% will be invested in SPY (NYSE:SPY) LEAP options in the form of in-the-money calls. It follows the S-Network BlackSwan Core Total Return Index and charges 49 bps in annual fees and expenses. The product has AUM of $219 million and trades in average daily volume of 70,000 shares (read: 3 Safe ETFs for Volatile Markets).

Vanguard Dividend Appreciation ETF (ASX:VIG)

Dividend paying securities are the major source of consistent income for investors when returns from the equity market are at risk. Dividend-focused products offer safety in the form of payouts while at the same time providing stability as mature companies are less volatile to large swings in stock prices. This is because the companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis. VIG is the largest and most popular ETF in the dividend space with AUM of $40.3 billion and average daily volume of about 1.5 million shares. The fund follows the Nasdaq US Dividend Achievers Select Index, which is composed of high-quality stocks that have a record of raising dividends every year. It holds 182 securities in the basket and charges 6 bps in annual fees. The product has a Zacks ETF Rank #2 with a Medium risk outlook (read: Bears Grip Market: 5 Safe ETF Investing Zones).

iShares Edge MSCI USA Quality Factor ETF QUAL

Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility, elevated margins, and a track record of stable or rising sales and earnings growth. These products thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings. QUAL provides exposure to large and mid-cap stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage) by tracking the MSCI USA Sector Neutral Quality Index. It holds 125 securities in its basket and trade in average daily volume of 1.4 million shares. The ETF charges 15 bps in annual fees (read: Here's Why You Should Bet on Quality ETFs & Stocks).

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Consumer Staples Select Sector SPDR ETF (NYSE:XLP): ETF Research Reports

iShares U.S. Healthcare Providers ETF (IHF): ETF Research Reports

Vanguard Dividend Appreciation ETF (VIG): ETF Research Reports

iShares Edge MSCI USA Quality Factor ETF (QUAL): ETF Research Reports

Amplify BlackSwan Growth & Treasury Core ETF (SWAN): ETF Research Reports

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Zacks Investment Research