Investing in recession-proof mutual funds is one strategy to consider when the economic outlook seems uncertain. Sector funds – mutual funds that concentrate holdings on a specific stock market sector or industry – may be an obvious choice. “Sector funds allow investors to take targeted bets on the appreciation potential of a particular industry category,” says Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Michigan. The reason? Certain sectors have historically performed better in different types of environments, he says. For example, mutual funds targeting defensive sectors such as consumer staples and utilities may be a safe play in the early stages of a recession as consumers shift away from discretionary spending. If you’re interested in building a portfolio of mutual funds that can withstand a recession, consider these seven sector fund options.
The Consumer Staples Select Sector SPDR Fund combines a low expense ratio of 0.13% with exposure to some of the top consumer staples sector brands, including Procter & Gamble (PG) and Walmart (WMT). Ernie Burns, president and CEO of Burns Estate Planning & Wealth Advisors, says sector funds like XLP could be a good choice since people still need to purchase food, household goods and personal products when the economy is experiencing a rough patch. “Consumer staples are one of the steadiest sectors of the market,” Burns says, pointing out that overall returns have remained consistent over the last three decades. Consumer staples funds may not beat the market, but they can provide consistent performance in a recession’s early stages.
