Shopping list

Rob Carrick: An ETF shopping list for people worried about the recession

The big question in the financial world in the second half of 2022 is whether central banks will be able to reduce inflation without plunging the economy into recession.

Say you’re worried they won’t succeed and you’re looking for ways to modify your portfolio using exchange-traded funds. Some ideas on ETFs to consider can be found in a recent report from National Bank Financial (NBF). Three possible economic outcomes are presented – a base case of slowing growth, high inflation and high rates; a bullish case of falling inflation, average growth and a slowing pace of rate hikes; and a bearish case of high inflation, recession and steep rate hikes.

The bearish outlook is the most alien to investors today, so let’s dig a little deeper. NBF expects equities to retreat further into bear market territory with rising volatility, while bonds will eventually appreciate. Overall, cash, Canadian equities and defensive sectors performed best.

NBF has listed six cash alternative ETFs, which essentially hold assets held in savings accounts: CI High Interest Savings ETF (CSAV-T), Purpose High Interest Savings ETF (PSA-T), Horizons Cash Maximizer ETF Corporate Class (HSAV-T), Evolve High Interest Savings Account Fund (HISA-NE), Horizons High Interest Savings ETF CASH-T) and Ninepoint High Interest Savings Fund ETF Series (NSAV-NE). The management expense ratios of these funds are mostly in the 0.15% range, leaving a net return of 2.8-2.9%.

Brokerage fees may apply when you buy and/or sell these ETFs. In addition, online brokers BMO InvestorLine, RBC Direct Investing and TD Direct Investing do not allow clients to purchase these products.

The NBF report says the sectors that have held up the best during recessions — suffered smaller losses, in other words — are consumer staples, gold mining and utilities. Two consumer staple ETFs highlighted in the report are the iShares S&P/TSX Capped Consumer Staples Index ETF (XST-T) and the BMO Global Consumer Staples Hedged to CAD Index ETF. (STPL-T).

A pair of utility funds are the BMO Equal Weight Utilities ETF (ZUT-T) and the iShares S&P/TSX Capped Utilities Index ETF (XUT-T). NBF notes that infrastructure ETFs also tend to have a large weighting in utilities.

If you’re wondering what happens to the broader market during a recession, the NBF report cites data showing the S&P 500 falls 23% on average after a recession begins. What is the probability of the outcome of the recession? The NBF report gives it a 25% probability, as well as 15% for the bullish hold. The base scenario has a 60% probability, a scenario in which the NBF says investors are most likely to see high volatility, no clear direction for stocks and bonds, and Canadian equities outperforming.