Insights

What Would a Recession Mean for ETFs?

With talk of escalating trade tensions between the U.S. and China, various geopolitical forces exerting downward pressure on the economy, a subdued tech sector, and more, it's not surprising that many market analysts are bracing themselves for the possibility of a recession heading into 2019. The S&P 500 is down roughly 3.7% as of market open Dec. 17, 2018.

3.7% is a downturn, but should that turn into a full-blown recession, it's likely that many investors will panic. Many, but not all. Those who are adequately prepared stand a greater chance of withstanding the downward pull of a recession economy, but also of riding out the recession period and earning profits in the long haul. The world of exchange-traded funds (ETFs) offers ample opportunities for successful investment when the market has turned down. Nonetheless, investors will need to plan carefully in order to mitigate risk while maximizing profit potential.

Why Buy-and-Hold Won't Cut it Anymore

Heading into 2019, some analysts estimate that two-thirds or more of U.S. wealth is in the hands of those who are retired or those who are quickly approaching retirement age. The traditional buy-and-hold strategy, in which everyday investors routinely invest in an IRA or a 401K while riding out the short-term twists and turns of the market, is unlikely to cut it for older investors according to CMG Capital Management Group. Here's why.

Investors who are currently in their 60s and 70s simply will not have the time to rebuild the funds lost in a market downturn. As CMG Capital points out, following the 1999 recession, it took some investors in the Dow 12 or more years to recover their lost wealth. What can one do to mitigate the potential losses caused by a recession? CMG Capital recommends putting a "200-day moving stop-loss average on everything" in order to minimize downside while still allowing for potential upside. That's especially if an individual does not have the time to wait for markets to recover.

How ETFs Can Help in a Recession

ETFs are one tool that can help you weather a recession. However, with nearly all S&P 500 sectors down over the past year, it can be difficult for investors to know where to turn when it comes to strategies and approaches. CMG Capital suggests reducing overall exposure to equities at this time, utilizing a long/flat strategy to allow for risk control.

The ETFs that may be useful for investors employing the above strategy include the Invesco S&P MidCap 400 Equal Weight ETF (EWMC). While the S&P 500 has performed rather poorly across the board this year, the utility sector is an exception. As of Dec. 17, 2018, the Vanguard Utilities ETF has yielded roughly 9.5% year-to-date. The most important thing for ETF investors to keep in mind is the potential benefits of balancing out equity exposure against fixed income and other strategies.

Invest According to Rules, Not Emotions

Remember, even in times of recession, it's crucial to stick with the rules you've set for yourself. CMG Capital recommends following the 200-day moving average, shifting to products focused on Treasury bills if and when this figure drops by 0.5% from a localized high point. The reverse could apply as well: when the average climbs by 0.5% from a local low, shift back. Of course, the individual strategies an investor employs will depend upon that investor's goals and perspective. However, having a plan in place — whether it involves ETFs or not — is essential. By following a plan, investors stand a better chance of not allowing emotions to govern their decisions.

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