I am not enthusiastic about the state of the economy. Then again, I haven’t been impressed by the weak recovery off the financial-crisis lows, either. It’s just that seeing Q1’s GDP come in at -2.9% — which everyone is blaming on the weather, as if we never have weather — makes me think this is not a one-time thing. That’s a huge decline.
Taken in concert with other data — such as terrible Q1 retail numbers, weak comps at rent-to-own stores, and an increasingly bleak labor force participation rate — I suspect we have hit critical mass and are about to enter another recession.
Recessions are not historically good for stocks. I think a terrible number on July 30, when the BEA issues its first advance estimate for Q2, is a day to be ready on move into some recession-resistant investments. Generally speaking, I prefer things like hard assets in recessions. They tend not to get hit as badly, and recover more quickly. I also prefer ETFs because they offer diversification and can smooth out volatility in your portfolio.
Here are a few suggestions.
FlexShares Morningstar Global Upstream Natural Resources ETF (GUNR) is an entry from the newest purveyor of ETF products. I like this particular play because it isn’t only energy-related (although it does have a 30% energy component). It gives you exposure to all kinds of natural resources, including metals (30%), agriculture (29%), and even water (5%) and timber (5%). It’s also diversified geographically, with 38% of assets located here in the U.S., but stretched across many other countries, including 20% in the UK, 13% in Canada, 7% in Australia, and holdings in France, Norway, Switzerland, South Africa and others.
The ETF carries 122 stocks, of which the top ten make up 38% — a bit much for my taste, but not a dealbreaker by any means. It’s also cheap with a 0.48% expense ratio.
SPDR Dow Jones REIT ETF (RWR) is a real estate holding that I like. There can be some trickiness with real estate in a recession; commercial properties can get clobbered. However, other REITs involving healthcare, storage, apartments, elderly living communities, and even some hotels, can remain solid.
This ETF carries 89 stocks, of which the top ten make up about 45% of the holdings. This ETF doesn’t fool around with tiny entities. The median market cap is $3.25 billion, with a mean of $6.1 billion. It has an outstanding return on equity of 14.17%. Most of all, it has an 11.24% annualized return since its 2001 inception, and has vastly outperformed the S&P 500 across all near-term and long-term periods.
Sticking to the hard-asset theory, I would also go with ETFS Physical Precious Metals Basket Shares (GLTR). This ETF, as the name implies, holds actual physical bullion. (It’s all tucked away in vaults in the U.K.) The basket is split as follows: 54% gold, 31% silver, 8% platinum, and 7% palladium.
I think precious metals and other commodities have a place, albeit a small one, in any long-term diversified portfolio. However, shifting other assets into this sector in anticipation of a recession may not be a bad idea. I think it would probably be considered more of a medium-term trade than anything else. You aren’t going to catch the absolute bottom, nor will you catch the top once the recession is over. However, these ETF holdings should act as an appropriate hedge even if you only catch portions of the move.
Lawrence Meyers does not own shares in any security mentioned.
