6 ETFs That May Be Recession-Proof

When storm clouds gather over the economy, savvy investors look for safety within time-tested shelters: recession-resistant exchange-traded funds (ETFs). While luxury retailers and travel companies often struggle during economic downturns, companies selling toothpaste, electricity, and bandages tend to stay profitable.

Even in the toughest times, people still need to brush their teeth, keep their homes powered, and take care of their health. That's why certain sectors have historically shown remarkable resilience during economic slumps. These "defensive sectors" include healthcare, utilities, consumer staples (everyday household items), and certain technology companies. The six ETFs below hold the kinds of stocks that can weather a coming economic storm.

1. The Consumer Staples Select Sector SPDR ETF (XLP)

XLP tracks the performance of the Consumer Staples Select Sector Index. This ETF invests in companies that profit when you buy the items in your shopping cart that you simply can't do without —toilet paper, soap, toothpaste, and essential food items.

During tough economic times, people might skip buying a new car or taking a vacation, but they'll keep buying these everyday necessities from brands like Procter & Gamble (PG) (makers of Tide detergent and Pampers diapers) and Walmart Inc. (WMT). These companies have cultivated strong customer loyalty over decades, meaning shoppers are less likely to switch brands despite tight budgets.

This brand power gives the companies in XLP an edge, allowing them to raise prices without significantly impacting demand, a key factor in maintaining profitability during inflationary recessions. Companies like Procter & Gamble and Walmart tend to have steady sales even when the economy stumbles, making this ETF a potential safe harbor. These firms are among the fund's largest holdings, as found below:

2. The iShares US Healthcare Providers (IHF)

Healthcare isn't optional—people need medical care regardless of economic conditions. This ETF focuses on companies that manage and provide healthcare services, like UnitedHealth Group (UNH) and Cigna Corp. (CI), tracking the Dow Jones U.S. Select Health Care Providers Index.

Since most people maintain their health insurance through economic downturns (either through employers or government programs), these companies typically see stable revenue streams. Plus, with the Baby Boomers aging, the demand for healthcare services is only expected to increase in the coming years, making IHF a potentially strong long-term investment, regardless of short-term economic fluctuations.

3. Vanguard Dividend Appreciation ETF (VIG)

This ETF is a collection of the market's most reliable dividend payers—companies that have not just paid dividends but increased them for at least 10 straight years. These tend to be established companies with strong financial foundations and steady cash flows, like Microsoft Corp. (MSFT), Apple Inc. (AAPL), and Broadcom Inc. (AVGO).

In addition, many within VIG are considered "dividend aristocrats," an elite group of companies with at least 25 consecutive years of dividend increases. This impressive track record demonstrates their ability to reward shareholders even during challenging economic times. The ETF is particularly attractive for investors seeking both defensive positioning and regular income.

4. The Utilities Select Sector SPDR ETF (XLU)

Utilities are about as recession-resistant as it gets—people need electricity, water, and gas, regardless of the economic conditions. This ETF tracks the Utilities Select Sector Index, which means it invests in companies that provide essential services, like NextEra Energy, Inc. (NEE), The Southern Company (SO), and Duke Energy Corp. (DUK).

XLU offers investors a piece of this steady, reliable sector. Since utilities operate as regulated monopolies in their service areas, they typically have very predictable revenue streams. While they might not offer explosive growth during good times, they tend to provide stable returns and attractive dividends even during market downturns.

In addition, when anticipating a recession, utility companies commonly deploy strategies to cut costs by reducing operating expenses and improving capital efficiency.

5. The Invesco Food & Beverage ETF (PBJ)

Everyone needs to eat, regardless of economic conditions. This ETF tracks the Dynamic Food & Beverage Intellidex Index, which means it focuses on companies that produce, distribute, and sell food and beverages—essentially, the basics of your grocery list.

While a recession might mean fewer dinners out, people still need to buy groceries. Companies like Kroger Company (KR), Kraft Heinz Co (KHC), and Constellation Brands Inc (STZ) typically maintain relatively stable sales, even as many consumers switch to cheaper brands. Think of the brands you reach for when stocking your pantry—from Kraft mac and cheese to Pepsi, many are likely held within PBJ. They also tend to pay solid dividends, providing an extra cushion during tough times.

6. The Vanguard Consumer Staples ETF (VDC)

VDC tracks the performance of the MSCI US Investable Market Index/Consumer Staples 25/50. This index includes a diverse set of companies in the consumer staples sector, with limits on the weighting of individual securities to ensure diversification, reflecting the performance of a key segment of the U.S. economy.

This means the fund offers broader exposure to companies that make and sell essential consumer products than some other options. It includes manufacturers like Procter & Gamble, retailers like Walmart, Target Corp. (TGT), and Costco Wholesale Corp. (COST), and classic brands like Coca-Cola Company (KO).

These companies benefit from a simple truth: people need basic household items and groceries in any economic environment. During recessions, discount retailers like Walmart and Costco often see increased traffic as consumers become more price-conscious, potentially boosting their revenues while other sectors struggle. These companies also do well during more vibrant times. For example, Walmart and Costco rank in the top five of the National Retail Federation survey for 2024.

The Bottom Line

While no investment is entirely recession-proof, specific sectors have historically demonstrated resilience during economic downturns. Defensive ETFs focused on healthcare, utilities, consumer staples, and companies with strong dividend histories offer investors a way to potentially protect their portfolios when markets turn volatile. These funds provide exposure to companies selling essential products and services that people need—from electricity and healthcare to toothpaste and groceries.

With expense ratios generally under 0.50%, these ETFs offer a cost-effective way to add defensive positioning to your investment strategy. However, as with any investment decision, investors should consider their financial goals, risk tolerance, and existing portfolio composition before investing.