5 Best ETFs to Invest in 2024: In the Wake of a Potential Recession or Economic Downturn

We’re rolling into 2024, and the financial world’s looking like a mixed bag of nuts – tricky yet full of opportunity for some serious gains. (and potential losses). If you are wondering what the best ETFs to invest in are, this post will dive into 5 defensive sectors worth consideration.

So, what’s the big question on everyone’s mind?

Is a recession knocking on our door? Is the US Fed gonna cut down interest rates to give the economy a little nudge? And finally, where should you stash your cash if all that goes down?

The numbers make it difficult to tell if we’re going to have a recession, and with the economy maybe getting a little boost from the powers-that-be, we are left scratching our heads, wondering which industries are gonna weather the storm and maybe even thrive in 2024.

In this piece, we’re not just skimming the surface. We’re diving deep into five sectors that are looking pretty sweet for 2024. We will present the Bull Case and the Bear Case, and throw in some of the best ETFs to invest in for each of these sectors. We’re talking about a solid game plan for steering through these wobbly times.

best ETFs to invest in

Defensive Sectors & Best ETFs to Invest In

Healthcare: The Constant Demand

Bull Case:

Healthcare is often seen as a defensive sector. Even in economic downturns, people still need healthcare services, making this sector less sensitive to economic cycles.

Healthcare remains an evergreen sector, resilient to economic downturns because people get sick even when money is tight. Add in the fact that we have some Aging populations, particularly in developed countries, which can lead to increased demand for healthcare services. Continuous innovation in medical technology, pharmaceuticals, and biotechnology can drive growth, independent of economic cycles.

In times of economic hardship, governments may increase spending on healthcare to support the population, potentially benefiting the sector.

Bear Case:

Investing in the healthcare sector also comes with challenges investors should consider. The industry’s heavy regulation means that shifts in healthcare policies can affect company profits. Economic downturns sometimes lead governments to cut healthcare costs, or consumers to spend less on certain things that may put pressure on the profit margins of providers and insurers.

Also, healthcare stocks can be overvalued, limiting their growth potential. Lower interest rates, while sometimes beneficial, can also indicate wider economic troubles that might reduce healthcare spending.

What is the Best ETF to Invest in for Health Care?

ETF Pick: Health Care Select Sector SPDR Fund (XLV)

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XLV encompasses a broad range of healthcare stocks, from pharmaceutical giants to equipment manufacturers, offering a diversified approach to investing in this defensive sector.

As of December 2023, the Health Care Select Sector SPDR Fund (XLV) has assets under management of approximately $38.18 billion, encompassing 64 holdings primarily in the healthcare sector​​​​. (Reference: https://www.ssga.com/us/en/individual/etfs) It projects a promising 3-5 year EPS growth of around 9.54%​​.

With a Price/Book ratio of 4.53 and a forward Price/Earnings Ratio of 20.26, the fund’s market valuation is well-defined​​​​. Its portfolio includes leading healthcare companies, diversified across various sub-sectors​​​​.

Performance-wise, XLV has seen a mixed trend, with a 1-year total return of -1.21% and a stronger 3-year return of 8.44%​​. Looking ahead to 2024, forecasts indicate potential fluctuations, with a mix of slight decreases in average price and bullish trends suggesting variability​​. (Reference: https://stockscan.io/)

2. Consumer Staples: Necessity Drives Stability

Bull Case:
Consumer staples including items like food, beverages, and household goods, are known for their defensive nature during recessions, maintaining stable demand even in economic downturns.

Companies in this sector often provide reliable dividend yields, offering a steady income stream in volatile markets. Additionally, these companies can act as an inflation hedge by passing increased costs onto consumers.

If we see lower interest rates in 2024, consumer staples companies, especially those with significant debt, stand to benefit from reduced borrowing costs, potentially strengthening their financial positions.

Bear Case:

During recessions, consumer staples companies may face limited growth potential since consumers focus on basic needs, leading to reduced opportunities for expansion. The sector is also full of intense competition and price sensitivity, which can result in lower profit margins.

Lower interest rates can decrease borrowing costs, but they may also be a sign of bigger economic problems that could affect consumer spending.

ETF Pick: Consumer Staples Select Sector SPDR Fund (XLP)

The Consumer Staples Select Sector SPDR ETF (XLP) is designed to track the Consumer Staples Select Sector Index, encompassing U.S. companies in sectors such as food and beverage, household products, and personal care.

Despite broader market turbulence, XLP has shown resilience, particularly in the defensive consumer staples sector. Looking ahead to 2024, the ETF is expected to continue providing stability and lower volatility, making it a preferred option for investors seeking defensive exposure and dividends, even though it trades at higher valuation multiples compared to the broader market​.

3. Utilities: Essential Services Anchor Stability

Bull Case:
Utilities are often considered a defensive sector due to their stable demand; regardless of the economic climate, people need water, gas, and electricity.

This stability translates to consistent revenues and, often, reliable dividends, making utilities an attractive option for income-seeking investors. Additionally, utilities tend to benefit from lower interest rates, as they are typically capital-intensive businesses. Reduced borrowing costs can significantly lower their expenses, thereby improving their profitability.

Bear Case:

Government regulations can limit price increases and control profits, which might restrain growth potential, especially in a recession when cost-cutting and efficiency become critical. Moreover, utilities often carry a significant amount of debt due to their high capital spending requirements.

Finally, utility stocks might not offer substantial gains compared to growth sectors, making them less attractive to investors with a higher risk profile looking for bigger gains.

ETF Pick: Utilities Select Sector SPDR Fund (XLU)

The Utilities Select Sector SPDR Fund (XLU) stands out as the best utilities ETF for 2024, based on its comprehensive portfolio and impressive performance. XLU offers investors access to a diversified collection of 28 utility companies, combining stability with potential growth.

4. Bonds and Treasuries: The Safe Harbor

Bull Case
Investing in bonds and Treasury ETFs during economic downturns or when interest rates are dropping can be a smart move. Here’s why: When the economy is shaky, people and institutions look for safer places to put their money. Bonds and Treasury ETFs are often seen as safe because they are backed by the government.

Also, when interest rates fall, the value of these bonds usually goes up. This happens because new bonds are paying lower interest, making the older, higher-interest ones more attractive. So, buying into bonds or Treasury ETFs can be a good way to protect your investment during uncertain economic times, as they are generally considered less risky compared to stocks and have the potential to increase in value when interest rates go down.

Bear Case

The downside of investing in bonds and Treasury ETFs during recessions or falling interest rates lies in the unpredictability of the bond market. Here’s a simpler breakdown: When interest rates go up, bond prices usually go down, and vice versa. This inverse relationship can lead to losses if interest rates rise unexpectedly after you’ve invested in bonds or bond ETFs.

Additionally, predicting the performance of these investments can be tricky, as it doesn’t just depend on interest rates but also on market conditions. There’s also the risk of selling bonds at a loss if the market moves unfavorably. So, while bonds and Treasury ETFs are generally seen as safe, they’re not without their risks, especially when economic conditions and interest rates are in flux​

ETF Pick: iShares Core U.S. Aggregate Bond ETF (AGG)
AGG gives investors access to a wide range of U.S. bonds, including government, corporate, and mortgage-backed securities, offering a balanced and diversified approach to fixed-income investing.

High-Risk ETF Pick – TMF

The Direxion Daily 20+ Year Treasury Bull 3X Shares ETF, known as TMF, is a special kind of investment fund that tries to triple the daily changes of long-term U.S. government bonds. Think of it like a magnifying glass that makes the movements of these bonds three times bigger. However, this also means it’s three times riskier.

It’s good for investors who want to make a bigger bet on these bonds without spending a lot of money, but it can be quite unpredictable. For 2024, TMF could do well if long-term interest rates go down as expected, but the journey might be very bumpy. It’s best used carefully as part of a bigger investment strategy, rather than just by itself for quick profit​.

5. Real Estate Investment Trusts (REITs): Capitalizing on Market Shifts

Bull Case:
Investing in REITs could be a smart move during recessions or when interest rates drop. Why? Well, historically, REITs have done quite well during economic downturns. In 2024, if we’re facing economic challenges, REITs might be more stable compared to other investments like regular stocks.

This stability comes from their strong financial health and the nature of their business – they earn money through properties they own, which can provide a steady income.

Also, if interest rates are low, which often happens during a recession, REITs become even more attractive. Lower interest rates mean cheaper borrowing costs for these trusts, which can lead to higher profits. Plus, investors looking for a good income from their investments might turn to REITs because they usually pay out decent dividends.

In a nutshell, if 2024 brings economic uncertainty, REITs could offer a safe place for your investment dollars, providing potential stability and steady income when other options might be more unpredictable.

Bear Case:

REITs often borrow money to finance their property investments. When interest rates go up, their borrowing costs increase, which can reduce their profits. This situation can lead to a decrease in the value of REITs. Also, if the overall economy struggles, this could impact the real estate market.

Lower demand for properties or difficulties in maintaining high occupancy rates in commercial or residential spaces could negatively affect REITs’ income.

ETF Pick: Vanguard Real Estate ETF (VNQ)

VNQ covers a broad spectrum of REITs, including those focused on office buildings, hotels, and residential properties, providing a comprehensive way to invest in real estate without the complexities of direct property ownership. It’s managed by The Vanguard Group and aims to track the performance of the MSCI US Investable Market Real Estate 25/50 Index.

In terms of performance, VNQ has experienced varied results over the years. In the past three years, since the global pandemic hit, REITs, including those in VNQ, have been under pressure and lagged behind major indexes. Over this period, REITs are in the negative. However, when looking at the year-to-date and longer-term performance, the picture brightens.

Wrapping Up

Navigating through 2024 will be interesting. We’ve pinpointed five key sectors, each backed by their standout ETFs, These choices are geared towards forging a portfolio that’s not only resilient but also primed for growth.

But remember, the real secret to investing success lies in aligning your portfolio with your personal financial goals and how much uncertainty you’re comfortable with. This approach becomes even more crucial in a dynamic year like 2024. So, let’s focus on creating an investment strategy that’s not just smart, but also right for your individual needs.

(Disclosure: At time of writing author does hold a position in TMF)


  • Joey Babineau

    Joey Babineau studied business at the University of New Brunswick and graduated in 2000 with a degree. His professional career began as a government analyst. After 12 years, he left that role to pursue his interests in real estate and online marketing. This shift has led to more strategic personal investments. Joey also has a strong presence online, where he is known for his practical and insightful approach.

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