Funds to Buy for a Slow Economy

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When the economy begins to slow down, it doesn't mean that investors should begin to abandon their long-term investment strategies and sell out of their stock funds. There are, however, smart ways to prepare your portfolio for challenging economic times. The best funds to buy when the economy is slowing are mutual funds and exchange-traded funds (ETFs) that tend to perform well just before and during an economic recession, such as broadly diversified funds and defensive sectors.

Key Takeaways

  • When the economy is slowing, the best funds to buy are mutual funds and ETFs that tend to perform well just before and during an economic recession.
  • This often includes those in broadly diversified funds and defensive sectors.
  • If you want to invest during a slowing economy, a good strategy for long-term investors is to remain exposed to stocks, but begin to get defensive.

Economic Cycle

The economy goes through various stages, which are part of the business cycle, sometimes referred to as the economic cycle. During the economic cycle, various ups and downs take place that generally revolves around periods of recession or expansion. Indicators, such as unemployment, job growth, production, and sales, are used to measure the state of the economy. The National Bureau of Economic Research is responsible for defining specific dates of these economic periods. The four phases include:

  1. The Early-Cycle Phase: The economy and markets are recovering from a ​recession. 
  2. The Mid-Cycle Phase: The economy is moderating.
  3. The Late-Cycle Phase: The economy is growing faster, but inflation and stock prices are getting dangerously high.
  4. Recession: The economy, as measured by Gross Domestic Product (GDP), is shrinking, and stock prices are falling.

If you want to invest during a slowing economy, a good strategy for long-term investors is to remain exposed to stocks, but begin to get defensive. This will ensure that you can take advantage of rising stock prices but also avoid the most significant declines of the coming bear market by bypassing the riskiest areas. To do this, consider buying into sectors such as health, utilities, and consumer staples, and certain bond funds.

5 Best Funds to Buy for a Slowing Economy

The best mutual funds and ETFs to buy for a slowing economy are no-load funds with low expense ratios that provide broad diversification when combined into one portfolio. Here are five good firms to consider buying during for a slow economy:

Healthcare Select Sector SPDR (XLV)

People still need to see the doctor and buy their medication, no matter what the economy is doing, so health stocks tend to be somewhat insulated from a maturing economy in the late-cycle phase. XLV is an ETF that holds high-quality large-cap US stocks like Johnson & Johnson and United Health Group (UNH). The expense ratio for XLV is 0.13%.

Utilities Select Sector SPDR (XLU)

For similar reasons that health stocks can hold up better than other sectors in a slowing economy, utility stocks can also be smart defensive holdings. Consumers are still paying for their utilities, such as gas and electricity, during economic slowdowns. XLU holdings are large US energy firms like Duke Energy (DUK) and NextEra Energy (NEE). The expense ratio for the XLU ETF is 0.13%.

Consumer Staples Select Sector SPDR (XLP)

If you want a fund that provides broad exposure to consumer non-discretionary stocks, XLP is a quality ETF to get the job done. Non-discretionary means that consumers buy the products for their everyday life and may not have much of a choice about the purchase. These products include food, beverages, and toiletries. Stocks included in XLP are Proctor & Gamble (PG) and Coca-Cola (KO), and the expense ratio is 0.13%.

SPDR Gold Shares (GLD)

A slowing economy often leads to volatility and uncertainty in capital markets, which leads investors to move some of their assets into physical commodities and investments that track their prices. Precious metals, especially gold, can benefit in this environment. Although GLD does not hold physical gold, it does track the price of gold bullion. The expense ratio for GLD is 0.4%.

Vanguard Ultra-Short-Term Bond (VUBFX)

This mutual fund invests in money market instruments and bonds with durations of 0–3 years. Buying an ultra-short-term bond fund in a slowing economy can be beneficial because interest rates are often rising in this environment, and bond funds with longer durations tend to see lower or negative price movement. The expense ratio for VUBFX is 0.2%.

The Bottom Line

The most important point to remember about investing in a particular economic environment is to diversify assets and not put all of your eggs in one basket. Not even the most seasoned investors and economists can accurately predict what the market will do over the short term.