3 ETFs To Help You Navigate Market Volatility, Recession Risks

The bond market is flashing warning signs, and investors are taking notice. Short-term Treasury yields have dipped sharply as concerns about an economic slowdown grow, and analysts warn that a Federal Reserve rate cut may be on the horizon. Historically, signals like these have preceded recessions, prompting investors to shift toward defensive assets.

For those looking to safeguard their portfolios, ETFs that focus on stability and essential industries can be a smart choice. Whether it’s low-volatility stocks, utilities, consumer staples, or government bonds, these ETFs help minimize risk while keeping your money at work. Let's explore the top options for weathering a potential downturn.

1. iShares MSCI USA Min Vol Factor ETF USMV

For investors looking to stay in the stock market but reduce risk, the iShares MSCI USA Min Vol Factor ETF is a strong pick. This ETF focuses on large- and mid-cap stocks that have historically exhibited lower volatility. It's designed to limit downside risk, making it a great choice for risk-averse investors.

USMV's portfolio includes firms from sectors like technology, financials, healthcare, and consumer staples. While this ETF helps shield investors from large losses during downturns, it also means less upside potential in booming markets. USMV has a year-to-date return of 5.5% and a 12-month return of 13.5%, proving its ability to hold up well in uncertain times. During the downturn of 2020, this ETF was able to pare the losses within a year of its 2020 peak (February 21, 2020).

Also Read: How To Ride Out Market Turbulence With These 5 Low-Beta ETFs

2. Utilities Select Sector SPDR Fund XLU

The utilities sector is often a safe haven during economic downturns. The Utilities Select Sector SPDR Fund offers diversified exposure to this sector, holding 31 companies. Its top five positions make up about 39% of its portfolio.

XLU has a low expense ratio of 0.09% and provides a dividend yield of 2.8% as of 2025. Since utility services like electricity and water remain in demand regardless of economic conditions, this ETF is a solid defensive choice. Over the past year, the ETF has delivered a 21.71% return.

3. Vanguard Consumer Staples ETF VDC

Consumer staples companies produce essential goods like food, beverages, and household products, which people buy regardless of the economic climate. The Vanguard Consumer Staples ETF offers exposure to this sector, holding 103 stocks while balancing exposure to industry giants like Coca-Cola KO and Costco Wholesale Corp. COST.

With an expense ratio of just 0.09%, VDC is an affordable way to invest in recession-resistant stocks. While consumer staples ETFs tend to be top-heavy, VDC provides a well-rounded mix of large and mid-sized companies.

The Market Signals You Should Watch

While defensive ETFs can help protect your portfolio, it's also important to understand why recession concerns are growing.

Investors have been moving into short-dated Treasuries, signaling concerns about an economic slowdown. Bloomberg reports that the Federal Reserve may start cutting interest rates as early as May to counteract slowing growth.

The inverted yield curve, where short-term bond yields exceed long-term yields, flashed warning signs in February, as the spread between three-month treasury yields and those of 10-year notes inverted last week. Historically, this has been a strong predictor of a recession knocking at the door. The curve had inverted in 2019, right before the economic downturn in 2020, according to Reuters.

Meanwhile, indicators such as the CNN Fear & Greed Index dropping into “Extreme Fear” territory and the Cboe Volatility Index (VIX) spiking to more than 25 reflect heightened investor anxiety.

Even Warren Buffett seems cautious, as Berkshire Hathaway is sitting on record cash reserves while trimming long-held positions.

Final Thoughts: Stay Prepared

Preparing your portfolio in advance rather than reacting at the last minute can help mitigate potential losses during economic downturns. Incorporating low-volatility equity ETFs, utility, and consumer staples funds can provide a more resilient foundation.

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