For months, economists have debated the likelihood of a recession. While some people are still optimistic that we can avoid it, a recession is beginning to look more likely.
A stronger-than-expected jobs report was cause for celebration for some, as job losses are a hallmark of recessions. A historically low unemployment rate also means the economy is showing no signs of slowing down, which can be a positive.
However, inflation also remains stubbornly high, which could lead the Federal Reserve to be more aggressive in its interest rate hikes -- which has the potential to result in a recession.
Fortunately, there's one rock-solid exchange-traded fund (ETF) that can help your portfolio survive even the roughest economic downturns: the S&P 500 ETF.
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How likely is a recession right now?
Nobody knows for certain whether we'll be hit with a recession or not, and even the experts are still arguing over it.
Treasury Secretary Janet Yellen recently explained during an appearance on Good Morning America that it's unlikely we'll face a recession in 2023, saying, "You don't have a recession when you have 500,000 jobs and the lowest unemployment rate in 50 years."
But Fed Chairman Jerome Powell has cautioned that we could still see higher interest rate hikes if inflation doesn't slow soon.
"The reality is we're going to react to the data," Powell said during a recent question-and-answer session at the Economic Club of Washington, D.C. "So if we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than is priced in."
In other words, the jobs reports and inflation data over the next few months will be key in determining the Fed's strategy, and if those numbers remain high, we could see more aggressive rate hikes -- increasing the chances of a recession.
The right strategy to protect your savings
First, it's important to note that there are a few precautions investors should take to prepare for a potential recession.
Double-check that you have at least three to six months' worth of savings stashed in an emergency fund, and don't invest anything unless you're certain you can pay all your bills and that your finances are in good shape.
If you do have cash to spare, now is a smart time to think about investing. Stock prices are still lower than they've been in a long time, and you can snag high-quality investments at a fraction of the cost.
An S&P 500 ETF is never a bad option, but it's a particularly smart choice in times like these to keep your money safer.
Why an S&P 500 ETF is a smart buy right now
An S&P 500 ETF is a fund that tracks the S&P 500 index, so it includes the same stocks as the index itself and aims to replicate its performance. There are plenty of advantages to this type of investment, but a few of the most notable include:
- Instant diversification: The S&P 500 includes stocks from 500 of the largest and strongest companies in the U.S., across a wide variety of industries. That level of diversification can substantially lower your risk, because if a few stocks (or even an entire sector) are hit hard during a recession, it won't sink your entire portfolio.
- A collection of big names: Again, the companies within the S&P 500 are the best of the best. Many of them are household names, including Amazon, Apple, Coca-Cola, Procter & Gamble, Home Depot, and hundreds more. If there are any companies to survive a recession, it's the juggernauts in the S&P 500.
- A perfect track record: The S&P 500 has existed for decades, and in that time, it has faced some of the worst market crashes and economic downturns in history. Yet it has recovered from every one so far. While there are no guarantees in investing, it's incredibly likely the S&P 500 will recover from whatever may happen in the future.
With an S&P 500 ETF, your investments will closely follow the performance of the index itself. And since the index is almost guaranteed to recover from a recession, an S&P 500 ETF likely will, too.
Because all S&P 500 ETFs follow the same index, they're going to see similar returns. But one fund that stands out is the Vanguard S&P 500 ETF (VOO 0.99%).
This fund was launched in 2010, and although that isn't the longest track record, it has earned an annualized average return of 12.64% over the past 10 years. It also has an expense ratio of just 0.03% (one of the lowest among ETFs), which could save you thousands of dollars in fees over time.
It's unclear what the future holds for the economy, but a recession isn't out of the question. If you can swing it, investing in an S&P 500 ETF can help protect your savings no matter what happens with the market.
