The Federal Reserve rapidly tightened its monetary policy over the past year, simultaneously shrinking its balance sheet and raising interest rates in an effort to squash inflation. In fact, the central bank raised its benchmark rate at its most aggressive pace since the early 1980s. The good news is inflation is indeed trending downward, but the bad news is Fed officials now expect the economy to slip into a mild recession later this year.
Unfortunately, no equity investment is ever completely safe, least of all during an economic downturn, and no business is completely recession-proof. But the Vanguard Value ETF (VTV 0.07%) is a good place for risk-averse investors to put their money right now. The index fund has fallen less sharply than the S&P 500 during the current bear market, and it has been less volatile over the past decade.
Understanding the business cycle
The business cycle is generally broken into four phases: early cycle, mid cycle, late cycle, and recession. The economy expands aggressively during the first two phases, economic growth moderates in the third phase, and the economy contracts during the fourth phase. According to Fidelity, consumer staples, energy, healthcare, and utilities stocks tend to perform the best during late cycles and recessions.
Where is the economy now? The National Bureau of Economic Research is the final authority when it comes to business cycle dating, but investors can reasonably assume the economy is either in the late cycle or a recession at the present time.
The Vanguard Value ETF
The Vanguard Value ETF tracks about 340 large-cap value stocks that span all 11 market sectors, but the fund is heavily invested in the defensive sectors discussed above. In fact, nearly 44% of its weighted exposure comes from consumer staples, energy, healthcare, and utilities stocks. The 10 largest holdings in the Vanguard Value ETF are detailed below.
- Berkshire Hathaway: 3.1%
- UnitedHealth Group: 2.9%
- Johnson & Johnson: 2.7%
- ExxonMobil: 2.7%
- JPMorgan Chase: 2.3%
- Proctor & Gamble: 2.1%
- Chevron: 1.8%
- Pfizer: 1.7%
- AbbVie: 1.7%
- Merck: 1.6%
The Vanguard Value ETF has a 10-year beta of 0.91, meaning it has been less volatile than the S&P 500 over the past decade. Additionally, the Vanguard index fund's heavy exposure to defensive stocks has allowed it to outperform the S&P 500 during the current bear market. The Vanguard Value ETF is currently 5% off its high, but the broader market is down 13%.
The downside to defensive stocks is that they generally underperform during bull markets. While the S&P 500 soared 316% over the past 15 years, the Vanguard Value ETF climbed just 245%. To contextualize those figures, $10,000 invested in the S&P 500 in April 2008 would be worth $41,500 today. But $10,000 invested in the Vanguard Value ETF at the same time would be worth just $34,500. However, some investors would gladly give up some potential gains in exchange for less volatility.
The last thing worth mentioning is the expense ratio. The Vanguard Value ETF bears a below-average expense ratio of 0.04%, meaning the annual fees on a $10,000 portfolio would total just $4. That makes the index fund a cheap way to diversify across hundreds of blue chip value stocks, many of which operate in recession-resistant industries. That strategy is particularly timely, given the Federal Reserve's latest prognosis for the economy.
