The Fed Expects a Recession: 1 Solid Index Fund Investors Can Buy With Confidence Right Now

Economic growth slowed dramatically in the first quarter as elevated inflation and high interest rates caused business investments to decline, and the situation continued to deteriorate in the second quarter. Consumer sentiment currently sits at a six-month low, hinting at weakness in consumer spending that could cause economic growth to decelerate further.

Projections from the Federal Reserve align with that outlook. Policymakers expect real gross domestic product to increase just 0.4% this year, well below the long-term trend of 2%, and they anticipate a mild recession before the end of 2023. Given that alarming forecast, some investors may think it prudent to avoid the stock market right now, but that decision will likely backfire. The S&P 500 usually rebounds before recessions end and missing part of the rebound can do lasting damage to a portfolio.

Here is one solid index fund investors can buy with confidence right now.

The Vanguard Dividend Appreciation ETF

Businesses that pay a dividend -- especially those that regularly raise the dividend -- tend to be more resilient to economic headwinds than their non-dividend-paying peers. The reason for that is simple. Businesses that consistently raise their payout usually benefit from steady cash flow, healthy balance sheets, and good management teams. Those qualities naturally lead to solid financial results even in an economic downturn, and that translates into share price outperformance.

Indeed, the Vanguard Dividend Appreciation ETF (VIG 0.49%) -- an exchange-traded fund that tracks more than 300 businesses that consistently raise their dividends -- outperformed the broader S&P 500 during the last two recessions. It has also fallen less sharply during the current bear market, and its 10-year beta of 0.87 means the Vanguard Dividend Appreciation ETF has been less volatile than the S&P 500 over the past decade.

Recession-proof market sectors

As I mentioned, consistent dividend hikes often hint at a fundamentally sound business, but there is another reason investors can buy the Vanguard Dividend Appreciation ETF with confidence right now, and it relates to asset allocation across the 11 stock market sectors.

The chart below details the weighted sector exposure for the S&P 500 index and the Vanguard Dividend Appreciation ETF.

Data source: S&P Global, Vanguard. 

The three sectors that typically perform best during recessions are consumer staples, healthcare, and utilities. The Vanguard ETF offers greater exposure to those three sectors as compared to the S&P 500.

Similarly, the three sectors that typically perform worst during recessions are real estate, information technology, and financials. The Vanguard ETF offers less exposure to those three sectors as compared to the S&P 500.

A great option for risk-averse investors

The Vanguard Dividend Appreciation ETF produced a total return of 178.4% (or 10.78% annually) over the past decade. At that pace, $125 invested weekly would be worth $107,500 after one decade, $406,900 after two decades, and $1.2 million after three decades.

As a caveat, the Vanguard ETF has historically beaten the S&P 500 during recessions, but it has still underperformed the market over long periods of time. Case in point: The S&P 500 produced a total return of 212.2% (or 12.05% annually) over the past decade.

Here is the bottom line: The Vanguard Dividend Appreciation ETF is a great option for risk-averse investors. It has a below-average expense ratio of 0.06% -- meaning the annual fees on a $10,000 portfolio would total just $6 -- and now is a particularly good time to buy given that Fed officials expect a recession this year.