Things are not all right in the bond market. On Wednesday, Sept. 16, 10-year Treasury yields hit their highest levels since 2007, just weeks after their 30-year counterparts accomplished the same dubious feat. Seasoned market participants know what soon followed: the global financial crisis.
That doesn’t mean history will repeat this time around. Still, professional investors have long relied on the bond market as a recession indicator, though not necessarily a foolproof predictor of coming economic contraction. The point is that an ounce of prevention is worth a pound of cure.
Investors can get that preventative ounce with the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD +0.06%), an exchange-traded fund (ETF) that could prove ideal if the U.S. economy contracts in earnest.
If a recession comes to town, this ETF could prove somewhat durable. Image source: Getty Images.
Recession protection with SPHD
This $3.4 billion Invesco ETF turns 14 years old next month. Over its time on the market, there have been many recessions, including most recently the coronavirus bear market/recession in 2020 and two consecutive quarters of GDP contraction (a major prerequisite for a recession) in 2022.
Likely due to the brevity of the 2020 recession, the intensity of the market recovery, and the risk-on views that stoked that rebound, the Invesco ETF badly trailed the S&P 500 that year. However, this ETF gained 0.6% in 2022 when the S&P 500 slid 18.2%. That implies a mixed bag for this ETF if another recession arrives, but the fund has history on its side.
In terms of stock performance during recessions since 1980, the leading sectors are consumer staples and healthcare. That’s potentially good news for this ETF because it’s home to some of the largest consumer staples companies by market cap. Combined, staples and healthcare names represent 28.4% of this ETF’s portfolio.
Invesco Exchange-Traded Fund Trust II – Invesco S&P 500 High Dividend Low Volatility ETF
Today’s Change
(0.06%) $0.03
Current Price
$50.65
Key Data Points
AUM
$3.4B
Dividend Yield
4.82%
Expense Ratio
0.30%
Top Holdings
VZ
3.42%
PFE
3.41%
GIS
3.08%
In a recession, this ETF also offers some addition by subtraction. Technology is usually the second-worst-performing sector during downbeat economic periods, but no tech stocks are included in this low-volatility ETF.
Dividends help, too
As its name implies, this Invesco fund is a dividend ETF. In fact, it yields nearly 4.4%, or roughly quadruple the S&P 500’s dividend yield. That’s an attractive yield, but more importantly, dividend stocks have demonstrated resilience during recessions.
One way to look at it is that dividend payers help market participants stay invested, even during rough times. On a somewhat related note, this ETF pays monthly, not quarterly, dividends, meaning investors receive a steadier income stream and faster compounding.
No, the Invesco S&P 500 High Dividend Low Volatility ETF isn’t perfect, and it may not rise in bear markets or recessions. However, it’s designed to perform better than the broader market during trying times and to do so with less turbulence. For risk-averse investors, that may be enough. The fund charges 0.3% per year, or $30 on a $10,000 position.
