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Portfolio managers are shifting toward recession-proof exchange-traded funds as investors seek shelter from market volatility.

Amid ongoing global trade tensions, wavering bond yields and falling interest rates, increasingly wary investors are turning to ETFs best positioned to weather a potential market crash.

While Hamilton-based Wickham Investment Counsel Inc. doesn’t anticipate a recession in the near term, “market noise” is causing enough uneasiness among investors that they are turning to lower-risk investments, according to portfolio manager Sean Pugliese. Wickham started increasing its exposure to fixed income by about 5 per cent in the spring after the December stock sell-off sparked concern.

“People were nervous, especially after the correction in the fourth quarter of 2018,” says Mr. Pugliese. “About three to six months into the year, we had just recouped what we had lost, and people were feeling like they didn’t want to go through that again.”

Rather than picking individual bonds, active ETFs offer access to a larger and more diverse inventory of bonds, Mr. Pugliese says. Wickham shifted toward ETFs that hold high-quality government and short- to mid-term investment-grade corporate bonds, such as the Vanguard Canadian Aggregate Bond Index ETF (VAB), the CI First Asset Investment Grade Bond ETF (FIG) and the Horizons Active Corporate Bond ETF (HAB).

“Short-term bonds tend to be less volatile, and they’ll be less impacted by interest rate movements and credit quality,” Mr. Pugliese says.

If an investor is growing worried about the possibility of a recession, then they should decrease their equities exposure gradually and reposition toward sectors that tend to provide more shelter during a downturn, according to Craig Ellis, vice-president and portfolio manager at Oakville-based Bellwether Investment Management Inc.

“You’re looking to play defense and try and protect capital in your portfolio,” Mr. Ellis says. “You’re not likely to get gains in too many stocks in a recession environment, so you want to increase the defensiveness of your stock portfolio.”

It means moving away from cyclical industries where revenues fluctuate depending on the state of the economy and opting for those that tend to benefit from falling interest rates, such as consumer staples, health care, utilities and telecommunications, Mr. Ellis says.

In consumer staples, he points to the iShares S&P/TSX Capped Consumer Staples Index ETF (XST) and the Vanguard Consumer Staples ETF (VDC), which hold large food retailers, such as Alimentation Couche-Tard Inc. and Procter & Gamble Co., that he says “aren’t as worried about the business economic cycle.”

Since the health-care sector in Canada is relatively small, with the S&P/TSX health-care index made up of only 10 companies, Bellwether uses the Vanguard Health Care ETF (VHT), which holds large U.S. equities such as Johnson & Johnson Inc. and Pfizer Inc.

“Health-care issues are always present and with the aging demographics, they’ll probably become more prevalent going forward,” Mr. Ellis says.

Similarly, investors would need to look beyond Canada’s six publicly traded telecommunications companies to find an ETF in this sector, such as the iShares U.S. Telecommunications ETF (IYZ), which holds Verizon Communications Inc. and AT&T Inc.

But investors should carefully screen telecommunications ETF holdings, Mr. Ellis says. The sector was reclassified last year as “communication services” and added companies that were previously grouped in technology, such as Facebook, Inc., Netflix, Inc. and Google parent Alphabet Inc. – which could make the ETF less attractive during a market correction.

“Those ETFs pick up some of the social media and tech types of stocks, which wouldn’t tend to do very well in a recession,” Mr. Ellis says.

While BMO Global Asset Management is still “moderately positive” on equities even as recession concerns continue, Mark Raes, head of product, says investors looking to de-risk their portfolio should opt for low-volatility ETFs while maintaining equity exposure to avoid missing out on any potential gains.

BMO offers ETFs that seek to balance risk with returns, he says. The BMO Low Volatility Canadian Equity ETF (ZLB) and BMO Low Volatility US Equity ETF (ZLU) include a mix of utilities, telecommunications, consumer staples, financials and real-estate stocks such as Hydro One Ltd. and Target Corp.

“People are looking for something that mutes market risk, which is exactly what low-volatility is constructed to do,” Mr. Raes says. “It’s meant to capture most of the upside with a clear reduction in the downside so that in the end, you come out further ahead.”

In addition to BMO’s low-volatility ETFs, Mr. Pugliese of Wickham Investment Counsel says the CI First Asset MSCI Canada Low Risk Weighted ETF (RWC) and iShares Edge MSCI Min Vol Canada Index ETF (XMV) offer similar low-risk equities.

“If there is a recession and the market corrects, these low volatility stocks won’t be impacted as much, and they tend to be higher quality,” Mr. Pugliese says.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 23/02/24 0:46pm EST.

SymbolName% changeLast
Vanguard CDN Aggregate Bond Index ETF
CI Investment Grade Bond ETF
Horizons Active Corporate Bond ETF
Ishares S&P TSX Capped Cons Stpl ETF
Consumer Staples ETF Vanguard
Healthcare ETF Vanguard
US Telecommunications Ishares ETF
BMO Low Volatility CAD Equity ETF
BMO Low Volatility US Equity ETF CAD
Ishares Edge MSCI Min Vol Can ETF

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