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The big question in the financial world in the second half of 2022 is whether central banks will be able to lower inflation without driving the economy into recession.

Say you’re worried they won’t pull it off and are looking for ways to tweak your portfolio using exchange-traded funds. Some ideas on ETFs to look at can be found in a recent report by National Bank Financial (NBF). Three possible economic outcomes are laid out – a base case of slowing growth, elevated inflation and high rates; a bullish case of falling inflation, average growth and a slower pace of rate hikes; and a bearish case of high inflation, recession and a sharp increase in rates.

The bearish outlook is the most alien to investors today, so let’s dig into it a bit. NBF projects stocks retreating further into bear market territory with rising volatility, while bonds eventually appreciate. Overall, cash, Canadian stocks and defensive sectors are the outperformers.

NBF listed six cash alternative ETFs, which basically hold assets kept in savings accounts: CI High Interest Savings ETF (CSAV-T), Purpose High Interest Savings ETF (PSA-T), Horizons Cash Maximizer ETF Corporate Class (HSAV-T), Evolve High Interest Savings Account Fund (HISA-NE), Horizons High Interest Savings ETF CASH-T) and Ninepoint High Interest Savings Fund ETF Series (NSAV-NE). Management expense ratios for these funds are mainly in the 0.15-per-cent range, which leaves a net yield 2.8 to 2.9 per cent.

Brokerage fees may apply when you buy and/or sell these ETFs. Also, online brokers BMO InvestorLine, RBC Direct Investing and TD Direct Investing do not allow clients to buy these products.

The NBF report says the sectors that have fared best during recessions – suffered lower losses, in other words – are consumer staples, gold miners and utilities. Two consumer staples ETFs highlighted in the report are the iShares S&P/TSX Capped Consumer Staples Index ETF (XST-T) and the BMO Global Consumer Staples Hedged to CAD Index ETF (STPL-T).

A pair of utilities funds are the BMO Equal Weight Utilities Index ETF (ZUT-T) and the iShares S&P/TSX Capped Utilities Index ETF (XUT-T). NBF notes that infrastructure ETFs also tend to have a large weighting in utilities.

If you’re wondering what happens to the overall market in a recession, the NBF report cites data showing the S&P 500 falls 23 per cent on average after a recession starts. How likely is the recession outcome? The NBF report gives it a 25-per-cent likelihood, along with 15 per cent for the bullish take. The base case gets a 60-per-cent likelihood, a scenario in which NBF says investors are most likely to see high volatility, no clear direction in stocks and bonds and outperformance by Canadian stocks.

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