These ETFs could be your best way to invest during a recession

The chances of a recession seem to be increasing. Just a couple of months ago, economists surveyed by Bloomberg estimated a 30% chance that the US would enter a recession over the next year. In the past week, Bank of America he forecast that a relatively mild US recession is likely to start later this year.

It is almost certain that this growing pessimism is causing many investors to think about where to put your money if a recession is coming. There are many good alternatives. But these exchange-traded funds (ETFs) might be your best way to invest during a recession.

look at uncle sam

What do investors want most during a major economic downturn? A safe haven. It’s hard to find a better safe haven than US Treasury Bonds. When you buy these bonds, you are lending money to the United States government. If the day ever comes when Uncle Sam can’t pay you back, the world is in big trouble.

However, Treasury bonds are not only good investments during a recession because they are safe havens. In the midst of a recession, the Federal Reserve frequently buys US Treasuries as part of a strategy to lower interest rates and spark an economic rebound. This purchase causes bond prices to rise.

Investing in ETFs that own US Treasury bonds gives you more flexibility than buying the bonds themselves. black rockThe iShares family of Treasury bonds, in particular, allows investors to focus on different maturities for government bonds.

The most traded of these ETFs is the iShares 20+ Year Treasury Bond ETF (TLT 0.56%). As its name implies, this fund holds US Treasury bonds with maturities of 20 years or more.

For investors who don’t want such long maturities, the iShares 10-20 Year Treasury Bond ETF (TLH 0.48%) is an alternative OR you could go with shorter maturities with the iShares 7-10 Year Treasury Bond ETF (FSR 0.34%)the iShares 3-7 Year Treasury Bond ETF (IIE 0.18%)or the iShares 1-3 Year Treasury Bond ETF (SHY 0.07%).

Lessons from two recessions

There have only been two US recessions since these iShares ETFs launched: the great recession from late 2007 to mid-2009 and the brief coronavirus recession in 2020. However, we can learn some lessons from the performance of ETFs during those two recessions.

Let’s look first at the Great Recession, which was one of the most severe recessions in US history. All iShares US Treasury ETFs held up quite well during this difficult period, while the S&P 500 crashed (Note: shaded period indicates when the US economy was in recession).

TLT data by YGraphics

Note that the ETFs with the longest maturities rose the most as the S&P 500 neared its bottom. However, at the end of the recession, the shorter-maturity iShares 3-7 Year Treasury Bond ETF was on top. Throughout the period, the iShares ETF with the shortest maturity was the least volatile.

Now, fast-forward to the 2020 coronavirus recession. Once again, all iShares US Treasury ETFs beat the S&P 500’s performance.

TLT data by YGraphics

The iShares 1-3 Year Treasury ETF was as stable as it was during the Great Recession. This time, however, the longest-maturity ETFs were the best performers for most of the short recession.

Expectations about interest rate fluctuations go a long way to explaining why these US Treasury ETFs behave differently. When investors think interest rates will fall, long-term ETFs tend to rise more than short-term ETFs.

beyond the recession

These US Treasury ETFs could easily outperform most stocks if the US economy were to enter a recession later this year or in 2023. They really could be your best way to invest during the period.

Keep in mind, however, that recessions generally don’t last that long. The average American recession since 1900 has lasted about 15 months. Milder recessions can be even shorter. Investors should therefore think long term beyond the recession.

Five years after the end of the Great Recession, the S&P 500 was outperforming all iShares Treasury ETFs. It took less than eight months after the end of the 2020 recession for the S&P to outperform these ETFs. Treasury bond ETFs are a great way to invest during a recession, but stocks are likely to give you better returns in the long run.