3 Funds for a Recession

Russel Kinnel: Economists are dialing back their expectations for economic growth, and many are saying the chance for a recession in the next 12 months has grown substantially. While I wouldn’t suggest making big changes to your portfolio based on economic forecasts, it helps to know what works in different scenarios, and you might want to make changes at the margins.

In recessions, the economy shrinks, and usually that leads to interest rates declining. That in turn means high-quality longer-term bond funds tend to perform well. These funds have big interest-rate exposure, meaning they gain when rates fall and lose when rates surge, as you might recall from 2022.

3 Funds for a Recession

1. Fidelity Tax-Free Bond FTABX
2. Vanguard Inflation-Protected Securities VAIPX
3. Vanguard Long-Term Bond Index VBLAX

Municipal bonds rarely default, even in recessions. Thus, Gold-rated Fidelity Tax-Free Bond is a fund that will generally fare nicely in a recession. Fidelity runs disciplined bottom-up strategies that avoid big market calls. Fees are modest, so most of the income flows through to investors.

Tariffs slow the economy, but they also spur inflation by raising costs for consumers. That’s why I chose Silver-rated Vanguard Inflation-Protected Securities. It has a long-duration portfolio that has interest-rate exposure but obviously protects against inflation. Fees are dirt-cheap. The one caveat here is that it’s not tax-efficient, so best kept to a tax-sheltered account.

Finally, Silver-rated Vanguard Long-Term Bond Index is another fund that should hold up well in a recession. The fund gives you exposure to long-term high-quality bonds. That means very little credit risk and a lot of interest-rate risk. The fund lost 27% when rates surged in 2022, so please use in moderation.

One last caveat is that economic predictions are no better than weather or sports predictions. They are reasonable, and often right, but sometimes way off.

Watch Worried About a Market Selloff? These 10 Funds Reduce Portfolio Risk for more from Russel Kinnel.