Recession risk is still looming large over markets, no matter how much digital ink is spilled, talking up a soft landing. While talk of the Fed avoiding a recession has spread rapidly, the Fed’s inflation fight still has a long way to go. What’s more, rates rose so quickly that the economy has yet to fully display the impact of that credit tightening. For those who want to add some extra caution to their portfolios to prepare for a late 2023, or early 2024 recession, consider adding some active ETF exposure.
Understanding Recession Risk
Where are the principal sources of recession risk? The Fed’s rate hikes stand out, of course, with another rate hike dropping this week. Traditionally, as mentioned above, rate hikes tend to have a lagging impact on the economy, with credit tightening impacting new loan growth, for example. However, there are more indicators than just those tied to the Fed that contribute to recession risk.
The housing market has struggled this summer, for example, with existing home sales falling 3.3% in June. Manufacturing has slowed, meanwhile, and even though consumers are spending, they’re spending on services and experiences rather than goods.
Firms like T. Rowe Price are still suggesting a recession is more likely than a soft landing, at least according to one white paper. Taken together, these risks may call for investors to take a look at the success of active ETFs so far this year.
See more: “So Far in 2023, Active ETFs Top Performance Charts”
Active ETFs can help portfolios navigate recession risk more ably than more staid, unresponsive indexed strategies. Index strategies may not be able to respond as quickly to recession risk indicators spiking later this year, for example, instead requiring a committee meeting to change course when certain opportunities may have passed that strategy by.
T. Rowe Price has several active ETFs for investors and advisors to consider. The shop offers a variety of options, including the recently launched T. Rowe Price Capital Appreciation Equity ETF (TCAF). Check out the video below from VettaFi for more on ETF performance.
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