What Happens to Your Vanguard ETF Portfolio During a Recession? I Ran the Historical Numbers.

While the U.S. economy still appears to be in relatively good shape overall, a number of factors are making investors nervous. Labor market growth has slowed significantly over the past year. Consumer credit stress is on the rise.

But the biggest catalyst, of course, is the war in Iran. The month-long conflict in the Middle East has already caused crude oil prices to nearly double. Inflation rates are expected to begin moving sharply higher again, and it's taking away the Fed's ability to lower rates to add support to the economy. That has a lot of folks fearful that a recession might not be far off.

So what might a recession do to the financial markets in 2026? It's been 17 years since the end of the housing crisis. The only recession since then happened during the COVID-19 pandemic's height. It would be safer to call that an anomaly than a garden variety economic downturn.

But that doesn't mean we can't learn a thing or two from the past. Let's break down those recessions to see how various themes performed and what we could expect today.

Image source: Getty Images.

Key takeaways

• The 2008 financial crisis resulted in a 55% drawdown in the S&P 500, but the biggest damage happened in the financial sector.
• Dividend growth stocks held up better, but value performed much worse due to bank and financial stock holdings.
• The COVID-19 pandemic saw a 34% decline in the S&P 500. It featured a sharp drawdown and quick recovery.
• Most major themes fell by similar amounts and demonstrated that this was more of an "everything falls together" bear market.
• 2026 could look more like a traditional bear market than either 2008 or 2020.

In order to take a look back at these prior recessions, I'm going to evaluate the performance of five different popular ETFs.

• State Street SPDR S&P 500 ETF (NYSEMKT: SPY)
• Vanguard Dividend Appreciation ETF (NYSEMKT: VIG)
• Vanguard High Dividend Yield ETF (NYSEMKT: VYM)
• Vanguard Growth ETF (NYSEMKT: VUG)
• Vanguard Value ETF (NYSEMKT: VTV)

(Note: I used the State Street SPDR S&P 500 ETF in this example instead of the Vanguard S&P 500 ETF (NYSEMKT: VOO) as the latter didn't launch until 2010 and wasn't available to use to demonstrate performance during the financial crisis.)

2008 financial crisis

Much like the tech bubble did the most damage to technology stocks, the 2008 financial crisis did the most damage to banks, lenders, and other similar institutions. That made this bear market a little unusual in that it wasn't the riskier, growth-oriented stocks that underperformed. It was value, where most financials get categorized, that was the big laggard.

Data sources: YCharts.

Dividend growth stocks held up much better than the broader market and experienced significantly less risk in the process. A lot of the bigger banks were paying above-average yields, so it's not surprising to see high yielders doing comparatively poorly.

This probably isn't a good proxy for 2026, given that we don't have any one particular area or market sector that looks especially vulnerable. It could ultimately be tech, but valuations don't look nearly as out of whack as they did 25 years ago. Plus, given the outperformance we've seen from tech and growth over the past few years, it would seem much likelier that those groups would underperform, as is traditionally the case in a bear market.

2020 COVID-19 pandemic

This was more of a market shock that saw everything sell off pretty immediately and sharply.

Data sources: YCharts.

Of the major themes, growth held up better than value, but there wasn't a big performance disparity. Losses came pretty much across the board. Dividend growth as a more defensive strategy again outperformed and did so with much less volatility, although the whipsaws of the 2020 market were much more dramatic than those of 2008.

What could a 2026 bear market look like?

Here are a few things that I believe could happen:

• If tech and the AI trade become the catalyst, the Vanguard Growth ETF and the S&P 500 become the clear market underperformers.
• Small-caps may not lag large-caps because they're already so cheap to begin with.
• If stagflation becomes the trigger, the Vanguard High Dividend Yield ETF could do relatively better, given its overweights in areas like energy and consumer staples.
• If commercial real estate and housing are the larger triggers, expect to see financials and REITs do poorly.
• Dividend growth seems like a good bet as a strategy.

Mark Twain said: "History doesn't repeat itself, but it often rhymes." Both the 2008 and 2020 recessions were unique, but they do provide important hints at how things could play out in a bear market today.

David Dierking has positions in Vanguard Dividend Appreciation ETF. The Motley Fool has positions in and recommends Vanguard Dividend Appreciation ETF, Vanguard Growth ETF, Vanguard High Dividend Yield ETF, and Vanguard Value ETF. The Motley Fool has a disclosure policy.