If a Recession Is Coming, I'm Buying These 4 Top ETFs on the Dip

With inflation still much too high and the Federal Reserve beginning to raise interest rates to help fight it, investors are rightfully becoming more concerned about the threat of inflation.

Despite those fears, artificial intelligence (AI) infrastructure building and strong corporate earnings growth have been able to shield the S&P 500 from more-significant downturns so far. But with some of the big tech executives talking about ways to slow down AI development, it could be time to think about what happens to stocks if that support disappears.

Since stocks often begin declining well before a recession officially starts, and they start to recover before the bottom is in, trying to time a recession is usually a bad idea. But shifting your portfolio more defensively instead of exiting into cash can make some sense.

There are several ways to do this. Let's look at four different exchange-traded funds (ETFs) that offer different approaches for becoming a little more conservative.

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1. iShares MSCI USA Quality Factor ETF

The iShares MSCI USA Quality Factor ETF (NYSEMKT: QUAL) focuses on financially healthy companies by looking for high returns on equity (ROE), low debt/equity ratios, and stable earnings growth. These companies are the ones better built to withstand more-challenging economies and can outperform the S&P 500 in down markets.

2. Vanguard Consumer Staples ETF

The Vanguard Consumer Staples ETF (NYSEMKT: VDC) targets the sector that tends to have some of the most durable demand regardless of the economy. In a recession, consumers may give up a new car, a fancy vacation, or a home upgrade. They usually don't give up toilet paper and groceries.

3. iShares MSCI USA Minimum Volatility Factor ETF

The iShares MSCI USA Minimum Volatility Factor ETF (NYSEMKT: USMV) is a different spin on the low-volatility theme. Instead of requiring that every stock included demonstrate less volatility than the broader market, this ETF aims to produce an optimized portfolio of shares that collectively -- through individual risk profiles and their correlations to other stocks -- minimizes the volatility of the entire portfolio.

4. Vanguard Intermediate-Term Treasury ETF

The Vanguard Intermediate-Term Treasury ETF (NASDAQ: VGIT) is more of your traditional risk-off investment. When investors sell their stocks during a recession, they often transition over to bonds for relative safety. This ETF targets middle-of-the-range maturities, so they potentially yield more than Treasury bills but don't come with the higher rate sensitivity of long-term Treasuries.

Choosing defense over selling

We could look at economic and market conditions today and come to the conclusion that a recession is inevitable. And it may be. But if you're going to try to time the market based on your belief, you have to be right three ways to ultimately make it worth it:

• That you're correct in your prediction about a recession.
• That you get out of the market at the correct price.
• That you buy back into the market at a lower price than you sold at.

That's a notoriously difficult trifecta to pull off. Not only do you have to be right, you also need to have the discipline to sell when stocks are near all-time highs and buy when conditions are at their worst. A lot of people are unable to do that.

That's why tilting to defense but keeping your equity and fixed-income exposure makes sense versus getting out altogether. Even if you're wrong about a recession, you still have the equity exposure that allows you to capture upside potential.

For long-term investors, this is more ideal because you would (in theory) maintain your long-term allocation consistent with your goals and risk tolerance. But you shift it in a way that adds some protection. It's a safer way to reduce risk in your portfolio without doing a major 180-degree turn in your investment strategy.

Any one of these ETFs could accomplish that. Choosing high-quality stocks is a strategy that can work for almost anyone. Minimizing volatility or targeting one of the most defensive sectors in the market also makes sense. And if you really need to get out of equities because they've become too volatile for your comfort, a tilt toward Treasuries is usually better than just shifting to cash.

Recessions can be scary. But if you're prepared ahead of time, your portfolio can handle it.

David Dierking has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.