History Says This Is Hands-Down the Best ETF to Buy if a Bear Market Is Coming
Key Points
Based on the history of the most recent bear market in 2022, “recession-proof” stocks like energy, healthcare, and consumer staples tend to be safer choices.
The Schwab U.S. Dividend Equity ETF (SCHD) holds a portfolio of 102 stocks with heavy weighting toward these “safer” defensive industry sectors.
SCHD strongly outperformed the S&P 500 and Nasdaq-100 indexes in 2022.
The S&P 500 index (SNPINDEX: ^GSPC) has had a better-than-average year, with a total return of about 15% year to date. But many investors worry that a bear market is right around the corner.
There are a few big risks facing the stock market. Higher bond yields are pushing up borrowing costs for businesses. The Fed remains committed to fighting stubbornly high inflation. And major tech companies are borrowing hundreds of billions of dollars to pay for the development of artificial intelligence (AI) tools that have excited investors but are not guaranteed to pay off.
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What if the stock market crashes in 2027? How should you invest today if a bear market is coming?
Let's look to the lessons of history and see which stocks tend to do better during bear markets. One low-cost exchange-traded fund (ETF) could put some of the best so-called "recession-proof stocks" in your portfolio.
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Which stocks are good in bear markets? Healthcare, energy, consumer staples
During a strong bull market like the one we're in now, investors are hopeful about the future. They're willing to put money into (so far) unprofitable ideas and companies with high growth potential. That often means tech stocks. The tech-heavy Nasdaq-100 index is up about 20.4% in 2026. But if a bear market arrives, some of those high-flying tech stocks tend to get punished the hardest.
Here's what happened in 2022 during the most recent bear market. The Nasdaq-100 was down about 32.4% that year, and the S&P 500 (which also includes many tech majors) declined by about 18.1%. Some sectors of the economy stood up to the downward pressure of the bear market. Energy, utilities, healthcare, and consumer staples stocks did much better in 2022 than the broader stock market indexes.
How should you invest now for a bear market in 2027? Consider SCHD.
Stocks that do better during bear markets and recessions are also called "defensive stocks." They don't always grow as fast when times are good, but they can be steadier and more resilient to "defend" your investments when times are hard. Energy, utilities, healthcare, and consumer staples are often among the stocks that do better in bear markets because these sectors are more "must-haves." Even if the economy is struggling, people keep paying for gas and heating their homes. They keep buying pharmaceuticals and everyday consumer items like groceries and shampoo.
One good choice for a low-cost ETF that holds many of these defensive sectors is the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). This dividend fund holds 102 stocks across a range of industry sectors. But SCHD is much less tech-heavy than the broader stock market, with only 9.23% of its assets invested in information technology stocks. Instead of relying too much on tech, the Schwab U.S. Dividend Equity ETF owns a broad range of stocks in healthcare (20.7% of the fund), consumer staples (20.4%) and energy (14.1%).
In the past 15 years since the fund's inception in October 2011, SCHD has delivered annualized returns of about 13.1%, and about 23.4% in the past year.
Schwab U.S. Dividend Equity ETF vs. bear market
Many of the top stock holdings in SCHD are household names like Coca-Cola (NYSE: KO) and Procter & Gamble (NYSE: PG), and pharma giants like Merck (NYSE: MRK). Recessions aren't good news for anyone, but companies like these are well-established and have strong balance sheets. They tend to keep generating strong profits and paying high dividends through good and bad economic times.
Here's how the Schwab U.S. Dividend Equity ETF performed during the most recent bear market in 2022:
While past performance can't predict future returns, some ETFs can handle volatility better than others. The Schwab U.S. Dividend Equity ETF is one of the best dividend index funds. It could be a good choice to diversify your portfolio against the risks of an upcoming bear market.
Ben Gran has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Merck. The Motley Fool has a disclosure policy.