Best ETFs: How A Manager With $7.5 Billion In Assets Is Hedged For Recession

Whether the U.S. economy is in a recession or not isn’t what’s most important to investors. Diversification is key no matter what and guides you to pick the best ETFs for your portfolio, says Adam Recker, managing director and head of equities at The Mather Group.

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That’s also one of the reasons why he joined Chicago-based TMG in 2017, which now has $7.5 billion in assets under management as of June 30. He helps clients marry low-cost, diversified, global investing with tax and financial planning while controlling risk.

“We’re really focused on controlling what we can control,” he said. And that includes portfolio rebalancing, keeping cash on hand and addressing risk.

The Mather Group’s Roots

Founded in 2011 by Stewart Mather as a Morgan Stanley breakaway, The Mather Group has been one of the fastest-growing registered investment advisors (RIAs) since. The firm’s client base includes high-net-worth individuals such as former business owners, Fortune 100 executives and other affluent clients.

For his best ETF recommendations, Recker believes that spending time in the market and allowing compounding to work, coupled with appropriate risk management, are what’s important for successful investing.

Risk management includes the appropriate allocation between stocks and bonds, as well as keeping cash on hand to weather the storm. The portfolio managers also review portfolio holdings often and will rebalance if necessary.

“Many investors want to take more risk, and so there’s always that guidance to make sure that (they understand) that there’s risk in investing and that these pullbacks are the compensation and the pain we have to accept for longer-term, outsized returns, potentially,” he said. “So preparing for bad times when times are good is part of the challenge to control risk.”

Having a plan ahead of time is paramount, he said, “so that, regardless of what the market throws at us, we have an idea and a plan that we’re going to follow when these times come.”

Best ETFs For This Market

Taking this philosophy into consideration, Recker proposes three ETFs.

“There’s going to be ups and downs with that, and so, because of our global, diversified focus, an ETF we use and we always have an eye on is Vanguard Total World Stock (VT),” said Recker. “Especially given the fact that everything has pulled back this year, relative to previous months and the beginning of the year last year, everything does look relatively more attractive.”

That said, there’s always a chance for further downside, he says.

The $23.5 billion fund is one of the most diversified and cheapest global funds available to retail investors. It invests in stocks of all sizes and weighs them by market cap.

VT holds over 9,000 stocks that are in the FTSE Global All-Cap Index. About 58% are in the U.S., while 41% are non-U. S. equities. Top 10 holdings, which make up only about 13% of the fund, include big names Apple (AAPL), Microsoft (MSFT), Google parent Alphabet (GOOGL), Tesla (TSLA), UnitedHealth Group (UNH), Johnson & Johnson (JNJ), Berkshire Hathaway Class B (BRKB) and Facebook owner Meta Platforms (META). UnitedHealth Group is on the IBD Leaderboard list.

The fund was up 7% in July but down 14.2% YTD. It charges an annual management fee of just 0.07%.

“An ETF that is diversified and just gets exposure to the global market should continue to drive value over long term,” Recker said.

Going For Value

His second ETF pick addresses the environment of rising interest rates with a defensive, more value-oriented fund: SPDR S&P 600 Small Cap Value (SLYV).

“That’s an asset class that over the long term has shown more resiliency in comparison to other pockets of the market,” he said. He says its underlying exposure to energy, financials, consumer staples and other defensive sectors has shown more strength. “We expect it to hold up better in an environment like this.”

The passive $4 billion fund focuses on smaller companies within the small-cap value market. It picks those that show strong value characteristics based on the book-to-value ratio, earnings-to-price ratio and sales-to-price ratio. SLYV is cap weighted and focuses on higher-quality and higher-profitability names that historically have outperformed the market.

SLYV rose 8.51% in July and is down 6.73% this year so far. It charges a 0.15% annual fee to hold the ETF.

Going Global With Best ETFs

For those who’d like to take advantage of opportunities abroad, despite continued risks and potential for further downside, Schwab Emerging Markets Equity (SCHE) is an option.

It’s a good way to “get low-cost exposure to that segment of the market,” said Recker. SCHE has $8.5 billion in assets and charges just 0.11% per year to own the fund.

The fund invests in large- and midcap stocks from developing countries, including local China A-shares, which comprise 38% of the fund. Taiwan, India and Brazil are the next top holdings. SCHE is very diversified with over 1,800 stocks, while the top 10 holdings represent about 22% of total assets.

Emerging-market funds are more volatile and carry higher risk, he points out. “We want to make sure that clients understand the role (they) play in a portfolio, and that it will allows us to stay the course over the long term.”

SCHE was down 1% in July and 15% in the first half of the year.

Adam Recker

• The Mather Group
• Managing director and head of equities
• Recker says investors shouldn’t overly fixate on whether the U.S. is in a recession or not. More important is choosing the best ETFs for a diversified portfolio.

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