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How you should be investing your money right now to prepare for a recession, according to a former financial analyst and educator

Austin Hankwitz   

How you should be investing your money right now to prepare for a recession, according to a former financial analyst and educator
  • Austin Hankwitz is a former financial analyst and investing content creator.
  • He uses TACK, an ETF, in times of market uncertainty like we're seeing now.

There's been a ton of buzz recently around a looming recession – and mass hiring freezes and layoffs point toward one being right around the corner.

There are several things people should be thinking about when it comes to preparing for a recession, like paying down high-interest debt and building a savings account.

But I want to spend some time walking through how I've been strategically investing my money while keeping this uncertain macroeconomic environment front of mind.

I create personal finance and investing content online – mainly short-form videos. I graduated from the University of Tennessee with a bachelor's in finance and economics and worked as a financial analyst for three years at a healthcare company. I now create personal finance and investing content full-time and have amassed 900,000 followers across my social media platforms in only two years.

I always look at TACK — an exchange traded fund that follows the market

On March 23, 2022 Fairlead Strategies launched an ETF (exchange traded fund) called the Fairlead Tactical Sector ETF – or "TACK" for short.

TACK is an ETF that follows three market characteristics that are incredibly important to observe and act upon during times of heightened volatility and uncertainty:

  1. Trend-following: This generally means it observes and reacts upon trends in the markets in this case by watching mathematical indicators based on moving averages.
  2. Overbought/oversold: This recognizes if a specific security is overbought (historically trading too high) or oversold (historically trading too low).
  3. Relative strength: This gauges price performance of one security versus another using a price-to-price ratio, in this case applied to sectors versus the broader market.

Once per month, the ETF is rebalanced to reflect Fairlead's findings regarding these characteristics. This steers the ETF either "risk-on" or "risk-off."

What risk-on means

When the ETF is deemed to go "risk-on," it aims to build on the return of the S&P 500. It does this in the most straightforward way possible – hold other ETFs that represent the sectors making up this index, concentrated in those with the best trends.

In case you all weren't familiar, there are 11 sectors that make up the S&P 500. All of these sectors can be invested into individually through ETFs offered by various companies. So when TACK wants to build on the return of the S&P 500, it holds proportionate weightings in the strongest eight of the ETFs shared below:

    1. The Communication Services Sector (XLC)
    2. The Consumer Discretionary Sector (XLY)
    3. The Consumer Staples Sector (XLP)
    4. The Energy Select (XLE)
    5. The Financials Sector (XLF)
    6. The Health Care Sector (XLV)
    7. The Industrial Sector (XLI)
    8. The Materials Sector(XLB)
    9. The Real Estate Sector(XLRE)
    10. The Technology Sector (XLK)
    11. The Utilities Sector (XLU)

How to have the best chance to outperform long term

Think about it like this — we all know an ETF is easily explained as "a basket of stocks." By investing into an ETF, you're buying into a "basket" that holds dozens (sometimes hundreds) of individual stocks. One ETF, or basket, could hold hundreds of stocks.

Since this ETF is comprised of other ETFs, you can think of this as "a basket of other baskets." This one "basket" is full of other "baskets," especially the 11 economic sectors that make up the stock market.

Theoretically, by concentrating in the leading sectors that the S&P 500 holds — you'll have a chance to outperform over a long period of time.

What risk-off means

However, when Fairlead Strategies identifies a soft spot in the markets they go "risk-off" and migrate to the following ETFs:

SPDR Gold Trust (GLD)

SPDR Portfolio Long Term Treasury ETF (SPTL)

SPDR Portfolio Short Term Treasury ETF (SPTS)

Here's a good breakdown of the ETF:

"Fairlead Tactical Sector ETF (the "Fund") seeks capital appreciation with limited drawdowns. A drawdown is the amount of investment value lost during a significant market decline, here related to the equity market, measured from peak to trough. The Fund seeks to limit drawdowns to preserve capital, such that a greater amount can be reinvested once the market has bottomed.

"Our methodology attempts to proactively identify market declines. When successful, this process should position the Fund into more defensive sectors and assets before market declines become worse, thereby limiting drawdowns."

Overall, the fund's strategy is designed to benefit from sector leadership during uptrends while minimizing downside risk during downtrends.

To add color around that statement, since TACK was launched in late-March the S&P 500 has traded down -18%. On the other hand, TACK is trading down only -4% — producing more than 14% in alpha against the markets.

Here's more information if you want to see the specific holdings inside the ETF that allowed them to outperform the market since inception.

What I'm doing with this information

Including this ETF in my portfolio is a no-brainer. As I've been sharing to my Substack publication over the last seven months, I've been stacking cash in anticipation for a large market correction. I'm currently sitting around a 30% cash position in my active portfolio.

Given this looming recession, continued chatter about supply chain issues, and inflation eating into corporate profits (Target and Walmart specifically) – continued market volatility is nearly certain.

If we look back in time, the 200-week exponential moving average has done a fantastic job marking the market "bottom" or close to it. Sure, no one can predict which way the stock market is going to move. However, if we drop below this moving average (when the S&P 500 trades below ~3,260) there's no telling as to what's going to happen and for how long.

To mitigate my downside risk while still having exposure to the market, when and if the S&P 500 trades below this figure I'm going to move most of my cash position into this ETF. Considering it truly is "no man's land" below this moving average, I have no idea how volatile the market will be when trading below. Assuming TACK will be "risk-off" if this happens, my downside risk during the heightened volatility should be limited.

Austin Hankwitz is a former financial analyst and full-time investing content creator.


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