IOver the past few weeks, recession speculation has intensified, and as a result, more and more analysts and pundits are coming up with stock fund and exchange-traded fund ideas that could prove sustainable if economic contraction sets in.
Predictably, many stock-based, recession-damping ideas are defensive. Consider sectors such as consumer staples and utilities. However, high inflation is pinching both of these groups, indicating that investors may want to rethink how to be defensive in a recession.
Enter the VanEck Vectors Environmental Services ETF (EVX). EVX, which tracks the NYSE Arca Environmental Services Index, is arguably a hidden gem among recession-proof ETFs, and it is for one simple reason: Trash. As in the exposure to waste removal companies.
“Waste disposal company Republic Services could serve as a hedge against inflation and a safe haven in the event of an economic downturn, according to Deutsche Bank,” reported Sarah Min for CNBC. “Analyst Kyle White upgraded Republic Services to a deferred buy, saying in a Thursday note that the company had strong pricing power and defensive characteristics in an increasingly difficult economic environment.”
For investors considering EVX, which turns 16 in October, the bullish analyst comment on Republic Services (NYSE:RSG) is relevant as the stock is tied to rival Waste Management (NYSE:WM) as the largest holding. of EVX. The shares of the two waste carriers weigh 11.1% in EVX.
“We are upgrading Republic Services (RSG) to a Buy rating because it (i) is an inflation hedge in the current environment, (ii) is a safe haven in a downturn in the market and (iii) offers compelling earnings growth, especially on a risk-adjusted basis,” Deutsche Bank’s White wrote in his report.
Admittedly, waste stocks are not perfect. The average year-to-date decline for Republic Services and Waste Management is around 13%. However, this is far greater than the nearly 23% lost by the S&P 500. Waste Connections (NYSE: WCN), another waste hauler that is part of the EVX portfolio, is also easily outperforming the broader market this year.
Something that is often overlooked about waste haulers is that these companies, including those residing in EVX, have forays into renewable energy. For example, Republic Services and Archaea Energy (NYSE: LFG) recently announced plans to develop 39 renewable gas projects across the country.
“The partnership, the nation’s largest RNG portfolio build to date, will convert landfill gas into pipeline-grade RNG that can be used for a variety of applications to replace gas from fossil fuels. The initiative is expected to drive substantial progress toward Republic’s long-term sustainability goal of beneficially reusing 50% more biogas by 2030,” according to a statement.
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