3 Safe Haven ETFs to Beat a Summer Slowdown
Though the U.S. markets staged a solid recovery during the first half of the year, hitting multi-year highs and ignoring geopolitical threats and lackluster economic data, they have been in a defensive mode in the past few weeks retreating in many sessions.
This comes despite the fact that we are seeing healthy Q2 corporate earnings, a gradually improving U.S. economy and a strengthening labor market with the four-week average U.S. jobless claims having hit an 8-1/2 year low last week along with rock-bottom interest rates.
The current market turmoil has led the blue-chip index – Dow – to close lower in most of the sessions in the past few weeks, with the index down roughly 3.4% from its July 16 record high of 17,138.
Ongoing geo-political tensions in Ukraine and the Middle East, renewed worries about a slowdown in China after HSBC services PMI fell to a near nine-year low in July, global slowdown concerns and chances of an early interest rate increase from the Federal Reserve following the strengthening labor markets, have led the markets to a risk-off mode. Consequently, it is also leading investors to a flight to safety.
In fact, the recent ban by Russia on food imports from the West in retaliation against sanctions imposed on it over Ukraine are seen as possibly hurting the fragile recovery in the European economy (read: Russian Food Import Ban Takes a Bite Out of These Agricultural ETFs).
Though the Russian government has announced an end to military drills near the Ukrainian border, the ban by Russia is clearly a signal that it has no intentions to buckle to Western pressure over Ukraine and that it might continue to strike back if required. If that be so, geopolitical tensions might escalate further and in turn dampen the global recovery
Given these woes, risk-averse investors are treading cautiously, while some are even dumping stocks and junk bonds in favor of safe haven assets to protect their portfolio from capital erosion. During the week ended August 6, investors redeemed $ 16.41 billion from stock mutual funds and ETFs, the largest weekly outflow since February.
Below we have highlighted three safe haven ETFs that investors can consider adding to their portfolios in the current volatility. These products are likely to gain should the turmoil worsen and the volatility in the market continues to escalate further (read: 5 Inverse ETFs for A Shaky Market).
iShares 20+ Year Treasury Bond ETF (TLT – ETF report)
Though U.S. treasuries were out of favor last year due to worries about Fed taper, they have become quite popular this year due to heightened global uncertainty. Treasuries are usually considered as safe haven assets by investors during volatile times.
TLT gives exposure to long-term U.S. Treasury bonds and is the one of the most popular and liquid ETFs in the bond space with AUM of $ 3.9 billion and average daily volume of more than 7.5 million shares.
The fund holds 26 bonds in its basket, while charging investors 15 basis points as fees. The average maturity for these bonds is 27.13 years, while the effective duration is 16.87 years. The 30 Day SEC Yield stands at 3.12%.
The ETF has gained roughly 2% in the past one week and 15% in the year-to-date frame, outperforming the broader markets by a wide margin. TLT currently has a Zacks Rank #3 or Hold rating.
Apart from TLT, investors can also consider 25+ Year Zero Coupon U.S. Treasury Index Fund (ZROZ – ETF report). The fund has been the best performer in the Treasury bond space and has added an impressive 27% this year.
SPDR Gold Trust ETF (GLD – ETF report)
Gold is often viewed as a safe haven asset to protect against political and financial risk, and has performed remarkably well this year following the weak equity markets and geo-political tensions. Funds tracking the yellow metal, such as GLD, can be a good choice for investors seeking safety.
GLD tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. The fund is the most popular and liquid bet in its space with an asset base of $ 33.4 billion and an average trading volume of more than six million shares a day. The fund charges 40 basis points as fees, has gained more than 2% in the past one week and is up 9% in the year-to-date frame.
Apart from GLD, investors can also consider COMEX Gold Trust (IAU – ETF report) – another popular choice in this space (read: Will Gold ETFs Continue to Shine?).
CurrencyShares Japanese Yen Trust (FXY – ETF report)
The Japanese currency, the yen, is often considered as a classic safe haven asset. Investors can target this via FXY, which measures the relative values of two currencies, the Japanese yen against the U.S. dollar. The fund gains in value as the yen appreciates relative to the dollar (see: all the Currency ETFs here).
The fund manages an asset base of $ 71.4 million, charges 40 basis points as fees and trades in moderate volume of under 75,000 shares a day.
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