Safe Haven ETFs: Five Funds For Riding Out The Storm

by on May 20, 2010 | ETFs Mentioned:

So much for a long, happy recovery. As soon as the last of those warning of a “double dip” had been laughed out of the room, a string of negative developments have sent global equity markets plunging. With Europe on the brink of a sovereign debt crisis, disappointing data releases in the U.S, and oil prices in freefall, the risk tolerance of many investors is being put to the test (see Finding The Right Oil ETF For A Crude Rally).

The reactions to the recent turmoil have been all over the board. Some are holding their ground, viewing the recent dip as an opportunity to buy risky assets at an attractive price (see Three ETFs With Sky High Betas). Others are betting on a prolonged period of turmoil through volatility ETNs or inverse ETFs. And then there are those who would rather watch from the sidelines, content to sell some risky assets and store cash in safe havens until the storm clouds clear and the VIX drops down to its long-term average. There are, of course, a number of ETFs suited to accomplishing this task. Below, we profile five safe haven ETFs for investors looking to dial down their risk profile (for more ETF ideas, sign up for our free ETF newsletter).

1. SPDR Gold Trust (GLD)

Gold is one of the most popular and oldest safe haven investments. When equity markets are volatile, demand for gold bullion has historically jumped, as investors seek out hard currency. Because gold makes up a substantial portion of global foreign reserves, there is some downside protection. GLD is one of the largest holders of gold bullion in the world, behind only a handful of foreign reserve funds. GLD has gained about 4% over the last month; SPY has lost almost 10% during the same period.

2. PIMCO Enhanced Short Maturity Strategy Fund (MINT)

While actively-managed equity ETFs have been slow to gain traction, interest in active fixed income ETFs has surged. MINT isn’t linked to any index, seeking instead to deliver greater income and total return potential than money market funds. A look at MINT’s holdings shows a mix of domestic and international fixed income securities, as well as cash. Although this ETF’s average duration change based on market conditions, the MINT fact sheet notes that it normally won’t exceed one year.

3. PowerShares DB U.S. Dollar Index Bullish (UUP)

It wasn’t that long ago that the dollar was facing significant downward pressure, as investors were calling for changes to the current foreign reserve system. But the recent turmoil in markets has shown that the greenback’s safe haven status is very much intact. Although the U.S. faces its share of budget problems and debt constraints, investors have flocked to dollar-denominated assets in recent weeks as volatility has spiked.

UUP tracks the Deutsche Bank Long US Dollar Index (USDX) Futures Index, a benchmark comprised of futures contracts that replicated the performance of being long the dollar against a basket of developed market currencies. UUP is up about 6% over the last month, thanks in large part to a significant allocation against the euro (see UUP’s fact sheet).

4. IQ CPI Inflation Hedged ETF (CPI)

This ETF is linked to the IQ CPI Inflation hedged benchmark, an index that seeks to provide a real return above the rate of inflation, as measured by CPI (see Beyond TIP: 10 ETFs To Protect Against Inflation). Around a core holding in short-term Treasuries, CPI utilizes a variety of asset classes, including currencies, commodities, and equities (see CPI’s holdings). Over the last month CPI has been largely immune from volatility that has pummeled risky assets.

5. SPDR Nuveen S&P VRDO Municipal Bond ETF (VRD)

This ETF’s holdings consist of variable rate demand obligations (VRDOs), a unique breed of municipal bonds. VRDOs are generally  issued with maturities 20 or 30 years away, but maintain a feature that allows investors to put them to a remarketing agent at par value plus any accrued interest. Because rates on most VRDOs reset on a weekly basis, they are effectively short-term securities.

VRDOs are generally low risk securities for a number of reasons. First, the put feature allows investors to cash in their security at any time and receive face value. Second, most VRDOs come with a letter of credit provided by a highly-rated bank that adds an additional layer of credit enhancement. The bank serves as a liquidity provider of last resort, and the bank’s credit rating is often assigned to the bond in place of the rating of the issuer (see Do You Need A VRDO ETF?). VRD has been extremely stable in recent weeks, serving as an effective tool for capital preservation (see a returns table).

Disclosure: No positions at time of writing.