Smith: Equity ETF Investors Defensive

February 27, 2014

Findings

So, what did we find?

During the seven large correction periods from 2000 to 2014, investors would have done well to be out of equities altogether. The average performance of the S&P 500 and MSCI EAFE was -36.3 percent and -38.7 percent, respectively. The best performers were currencies, gold and MLPs.

The dollar, through the lens of the PowerShares DB US Dollar Index Bullish Fund (UUP | B-39) and yen, as measured by the CurrencyShares Japanese Yen Trust (FXY | A-99), posted average performance of 10.5 percent and 9.4 percent, respectively.

Gold—in this instance, the iShares Gold Trust (IAU | A-100) or SPDR Gold Shares (GLD | A-100), rose slightly more than 6 percent.

MLPs were slightly positive, which may not sound like a huge accomplishment until you realize they outperformed the broad equity markets by upward of 40 percentage points. Meanwhile, defensive stock sectors lost less than the broad market, but generally had losses in the double digits.

Medium-Sized Corrections

For the six medium-sized corrections, the S&P and EAFE indexes fell by an average of 15.7 percent and 15.9 percent, respectively. Again, precious metals and currencies performed the best.

Gold vehicles such as GLD, IAU and SGOL, the ETFS Physical Swiss Gold (SGOL | A-100), were the top performers, followed by silver, as measured by the iShares Silver Trust (SLV | A-99).

The yen, dollar and Swiss franc—as measured by the CurrencyShares Swiss Franc Trust (FXF | B-99) came next, followed by agricultural commodities through the lens of the Elements Rogers International Commodity - Agriculture Total Return ETN (RJA | C-49), which posted slightly positive performance.

U.S. utilities—as measured by Utilities Select Sector SPDR Fund (XLU | A-93) and the Vanguard Utilities ETF (VPU | A-98)—and global utilities as in the iShares Global Utilities ETF (JXI | A-85) were roughly flat.

Platinum, or more specifically, the ETFS Physical Platinum (PPLT | A-100) performed roughly in line with the indices (-14.4 percent) and palladium—or the ETFS Physical Palladium (PALL | A-100) grossly underperformed (-24.7 percent). But again, they’re relatively young funds with short track records.

There were eight periods of smaller corrections involving equity-market declines ranging from 5-10 percent. The S&P 500 and EAFE averaged drops of 7.3 percent and 8.3 percent, respectively.

As before, currencies did the best. They include the yen, dollar and Swiss franc. All other categories had negative performance, on average. That said, utilities and global utilities were again the best equity sectors, with performance the only slight negative.

Perhaps even more interesting, all of our defensive vehicles outperformed the S&P and EAFE during these small correction periods.

So, if history is any guide, investors would do relatively well using any of these vehicles during small drawdowns. For larger corrections, however, investors should think about being out of stocks altogether.


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