Investors Flood Safe Haven ETFs

The violent stock market downturn has been a boon for these ETFs.

sumit
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Senior ETF Analyst
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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

The January bloodbath on Wall Street continued this week, sending stock markets spiraling ever lower. At one point in Wednesday’s session, the S&P 500 touched 1,812―a notable 15.1% below its all-time high and its lowest level since February 2014―before bargain buyers sent the index up 50 points by the end of the day and another 20 points or so on Thursday morning.

The small-cap Russell 2000 did even worse, reaching 958, its lowest since June 2013. With 2 1/2 years of gains wiped out and down 26% from its highs, some brave investors waded in, sending the index into the green by the end of the session.

Market analysts are split on whether Wednesday's price action represents the ultimate capitulation or selling exhaustion that leads to a bottom in the market―or whether it was merely a pause in a larger bear market.

Billions Flow Into Treasury ETFs

In any case, some investors are taking no chances as they batten down the hatches and flood into the safest of assets to ride out the storm.

The ultimate safe havens are, of course, U.S. Treasury bonds. At a time in which risky, corporate junk bonds are plunging precipitously on oil- and economy-related woes, the risk-free Treasury looks attractive to these investors.

Treasury ETFs are among the biggest asset gainers so far this year, taking up three of the top five spots on the 2016 fund flows list.

The iShares 20+ Year Treasury Bond ETF (TLT | A-83) saw inflows of more than $1 billion so far this year, while the iShares 7-10 Year Treasury Bond ETF (IEF | A-55) and the iShares 1-3 Year Treasury Bond ETF (SHY | A-97) followed closely behind, with inflows of $828 million and $710 million, respectively.

Performance Strong In 2016

Performancewise, these ETFs have delivered. Yields on U.S. government bonds, which move inversely with prices, have dropped across the board.

The 30-year yield fell from 3.02% to as low as 2.71% on Wednesday. The 10-year fell from 2.27% to 1.94%, and the two-year fell from 1.05% to 0.79%.

U.S. 10-Year Bond Yield

For the ETFs mentioned, that translates into gains from 0.5% to 5.1% for the year so far, as can be seen on the chart below:

YTD Returns For TLT, IEF, SHY

There's no telling if Treasury bond ETFs will continue to outperform through the rest of 2016, but it's certainly been hard to bet against them. Due largely to the turmoil in stock markets, expectations of Fed rate hikes have diminished significantly, which is bullish for bonds.

Currently, futures markets are pricing in one rate hike for the rest of the year at the September meeting or later.

Of course, sentiment could change on a dime if the U.S. economy proves resilient to the slowdown abroad and to the oil downturn. In that case, the bond rally could quickly reverse.

Gold Creeps Higher

Meanwhile, the other safe haven slowly rising in 2016 has been gold. After losing 10.4% last year, the yellow metal is up 3.6% so far this year.

YTD Returns For Spot Gold & GLD

To be sure, gold isn't considered a safe haven by everyone, but for a vocal minority, it certainly is. The fact that gold is creeping higher at the same time that other commodities like oil fall ever lower is a sign of its safe-haven value, they argue.

Perhaps most interestingly, the metal has risen since the Fed hiked rates on Dec. 16. At the time, gold was trading just above the $1,050/oz level. Today it stands close to $1,100.

Just as is the case with Treasurys, continued volatility in financial markets could spark another leg higher in gold; conversely, a sense of stability in broader markets could quickly send prices back down.

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.