Safe Haven ETFs Jump On Market Fears

Investors hedge against the possibility of a broad market correction.

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

U.S. stocks were hammered this week after a surprise move by China to devalue its currency. The yuan fell as low as 6.45 against the U.S. dollar before intervention by the People's Bank of China helped the currency to recover slightly.

The rapid descent in the Chinese currency, which is at its lowest levels in four years, has fueled concerns about a global currency war. China's government has denied those claims. At the very least, though, the move underscores the persistent worries about the health of China's slowing economy. That has dampened financial market sentiment all year long.

After rising for the past six-straight years, the S&P 500 has been range-bound throughout 2015. According to Bloomberg, the stock index has crossed its 50-day moving average (up and down) by a record 35 times and counting this year.


S&P 500 Plotted With 50-Day Moving Average

Sooner or later, the market's range will break; the only question is, in which direction?


Safe Havens Advance
Based on this week's news and price action, bets are picking up that the next move will be to the downside. The classic safe-haven, exchange-traded funds have been advancing, an indication that fears of a breakdown are growing.

The most obvious of these safe havens are the ETFs tied to Treasury bonds. The benchmark U.S. 10-year bond yield hit the lowest level in more than three months at 2.04 percent this week. In turn, the iShares 20+ Year Treasury Bond ETF (TLT | A-85) and the PIMCO 25+ Year Zero Coupon U.S. Treasury ETF (ZROZ | C-46) have surged.

TLT, which focuses on the long end of the Treasury curve, is up a solid 1.5 percent since the start of the month and flat on a year-to-date basis. The highly interest-rate-sensitive ZROZ, which holds long-term government bonds that don't have coupon payments, is up 2.8 percent this month and down 1.9 percent since the start of the year.


August Returns For TLT, ZROZ

Another safe-haven ETF that has been perking up recently is the SPDR Gold Trust (GLD | A-100), as well as other physically backed gold funds. The $24 billion fund has gained a solid 2.7 percent in August so far, but is still down 5.1 percent for 2015 as a whole.

Gold made headlines last month after prices fell to a five-year low at $1,072 an ounce. The yellow metal currently trades around $1,125.

Equity Safe Havens
On the equity front, the two defensive sectors that come to mind are consumer staples and utilities. Unsurprisingly, both have outperformed the broader market in August.

The Consumer Staples Select SPDR (XLP | A-94), which owns relatively conservative stocks like Procter & Gamble, Coca-Cola and Phillip Morris, has fallen by 0.2 percent this month, less than the 0.8 percent decline for the SPDR S&P 500 (SPY | A-98).


On a year-to-date basis, XLP is up 4.8 percent, while SPY is up 2.6 percent.

Meanwhile, the Utilities Select SPDR (XLU | A-86) jumped an impressive 2.8 percent so far in August, but remains down 2.6 percent for the year as whole. With their high yields, utilities are seen as a particularly interest-rate-sensitive sector. Lower interest rates are thus a positive for the group.


August Returns For XLP, XLU, SPY

The final safe-haven worth pointing out is one of the "smart beta" funds that have taken the ETF industry by storm. The PowerShares S&P 500 Low Volatility ETF (SPLV | A-62), with an impressive $5.1 billion in assets, has delivered on its low-volatility promise during the recent market tumult.

SPLV, which selects 100 stocks from the S&P 500 with the least volatility during the past year, is up by 0.5 percent in August, beating SPY's 0.8 percent decline. On a year-to-date basis, SPLV's 2.4 percent return is just a hair below SPY's 2.6 percent gain.

The Bottom Line

Worried that the range-bound stock market could break down soon, investors are bidding up safe-haven ETFs tied to Treasurys, gold and defensive sectors. Whether the rush into these ETFs is warranted remains to be seen, but for now, they are handily outperforming the broader indexes.


Contact Sumit Roy at [email protected].

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.