“Safe haven” ETFs offer cover as Euro uncertainty roils markets

Nov 2nd, 2011 | By | Category: Fixed Income

[This article was published before the resignation of George Papanderou]

The unexpected move by George Papandreou, prime minister of Greece, to call for a referendum on the recently negotiated bailout has sent shock waves through European financial markets. Just as investors were beginning to feel confident enough to dip their toes back in the market, they are quickly reminded just how precarious the situation is.

"Safe haven" ETFs offer cover as Euro uncertainty roils markets

"Safe haven" ETFs offer cover as Euro uncertainty roils markets

While it appeared that politicians had started to get a grip on the crisis, they had perhaps overlooked the human element. Such severe cuts are understandably hitting Greek morale and, with protests escalating on the streets of Athens, austerity fatigue is clearly setting in. A yes vote in the referendum cannot be guaranteed.

The prospect of a no vote or indeed a general election – and consequently the possibility of a hard, disorderly default by Greece – has sent the Euro Stoxx 50 Volatility Index (VStoxx) surging higher. It has also once again sent investors scurrying for cover into so-called “safe haven” assets.

While there is no such thing as a risk free asset, there remain a number of popular safe haven hiding places for investors wishing to best preserve their wealth. These include, for example, US treasuries, UK gilts, German bunds, money market funds and gold.

For investors considering de-risking their portfolio, they might want to think about the ETFs listed below, all of which are domiciled in Europe and registered for UK distribution. However, one should not expect high yields: these ETFs are all about low risk and capital preservation.

UK Gilts

Yields on UK government bonds, known as Gilts, are at 50-year lows. While the UK budget deficit is substantial, the Chancellor’s unwavering commitment to cut it has impressed the financial markets. Though growth is woefully sluggish, a weaker exchange rate should help boost the country’s international-oriented economy. Debt-to-GDP is high, but less than that of the US, France and troubled Italy.

iShares FTSE UK All Stocks Gilt
iShares FTSE Gilts UK 0-5
db X-trackers iBoxx £ Gilts Total Return Index ETF
Lyxor ETF iBoxx £ Gilts
Lyxor ETF iBoxx UK Gilt Inflation-Linked £
iShares Barclays Capital £ Index-Linked Gilts

German Bunds

Like Gilts, German bund yields are at record-low levels. This reflects the country’s robust economy, moderate budget deficit and low debt-to-GDP ratio (relative to others). As a major exporter, the German economy would suffer if the global economy slows further. And though it remains embroiled in the euro-zone debt crisis and will have to shoulder much of the burden, its debt is not yet at risk.

db X-trackers iBoxx € Germany 1-3 TR INDEX ETF
db X-trackers iBoxx € Germany TR INDEX ETF

US Treasuries

Despite Standard & Poor downgrading the US credit rating, Treasuries remain a favoured asset class during times of increased nervousness. Though the country’s debt-to-GDP ratio is high and rising, it is set to fall once the bipartisan “Super Committee” allocates some $1.2trn of cuts. The USD is the global reserve currency and, while gridlock on Capitol Hill doesn’t help, the country remains a safe bet.

Lyxor ETF iBoxx $ Treasuries 1-3Y
db X-trackers iBoxx $ Treasuries 1-3 TR Index ETF
CS ETF (IE) on iBoxx USD Govt 1-3
SPDR Barclays Capital US Treasury Bond ETF

Money Market

Short maturity money market ETFs seek to maximise current income consistent with the preservation of capital and a high degree of liquidity. These particular ETFs are actively managed by PIMCO and invest primarily in short-term investment grade debt, including corporate, government, agency and asset-backed securities.

PIMCO US Dollar Short Maturity Source ETF
PIMCO Sterling Short Maturity Source ETF

Gold

Gold has always been viewed as a traditional safe-haven asset; however, after a decade-long rally, September’s correction shows that at elevated levels gold is vulnerable to profit-taking.

iShares Physical Gold ETC
Source Physical Gold ETC
DB Physical Gold GBP Hedged ETC
ETFS Gold Bullion Securities ETC

Importantly, investors should be conscious that high gold prices reflect fears of inflation, whereas low government bond yields imply fears of deflation. They can’t both be right. For investors looking to best preserve their wealth, while not entirely de-risking, they would be wise to ensure their portfolios remain fully diversified and consider holding both elements of short duration investment grade debt and gold.

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