Which Safe Havens Survived the Selloff?

The tremors rippling through stock markets this week may have exposed a few misnomers, in particular that some instruments are good enough hedges or sufficiently "defensive" investments to insulate investors from market downturns.

Gold is down in tandem, as are a number of exchange traded funds [ETFs] widely perceived to be defensive – e.g. the Consumer Staples Select Sector SPDR (XLP) and Claymore Sabrient Defender Index (DEF).

We hear a lot about gold being a hedge against financial turbulence but it seems the precious metal is now driven more by income trends in Asia. In other words, it’s looking more like a cyclical play like the rest of the commodity group, dependent on Asian business cycles.

What held up during the sell-off? Government bonds did, as highlighted by bond ETFs such as the iShares Lehman 20+ Year Treasury Bond (TLT). But a new and less familiar ETF is also hanging in well too: the CurrencyShares Swiss Franc Trust (FXF).

Ah yes, the Swiss Franc. It had a good run during the turmoil of the 1970s just like gold. But as it’s less affected by Asian business cycles in this decade (thanks in part to the removal of gold backing in 2000), perhaps it will emerge as a purer hedge. The CurrencyShares Swiss Franc also pays interest – not a lot but still better than the 0% on gold.

Related Articles: U.S. Sector Performance: Financials, Consumer Staples Near Lows, Utilities Peaking • Defensive Funds: How Did They Fare During This Downdraft? • Behind the Global Stock Market Shake-out

Comments

[David Jackson:]

We wanted to inform Seeking Alpha's readers that this article has been changed from the original as follows. Mr MacDonald originally wrote: "The tremors rippling through stock markets this week may have exposed a few frauds in the hedging and defensive categories." Sabrient, the index provider for the Claymore Sabrient Defender Index, rightfully objected to the word "frauds", which means "intentional deception resulting in injury", so we changed the opening sentence to "The tremors rippling through stock markets this week may have exposed a few misnomers, in particular that some instruments are good enough hedges or sufficiently "defensive" to insulate investors from market downturns."

R. Guy Kraines, President and COO of Sabrient, wrote to Mr MacDonald objecting to the use of the word "frauds". His letter also stated:
<blockquote>On the market front, I'm sure you recognize that essentially every 100% long equity position (which describes all equity ETFs) got clobbered on February 27th, whatever sector they were in, whatever selection technique they used or wherever in the world they were invested Even commodity-based gold and oil stocks got hammered.

The better performing investments you note in the article (bonds and the Swiss franc) don't represent stock market investments. Your point in noting this is obvious, but it should in no way cause you to start your column by denigrating a particular equity investment.

Further, we'd like you to reconsider the performance of DEF overall. You fail to note that, since it's inception on December 21, 2006 through February 26 th, it outperformed the S&amp;P 500, increasing 5.23% vs. 2.58% for the S&amp;P. One might have thought that, having ratcheted higher faster than the S&amp;P, it might have been exposed to risk of a greater correction. From inception through March 8th, it increased 1.61%, versus a loss of 0.74% for the S&amp;P 500, a broader performance gap.</blockquote>...

According to Matt Hougan's article, Did Specialty ETFs Provide a Cushion From the Fall?, DEF fell 4.98% from its close February 26th to close March 5th, versus a decline of 5.39% for the S&P 500 ETF, SPY.

2007 Mar 10 05:22 PM