Which Safe Havens Survived the Selloff?

Includes: DEF, FXF, TLT, XLP
by: Larry MacDonald

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 (NYSEARCA:XLP) and Claymore Sabrient Defender Index (NYSEARCA: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 (NYSEARCA:TLT). But a new and less familiar ETF is also hanging in well too: the CurrencyShares Swiss Franc Trust (NYSEARCA: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 PeakingDefensive Funds: How Did They Fare During This Downdraft?Behind the Global Stock Market Shake-out