5 ETFs For Portfolio Safety, Stability And Diversification

Includes: GLD, IAU, MUB, TLT, ZROZ
by: Zacks Funds

Global stock market volatility, oil price collapse and economic slowdown in China continue to rattle investor confidence this year. Former high flying stocks have come back to earth in the past few weeks as investors worry about the impact of weak global demand on corporate earnings. Investors had poured a lot of money into these stocks despite their sky high valuations but "risk-off" sentiment is sending many to "safer" assets now.

As the domestic economy continued to recover slowly but steadily over the past few years, US stocks remained one of the best asset classes in the world. But of late, domestic economic growth has been rather uneven. In the current uncertain market environment, it would be better for investors to focus on capital preservation. Below we have discussed some ETFs that will not only provide stability and diversification to your portfolio but also help in capital preservation.

Long-Term Treasury Bonds

The Federal Reserve spent the last year prepping the markets for a rate hike for the first time in almost a decade and ultimately raised rates by 25 bps in December and also penciled in four rate hikes this year. The market however expects not more than one rate increase this year. So, bond markets continue to frustrate bears again.

Longer-term bonds are impacted more by inflationary expectations than by monetary actions and with expectations so muted, the bullish trend for these ETFs is likely to continue. Then while rates are low here in the US, they are much lower in the other parts of the developed world. In Europe and Japan, monetary authorities are expected to continue easing in order to fight deflationary risks. So, compared with those interest rates, US interest rates are still very attractive for foreign investors.

25+ Year Zero Coupon U.S. Treasury Index Fund (NYSEARCA:ZROZ)

ZROZ follows the BofA Merrill Lynch Long US Treasury Principal STRIPS Index, which focuses on Treasury principal STRIPS that have 25 years or more remaining to final maturity. It charges just 15 basis points in expenses while the 30-day SEC yield is 2.53% currently.

iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT)

TLT tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index. It is the most popular and liquid ETF in the space with AUM of over $9.4 billion and excellent daily trading volumes. The fund charges 15 bps in expense ratio while the 30-day SEC yield is 2.34% currently.

Both these ETFs have Zacks ETF Rank #2 (Buy).


On Monday, gold recorded its biggest daily gain in more than 14 months as a strong risk-off sentiment continues to force investors to pile into the safety of the precious metal.

Additionally, a falling dollar (commodity prices generally move inversely to the dollar) and rising demand in China and India-the two biggest consumers of gold in the world-have also been helping gold's ascent. Chinese investors in particular have been buying gold lately as the country's stock market and currency continue to swoon.

Negative interest rates in some of the major countries are also boosting gold prices. Gold critics often argue that the "barbarous relic" is an unproductive asset since it pays nothing to holders and that argument does make some sense when interest rates are high but not in the ultra-low/negative interest rate environment.

iShares Gold Trust (NYSEARCA:IAU)

IAU provides a convenient and cost-effective access to physical gold. It is a physically backed ETF with more than $5.2 billion in assets. The fund has beta of -0.23 with the S&P 500 index and adds diversification benefits to an equity focused portfolio.


GLD is the most popular gold ETF with almost $29 billion in AUM and excellent trading volumes. It is a physically backed ETF that charges 40 basis points in annual expenses.

While IAU has a lower fee, GLD's excellent trading volumes make its trading very cheap. So, IAU is more suitable for buy and hold investors while GLD is better for trading portfolios.

Municipal Bonds

Municipal bonds were one of the best performing asset class in the US fixed income space last year. There are many factors that suggest that they may continue to outperform this year as well, including decreasing supply, rising tax rates and juicy income yields in the current ultra-low rate environment.

Municipal bonds supply as of the end of last year was about $400 billion, boosted mainly by refunding issuances in anticipation of higher interest rates. Experts expect the supply to decrease by about 25% this year.

iShares Muni Bond ETF (NYSEARCA:MUB)

MUB is the most popular ETF in the municipal bond space with more than $6.1 billion in AUM. It charges 25 bps in expenses and has a 12-month yield of 2.49%. The income is exempt from federal taxes and the Alternative Minimum Tax (AMT). The product provides a convenient access to more than 2000 investment grade municipal bonds.

The Bottom-Line

During times of turmoil, it is most important for investors to stay focused on their longer-term investing goals. Further, it is beneficial to stay diversified as history has shown us diversified portfolios always have better risk-adjusted returns over longer periods.

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