Safe Haven ETFs Surge On Brexit Fears

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Includes: FXY, GLD, TLT, VXX
by: Zacks Funds

The global investing world, especially the risky assets, went into a tailspin lately as opinion polls showed higher chances of Britain leaving the European Union on June 23. Notably, the UK will arrange a vote on that day to come to unison on whether it will remain in or leave the debt-ridden and travail-trodden EU.

The most recent opinion polls revealed that 52% Brits want to leave the EU, while only 33% are against it, resulting in a sturdy 19-point margin of lead. While sheer uncertainty around the Brexit outcome was enough to derail the market momentum, higher chances of Britain's exit took the market by storm on June 10, increasing volatility. The volatility ETN the iPath S&P 500 VIX ST Futures ETN (NYSEARCA:VXX) was up over 9% on June 10.

What if Britain Exits EU?

Post Brexit, Britain could set its own trade agreements. Also, Britain will get rid of the blazing immigrant issues. At the current level, the UK has no control over accepting migrants as citizens of EU members have permission to reside in any member country. Britain is incurring a net £3 million in cost every day due to surging EU migration. Some even argue that this immigrant issue is actually fostering chances of terrorist attacks.

Also, Britain will save a considerable amount in membership fee if it cuts ties with the EU. Last but not the least, falling apart with the EU will free the UK from the EU's debt-crisis related hazards.

But there are a number of downside risks. Most importantly, post break-up, trade tariffs will be imposed on Britain while doing business with EU states. At present, free trade is allowed among EU members. Since the EU shares intense trade relations with Britain, levy of new trade barriers are expected to hurt the country's economy. Plus, some are of the view that Brexit would hit the low-income strata, as lower national income would result in reduction in the welfare budget.

Given these woes and mixed views, risk-averse investors are treading cautiously as most are dumping stocks in favor of safe haven assets to protect their portfolio from capital erosion. Below we have highlighted three safe haven ETFs that investors can consider adding to their portfolio amid the current volatility. These products are likely to gain should the turmoil worsen and the level of volatility escalate.

Gold

SPDR Gold Trust ETF (NYSEARCA:GLD)

Gold is often viewed as a safe haven asset to protect against financial risks, and has performed well lately (despite not-so-upbeat fundamentals) on heightened market volatility. The metal hit a four-week high on Brexit bets.

Funds tracking the yellow metal, such as GLD, can be a good choice for investors seeking safety. GLD tracks the price of gold bullion measured in U.S. dollars. The fund gained about 2.6% in the last five days (as of June 10, 2016). GLD has a Zacks ETF Rank #3 (Hold).

Currency

CurrencyShares Japanese Yen Trust ETF (NYSEARCA:FXY)

The Japanese currency, yen, is often considered a classic safe haven asset. The yen surged to a three-year high against the euro and to a one-month high versus the greenback in Asian trade on June 13, 2016, to reflect Brexit woes.

Also, reduced expectations of a near-term Fed rate hike oozed some strength out of the greenback lately, which gave the yen a further boost. The sentiment regarding risk-aversion was so strong that the yen is gaining despite the ultra-loose monetary policy in Japan.

Investors can target this currency via FXY, which measures the value of the yen against the price of the greenback. The fund added about 0.7% in the last five trading sessions (as of June 10, 2016). FXY has a Zacks ETF Rank #3 (Hold). However, we are not sure about the longevity of the yen rally as easy Japanese monetary policy and hopes for more stimulus will not favor the currency for long.

Treasury Bonds

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

Though U.S. treasuries were out of favor a few days back due to worries over sooner-than-expected Fed tightening, Brexit bets brought this safe asset into the limelight. Dimming prospects of a near-term Fed rate hike, global growth worries and still-low oil price, which put a lid on global inflation, led Treasury valuation to soar.

Yields on the U.S. benchmark 10-year notes slipped 4 bps to 1.64% on June 10 from the earlier day, ending up at a three-year low level. Yields on the U.S. benchmark 20-year notes fell 3 bps to 2.02% on June 10 from the earlier day.

The ultra-popular long-term Treasury ETF - TLT added about 0.5% on June 10. The fund advanced about 1.4% in the last five trading sessions (as of June 10, 2016). The fund has a Zacks ETF Rank #2 (Buy).

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