Nowhere To Hide? Consider “Semi-Safe” Havens (IXP, HDV, LQD, DVYE, MUB)

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June 13, 2012 5:00pm NYSE:DVYE NYSE:HDV

Russ Koesterich: Many investors concerned about a worsening European crisisand a stalling recovery are searching for safe-haven investments. Unfortunately, they are rapidly running out of choices.


Membership in the club of AAA-rated countries is rapidly shrinking, and rising correlations mean that, at least in the short term, virtually all risky assets are moving together. While there are still a few places to hide, I believe the “safety” of the real safe-haven investments comes at a cost. For this reason, I’m advocating that investors consider a group of assets I’m calling the “semi-safe havens.”

The Real Safe Havens: For investors looking to avoid any capital losses, there’s a small list of arguably truly safe assets that are likely to hold their value, and even appreciate, in the event of another crisis. However, as I mention above, their safety comes at a price.

1.)    Gold: The yellow metal qualifies as a safe haven on one level – it’s relatively uncorrelated with other risky assets, particularly stocks. However, while gold is a diversifying asset, it doesn’t satisfy the full definition of a safe haven because it can be as volatile as stocks.

2.)    US Dollar Cash: Cash will obviously hold its value and produces no volatility, but a long term position in cash will produce negative real yields.

3.)    US Treasuries: At today’s levels, Treasuries offer little better than cash in the way of yield and record-low coupons mean that duration risk is also at a record high. Currently, even a small back up in Treasury yields would lead to significant losses.

The “Semi-Safe” Havens: Instead of opting for traditional safe havens, investors looking to limit their downside but still generate some yield should consider the following list of potential “semi-safe-havens.”

1.)    Traditional Low Beta Sectors: Even during the recent downturn, the traditional low beta (a measure of the tendency of securities to move with the market at large) sectors – consumer staples, healthcare, utilities and telecommunications – have provided some cushion. For instance, as of Monday’s close, the US market was down roughly 8% from its peak. In contrast, at the same time, healthcare and consumer staples were down roughly 4% and 2% respectively, while utilities and telecom were posting new highs for 2012. I particularly like global telecommunications, which has a low beta, a relatively high yield and is accessible through the iShares S&P Global Telecommunications Sector Index Fund (NYSEARCA:IXP).

2.)    High Dividend and Minimum Volatility Funds: As I’ve mentioned in the past, high dividend and minimum volatility investments tend to provide good downside protection. In particular, I like the iShares High Dividend Equity Fund (NYSEARCA:HDV), given its low beta and quality screen, and the iShares Emerging Markets Dividend Index Fund (NYSEARCA:DVYE).

3.)    Municipal and Investment Grade Debt: On the fixed-income side, for investors looking for relative safety with some yield, municipal and investment grade debt may provide some protection, albeit less than a Treasury, while also providing positive real yield. Potential  iShares solutions include the iShares S&P National AMT-Free Municipal Bond Fund (NYSEARCA:MUB) and the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEARCA:LQD).

With Europe a lingering concern and the US fiscal cliff unlikely to be resolved until after the election, I’m sympathetic with investors’ desire for safety. However, as traditional safe-haven investments come with considerable costs, “semi-safe havens” may be the new place to hide.

Written By Russ Koesterich From The iShares Blog  The author is long IXP, HDV, MUB, and LQD.

Russ  Koesterich, CFA, is the iShares Global Chief Investment Strategist as well as the Global Head of Investment Strategy for BlackRock Scientific Active Equities. Russ initially joined the firm  (originally Barclays  Global Investors) in 2005 as a Senior Portfolio Manager in the US Market Neutral Group. Prior to joining BGI, Russ managed several  research groups focused on quantitative and top down  strategy. Russ began his career at Instinet in New York, where he occupied several  positions in research, including Director of Investment Strategy for  both US and European research. In addition, Russ served as  Chief North  American Strategist for State Street Bank in Boston.

Russ holds a JD from Boston College Law School, an MBA from Columbia Business School, and is a holder of the CFA designation. He is also a frequent contributor to the Wall Street Journal, New York Times, Associated Press, as well as CNBC and Bloomberg Television. In 2008,  Russ published “The ETF Strategist”(Portfolio Books) focusing on using exchange traded funds to manage risk and return within a portfolio.


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