Having some protection against problems that unexpectedly arise—be it illness, weather disaster or a vehicle collision—can provide peace of mind, as the massive growth of the insurance industry attests. Investors are no different, as many of them like the idea of having a safe-haven investment to run to whenever market turbulence rears its ugly head.
The recent bank stock panic is a case in point, and it offered a useful glimpse into which assets tend to outperform in a fear-driven market environment. Historically, there are five main investment categories that have proven their worth as safe-haven investments in such conditions. In no particular order they are: 1.) U.S. Treasury bonds, 2.) the Japanese Yen, 3.) utility stocks, 4.) consumer staple stocks and 5.) gold.
In recent years, an argument can be made that a sixth category has been added to this list, namely cryptocurrencies (i.e., bitcoin). For discussion purposes, we’ll go ahead and add cryptos to the list via the popular Grayscale Bitcoin Trust (GBTC).
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Let’s start with bitcoin. To be fair, GBTC and other bitcoin-related funds have had a stellar performance in the wake of the Silicon Valley Bank crisis—which crypto enthusiasts are quick to insist is a testimony to bitcoin’s value as a safe-haven investment. (GBTC was up a whopping 30% in just the first three weeks of March!)
However, I’m not quite willing to consider bitcoin as a candidate for our Top Three list since its trading history is much shorter than that of the other five assets mentioned here. What’s more, the impressive performance in GBTC in March is one of the relatively few times that bitcoin has actually outperformed in a crisis environment. (In fact, there have been many instances in recent years when financial market weakness was preceded by bitcoin price weakness.)
Is it possible bitcoin has finally “turned a corner” and is now being accepted by investors as a worthy safe haven? Perhaps. But until we see some additional evidence in which GBTC and other cryptos outperform equities during a crisis period, I suggest putting bitcoin in the “wait and see” category before treating it as an insurance policy for extreme market volatility.
Before we get to the Top Three, here are the two traditional safety assets that didn’t make the cut.
Utility stocks do indeed tend to perform well in bear markets. But when a panic erupts, they often get thrown overboard with other stocks—at least temporarily (witness the 2008 credit crisis, for instance). Consumer staples can also offer some protection in a bear market, as they tend to hold their value better than the average stock. However, consumer staples also typically suffer in a crash or panic environment. As such, they can’t be considered as a “complete” safe-haven investment.
Let’s now look at the top performers in the “safe haven” category for ideas on how you can hedge your portfolio during troubled times. In creating this list, I looked at 15 instances of panics (and mini-panics), most of them lasting from a few days to a few weeks—and spanning a 25-year period going back to 1997—to see how each of the three assets performed. Here they are in ascending order:
Safe-Haven Investment #3: Gold
The yellow metal is one of the world’s oldest safe-haven assets, serving as a store of value for thousands of years. Gold’s average price gain during panic or crisis periods of the past 25 years is +2%. This might sound like a meager return, but considering the stock market’s average performance during these periods was a horrid -17%, gold’s showing is quite strong by comparison. In six of the 15 crisis periods I reviewed, gold had a negative return, although the average for these subpar performances was “only” down 5% (versus a 13% average loss for the S&P 500).
A good way to get exposure to gold is through an actively traded gold-backed ETF, such as the iShare Gold Trust (IAU) or the GraniteShares Gold Trust (BAR).
Safe-Haven Investment #2: Japanese Yen
The yen has traditionally been regarded as a safe-haven currency during times of global turmoil, or when investors are feeling particularly risk-averse (in part because of that nation’s long-term history of having a healthy current account surplus). The yen’s average price appreciation during crisis periods in the past quarter century is 3%. Significantly, there were only two instances in the last 15 crisis periods I reviewed when the yen had a negative return, for an average loss of 6% (versus a 21% average loss for the S&P 500).
One of the best ways of gaining some exposure to the yen is via the Invesco Currency Shares Japanese Trust (FXY).
Safe-Haven Investment #1: Treasury Bonds
Longer-dated U.S. Treasury bonds have an established track record of outperforming the stock market—and virtually all other investable assets—during financial panics. Investors the world over turn to Treasuries as a trusted haven due to their lack of significant default risk. In the last 25 years, Treasury bonds have drastically outperformed equities and other risk assets during turbulent times, with an average gain over the last 15 crisis periods of 5%. In only three of the last 15 panics did longer-dated Treasury prices show a loss, with an average loss of 8% (versus a 17% average loss for the S&P 500).
If you want some exposure to Treasury bonds, two worthwhile trading vehicles are the iShares 7-10 Year Treasury Bond ETF (IEF) and the iShares 20+ Year Treasury Bond ETF (TLT).
In summary, while Treasury bonds were the top performer during the crisis periods I looked at, gold had the lowest average drawdown, which might be something to consider. You also might be wondering: “Why bother buying any of these safety assets during a panic given that by the time I purchase them, the panic might soon be over?”
The answer is that in almost every single one of the 15 financial panics I examined, all three safe havens went on to post solid gains over the six-to-nine-month period following the panic. So, the lesson here is that when you’re considering a hedge against market turmoil, don’t be afraid to hold safe-haven investments beyond the initial panic period: the real payoff is typically further down the road.
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