Must-know: Which safe havens are truly safe?


Dec. 4 2020, Updated 10:52 a.m. ET

David looked at how a number of safe havens performed in comparison to the broad equity market during periods of high financialmarkets stress over the last two decades.

He identified the periods of uncertainty, including the 2008 financial crisis and the collapse of LongTerm Capital Management in 1998, using the Cleveland Financial Stress Index. He also compared the assets’ monthly average riskadjusted returns in order to gauge which safe havens delivered more stable outperformance.

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Based on David’s analysis, though all of the safe havens examined outperformed the broad equity market during the high stress periods, they didn’t outperform equally. The 10year U.S. Treasury (IEF) was the best performing safe haven on a riskadjusted basis, followed by 10year German Bunds, 10year U.K. Gilts, yen and gold (IAU), as the chart below shows.

In regards to gold (IAU) in particular, although the precious metal ranked highest in terms of average outperformance when risk didn’t come into the equation, it actually was the least attractive safe haven on a riskadjusted basis. This is thanks to its status as the most risky safe haven examined (as measured by return volatility).

Market Realist – As can be seen from the previous chart, gold (GLD) may not be the best bet when it comes to investing in safe haven assets. Ten-year Treasuries—as tracked by iShares 7–10 Year Treasury Bond ETF (IEF)—seem to be the safest hedge in periods of high uncertainty.

In addition, David found that U.S. Treasuries (TLT) tended to outperform even when the source of uncertainty happened to be the U.S. government. In other words, investors who are worried about U.S. fiscal policy or a government shutdown might still want to opt for U.S. Treasuries as a safe haven. This may have to do with investors’ perception that the U.S. Treasury is the closest thing we’ve got to a risk-free asset, and their faith that the U.S. government will always solve its problems, even if the solutions come at the last minute.

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To be sure, David’s analysis didn’t include an exhaustive list of safehaven assets. Still, it’s a helpful start for setting a safehaven allocation. In addition, safe haven assets aren’t risk-free investments. Still, it’s worth noting that even the least attractive safe haven (i.e. gold) in the analysis still outperformed the equity market during the stressful periods examined in the analysis.

Finally, these safe havens are probably not the best options for investors who, like me, don’t see a correction looming on the horizon. During periods of normal market performance when uncertainty isn’t high, safe havens tend to underperform the equity market.

Market Realist – Although not considered safe haven assets, in the current context of high geopolitical risk and consequently volatility, investors could consider investing in sectors like energy and large cap companies. Energy—as tracked by Energy Select Sector SPDR Fund (XLE)—has consistently outperformed this year with year-to-date (or YTD) returns of 14.65%. The iShares U.S. Energy ETF (IYE) has given YTD returns of 13.44%. With emerging market equities again on the rise and the Chinese economy showing healthy signs of recovery, another good option for investors could be investments in emerging market exchange-traded funds (or ETFs) like the iShares MSCI Emerging Market ETF (EEM) and single country ETFs like the iShares China Large-Cap ETF (FXI).

Read our series on Must-know: Inflation fighting investments to learn more about which safe-haven assets to invest in during times of inflation.


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