Just when you thought the markets were getting complacent, this past week threw us for a curve. The Dow Jones Industrial Average kicked off the week by dropping nearly 1,100 points at its lowest point on Monday — an unprecedented drop that followed several previous days of declines.
The reason? Growth concerns about China and the threat of contagion spreading to the rest of the world. China’s emerging market growing pains could be turning into a full-blown episode. The nation’s Shanghai Composite sank a massive 8.5%, and its key manufacturing numbers recently came in at six-year lows.
Given China’s status as the world’s second-largest economy, major trade partner and giant consumer of commodities, the world worried that things could get pretty ugly.
The days that followed were a roller coaster of lows and highs, proving one thing: volatility has come to roost in the markets once again.
However, there are a few ways to fight the wiggle.
Today, we’re going to look at the iShares MSCI USA Minimum Volatility (USMV), Vanguard Long-Term Government Bond ETF (VGLT) and the SPDR Gold Shares (GLD), all of which could help investors navigate this crazy market.
Best ETFs for Safety: Vanguard Long-Term Government Bond ETF (VGLT)
Expense Ratio: 0.12%
Treasury bonds are often seen as the ultimate diversifier with regards to stocks. Historically, they move in opposite directions and provide a buffer against major stock market shocks.
So, funds that track bonds could be some of the best ETFs to buy during this period of market strife … and the Vanguard Long-Term Government Bond ETF (VGLT) could be the real cream of the crop.
VGLT tracks the long-term U.S. government bond market — bonds with maturities of longer than 10 years. By going out that far on the yield curve, investors can pick up a few more percentage points of income. (VGLT currently yields 2.7%.)
While it might seem odd to buy a long-dated bond fund — considering that when the Federal Reserve finally raises rates, it’ll crush bond prices — the “when” keeps getting pushed back and feels increasingly like an “if.” The recent market drudgery, Chinese contagion and zero inflation has put the rate hike under the microscope. The head of the Federal Reserve Bank of New York, William Dudley, believes the craziness in the market doesn’t make a hike “compelling.”
So, long-dated bond funds like VGLT should get a pass for a bit longer.
Best ETFs for Safety: iShares MSCI USA Minimum Volatility ETF (USMV)
Expense Ratio: 0.15%
Volatility is simply a measure of variance in returns, but that speaks to uncertainty in the market — and investors hate uncertainty. That’s why the popular CBOE Volatility Index (VIX) is sometimes called the “fear index” — it’s a measure of how much people are freaking out.
However, a few ETFs try to take volatility out of the equation — not a bad idea given the current state of the market.
One such fund is the iShares MSCI USA Minimum Volatility ETF (USMV), which attempts to smooth out a portfolio’s ride in the market by tracking U.S. stocks that have lower volatility characteristics relative to the broader U.S. equity market. Basically, USMV isn’t supposed to “swing” as much as the broader market. (Though you do occasionally get quick blips, like that occurred Monday in a number of ETFs.)
Said differently, USMV allows investors to participate in much of the market’s upside while attempting to limit downside.
Best ETFs for Safety: SPDR Gold Shares (GLD)
Expense Ratio: 0.4%
The last few years haven’t been kind to gold. With the world’s economies bouncing back from the Great Recession and credit crisis, prices for the yellow metal and its appeal fell hard.
Well, with volatility and potential chaos returning back into the markets, gold seems to be back with a vengeance.
After dropping to new lows last month, gold has managed to log its best series of weekly gains since this past January as the metal is now seeing greater support as a safe haven. When things got really dicey, gold acted like it was supposed to — an insurance policy against severe market corrections and volatility.
That’s why all investors should have some exposure to the non-correlated precious metal.
The most popular way to get said exposure are the SPDR Gold Shares (GLD), which boasts $25 billion in assets under management. GLD units, which represent a 10th of an ounce of gold, trade roughly 8 million shares daily. The fund doesn’t use futures to get its gold exposure, but owns physical bullion stored in a vault on behalf of investors. That keeps GLD’s share price closely mirroring what is happening in the gold market.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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