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4 ETFs That Benefit From Global Uncertainty


How to insulate your portfolio from the pernicious effects of equity volatility.

The looming prospect of global uncertainty and social unrest abroad has renewed the perception that precious gains in stocks can turn on a dime. The political instability in the Ukraine coupled with the threat of military action by Russia is leading a global sell-off in equity markets this week.  No surprisingly, the hardest-hit regions are emerging market indices, which have the most direct exposure to these areas of turbulence. 

However, there are areas of the market that are getting a boost from this uncertainty and offer a way to insulate your portfolio from the pernicious effects of equity volatility. 

Treasury Bonds

The first area that investors almost always flock to when stocks get rocky is Treasury bonds. The iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT) has been strengthening all year as investors look to shore up their equity gains with a safe-haven asset class. TLT holds a concentrated portfolio of long-duration Treasury bonds that are more sensitive to changes in interest rates, which is why this ETF has been able to jump out of the gate with a gain of more than 7% this year.  

In fact, nearly every segment of the bond market has been seeing a bid this year as falling interest rates have supported corporate, municipal, and mortgage prices as well.  Investors are clearly willing to overlook the Fed's incremental tapering adjustments and any looming inflationary effects on the horizon for the safety of fixed income in the near term. 

Oil Prices

Whenever there is the threat of conflict in a commodity-rich nation, we typically see a spike in oil prices as well.  The United States Oil Fund (NYSEARCA:USO) has been steadily climbing since the beginning of the year and jumped dramatically on Monday when Russia started to increase military action. USO tracks the daily price movement of West Texas intermediate crude oil contracts and is an easy way for ETF investors to access these markets. 

This ETF has gained over 6% this year and will likely continue that upward trajectory if we see an escalation of tensions among Ukraine and Russia. Any potential for a disruption in production or supply of oil is generally a cause for angst among commodity traders, which drives prices higher. Russia has a great deal of oil and gas reserves that supply much of the world with its product. 

Strength in oil prices will also support energy-related stocks as well, which makes the Energy Select Sector SPDR (NYSEARCA:XLE) worth watching as a strong sector candidate.  

Gold Bullion

The last area that investors like to use as a safe harbor when equity storms arise is gold bullion. The SPDR Gold Shares ETF (NYSEARCA:GLD) has bounced back from an abysmal 2013 and convincingly thrust its way back into the spotlight to start the year. GLD made a strong gap higher on Monday morning as investors sought out the safety of hard assets to diversify their portfolios. 

It appears that value-seeking investors stepped in to purchase the yellow metal at prices still well below the high-water mark. So far this year, GLD has gained more than 11% and recaptured several important trend lines, which bodes well for further gains this year. Demand for gold has been strong throughout Asia and emerging market countries; this should help support prices moving forward as well. 

The Bottom Line

Depending on your investing style and asset allocation, it may make sense to have a portion of your portfolio in at least one of these asset classes. Oftentimes these non-correlated sectors can offer a way to mitigate volatility and improve long-term results by offsetting existing equity positions. In my opinion, this type of diversification is critical to maintaining a balanced portfolio approach.

The caveat is that all of these themes have already increased substantially this year and may not represent the most optimal entry points at these levels. Make sure that if you do decide to add money to these themes that you do so with a risk management mindset that takes into account the potential for a reversal.

Read more from David Fabian, Managing Partner at FMD Capital Management:

2 Sectors That You May Be Late to the Party Buying

3 Reasons Bulls Take On Too Much Risk

When It Comes to Making Recommendations, Advisors Should Eat Their Own Cooking

Twitter: @fabiancapital
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