There are many ways to find a safe harbor for your investments during periods of market volatility. One is to dock your assets in a low-risk, low-return investment and ride out the storm waiting for better times. Another strategy is to stay in the market but move your assets into highly liquid funds. These funds are easily traded, so you can move in and out, going long or short, to take advantage of market moves. A third strategy would be to invest in areas that have traditionally proved to be resistant to economic downturns: necessities of life such as consumer staples or utilities.
Low risk, low return
Treasury securities jumped in price so much in one day this past week because of strong demand from investors who sought a safe place for their money. High demand drove prices up and yields down. (There is an inverse relationship between prices and yields with fixed-income instruments.) We have to go back to October 1987, when the stock market had a complete meltdown, to find something comparable.
If you are among those investors who like to hunker down and look for the safest harbor during times of uncertainty, iShares Lehman 1-3 Year Treasury Bond ETF
SHY has both an effective duration of 1.66 years and an average maturity of 1.76 years, two measures indicating that this fund holds securities for a relatively short time before they mature. With a minuscule 0.15% expense ratio, this fund has been popular with investors as indicated by its $7.5 billion in assets. The fund has a 30-day yield of 4.45% and an average yield to maturity of 4.10%
A little further out on the risk limb is the Vanguard Short-Term Bond ETF
Liquidity
An exchange-traded fund (ETF) puts its money in an index of investments that have something in common. ETFs are traded like stocks.
The price you pay for an exchange-traded fund is determined by the market and is based upon the underlying portfolio of securities. With a thinly traded ETF there can be bid/ask spreads, which means a fund can be bought at a premium or sold at a discount to the portfolio's value. The more liquid a fund, the more likely it is to trade close to the value of its assets. When it comes to liquidity, three broadly diversified ETFs stand out as champions. The S&P 500 Index Spiders
When markets are volatile and there is a lot of uncertainty, liquidity for some issues can dry up, making it difficult or expensive to trade. Because these three ETFs are traded a lot, it is unlikely that liquidity for their shares will evaporate, and you should be able to trade these funds at a fair price. These funds will move with the markets and their shares will fluctuate in value, so an investment in one of these funds still leaves you open to market risk. However, these are great vehicles for getting broad market exposure that will let you go with a market trend; they can be traded whenever the market is open.
Traditional safe harbors
Some industries have been traditionally viewed as safe harbors. The ideal defensive industry would have little sensitivity to the business cycle and would outperform other industries when the economy enters a recession. Businesses in these industries produce goods that people need for their daily lives.
There are many sector ETFs to choose from that focus on defensive industries. Two examples that could fit well in most investors' portfolios are from Vanguard and iShares. The Vanguard Utilities ETF
Turkey, ostrich, or owl
Timing the market is a difficult enterprise and often fails to work even for the best investors. That doesn't mean you should foolishly stick your neck out when the market is extremely volatile or burrow in the sand and never again look up. Assess your tolerance for risk, and make wise choices.
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Fool contributor Zoe Van Schyndel lives in Miami and enjoys the sunshine and variety of the Magic City. She does not own any of the funds or securities mentioned in this article. The Motley Fool has a disclosure policy.
