Without a resolution to the escalating geopolitical tension between Ukraine and Russia, exchange traded fund investors should keep a close eye on a couple of asset classes to help minimize or even profit from the increased volatility.
According to analysis on funds in a theoretical scenario of a falling ruble, higher natural gas prices and a dip in Russian and Polish equities, the research firm RiXtrema Inc. discovered that funds with heavy exposure to financial services, international equities and real estate are the most vulnerable to the current crisis, reports Jeff Benjamin for InvestmentNews. [BlackRock: The Situation in Ukraine: Why Stocks Are Vulnerable]
“This just shows how globally connected the financial system is these days,” RiXtrema president Daniel Satchkov said in the article. “If a prolonged conflict were to erupt, the reverberations would be felt throughout the global system.”
For instance, the analysis showed that the Vanguard Financials Index Fund (VFAIX), or the Vanguard Financials ETF (NYSEArca: VFH), could experience a 56% plunge due to a worst-case scenario in Ukraine.
Additionally, of the 10 worst affected funds, three were real estate funds, with declines of at least 40%. For example, the Vanguard REIT Index Signal (VGRSX), or the Vanguard REIT ETF (NYSEArca: VNQ), could potentially plummet 48%.
“REITs in general have been extremely sensitive to volatility and given the fragile housing recovery, they could be crushed by a prolonged crisis in Ukraine,” Satchkov said.
On the other hand, long-duration Treasuries, commodities and gold funds will capitalize on the heightened volatility. RiXtrema predicts that these assets could gain at least 16% under an extended crisis in Ukraine.
“Russia is an important commodity supplier and prolonged hostilities have the potential to disrupt both natural gas and oil markets,” Satchkov added. “While gold hasn’t proven to be a safe haven asset in times of deleveraging crises, it still holds significant safe haven appeal in military conflicts.”
Long-term Treasury bond ETFs include the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT), which has a 16.8 year duration, Vanguard Extended Duration Treasury ETF (NYSEArca: EDV), which has a 24.9 year duration, PIMCO 25+ Year Zero Coupon U.S. Treasury Index Fund (NYSEArca: ZROZ), which has a 27.3 year duration, and SPDR Barclays Long Treasury (NYSEArca: TLO), which has a 16.4 year duration.
Broad commodity exchange traded product options include the PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC), iPath Dow Jones-UBS Commodity Index Total Return ETN (NYSEArca: DJP) and iShares GSCI Commodity-Indexed Trust (NYSEArca: GSG). These offerings provide diversified exposure to agriculture, energy and metal commodities.
The physically backed SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL) all provide exposure to gold price movements.
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