3 ETFs That Can Protect in a Downturn

Investing in a tracker may not appeal while global markets are in turmoil, but some ETFs should not be overlooked

Annalisa Esposito 19 March, 2020 | 11:17AM
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The FTSE 100 suffered its second biggest one day fall in the history of the index this month and many share prices appear to be still in freefall. After a short-lived recovery as the Government laid out plans to cushion the blow of the coronavirus crisis, the FTSE 100 plunged nearly 4.5%.

With such a bleak backdrop, investors may not consider choosing an exchange-traded fund (ETF), which essentially just tracks the stock market. While global stock markets have soared over the past decade, these low-cost investments have attracted billions of assets. But do they hold the same appeal in a bear market? 

Here are three defensive strategies for investors looking for some protection: 

iShares UK Gilts ETF (IGLT)

It's worth remembering that ETFs don't just track stock markets; many offer access to other assets such as fixed income and cash. Morningstar analyst Jose Garcia Zarate believes that turbulent markets show the importance of always keeping sliver of very high-quality fixed income (such as government debt) in your portfolio. “Corporate debt may not be appropriate in these circumstances as the probability of defaults is likely to go up significantly, so really the things you might want to hold are government debt or cash,” he says.

The Gold-Rated iShares UK Gilts ETF offers exposure to the market of UK conventional government bonds at a very low price - the ongoing charge of 0.07% was cut from 0.20% last year. The fund has returned 3.75% year to date, and has produced annualised 4.4% returns over a five-year period. 

“This a classic buy-and-hold exposure for a UK investment portfolio," says Garcia-Zarate. "Any ups and downs in valuations in relation to changes in monetary policy tend to balance themselves out over the long run.”

This ETF invests in bonds of various duration, all issued by the UK government. It tracks the FTSE Actuaries Government Securities UK Gilts All Stock Index, which has around 45 holdings - around 20% are short-dated, 25% medium-dated, and 55% long- and ultra-long. 

Garcia-Zarate believes it's a compelling core long-term holding in UK conventional gilts. “It should be part and parcel of any UK portfolio at all times, not just now,” he adds. 

Invesco UK Gilt 1-5 Year ETF (GLT5)

While market turmoil is a time that investors turn to perceived safe havens, it is worth pointing out that the coronavirus pandemic is a very different scenario than a normal recession and investors need to “ thread very carefully”. He adds: “This is not a normal downturn, but one caused by a sudden and most total collapse of global demand as whole economies go into lockdown.”

The Invesco UK Gilt 1-5 Year ETF tracks the performance of the Bloomberg Barclays UK Gilt 1-5 Year Index (the "Reference Index") less fees, expenses and transaction costs. "It is an option for investors who wants exposure to UK government bonds, but want to limit their exposure to the short part of the yield curve (one to five years) in this environment of zero-bound interest rates” explains Garcia-Zarate.

The fund is just about in positive territory, with a return of 0.34% year to date and has an ongoing charge of just 0.06%.

SPDR Bloomberg Barclays 1-3Mth T-Bill ETF (ZPR1)

This tracker is an option for investors seeking a alternative to cash. It provides exposure to the 1-3month US Treasury Bill market, which is as about as close as one can get to cash-like liquidity backed up by the US government. So, compared to US government bonds, which have maturities of 2 years and above, bills are much more liquid instruments and carry substantially lower risk. 

The ongoing charge is 0.10% and it has produced an enviable 11% return year to date. This is largely driven by US rate cuts (the Fed has now cut interest rates to 0%), which pushes up the price of government bills and bonds, particularly those with a short maturity. This is further compounded as more people pile into these assets as a safe haven, further pushing up the price.

“This is a good option for those looking for an ETF to park cash, who want the highest level of liquidity. This invests in instruments that are one-step removed from cash deposits," says Garcia-Zarate.

However, one risk is that the ETF is not hedged so the returns will be influenced by fluctuations in the exchagne rate between the pound and dollar. Sterling has in recent days fallen to all-time lows against the greenback. Garcia-Zarate adds: "But in the great scheme of things, in a scenario like this being exposed to dollar, which remains the key global currency, may not be a bad idea."


The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Annalisa Esposito  is a data journalist for Morningstar.co.uk

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