Conflict playbook: Investors can protect themselves in these ETFs and securities

Published Thu, Feb 24 202212:01 PM ESTUpdated Thu, Feb 24 20221:29 PM EST

Jesse Pound @/in/jesse-pound @jesserpound

As the Russian invasion of Ukraine has increased fear and uncertainty in markets around the globe, some traditional safety plays are proving popular. Funds that track more defensive assets have outperformed the S & P 500 — and in some cases risen — in recent days as the conflict in Eastern Europe came into focus, rattling investors who were already on edge about the next steps from the Federal Reserve. "The Russia/Ukraine situation, which is driving oil prices higher, is obviously exacerbating inflation and future tightening concerns. We continue to recommend defensive positioning until inflation shows definitive signs of decelerating," Wolfe Research's Chris Senyek said in a note to clients. One area that has done well in recent days is U.S. government bonds, which are widely considered the safest form of debt. Bond yields, which move opposite of price, had risen to start the year in anticipation of rate hikes from the Federal Reserve, but that moves has reversed recently. Exchange-traded funds offer a simple way for investors to gain exposure to the bond market. The iShares 20+ Year Treasury Bond ETF (TLT) was headed for its fifth positive session in six Thursday and is roughly flat over the past two weeks. Corporate debt with strong credit ratings has also performed well. The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) was positive on Thursday and is down less than 1% over the past week. Funds that track municipal debt in the U.S. may also be an option for defensive investors. Gold, which was already seeing some increased demand due to high inflation in the U.S., has been a big winner in recent months. The SPDR Gold Shares ETF (GLD) and Sprott Gold Miners ETF (SGDM) are both positive over the past week and up sharply in February. "The conflict is likely to support gold, platinum, and palladium, of which Russia is a major producer," HSBC chief precious metals analyst James Steel said in a note to clients. "The impact can come from two areas: safe-haven demand and turbulence in global equities. There is a well-defined inverse relationship between gold and global equities, which is pronounced during periods of high political risk." Utility stocks are also holding up better than the broader market. The Fidelity MSCI Utilities Index ETF (FUTY) and Utilities Select Sector SPDR (XLU) were both heading for their fourth-straight decline on Thursday, but their losses were modest compared with the broader stock markets. Health-care ETFs have performed similarly. One group of stocks that doesn't fit into the traditional defensive bucket but has helped offset declines elsewhere is energy. Russia is a major supplier of oil and gas to Europe, so the invasion and sanctions have led energy prices to spike. The SPDR S & P Oil & Gas Exploration and Production ETF (XOP ), for example, has had a volatile February but is up about 2% for the month. Notably, defense sector stocks have not performed well as safety plays in recent weeks, at least as a group. The iShares U.S. Aerospace & Defense ETF (ITA) was down again on Thursday after falling more than 1% in each of the four prior sessions. To be sure, investors may want to be cautious in shifting toward defensive sectors, as their recent gains could reverse if the conflict in Ukraine is resolved quickly. "Despite the recent pressure we remain constructive on US equities and expect the market to recover should geopolitical risks abate," UBS strategists said in a note to clients on Thursday. — CNBC's Michael Bloom contributed to this report.

Traders on the floor of the NYSE, Feb. 17, 2022.

Source: NYSE

As the Russian invasion of Ukraine has increased fear and uncertainty in markets around the globe, some traditional safety plays are proving popular.