The spread of the coronavirus has been bad news for stocks this week, with the S&P 500 and Nasdaq both down -6% since Monday, and the Dow down -7% so far this week.
The World Health Organization said Wednesday that the number of new cases of COVID-19 outside of China exceeded the number of new confirmed cases inside the country where the virus originated for the first time Tuesday. The outbreak has spread to 37 countries, with 2,790 cases outside of China.
Officials in the U.S. have said the outbreak is likely to turn into a pandemic, and warned Americans to prepare for the coronavirus to hit the U.S.
As the headlines have become bleaker, stocks have plunged, bond yields have slid to record lows, and mortgage rates have fallen to an eight-year low. Meanwhile, gold hit seven-year highs this week, and utilities are hovering near all-time highs.
With safe havens on the rise, it’s clear that some investors are seeking protection against more downside.
“There are really two strategies here,” said Dave Nadig, chief investment officer and director of research at ETF Database. “One is to reposition and one is to hedge. If you’re looking to hedge, I find the things that are going to go up when the market continues to go down.”
Nadig recommends traditional safe havens like gold, which he is playing via the GLD Gold SPDR Shares ETF, or a lower-fee alternative like SGOL Aberdeen Standard Gold ETF Trust, both of which are at highs not seen since 2013.
“I think it’s more interesting, though, to think about other ways of staying in the market to stay invested,” Nadig said. “That can mean something as simple as looking at sectors of the market that may be a little immune to an ongoing concern about supply lines and all of that.”
Nadig said that that kind of trade could manifest in something like the XLC S&P Communication Sector SPDR Fund, which he says is a good protection play. The XLC is down more than -8% this week after a -9.3% drop in Facebook (NASDAQ: FB)—its largest holding— over the last week.
“I like the communications sector here. … It’s taken a big hit from Facebook,” Nadig said, which accounts for 43% of the XLC portfolio together with Alphabet (NASDAQ: GOOGL, GOOG). “It’s very concentrated, but you’re also picking up Disney (NYSE: DIS) and Netflix (NASDAQ: NFLX), and names that I think will be much more immune to a protracted downturn.”
Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, recommends leveraging the rise in safety trades like utilities with factor-based funds.
“There’s safer ways” of finding protection aside from investing in something like the communications sector as a whole, Rosenbluth said.
“SPLV and USMV are two of the flagship products that are out there from Invesco and iShares, and they’re more defensive, so you’ll have heavier weightings in those more stable sectors,” Rosenbluth explained. “You’ll still have some exposure to some of the more cyclical ones, so, you can be in the market… but protect more of the downside as opposed to shifting to fixed income.”
Nadig concluded by cautioning investors against taking the hit to the market this week as a chance to scoop up stocks that are just now starting to back down from overheated conditions.
“I would not necessarily be looking at this as the opportunity to start buying high-flying tech stocks again just because they’re down a couple [of percentage points,” Nadig said. “Remember, these are the prices we just saw a couple weeks ago. It may feel like a big correction right now, but, really, it’s just a two-week Groundhog Day.”