When the coronavirus exploded and the stock market imploded in March, there was a brief time—similar to the depths of the Great Recession—when seemingly no financial assets were safe. Stocks, bonds (with the exception of U.S Treasurys), gold, commodities and currencies (with the exception of the U.S. dollar) all turned red between February 19 and March 23 as the S&P 500 went from its all-time high to its bear-market nadir after a staggering 34% plunge.

The carnage was such that the notion of “safe haven” assets appeared to be a chimera. But they do exist, and a come-to-Jesus moment like a severe bear market is a good time to examine the nuanced nature of safe havens and what kind of expectations investors should have. There are two ways to approach them.

Investors typically view safe havens as offering protection in market downturns. This can include defensive stocks, bonds, real estate, gold, commodities, currencies, private equity and alternatives. You can throw insurance, art, wine and collectibles into the mix, too.

When exchange-traded funds were used as a proxy for various asset classes, it showed Treasurys benefited from the monthlong flight to safety. For example, the iShares 20+ Year Treasury Bond ETF (TLT) jumped more than 14% and the iShares 7-10 Year Treasury Bond ETF (IEF) rose more than 6% as equities tanked.

But it was a different story for corporate bonds, where the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) dropped 12.3% and the Vanguard Long-Term Corporate Bond ETF (VCLT) lost 16.5%. (As of April 9, LQD had subsequently rallied more than 25% and VCLT more than 33% after the Federal Reserve said it would buy investment-grade bond ETFs as part of efforts to provide liquidity for outstanding corporate bonds.)

ETFs invested in the Swiss franc and Japanese yen were down ever so slightly during the depth of the crash, while the Invesco DB US Dollar Index Bullish Fund (UUP) gained 3.7%.

Other assets commonly viewed as safe havens seemed to have fulfilled their basic mission in falling less than the S&P 500, but that can feel like a hollow victory if the loss was large. Defensive stocks, in this case those represented by the Consumer Staples Select Sector SPDR Fund (XLP), fell 23% during the aforementioned one-month period of market mayhem.

The Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) and Aberdeen Standard Physical Precious Metals Basket Shares ETF (GLTR) fell 25% and 17.8%, respectively. The SPDR Gold Trust (GLD), which mirrors the price of gold bullion, fell nearly 4%. All in all, GLD essentially earned its keep as a safe haven during that trying period, and it was up almost 7% year to date as of April 9 while the S&P 500 had dropped 13.6%.

Keep in mind that ETFs trade like equities, which means they have a higher correlation to stocks than their underlying assets would suggest. So while the Hoya Capital Housing ETF (HOMZ), which tracks an index related to U.S. housing, lost 47% during the heart of the meltdown, it’s safe to say your home didn’t lose 47% in value. Meanwhile, the Invesco Global Listed Private Equity ETF (PSP) investing in private equity companies cratered 46%.

“An ETF that owns some private equity—or has some derivative model to try to replicate private equity returns—is not private equity,” says Leo Kelly, CEO of Verdence Capital Advisors, a private wealth advisory and multi-family office firm in Hunt Valley, Md. He notes that his firm moved its high-net-worth clients into alternative investments and private equity during the past couple of years.

“Private equity doesn’t reduce risk, but it takes volatility off the table and moves it out of the hyper-volatile public markets,” Kelly says. “In other words, these are assets based on their actual valuation and not just the whims of the market.

“One thing we stress with clients regarding private equity is it’s no different than investing in public equity in that you need to know what you own, and more so with private equity,” he continues. “Whether or not private equity holds up in times of stress depends on what it owns. There’s as much diversity in underlying assets in private equity vehicles as in public equity.”

It’s the 1% of the time where volatility spikes and panic ensues when people sell what they can sell despite the fundamentals, says Sal Bruno, chief investment officer at ETF sponsor IndexIQ.

“When we talk about safe havens, are we talking about the 1% of the panic times or an environment marked by high risk, but not panic risk?” he asks. “We think when you look at high risk, alternatives generally do a pretty good job of diversifying versus equity and fixed income. And they go down a lot less than equities during a panic period.”

IndexIQ offers various ETFs with absolute-return strategies. Its largest product is the $764 million IQ Hedge Multi-Strategy Tracker ETF (QAI), which follows an index that tracks the returns of distinct hedge fund investment styles via a portfolio that includes both long and short positions in ETFs and exchange-traded products. This fund dropped nearly 14% during the worst month of the downturn. But that was 20 percentage points better than the S&P 500.

Long-Term, Holistic Approach
The second approach to safe havens entails a long-term, comprehensive investment strategy that’s as much about offense as it is defense.

“A safe haven is an asset that retains its value over time,” says Kelly. “And it should generate sufficient returns to keep up with inflation so that you don’t have an asset with deteriorating buying power. By definition, it keeps you neutral, and then you add risk to that as you hope to accumulate wealth.”

As Kelly points out, “time” is the operative word when thinking about safe havens.

“A safe haven in the short term is cash, it’s short-term Treasurys,” he says, adding they’re not a long-term safe haven because their purchasing power is eroded by inflation.

Kimball Brooker, deputy head of the global value team at First Eagle Investment Management, agrees with that principle. His take is that a diversified basket of equities is a form of safe haven in that it protects your long-term purchasing power.

“Diversification and selection are key features of that,” he says. “That comes with some volatility, but that gets to how you want to think of safe havens. If you want zero volatility, cash is your best bet. If you incorporate other dimensions of safe haven that we believe in, which includes protecting and even growing the real value of your portfolio, you probably want to think about adding equities into the mix. That will bring some market volatility which you can’t control. What you can control is you get to pick the equities.”

Through the end of March, the firm’s First Eagle Overseas Fund’s top three sectors were precious metals (mainly gold), consumer staples and industrials. The fund was down 17.7% in the first quarter, or 5 percentage points better than its bogey, the MSCI EAFE Index.

Brooker notes that Covid-19 is a black swan moment. “From a financial perspective, it’s a lesson in trying to pick companies and investment strategies that are built to survive the problems that definitely will come,” he says. “You can’t predict what type of problem it will be.”