Despite heated rhetoric from both President Donald Trump and North Korean President Kim Jong Un about North Korea’s nuclear tests, the U.S. stock market up to now has largely tuned out the saber rattling.
The SPDR S&P 500 ETF Trust (SPY) is near all-time highs and is up 13 percent year-to-date, even though Trump on Tuesday said at the United Nations the U.S. would "totally destroy North Korea" following its recent spate of missile and nuclear tests. Those tests include claiming it successfully detonated a hydrogen bomb, along with lobbing intercontinental ballistic missiles over its neighbors.
Exchange-traded funds focusing on South Korea and Japan, the two countries Kim Jong Un has targeted with rhetoric and missiles, show strong returns, suggesting other factors may be influencing their performance. The biggest South Korean ETF is the iShares MSCI South Korea Capped ETF (EWY), which is up 31 percent. It has $3.8 billion in AUM and an expense ratio of 0.64 percent. The biggest Japanese ETF is the iShares MSCI Japan ETF (EWJ), up 14 percent. It has $16.2 billion in AUM and an expense ratio of 0.48 percent.
The talk and action out of North Korea currently isn’t phasing the markets, but escalation of the situation may finally shake investors’ complacency and spark a rush into defensive securities. And gold is “unquestionably” the first flight-to-safety hedge against political risk, says Brett Manning, senior market analyst at Briefing.com.
There are several gold ETFs available, with the SPDR Gold Trust (GLD) the biggest by AUM, at $898 million. It has an expense ratio of 0.40 basis points and is up 12.8 percent. The geopolitical worries are part of the reason gold recently rallied to more than $1,300 an ounce, Manning says.
Bitcoin may be drawing some funds away from gold as a safe-haven, but Manning says that gold still has benefits over the cryptocurrency.
“The only problem with bitcoin is if there’s anything in the direction of a nuclear bomb, in theory it can cause an electromagnetic pulse which prevents people’s ability to use digital assets,” he says.
Another protective strategy is using covered-call ETFs, also known as buy-write ETFs, which also provide good yield. There are seven such funds, according to ETFdb.com, with a year-to-date return ranging from 8.8 percent for the PowerShares S&P 500 BuyWrite Portfolio (PBP) to 12.7 percent for Horizons NASDAQ-100 Covered Call ETF (QYLD). PBP has an expense ratio of 0.75 percent, a yield of 3.06 percent and has $325 million in AUM, making it the largest of these ETFs. QYLD has $145 million in AUM, an expense ratio of 0.60 percent and a yield of 7.79 percent.
Investors looking to be proactive rather than just protective during this simmering North Korean crisis can consider aerospace and defense ETFs. There are three non-leveraged ETFs available in this space, and all have year-to-date returns of 20 percent-plus. The largest is the iShares U.S. Aerospace & Defense ETF (ITA), which has $4.2 billion in AUM and an expense ratio of 0.44 percent. It’s up 26.9 percent year-to-date, and is the best performer of the three.
“The advantage to holding aerospace and defense ETFs is that Trump is constantly coming out and saying he wants to increase military spending,” Manning says. However, he adds, these stocks will likely get hit, along with other equities, if tensions with North Korea spike.