This column was originally published on RealMoney on Aug. 30 at 2:32 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.The debate about whether the stock market is going to buckle under the weight of an "imminent" recession seems to have intensified recently. A reasonable reaction to take with your portfolio might be to sell everything and wait it out. Of course, the worst-case consequence of waiting it out with nothing but cash is that you are wrong and the market skyrockets without you. I thought it worthwhile to explore a few things that might do well regardless of the U.S. economic cycle, beyond the standard recommendations of health care and staples stocks, although both those areas have merit. In searching out some ideas, I am looking for yield, low volatility, and a low correlation to the U.S. stock market.
Aussie and Swiss SolutionI have in the past written about some stocks or funds that have these attributes. One
It endured a sharp correction in the spring as 10-year Treasury yields were moving higher. (Recent performance, however, has almost made up for that correction.)Another liability is headline risk. Macquarie Bank, the trust's parent investment bank, is in the news a lot, as it has been actively trying to buy the London Stock Exchange and other high-profile assets. Any perceived success or failure could impact MIC. I believe the Rydex currency exchange-traded funds (ETFs) also offer some value in this discussion. Both the Swiss Franc ETF, CurrencyShares Swiss Franc Trust ( FXF), and the Australian Dollar ETF, CurrencyShares Australian Dollar Trust ( FXA), could do well in the face of a U.S. recession. The franc stands to benefit from some safe-haven demand. The Australian dollar could do well if short rates in the U.S. go down to stave off a recession. This would put more of a spotlight on the yield differential that favors the Aussie. Also, neither Switzerland nor Australia relies heavily on exporting to the U.S. for economic success. FXF has a 0.034 correlation to the S&P 500, while FXA's correlation is 0.171. FXF yields just less than 1%, but rates are expected to go up in Switzerland, and FXA yields about 5.5%.
Call-Writing Funds PlanFrom the closed-end fund (CEF) world, one might also consider the many call-writing funds, which buy stock and sell either covered calls or index options (calls and puts) to generate income. The idea is that these will be less volatile than the stock market, and less sensitive to interest rates than bond funds. These funds have had their share of feast and famine. Given that the context is defense against U.S. recession, a call-writing fund that owns foreign stocks may be a better way to go. Here are three that have done well of late.
|Call-Writing Closed-End Funds |
These offer low correlation to the S&P 500
|Name||Yield||Discount to Premium||Correlation to SPX||Correlation to Bonds*|
|Evergreen International Balanced (EBI)||8.93%||-0.81||0.095||0.046|
|Blackrock Global Opportunity (BOE)||8.75%||1.92%||0.23||0.011|
|ING Global Equity Dividend (IGD)||9.47%||2.76%||0.265||0.008|
|*bonds as measured by the Vanguard Long Term Bond Index Fund (VBLTX)|