Flight to Safety

Continuing nervousness over banks drove stocks down and caused investors to flee to the relative safety of gold and US treasuries in trading on Wednesday, September 17.

The $15 billion ETF SPDR Gold Trust (GLD) jumped nearly $10 or 13%.  Competing funds COMEX Gold Trust (IAU) and PowerShares DB Gold Fund (DGL) also rose 13%.

Investing in short term US Treasuries is also easy with ETFs.  The SPDR Barclays Capital 1 – 3 Month T-Bill ETF (BIL) trades at just under $46 and changing treasury yields are reflected in the dividend.  The heavy demand for T-Bills has driven the monthly dividend to less than a third of what it was a year ago.

Other ETFs that specialize in short term US Treasuries include the Barclays Capital 1-3 Year Treasury Bond Fund (SHY) and the Barclays Capital Short Treasury Bond Fund (SHV) which owns US Treasuries with a remaining maturity of between 1 and 12 months.  Note that BIL, SHY and SHV are sponsored by Barclays’ iShares and that Barclays Capital’s only role is to provide the index.

The flight to Treasuries was also a result of the Tuesday news that a large money market fund saw its NAV drop below $1.00 as the fund’s parent was unable to fully cover a large position in Barclays Capital commercial paper.

There are no true equivalents to a constant share price money market fund in the ETF world.  The closest is the WisdomTree U.S. Current Income Fund (USY) which invests primarily in very short term, high-quality money market securities.  Holdings as of September 17 did not include any Barclays Capital or AIG paper.