In this post I take a look at the performance of select ETFs when US equities have a down day as measured by the daily performance of SPY. I looked at the previous 10 years of daily returns (2520 trading days). The ETFs that I selected are those considered to have low or negative correlations with US equities.
Here are the results:
· TLT (long-term US treasuries) and FXY (Yen) are the best diversifiers on down days in the stock market. Historically, the worse the day, the greater the likelihood that TLT and FXY will be positive on the day and the higher their returns will be.
· GLD (gold) does well on really bad days, but not particularly well on moderate down days.
· GDX (gold miners) is not effective at all. The worse the day for US equities, the worse the day for GDX.
This information is useful for portfolio construction. For example, our portfolio includes a 15% allocation to both TLT and GLD. This should, based on historical performance, help lower portfolio drawdowns.
It is also useful when considering discretionary trades and how they might impact a portfolio that is long equities.