Investors re-position their portfolios as Greece debt crisis deepens

Jul 1st, 2015 | By | Category: Equities

Greece is officially in arrears on its loan repayments to the IMF and a referendum is scheduled for Sunday that could pave the way for an exit from the Euro. Investors are re-positioning their portfolios to brace against this event. The Greek markets themselves have been hit the hardest; the Global X FTSE Greece 20 ETF (GREK), which invests in the 20 largest firms on the Athens stock exchange by market-cap, fell by 19% on Monday and trading on the actual Athens exchange was suspended until at least July 6th.

Investors re-position their portfolios as Greece crisis deepens

Investors are re-allocating their portfolios away from riskier assets in the wake of the escalating Greek debt crisis

Stocks across Europe, especially those related to banking and finance, trended downwards as the possibility of a default became an ever greater reality. Even in the US, where many firms rely on Europe as a major market for their products, stock markets dropped by their largest single-day fall in over a year. In general there has been a move into safer assets, such as gold and Treasuries, while there has also been a significant move into assets that may actively benefit from Greece leaving the single currency.

So what are some of the options available to investors?



Investments in gold have been seen as a safe-haven and a good store of value for thousands of years. Although the international monetary system has evolved to rely less on gold, the precious metal has nonetheless maintained an international importance.

It continues to be a good hedge against inflation, a key benefit over holding cash, and still plays an important role in international settlements as central bank reserves and financial organizations such as the IMF currently own 20% of the above-ground gold inventory. Some argue that gold maintains a psychological importance due to its historic strategic importance in world affairs.

As markets become unsettled and investors sell out of riskier assets, demand for gold usually increases. ETFS Physical Gold ETC (PHGP) and ETFS Physical Gold ETC (PHAU) are two exchange-traded funds that are listed on the London Stock Exchange and track movements in the spot price of gold. The first is denominated in GBP, being subjected to currency fluctuations between sterling and the US dollar, while the second is denominated in USD. They are both highly liquid funds, reporting combined AUM of £4.2bn. Both funds offer the opportunity for a direct investment in gold as they are backed by physical gold stored in London through HSBC. Both have Total Expense Ratios (TER) of 0.39%.

The SPDR Gold Trust ETF (GLD), trading off the NYSE Arca, offers the most liquid option for US investors to access an ETF that also invests directly by holding physical gold stock. The AUM of this fund currently reaches above $26bn, making it the most popular gold ETF in the world. All three ETFs were up modestly on Monday trading, at around 0.5-0.6%, but marks a significant bounce back from funds that have lost 10.9% of their value over the previous 12 months.

Treasury Bonds and Cash

Another safe-haven for investors in uncertain times is US Treasury Bonds. There has been much talk recently about a possible rate hike by the Fed which will consequently push prices lower. Many analysts believe that such a hike may come as early as September due to improving conditions in the US economy. However it seems a Greek default is ever more likely and if so would occur way before September. The growth-dampening effect to the US, for example a reduction in exports to Europe, might prompt the Fed to push back the date of such a rate increase.

iShares offer a suite of UCITS-compliant ETFs that track the performance of Treasury bonds with various maturities, allowing the investor to diversify against potential undesirable twists in the Treasury yield curve. The iShares $ Treasury Bond 1-3 yr UCITS ETF (IBTS), the iShares $ Treasury Bond 3-7 yr UCITS ETF (CBU7), the iShares $ Treasury Bond 7-10 yr UCITS ETF (IBTM) and the iShares $ Treasury Bond 20+ yr UCITS ETF (IDTL) are all traded on the London Stock Exchange and are denominated in US dollars. The TER of each fund is 0.2%

Investors may be interested in funds that track cash-equivalents as a means of holding safer assets during times of high volatility. The PIMCO US Dollar Short Maturity Source UCITS ETF (MINT) is traded in US dollars on the London Stock Exchange. The fund currently has 385 holdings and invests predominantly in investment grade credit (70%) and short-term loans backed by upcoming mortgage repayments (15%). The fund has an average maturity and effective duration of 0.36 years. The underlying loans have an average quality rating of A and the TER of the fund is 0.35%.

Alternatively, investors may wish to consider the PIMCO Sterling Short Maturity Source UCITS ETF (QUID) which trades in GBP on the London Stock Exchange. The fund currently has 119 holdings and invests mainly in investment grade credit (53%) and short-term government securities (39%). There are holdings in securities that are denominated in G7 currencies other than the pound but full currency hedges are employed regarding all such investments. The average maturity of the underlying loans is 0.39 years and the effective duration is 0.38 years. The average quality rating is AA- and the TER of the fund is 0.35%.

For those wishing to potentially profit from future negative developments in the ongoing Greek saga, investors may wish to consider the following options.


There are some intricate ETFs available that track volatility in the market, enhancing returns should the general volatility of its benchmark market go up. One example is the Lyxor S&P 500 VIX Futures Enhanced Roll UCITS ETF, denominated in euros and trading on the Borse Frankfurt, Borsa Italiana and the AEX. The fund tracks changes in VIX, known as the ‘fear index’, which reflects perceived volatility in the S&P 500 over the next 30 days. As perceived volatility increases so the fund provides positive returns. The fund returned 5.3% on Monday due to the increased uncertainty caused by Greece’s default.

Investors are warned to watch their time-frame when investing in this fund as the fund could suffer from losses in the long term due to the ‘contango’ shape of the futures curve, a situation where the futures price is above the expected futures spot price, leading to an expected decline in value if the futures contracts are held to maturity. Short-term gains are very possible though, especially in highly uncertain times. The TER of the fund is 0.60%.

Short Funds

Analysts are uncertain as to the extent of the ramifications of Greece leaving the Euro but there is no denying that markets across Europe will trend downwards. The Boost Euro Stoxx 50 3X Short Daily ETP (3EUS) provides a daily return that is three times the inverse performance of the Euro Stoxx 50 Index less fees. The fund is denominated in euros, trades on the London Stock Exchange and utilizes currency swaps to establish its leveraged position. As of the end of May 2015, the index was tilted mostly towards the banking sector (18.4%), followed by chemicals (9.9%) and industrial goods and services (8.8%). The countries with the highest weightings were France (35.4%), Germany (31.4%) and Spain (12.7%). The fund traded 14.7% higher on Monday. The TER is 0.8%.

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