3 Safe-Haven Alternatives to Treasuries

Treasuries are at risk of losing their highly coveted, top-notch rating.


Outside of burying your cash in the backyard, U.S. treasury bonds remain one of the safest places to keep your money. But that could change soon. Two major ratings agencies, Standard and Poor's and Moody's Investors Service, have said policymakers in Washington need not only to raise the debt ceiling by the August 2 deadline, but to raise it along with substantial cuts to the deficit. It's not clear how much the ratings agencies would like Congress to shave off the deficit, but they clearly don't believe the negotiations have gone far enough. If lawmakers can't come to an agreement, treasuries could lose their elite, top-notch rating. That has many in the investment community shaking their heads.

"Even the word 'safe haven' right now has basically lost its meaning, primarily because of this potential downgrade," says Jeffrey Sica, chief investment officer of Morristown, N.J.-based investment firm SICA Wealth Management. "Really what [treasuries] have become is the best of the worst. Money has flowed into treasuries primarily because everything in [the sovereign debt crisis in] Europe looks so horrendous." At this point, nothing can truly replace the safety, liquidity, and size of the treasury market, but here are a few alternatives for investors to consider:

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Commodities. Generally, when investors lose faith in paper currencies, they turn to hard assets—especially gold—because of their inherent value. Just this week, gold hit a record of above $1,600 per ounce. Silver, often referred to as "the poor man's gold" because it's generally cheaper to purchase, has been on its own run lately, and currently trades around $40 an ounce. Christian Magoon, CEO of asset management consultant firm Magoon Capital based in Illinois, says investors should even consider "soft" commodities because of their finite nature. "Everything from gold to probably corn ... would now be more attractive because they're not able to be printed, and they're not linked to paper currencies, so you would expect them to hold their value," Magoon says. Two of the most popular exchange-traded funds that are physically backed by hard assets are iShares Silver Trust (symbol SLV) and iShares Gold Trust (IAU). Sica recommends PowerShares DB Agriculture ETF (DBA), which invests in a range of commodities, including corn, sugar, and soybeans.

Tom Lydon, editor of ETFTrends.com, offers a twist on investing in precious metals. "Instead of following the price of the metals, look to the mining companies," Lydon says. "It costs the same to pull the metals out of the ground, no matter the price of the metal." Since gold has recently reach new highs, he favors ETFs like Market Vectors Gold Miners (symbol GDX), which invests in the stocks of gold-mining companies.

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Other currencies. The Swiss franc is one of the world's strongest and most stable currencies. Year-to-date, it has appreciated about 13 percent against the U.S. dollar. That's because Switzerland is a relatively stable country that isn't facing debt problems like many other European nations. Michael Cuggino, manager of the Permanent Portfolio Fund (PRPFX), maintains a fixed allocation of 10 percent of the fund's total assets to the Swiss franc. "We do [currency diversification] with the Swiss franc," Cuggino says. "It provides you with a true offset to what's going on with the dollar and the Euro." Investors can get exposure to the Swiss franc by owning bonds issued by the Swiss government, or through an ETF like CurrencyShares Swiss Franc Trust (FXF).

While interest rates remain near zero in the United States, they're much higher in some emerging markets such as China and Brazil, where central banks have hiked interest rates in recent months. Magoon recommends currency ETFs like WisdomTree Dreyfus Emerging Currency (CEW), which owns a basket of emerging markets currencies. He says investors can also take advantage of appreciating currencies in commodity-rich nations like Australia that generally have stronger currencies. To invest in such countries in both developed and emerging markets, he suggests WisdomTree Dreyfus Commodity Currency (CCX), which also owns a number of different currencies.