What Is a Safe Asset?

Safe assets are assets which, in and of themselves, do not carry a high risk of loss across all types of market cycles. Some of the most common types of safe assets historically include real estate property, cash, Treasury bills, money market funds, and U.S. Treasuries mutual funds.

The safest assets are known as risk-free assets, such as sovereign debt instruments issued by governments of developed countries.

Understanding Safe Assets

Safe assets can also be referred to as safe havens, offering investors safe investments that preserve capital and withstand high levels of market volatility. Most investors will hold some portion of safe assets as part of a balanced portfolio, and many conservative investors may hold the majority of these assets in their portfolio to ensure capital preservation. Real estate property, cash and Treasury bills are some of the assets investors may consider safe.

A safe asset investment diversifies an investor’s portfolio and is beneficial in times of market volatility, where it often provides liquidity. Most times, when the market rises or falls, it is for a short period of time. However, there are times, such as during an economic recession, when the downturn of the market is prolonged. When the market is in turmoil, the market value of most investments falls steeply.

Treasury bills are backed by the U.S. government and considered to be risk-free. Investors in the U.S. can look to these investments as a safe asset since the default rate is nearly zero. Treasury bills are offered with varying maturities, and yields can vary with market cycles. In the United States, T-bills are considered to be the risk-free asset, and the interest rate attached to them the risk-free rate of return.

Key Takeaways

  • Safe assets are assets which, in and of themselves, do not carry a high risk of loss across all types of market cycles.
  • Common safe assets include cash, Treasuries, money market funds, and gold.
  • The safest assets are known as risk-free assets, such as sovereign debt instruments issued by governments of developed countries.

U.S. Treasuries Mutual Funds

Many investors choose to use safe mutual fund assets as cash sweep vehicles for idle cash in their portfolios. U.S. government mutual funds can provide an ideal investment for this holding. These funds are diversified among U.S. government securities. Money market mutual funds are among the most popular cash sweep vehicles. These funds can offer investors slightly higher returns than standard checking and savings accounts while still remaining risk-free. U.S. government money market mutual funds will hold short-term U.S. government securities. These funds have a mandated net asset value of $1.

Safe assets are a product of time and circumstance. During the 2008-09 financial crisis, for instance, money market funds 'broke the buck' and traded under $1 per share causing many to question their status as safe assets at the time.

U.S. government mutual funds outside the money market category can be another safe asset, as they also hold risk-free government securities. These funds are structured like traditional mutual funds. They can be constructed with government securities of varying maturities. Generally, longer-term U.S. government mutual funds will offer higher returns than short-term or intermediate-term portfolios.

Two of the most popular long-term U.S. government mutual funds include the Vanguard Extended Duration Treasury Index Fund and the Fidelity Long-Term Treasury Bond Index Fund. The Vanguard Extended Duration Treasury Index Fund is a passive fund that seeks to track the performance of the Bloomberg Barclays U.S. Treasury STRIPS 20 to 30 Year Equal Par Bond Index. This fund had a one-year return of 7.81% through January 31, 2018. The Fidelity Long-Term Treasury Bond Index Fund is also an index fund and seeks to track the Bloomberg Barclays U.S. Long Treasury Index. As of January 31, 2018, the Fidelity Long-Term Treasury Bond Index Fund had a return of 4.49%.