As the bull market grows long in the tooth and depressed volatility fuels rising complacency, investors consider real assets and related exchange traded funds to diversify and hedge a potentially equity-heavy portfolio.
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"Risks of an aging bull market and record low volatility may spur investors to diversify into real assets for protection," Maxwell Gold, Director of Investment Strategy for ETF Securities, said in a research note. "Rising inflationary pressures may benefit real assets. Real assets remain cheap relative to financial assets."
The current U.S. bull market rally is the second longest on record and is now approach its 9th year. Consequently, more wary investors are beginning to question how much longer this equity run can continue uninterrupted. Further fueling concerns, the record low market volatility has added to thoughts of an increasingly complacent market condition.
Consequently, Gold argued that investors should consider real assets as a portfolio diversifier since they exhibit low correlation to both U.S. equities and fixed-income assets and would provide downside protection against a spike in volatility in financial assets.
For instance, investors who want to use precious metals as a short-term hedge and even a long-term play may consider a number of physically backed metals-related ETFs as a way to diversify a traditional stock and portfolio, including ETFS Physical Swiss Gold Shares (NYSEArca: SGOL), ETFS Physical Silver Shares (NYSEArca: SIVR), ETFS Physical Platinum Shares (NYSEArca: PPLT) and ETFS Physical Palladium Shares (NYSEArca: PALL). ETF investors can also use the ETFS Physical Precious Metals Basket Shares (NYSEArca: GLTR) as a catch-all of all four precious metals.
Investors interested in diversifying their portfolios with other commodities exposure also have a number of ETF options available to them. ETF Securities recently came out with a line of ETFs to outperform the widely observed Bloomberg Commodity Indices without the need to worry about troublesome K-1 forms come tax season, including the actively managed ETFS Bloomberg All Commodity Strategy K-1 Free ETF (NYSEArca: BCI), ETFS Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (NYSEArca: BCD) and ETFS Bloomberg Energy Commodity Longer Dated Strategy K-1 Free ETF (NYSEArca: BEF).
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"Given elevated valuations among financial assets and on-going geopolitical, monetary policy, and fiscal policy risks, investors may shift to real assets," Gold said.
Furthermore, real assets may also stand out during rising inflationary periods as they are a better store of wealth. Gold pointed out that input costs to producers continue to rise with higher wage costs from a tightening labor market and inflation is picking up speed in the form of a weaker U.S. dollar. Looking ahead, market expectations for inflation have also risen in recent years as the economy continues to expand.
"An environment of elevated and rising inflationary pressures may benefit real assets compared to financial assets. Real assets have a high sensitivity (or beta) to inflation and typically perform well when inflation increases," Gold said.
This article was provided courtesy of our partners at etftrends.com.