A recent study by the International Monetary Fund (IMF) casts doubt on the traditional view of bonds as a safe haven during stock market downturns. The findings, released in February, reveal that since 2019, bonds and stocks have become more positively correlated. This shift challenges the long-standing belief that when stocks fall, bonds rise, leaving many investors pondering new strategies for diversification.
In light of this changing landscape, the IMF suggests that commodities might offer more stability than bonds in turbulent market conditions. For example, exchange-traded funds (ETFs) focused on commodities, such as silver or rare earth metals, could serve as useful hedges against stock market volatility. Two notable options are the iShares Silver Trust and the VanEck Rare Earth and Strategic Metals ETF, both of which present distinct risk profiles and potential returns.
The iShares Silver Trust, which closely tracks the price of silver bullion, has seen remarkable performance over the past five years, boasting annualized returns of 21.75%. Strong demand for silver has been fueled partly by inflation concerns and its industrial applications, including in solar energy. However, the ETF’s recent volatility has been stark, with a 50% loss from its peak earlier this year, reflecting the risks inherent in such investments.
In contrast, the VanEck Rare Earth and Strategic Metals ETF, which focuses on companies involved in the production and refinement of rare-earth materials, has had a complex performance record. Although it gained 17% year-to-date, its longer-term average annual return since inception in 2010 is -2.67%. This ETF appears to capitalize on the growing demand for rare-earth metals in advanced technologies, but potential investors should be aware of its historical performance and associated risks.
Investing in precious metals and rare-earth materials can provide a hedge against stock market crashes. Historical data following the downturn in 2022 serves as a case study: while the S&P 500 dropped 18% and bond ETFs suffered losses as well, the iShares Silver Trust managed to achieve a modest gain of 2.37%. Conversely, the VanEck ETF did not fare well, losing 31.1%, highlighting its susceptibility to tech stock sell-offs.
While the iShares Silver Trust may offer a better risk-adjusted option for those looking to protect against market downturns, it comes with its own set of risks, including high volatility and no dividend payouts. Furthermore, these funds tend to have higher expenses compared to traditional low-cost index funds.
Potential investors are advised to assess their overall portfolio strategy carefully. While the iShares Silver Trust showed resilience during recent downturns, it might not be the first pick among top-performing stocks recommended by experts, who often focus on long-term growth potential.
