Diversify with Gold ETFs in a More Volatile Market Outlook

Exchange traded fund investors who are looking for ways to improve the risk-return characteristic of an investment portfolio in current market conditions should consider the role gold can play in today’s global multi-asset portfolio.

On the recent webcast, Gold: What You Need to Know for 2019, Matthew Bartolini, CFA, Head of SPDR Americas Research at State Street Global Advisors, pointed out that 2018 has been a tough year for most asset classes, with the MSCI EAFE Index of developed market stocks down 10%, the MSCI Emerging Markets Index close to 13% lower and the Bloomberg Barclays U.S. Aggregate Bond Index down 2%. Volatility has also picked up with the S&P 500 experiencing a gain or loss of over 1% for 23% of trading days this year, compared to the 22% historical median percentage rate of trade days per year since 1928.

For the first time in 27 years, stocks and bonds both declined in the same year, which has lead to the traditional 60/40 portfolio of stocks and bonds generating a return of 13% below their long-term historical calendar year median of +10.7% since 1991.

“Given more rate hikes expected for 2019 and asymmetric duration risks/yield profile of the broad investment grade fixed income market, the drawdowns we have witnesses in 2018 bond markets may be likely to continue,” Bartolini said.

Among the top concerns investors are facing today, many market participants highlighted the slowdown in the global economy, geopolitical trade concerns, end of the U.S. equity bull market and tightening global monetary policies, signaling that they anticipate these factors will impact equities acutely ahead. While many concerns still linger, investors still want to a balanced portfolio and generate total return.

Looking ahead, the U.S. economy is expected to see decelerating growth, which is consistent with other developed economies, whereas the emerging markets are projected to see growth level off at a higher rate over the next five years, according to Bloomberg, IMF and State Street Global Advisors projections. Bartolini also argued that the increasing margin pressure from higher input costs, moderating sales growth and escalating trade conflicts could put sustainability of earnings growth in doubt.

With the traditional market segments under pressure, investors may turn to alternative assets like gold to diversify and bolster their portfolios.