The recent market twists, President Donald Trump’s surprise tariff moves and the Federal Reserve’s ongoing monetary tightening all reveal potential cracks in the ongoing bullish environment that could shake the markets. Exchange trade fund investors, though, may consider alternative asset exposure like precious metals to hedge against turns in stocks.
“February was filled with volatility – the VIX hit its highest level since 2015, expectations for further rate hikes from Jerome Powell and trade tension following the announcement of US tariffs on steel and aluminum – which drove investors to precious metals to mitigate against market drawdown and risk factors. If this uncertainty persists, investors may further increase precious metals allocations,” Maxwell Gold, director of investment strategy at ETF Securities, said in a research note.
During periods of elevated volatility, gold has historically maintained a level of support, with a median weekly return of 0.5% and a broadly normal distribution of returns.
Moreover, the true effectiveness of gold during market downturns stands out when evaluating sustained sell offs in equity markets, compared to individual bouts of extreme volatility. For instance, during periods when the S&P 500 suffered a peak-to-trough drawdown of 15% or more since 1987, gold significantly limited downside drawdowns, with gold prices averaging 7.2% return while the S&P 500 averaged a total return loss of 25% over these sell-offs.
“We believe gold remains a critical component of risk management within a diversified portfolio,” Gold said.
Investors who want to access precious metals may consider a number of physically backed metals-related ETFs as a way to diversify a traditional stock and portfolio, including the ETFS Physical Swiss Gold Shares (NYSEArca: SGOL).
ETF Securities also argued that a diversified basket of precious metals tends to perform more consistently versus any single metal and creates an exposure to both the cyclical and non-cyclical drivers of gold, silver, platinum and palladium as a whole. Consequently, investors may look to the ETFS Physical Precious Metals Basket Shares (NYSEArca: GLTR) as a catch-all of all four precious metals, which may help improve portfolio efficiency while providing benefits of diversification and risk management to asset allocations.