Use Gold ETFs to Better Manage Portfolio Risks

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.