The S&P 500 is up over 25% this year, but overall 2013 has been a trick-or-treat market for many investors who ventured beyond U.S. stocks.
Some of the worst-performing investments so far this year come from completely opposite ends of the risk spectrum.
For example, riskier sectors such as gold miner stocks and emerging markets have been some of the biggest disasters.
Conversely, traditional safe havens such as Treasury bonds and investments that hedge against market volatility are also among the worst performers.
In honor of Halloween, here are five sectors that have come back to haunt investors this year:
Gold and miner stocks: Bullion prices are down more than 20% so far in 2013 and it looks like gold’s winning streak will come to an end after 12 years of gains. Investors who tried to hop on the bandwagon near gold’s nominal all-time high have suffered losses, and bullion holdings in gold ETFs have declined sharply since the end of 2012. The amount of bullion in exchange traded products has fallen by about 27% from record levels at the start of 2013 as investors lose their taste for gold as an inflation hedge and disaster insurance. Investors have pulled over $20 billion from SPDR Gold Shares (GLD). For 2014, gold may get back on track if inflation starts to heat up or if the Eurozone debt crisis rears its ugly head again. This year has been a downright horror show for investors in gold mining stocks with Market Vectors Gold Miners ETF (GDX) shedding nearly half its value. Gold miner stocks may continue to lag bullion prices until managements can regain the trust of investors, who are fed up with soaring costs and misallocation of capital.
Emerging markets: The iShares MSCI Emerging Markets ETF (EEM) and Vanguard FTSE Emerging Markets ETF (VWO) are both in negative territory for the year. Emerging markets have been trounced by the S&P 500 and most other major stock indices for developed economies. In contrast with the steady march higher this year for the S&P 500, emerging markets have been very volatile. The asset class fell sharply during the spring when U.S. Treasury yields spiked on expectations the Federal Reserve would scale back its economic stimulus. Weakening emerging market currencies against the U.S. dollar have intensified the damage for investors who don’t hedge their foreign-currency exposure. However, looking ahead, lower valuations and improving fundamentals could make emerging markets attractive for long-term investors who can handle the volatility.
Commodities: The collateral damage from concerns over emerging markets has spilled over into commodities this year. In particular, worries that China’s economy is slowing have weighed on prices because the country is a big commodity importer and metals consumer. And like gold, commodities have been under pressure as inflation hasn’t taken off even though central banks continue with the easy monetary policies. Rising interest rates may also curb investment demand for commodities since bonds are paying better yields from rock-bottom levels. PowerShares DB Commodity Index Tracking Fund (DBC) is down about 6% this year. The ETF follows a basket of 14 commodities, including metals, agriculture, oil and natural gas. Commodities are known for their volatility and have obviously had a tough year. However, they could still make sense for investors to diversify equity portfolios and as a hedge against future inflation driven by commodity demand from emerging markets.
Treasuries: U.S. Treasury bonds are supposed to be the ultimate safe haven but rising yields have made them risky for investors this year. Bond prices and yields move inversely. Bonds with longer durations have been hit the hardest – iShares 20+ Year Treasury Bond ETF (TLT) is off 9% this year. Foreign investors in the $11.6 trillion U.S. government bond market worried over the government shutdown and debt ceiling have cut their holdings for four consecutive months, the longest stretch since 2001. Moving forward, Treasuries could be sensitive to U.S. economic data, inflation expectations, more risk-off bouts in the market and expectations of Fed bond tapering. Treasury bonds tend to perform well when stocks are out of favor and investors are positioning for deflation.
Volatility hedges: Tradable products that track CBOE Volatility Index (VIX) futures have grown in popularity after the financial crisis with investors who want to hedge stock portfolios or simply speculate on market pullbacks. Known as Wall Street’s fear gauge, the VIX tends to rise during sell-offs when investors are running for cover in the options markets. However, the VIX was down 26% year to date through Oct. 22, based on historical price data from the CBOE. Exchange traded products designed to replicate the performance of VIX futures contracts have suffered even bigger losses. The iPath S&P 500 VIX ST Futures ETN (VXX), which holds $1.3 billion of assets, is down 59% this year. Volatility-linked products have been awful long-term investments while successfully timing short-term moves is extremely difficult, so investors may want to avoid VIX plays.
Photo Credit: Maharepa
DISCLAIMER: All performance data based on Oct. 22 market closing prices. All opinions included in this material are as of October 22, 2013 and are subject to change. Investment involves risk. Past performance is no guarantee of future results.