Two ETFs for Any Season

06/24/2010 12:01 am EST

Focus: ETFS

With the last few years’ volatility and major indexes still below highs last seen more than ten years ago at the beginning of the “tech wreck,” many investors are wondering if there are any “safe harbors,” or investments that can still generate a decent return on investment for the long term.

While there’s no sure thing, one can look back over the last ten years and find various asset classes that have steadily outperformed the S&P 500 and might continue to do so in the future.

In this article, we’ll take a look at two of these and examine how they’ve fared and how and why they might continue to outperform in the future.

All That Glitters Is Gold  

I’m not a gold bug by any means, but a look back shows us that gold has been in a solid bull market since 2000 and has generated significant excess returns on investment over this period of time.

In this chart of gold versus the S&P 500, we can clearly see how GOX, the CBOE Gold Index, has outperformed the S&P 500 since 2000. However, the last ten years have not been without periods of volatility and underperformance, or volatility as outlined by the jagged red trace above as gold logged +350% returns versus less than 0% for the S&P 500.
Going forward, advocates of gold say that no matter what happens, gold can’t miss. (Again, I caution against thinking that anything is a “sure thing.”)

They say this because if all the recent money printing and deficit spending—not just in the US, but around the world,—leads to inflation, then gold will be a good hedge against rising prices. On the other end of the spectrum, if we’re heading for a global financial collapse under the weight of global debt and sovereign defaults, then gold will be the currency of last resort and a final store of value, so it will also go up in that case.

NEXT: Another Asset Class That Continually Outperforms


Black Gold Glitters, Too

The second asset class that has outperformed over the last ten years is energy, and in particular, oil.

In this chart, we compare the price of the CBOE Oil Index to the S&P 500 since 2000. Again we see a similar pattern wherein oil has generated gains of +150% versus less than 0% for the S&P 500. And again, we see that these gains have not come without significant volatility and setbacks along the way.

Advocates of oil and energy say that prices can only go up as an increasingly energy-hungry world vies for more and more of a declining resource. Energy and oil prices are directly tied to global demand, but it’s easy to make an argument that with the industrialization of the emerging world, demand (and prices) have only one way to go and that way is up.
If you buy into the rationale of the advocates of these two asset classes, then retail investors now have easier access to the gold and oil markets than ever before via exchange traded funds.

The largest gold ETF is the SPDR Gold Trust ETF (GLD), which buys physical gold and whose assets are larger than most countries, while another option for exposure to the gold market is via the Market Vectors Gold Miners ETF (GDX), which tracks the AMEX Gold Miners Index of companies involved in gold mining activities.

For advocates of the energy/oil market, the largest exchange traded fund is the United States Oil Fund (USO), a commodity-based ETF that tracks the price of west Texas intermediate crude oil predominantly through the use of oil futures contracts.

The novel element to all of these ETFs is that now investors can gain exposure to commodities markets via a stock-like vehicle that can be used in cash accounts, IRAs, or even 401(k) accounts without having to venture into the ever- dangerous and volatile futures markets.

None of the above is meant to be a recommendation or investment advice, and no one has a crystal ball or can predict the future, so there’s never a guarantee that these might turn out to be good investments over the long haul. However, if past performance is any indication of future performance, gold and oil/energy might be two good places to look for long-term returns that could outperform traditional index investing.

By John Nayaradi of

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