5 assets investors are buying in the dip: From commodities to ETFs

Stock markets and cryptocurrencies globally endured a bruising year in 2022.

The FTSE 250 lost almost 20%. In the US, the S&P 500 is also in a bear market and lost nearly 20% in 2022. The tech-heavy Nasdaq-100 slid by more than 34% in the year.

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A confluence of factors, including supply chain shocks due to the pandemic, the war in Ukraine and slowing economic growth, have contributed to this steep decline.

Now, rapid interest rate hikes from central banks looking to rein in inflation mean that investors can’t expect any relief from this volatility anytime soon.

How long can we expect market volatility for?

eToro market analyst Josh Gilbert said that markets are currently experiencing the highest level of volatility since 2020 – the time of the COVID-19 crash and subsequent rally.

“The bigger and longer this interest rate upcycle goes, the greater the risk of an economic recession and the sharp fall in company earnings this would bring,” Gilbert told Finder.

So how are investors attempting to play these recent market crashes to generate returns? One method that was popular during the coronavirus stock market crash was “buying the dip”.

1. Commodities

Commodities are basic natural resources such as oil, food and metals and are often thought of as the building blocks of the economy.

Most commodities are considered an excellent hedge against inflation and serve the crucial purpose of diversifying the portfolio.

On the downside, they can be highly volatile based on supply and demand factors, as reflected in the price of iron ore which has ranged between $85 and $220 (£74–£192) a tonne over the last 18 months.

Generally, commodities can be bought, either directly or via commodities exchange-traded funds (ETFs).

Commodities were the golden child of 2022, with Bloomberg’s commodity index climbing by 12% over the year. Oil was among the best-performing commodities this year with a jump of a staggering 60% because of tight supplies amid the war in Ukraine and recovering demand after the coronavirus pandemic.

Given that commodities have performed so well, it’s no surprise that the Energy Select Sector ETF (NYSE: XLE) is one of the top-performing funds in 2022, gaining more than 50%. The ETF comprises some of the biggest names in the industry, including Exxon Mobil and Chevron Corp, with 91% of its allocation in oil, gas and consumable fuels.

2. Gold

While gold is technically a part of the commodities subset, its popularity means it should be considered an alternative asset in its own right.

The precious metal is widely perceived as a store of value and a hedge against inflation.

Gold’s value typically increases when the overall market is in turmoil. For example, the gold price more than doubled between 2008 and 2011, even as the worldwide economy struggled through the global financial crisis. Similarly, while stock markets have slid heavily in the last year, gold prices had a small loss of 7%, but generally held their ground.

Despite facing headwinds in recent weeks, gold remains a valuable asset for investors especially because it offers diversification for the portfolio. Retail investors also have multiple options to invest in the commodity – physical gold bullion, stocks of gold producers, gold ETFs or trading gold via the futures market.

3. Thematic ETFs

Long-term investors consider down markets as an opportunity to add to or rebalance their portfolios. A time-honoured strategy for dealing with market downturns is to move money from high-growth sectors to those offering more stable returns.

“Defensive stocks took a back seat throughout 2020 and 2021 as high-flying tech stocks grasped investors’ attention,” Gilbert said.

“Now, as a result of recent market movements, investors are rotating to defensive for stable earnings and dividends, especially as the macro risks continue to rise.”

Some of eToro’s best-performing portfolios in 2022 included sectors such as consumer staples, health care and utilities, which are generally less exposed to rising economic growth risks and will provide robust dividends.

For instance, its model Public Utilities Stocks “smart portfolio”, which focuses on providers of basic amenities such as water and electricity, has returned nearly 6% in the last 2 years.

Similarly, its Dividend Growth Stocks portfolio, which includes big names such as Coca-Cola, McDonald’s and Walmart, has benefited from the focus on health care, energy and consumer staple sectors that have all done well this year, with solid profits and shareholder payouts. The portfolio has grown by 16% in the last 2 years.

Some investors taking a longer-term view on markets are also seeing the sell-off in sectors such as technology as an opportunity, given that there have been steep falls of 70–90% on popular stocks such as Block, Zoom and Netflix.

4. Traditional ETFs

An ETF is basically a basket of securities that trades on an exchange just like a stock.

Given their far lower management fees compared to managed funds, ETFs offer a low-cost way for less-active investors to earn a return similar to an index or a commodity.

The value of the ETF goes up or down with the index or asset they are tracking. However, they are considered a useful weapon to help manage the volatility risk because they typically trade very closely to their net asset value.

Index funds such as ETFs also offer the advantage of diversification and offer a wide variety of underlying assets that can be tracked. These include a benchmark index such as the S&P 500 or FTSE 100 to commodities such as gold, natural resources or agricultural products or even sector-specific funds such as energy ETFs or real estate ETFs to thematic ones like ethical investments.

5. Crypto

Cryptocurrency felt the full force of the selling pressure in 2022, with Bitcoin sliding around 60% from its all-time high. However, despite major drawdowns across the crypto space, the development of crypto and its use cases as well as regulation of the industry is continuing regardless.

Diehard crypto believers continue to take the opportunity to put money into Bitcoin and its peers like Ethereum to buy the dip despite ongoing market carnage. These investors believe that the blockchain technologies underpinning cryptoassets have good firm grounding for the future and are seeing a growing group of people that now accept the digital assets in the real world.

The more different assets you own, the more diversified you become.

And while these are only thought starters, it might help an investor create a diversified portfolio. Which of the above options an investor chooses is often dependent on their risk profile and time horizon. Multi-asset platforms such as eToro offer broad exposure to all these assets on a single platform.

Bottom line

Buying the dip is often seen by investors as an opportunity to get hold of high-value shares at a discount. While this can be true, and previous market crashes have recovered over time, you can’t rely on past performance and assume that all stocks will recover. Make sure you understand this additional risk involved and that recovery isn’t instant, you could find yourself holding investments for a long period of time.