Investing in real assets with ETFs

Improve the diversification of your 60/40 portfolio with real assets like gold, commodities, and infrastructure—especially now that bonds are no longer the go-to for offsetting stock volatility.

It’s tough to face a challenge when you’re not feeling 100%. Nobody wants to run a race with shin splints, interview for a job with a rotten cold, or house hunt during an uncertain time at work.

But that’s where the 60/40 portfolio finds itself—facing rising macro uncertainty at a time when its ability to mitigate equity downside has been sapped due to elevated bond and stock correlation.

Moving from bonds to real assets to offset equity drawdowns

Investors have long relied on bonds to trade in the opposite direction of stocks to offset equity market drawdowns. But surging inflation and rising interest rates turned the typical stock/bond relationship on its head in 2022—and stocks and bonds have been positively correlated ever since (Figure 1).

That means bonds offer only a fraction of the protection against equity volatility that they used to. And that’s especially problematic now, with monetary and fiscal policy on a collision course.

The Federal Reserve (Fed) is waiting to cut interest rates until the data points to inflation being more firmly under control. Meanwhile, the Trump administration’s tariff policies threaten to stoke inflation, and its expansionary fiscal agenda likely will increase the US’s already unsustainable debt, stressing bond markets.

That stress opens the door for inflation-sensitive liquid alternatives like real assets—physical, tangible investments whose value is derived from their intrinsic qualities and actual use. These include:

• Natural resources: Commodities and raw materials, including gold, industrial metals, energy, oil, gas, timber, and agriculture.
• Real estate: Land, residences, office buildings, retail stores, warehouses, and factories. Real Estate Investment Trusts (REITs) are companies that own and operate different types of real estate.
• Infrastructure: Transportation (roads, airports, railways), utilities (power plants, water systems), and telecommunications.

Why—and how much—should you allocate to real assets?

Investing in real assets can’t eliminate market uncertainty. But building a 5% to 10% real assets allocation—drawing equally from stocks and bonds and/or using elevated cash balances—can help diversify your 60/40 portfolio and better position it for today’s challenging environment.

Real assets may help keep your portfolio on track with:

• Low correlations to stocks and bonds. A properly diversified portfolio holds multiple asset classes where when one asset class zigs, the other zags. Asset classes with uncorrelated performance can help manage portfolio risk.

Within real assets, gold and commodities have low correlations to a 60/40 portfolio because they’re physical assets. REITs, infrastructure equities, and natural resources equities have higher correlations because they represent certain type of ownership of a business and trade more like stocks (Figure 2).

• Preservation of purchasing power. When hedging against above average inflation, investors typically purchase assets that maintain or increase in value as inflation rises.

Since economic fundamentals of real assets, such as the market price of commodities and cash flows of companies producing oil and gas, are highly sensitive to inflation trends, their strong performance during an inflationary environment, especially during unexpected higher inflation periods, provides investors a powerful inflation management tool to offset traditional assets’ vulnerability to inflation risks. (Figure 3).

Moreover, commodities, gold, and inflation-linked bonds may also mitigate equity downside during times of rising inflationary pressures. In 2022, for example, broad commodities and natural resource equities rose 26% and 10% respectively at a time when the S&P® 500 was down 18%.¹

ETFs make it easy to invest in real assets

ETFs are expanding access to these once-exclusive strategies. More than half of investors familiar with ETFs (51%) say ETFs provide an efficient, cost-effective way to invest in alternatives.²

And the unique benefits ETFs deliver to investors extend across real assets:

• Greater diversification: ETFs give investors exposure to a basket of equities, bonds, commodities, or real estate in a single security—making it easier to build diversified portfolios.
• Low cost: Fees and expenses can erode investment returns. Passively managed ETFs typically have lower management fees and operating expenses compared to mutual funds, hedge funds, or private investment accounts. In fact, historically, the median expense ratio for ETFs is 0.56% versus 0.90% for mutual funds.³ Additionally, ETFs trade commission-free on many brokerage platforms, which can lower the total cost of owning an ETF.
• High liquidity: Liquidity implies there are numerous buyers and sellers for an asset, making it easy to transact without significant price fluctuations. Because ETFs trade throughout the day on an exchange (known as the secondary market), they are considered liquid investments. And through their creation and redemption process, ETFs gain a liquidity boost from the primary market—where securities are created and initially sold. Liquid ETFs allow investors to make quick adjustments to take advantage of short-term tactical opportunities, even in times of market stress.
• Trading flexibility: Because ETFs trade on stock exchanges, they are priced intraday and can be easily bought or sold. With ETFs, investors can also use limit orders and stop-loss orders or buy on margins.
• No storage stress: Storage of physical real assets like gold and commodities can be a real issue. An ETF’s ongoing expenses may be lower than the costs associated with buying, storing, and insuring a physical asset like gold.