Why This MVP Deserves Tech Stocks’ Place In Your Investing Line-Up

Why This MVP Deserves Tech Stocks’ Place In Your Investing Line-Up
Stéphane Renevier, CFA

about 2 years ago5 mins

  • Tech stocks have outperformed real assets for decades, but real assets might be about to stage a comeback.

  • After all, their valuations are more attractive, they provide protection against inflation, they’re resilient to rate hikes, they provide a higher and more stable income, and they help diversify your portfolio.

  • To invest in the theme, there exist plenty of cheap and liquid ETFs on commodities, natural resources, real-estate, infrastructure, or even everything in one.

Tech stocks have outperformed real assets for decades, but real assets might be about to stage a comeback.

After all, their valuations are more attractive, they provide protection against inflation, they’re resilient to rate hikes, they provide a higher and more stable income, and they help diversify your portfolio.

To invest in the theme, there exist plenty of cheap and liquid ETFs on commodities, natural resources, real-estate, infrastructure, or even everything in one.

Mentioned in story

Real assets – any investment you can touch, like oil, gold, real estate, pipelines, airlines, and cellphone towers – have been left out in the cold next to their much more appealing “financial assets” cousins: tech stocks. But there are five reasons to dump those high-fliers for their under-the-radar counterparts.

Real asset valuations are more attractive

You’ve probably heard this a lot: stock valuations – particularly those of fast-growing tech stocks – are sky-high. And while it’s harder to estimate the fair value of real assets, their extreme underperformance next to financial assets since the 1980s suggests they are a much more attractive value proposition right now.

Real assets near all-time lows relative to financial assets. Source: BofA
Real assets near all-time lows relative to financial assets. Source: BofA

Real assets provide protection against rising inflation

High inflation tends to squeeze companies’ margins and reduce their profits, but real assets tend to benefit from it. That’s partly because their income is linked to rising prices, and partly because their supply takes a long time to adjust to strongly rising demand, which pushes prices up until a new equilibrium is found. In fact, we might even say that real assets are inflation, as things like higher food prices and housing rent have a direct impact on the measure. In other words, if inflation goes up, so do real asset prices.

Real assets outperform in inflationary environments. Source: Bloomberg
Real assets outperform in inflationary environments. Source: Bloomberg

Real assets are resilient to rising interest rates

Financial assets have been supported by the trend of falling interest rates for decades, and they’ve been pushed to new highs since the global financial crisis thanks to extremely accommodative central banks. But when rates rise, financial assets – particularly those of rate-sensitive sectors like technology stocks – are particularly ripe for a selloff as they adjust to the new reality. That’s not to say growth stocks will necessarily crash or that real assets will run away with it, but the latter is likely to outperform the former.

Real assets provide a higher and more stable income

The dividend yield of the S&P 500 is less than 2%, but real assets tend to generate an income in the 5-10% range. That makes them particularly appealing in a world where institutional investors not only have to generate returns, but also regular income – something bonds and stocks are increasingly unlikely to achieve.

Real assets can help diversify your portfolio

Real assets have a low correlation with the main asset classes, and including them in a portfolio of stocks and bonds has been shown to improve its risk-return profile. But what makes them particularly attractive is that they outperform stocks in both a stagflationary (low-growth and high-inflation) and reflationary (high-growth and high-inflation) environment – two environments investors are likely to face in the near future.

So what’s the opportunity here?

There are three main ways you can invest in real assets: you can buy the physical asset itself, buy futures on the underlying asset, or buy stocks or funds that directly benefit from the price of real assets. The first two aren’t exactly easy for retail investors to implement, so the third option might be best. Here are a few ideas of what you could buy.

Commodities

If you’re looking to invest in commodities, you have two options: going specific or going broad. If the former, you might want to buy an ETF tracking a particular commodity: the Aberdeen Standard Physical Gold Shares ETF (ticker: SGOL, expense ratio: 0.17%) is a low-fee and liquid option for gold, while the Invesco DB Energy Fund (ticker: DBE, expense ratio: 0.77%) gives you access to a diversified basket of energy commodities. For agriculture, the Invesco DB Agriculture Fund (ticker: DBA, expense ratio: 0.93%) might be your best bet, and the Invesco DB Base Metals Fund (ticker: DBB, expense ratio: 0.80%) is a solid option for metals.

Those who prefer a broader basket might want to look at the iShares Bloomberg Roll Select Commodity Strategy ETF (ticker: CMDY) which has one of the lowest expense ratios at 0.28%. For those with a long-term horizon, the abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (ticker: BCD, expense ratio: 0.29%) might be a good option: it not only has low fees, but also invests in futures contracts further down the line, reducing the return drag caused by futures known as “contango”.

Natural Resources

One of the most liquid ETFs focusing exclusively on natural resources is the FlexShares Morningstar Global Upstream Natural Resources Index Fund (ticker: GUNR, expense ratio: 0.46%). Two factors make this ETF quite interesting: it focuses on the “upstream” portion of the natural resources supply chain, and it has significant exposure to the water and timber industries. Those sectors are less covered and hence less likely to be overpriced, as well as more likely to diversify your portfolio.

Real estate

If you’re interested in investing in real estate, you can do so in a liquid way through Real Estate Investment Trusts (REITs). The cheapest and most liquid option is the Vanguard Real Estate ETF (ticker: VNQ, expense ratio: 0.12%), but those who want a higher exposure to residential real estate (as well as other sectors like healthcare and self-storage) should consider the iShares Residential and Multisector Real Estate ETF (ticker: REZ, expense ratio: 0.48%). Income-focused investors, meanwhile, might be attracted by the more than 6% dividend paid by the Nuveen Real Estate Income Fund (ticker: JRS, note: this is a closed-end fund).

Infrastructure

Due to its high and stable income, infrastructure is often used by institutional investors as a replacement for fixed-income investments like bonds. The largest and most liquid ETF in that space is the Global X US Infrastructure Development ETF (ticker: PAVE, expense ratio: 0.47%), which invests in a range of companies involved in multiple facets of infrastructure development, including the production of electrical components and equipment, construction and engineering, and railroad development.

The all-in-one option

If you just want to avoid the headache of selecting specific real assets sectors altogether, the FlexShares Real Assets Allocation Index Fund (ticker: ASET, expense ratio: 0.57%) might be for you: it gives you access to real estate, infrastructure, and natural resources for a relatively low fee. An even more comprehensive (but slightly more expensive) option is the VanEck Inflation Allocation ETF (ticker: RAAX, expense ratio: 0.78%), which also includes commodities and even bitcoin.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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