Until recently, many people had never heard of Bitcoin. But the hyperbolic rise in the price of the digital crypto-currency — from $5 as recently as mid-2012 to more than $100 recently — has captured broader attention as financial crises (most recently the one on Cyprus) continue to make markets and investors nervous about traditional, government-issued currencies.
Proponents argue that the rise in Bitcoin’s value and use marks a lack of confidence in those fiat currencies whose value is under the influence of central bankers and politicians. Skeptics point back at a long line of economic bubbles as they predict an eventual plunge in Bitcoin prices.
Economic history is on the side of the skeptics. Let’s take a look at five other assets that gained even more intense interest among speculators and ordinary investors before their bubbles burst, sending prices back down to earth.
Motley Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our newsletter services free for 30 days.
With stocks hovering around all-time highs, many are wondering if equities are the next great bubble getting ready to burst. But stocks aren’t the only things that look frothy: There are a lot of other asset classes that sure look like bubbles.
We’ve compiled a list of the assets that analysts now believe are flashing the warning signs of over-inflation.
BOSTON — An annual scorecard of mutual fund performance is in, and it’s generating more of the negative headlines that fund managers have become accustomed to in recent years.
The key finding: Two-thirds of managed U.S. stock funds failed to beat the market in 2012, according to S&P Dow Jones Indices. For all their stock-picking skills, the vast majority of managers couldn’t claim an edge over low-cost index funds and exchange-traded funds that seek to match the market.
It was the sixth time in the last 10 years that average annual returns of managed funds fell short of the market‘s overall performance. Faced with such persistently disappointing results, it’s understandable that an investor might consider giving up and rely exclusively on index funds.
But look deeper into the latest annual scorecard, and there’s a positive takeaway for investors. Funds specializing in stocks of small foreign companies have beaten their market benchmark year after year.
In 2012, 85 percent of this small group of funds posted larger returns than an S&P index of stocks from foreign developed countries. Returns for the five-dozen funds in the international small-cap category averaged 21.7 percent, compared with 15.4 percent for the index.
It wasn’t a one-year fluke. Ninety percent outperformed over three years, and 79 percent over five years.
Those results are far better than the long-term numbers for other stock fund categories, suggesting that international small-cap is the go-to category for market-beating fund performance.
“It’s kind of like an overlooked child,” says Aye Soe, an S&P Dow Jones Indices researcher who authored the company’s latest scorecard. “There are lots of opportunities there, and active managers can find them.”
How They Do It
Stocks of small companies based overseas generate less attention from investment managers and stock analysts than the big U.S. names in the Standard & Poor’s 500 index. That under-the-radar status creates greater opportunity to find stocks that are underpriced relative to their earnings potential.
That’s reflected in the wide variations in returns among small-cap international stocks. The gap between the best and worst performers is typically larger than in other market segments.
“That creates more opportunity for active managers to add value,” Soe says.
A couple examples of top-rated small-cap international funds, and stocks that have generated strong recent returns:
Franklin International Small Cap Growth (FINAX) found a gem in Jumbo SA, which was recently the fund’s third-largest holding. Shares of the Greece-based retailer of children’s products have surged 43 percent over the past 12 months.
Investors are getting more excited about the stockmarket now that it has fully recovered from the financial crisis and started to set new record highs. But if you’re looking to invest now, you have to protect yourself from the possibility that the long bull market could reverse itself.
It’s always tough both financially and psychologically to recover from immediate losses on investments you just bought, so taking steps to avoid big losses is well worth the effort.
With that goal in mind, here are five exchange-traded funds that can strengthen your portfolio against the threat of a possible stock–market decline while still giving you exposure to further gains if the bull market continues.
iShares MSCI USA Minimum Volatility (USMV)
This ETF seeks out stocks that tend to rise and fall more gently than the overall stockmarket. With a concentration on health-care stocks like Eli Lilly & Co. (LLY) and consumer-oriented stocks like cereal giant General Mills Inc. (GIS), the iShares ETF focuses on stocks with defensive characteristics that hold up well under any economic environment. That won’t keep the fund from losing money in a falling stockmarket, but it should help reduce the extent of your losses. And with low costs of just 0.15 percent annually, the ETF doesn’t charge a ton to give you that protection.
PowerShares S&P 500 Low Volatility (SPLV)
Like the iShares ETF above, this fund focuses on low-volatility stocks in defensive industries. But the mix of investments in the PowerShares ETF is different, as it concentrates largely on utility stocks, which make up more than 30 percent of the fund’s portfolio right now. Utility giants Southern Co. (SO) and Consolidated Edison Inc. (ED) provide strong dividend income, and their ability to rely on regulated income from millions of utility customers gives them security even when the economy starts to falter. The fund’s costs of 0.25 percent per year are a bit higher than the iShares ETF but are still reasonable for ETFs generally.
PowerShares S&P 500 BuyWrite (PBP)
At first glance, this ETF looks a lot like a typical index-tracking fund, owning Apple Inc. (AAPL), ExxonMobil Corp. (XOM), and many of the other big companies in the S&P 500. But the twist this ETF uses is to write covered call options against that stock, boosting income at the expense of giving up some of the upside in its stock holdings. During bull markets, that strategy underperforms the overall market, but it produces more favorable results when stocks decline. With expenses of 0.75 percent, the strategy is a bit pricey, but it’s still an interesting way to protect against the full impact of a downturn.
On the other side of the coin you have advocates arguing that gold is the best choice to preserve purchasing power when central banks are pouring huge amounts of money into the world financial system, posing a threat to the value of ordinary currencies.
The debate over gold will never end, but what’s indisputable is that gold prices rose more than 600 percent from mid-1999 to mid-2011, topping out around $1,900 an ounce, but have fallen by about $300 an ounce in the two years since.
If you’re inclined to take advantage of what gold bugs might call a bargain opportunity, here are five ways you can add gold exposure to your investment portfolio.
LONDON — A handful of the world’s biggest merchants play a tense, high stakes game every few weeks and a well-connected newcomer from Asia just sat down at the table.
The stakes are in sugar often worth hundreds of millions of dollars; the occasion is the expiry of futures contracts.
Five leading American and European trade houses — Cargill, Louis Dreyfus, ED&F Man, Sucden, and Bunge — have typically jockeyed for the best position ahead of the delivery and receipt of sugar when futures contracts expire, which happens nine times a year.
At the latest raw sugar futures expiry last week, the exclusive club was joined by Singapore-based Wilmar International Ltd., sole receiver of 152,762 tonnes of Central American and Brazilian sugars worth around $61 million.
The expiries are risky because a bet that leaves a player holding large amounts of physical sugar can reap huge rewards when supplies are tight and prices are rising, but a trade house can face eye-watering losses if the harvest’s outlook improves or demand is dented at the last moment.
Wilmar is taking delivery through a sugar futures expiry for the first time since entering the market three years ago.
Need to Move Fast
This delivery is barely more than a quarter of the size of the previous raw sugar expiry, for the October 2012 contract, which saw Bunge receive almost 600,000 tonnes, valued at roughly $240 million.
Analyst Jonathan Kingsman said Wilmar will have to be nimble to sell the Brazilian sugar that it acquired through the expiry ahead of the country’s coming crop, which starts around April and is expected to be abundant — potentially weighing on prices.
“People [traders] were wary of taking delivery of Brazilian sugar with a big new Brazilian crop expected to start early — you would have to move quickly to get it out if values come down,” said Kingsman, head of agriculture at data and information provider Platts.
Much futures business is done by financial investors who trade promises involving sugar but close out the bets before they risk taking actual delivery of the raw sugar traded on InterContinental Exchange (ICE) or white sugar from NYSE Liffe.
As the expiry draws closer for a contract such as the ICE current front month futures, only those players with a real interest in the physical commodity remain.