“Cash, precious metals, crypto” are the new standard for maximum stock market risk

With a handful of mega-cap tech and AI stocks leading the way, S&P 500 Index dominating the U.S. market in a way without historical precedent, portfolio concentration risk has taken on a new form for investors who have long been urged to follow a version of Warren Buffett’s stock advice to “never bet against America.”

But with the nine technology stocks superior to those of Buffett Berkshire Hathaway by weight in the index representing almost 40% of the market, this is an imbalance that pushes investors to look for new ways to hedge. Buffett may not agree with their answer either, having long been skeptical about the value of precious metals, but many are turning to cash, gold and crypto to find uncorrelated returns and protection against volatility.

“If you break down ETF flows by category, it’s cash, precious metals, and then crypto,” Todd Sohn, senior technical and ETF strategist at Strategas Securities, said on CNBC’s “ETF Edge” earlier this week, referring to the most popular trades with investors this year. “They are clearly being adopted by more traditional (investors).”

He directly linked this trend to concentration risk. “Some investors realize they have a lot of exposure to technology and AI, so they need to differentiate and find uncorrelated assets,” Sohn said.

While some experts are recommending scary allocations to gold and crypto, and there is more talk of a 60-20-20 portfolio to replace the classic 60-40 stock-bond mix, most allocations are still small, but growing.

“Most of the conversations I have and the allocation documents I will read say one to three percent on crypto and three to seven (percent) on gold,” Sohn said.

Gold had a tough week, with strong selling, but up more than 60% for the year heading into this week’s trading, it’s not a major surprise to see some profit-taking. Gold hit record highs above $4,400 this month, supported by central bank buying, dollar depreciation and lingering geopolitical risk, the so-called “depreciation trade.”

THE SPDR Gold Stocks (GLD) saw about $6.8 billion in flows over the past month, in a year in which gold funds brushed close to the $40 billion mark in net investor inflows.

Crypto, the increasingly attractive new hedge for investors, also had a good year, even as gold more than tripled. bitcointhe yield of 17%, while ethereum gained 15%. The launch of spot bitcoin ETFs introduced institutional money into the space and transformed digital assets into legitimate portfolio tools. The iShares Bitcoin Trust (IBIT) is one of the largest spot Bitcoin ETFs, managing nearly $90 billion in assets, according to VettaFi.

Sohn says using ETFs to access new approaches to the market has been central to its history and evolution. “We started with large-cap stocks in 1993, gold and emerging markets in 2004, and now we offer covered call products and maximum return products,” Sohn said.

It also means that investors can manage risk differently. Instead of relying on high-yielding stocks or simple bond funds, they can build portfolios with derivative ETFs or alternative exposures.

Crypto tells a similar story. With the establishment of regulated ETFs, Bitcoin and Ethereum have moved from the status of speculative transactions to recognized components of diversified strategies. “The pace of these developments and the innovation that is enabling the launch of these ETFs is meteoric,” Sohn said.

Disclaimer