Special Report
The 7 Best Investments of 2014
December 9, 2014 6:20 am
Last Updated: December 12, 2014 9:32 am
5. Commodities
This year has not been especially kind to commodities. The benchmark S&P GSCI commodities index declined by 24% year to date. Some of the most popular commodities have tumbled. WTI crude oil, the U.S. benchmark for oil, dropped more than 33% so far this year. Brent crude, the international oil benchmark, has slid even further — 37% on the year. Joining oil, precious metals such as gold and silver, also declined so far this year.
Among the lucky few commodities to survive the rout has been coffee. ICE Coffee C futures contracts have gained nearly 62% this year. Concerned about dry weather in Brazil, investors pushed coffee above $2.00 per pound earlier in the year. Even drinkers of instant coffee — usually made from robusta coffee beans — have not gotten a break, thanks to a weak robusta crop in Vietnam, the largest producer of robusta, according to The Financial Times.
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6. Currencies
A rallying dollar has perhaps been the defining trend of the foreign exchange market in recent months. The end of quantitative easing by the Federal Reserve and an improved outlook for U.S. growth have helped push the dollar higher. Other factors included hopes the European Central Bank will expand its stimulus programs as well as aggressive policies from the Bank of Japan.
Yet the dollar’s gain against some currencies has been especially pronounced. The Russian rouble, in particular, has slid 60% relative to the dollar. This has meant big gains for those selling rouble to buy U.S. dollars. However, it has also meant pain for Russia, which has been hit by Western sanctions related to its role in the Ukraine crisis as well as a drop in oil prices. The effect of the lower rouble has been higher inflation and interest rates in Russia.
7. Fixed income mutual funds
The fixed income market is massive and diverse. Investors can choose anything from Treasury bills — which carry little default risk, offer low interest rates, and mature in a few months — to highly speculative securities with equity-like traits, such as high yield bonds and convertible debt. Mortgage debt, municipal bonds, and bank loans also add to the huge variety of available debt.
Mutual funds are similarly diverse. Some funds invest accept additional credit risk for higher income, others limit themselves to safe Treasury securities, and some look to maximize tax efficiency by focusing on municipal debt. This year, the highest-earning bond fund has been the Vanguard Extended Duration Treasury Index Fund, which had returned 39% in the year to date. In order to generate high returns, the fund invests in Treasury STRIPS — zero-coupon bonds created from existing U.S. government debt — that matures in 20 to 30 years. However, because of this strategy, the fund is extremely exposed to changes in interest rates. In fact, Vanguard notes that “the fund is primarily intended for institutional investors with extremely long-term liabilities.”
Correction: A previous screen indicated the wrong bond fund has been the most profitable in the year thus far. In fact, the Vanguard Extended Duration Treasury Index Fund has been the top-performing bond fund in the year-to-date.
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