Leery of stocks? Some other investments to consider

'Short' funds, commodity funds, and US Treasuries offer opportunities – but not without their own risks.

By Mark Trumbull

from the December 24, 2007 edition

If you're leery about stocks, other investments abound – but they often carry their own risks.

Investors who feel truly bearish can buy "short" funds – these will rise when stocks go down. The Rydex Inverse 2X S&P 500 is a fund (ticker: RSW) that will gain about $2 for every $1 that the S&P 500 goes down. ProShares offers similar funds focused on specific sectors. The UltraShort Financials fund (SKF) is up about 50 percent in 2007. But buyer beware: If your bearish view is wrong, you lose big.

Another option: Funds that invest in indexes of commodity contracts, for things such as oil, metals, and grains. Powershares DB Commodity Index Fund (DBC) is one such option. "Some commodity exposure" is good, "because it looks like the commodity run has further to go" in the global economy, says Michael Cosgrove, publisher of the EconoClast newsletter in Dallas.

Commodities can be volatile, but also defensive. The reason, Mr. Cosgrove says, is that commodity "correlation [with stocks] is low."

But some analysts worry that the commodity bull market will peter out as the global economy cools a bit.

A lively debate also rages over bonds, long the mainstay alternative to stocks. Economist Gary Shilling predicts a recession and a decline in interest rates as investors worry about deflation, not inflation. That would boost the price of bonds, especially those backed by the government.

Treasury bonds tend to be safer than corporate ones, since the likelihood of corporate defaults rises during economic downturns. "One of the biggest misconceptions going … is that Treasuries are for widows and orphans and you buy them for yield," says Mr. Shilling.

One Treasury exchange traded fund, Lehman 7-10 Year Treasury (IEF), is up about 6 percent this year, handily beating the S&P 500.

"Stocks and bonds, really for the first time in about 20 years, … have been moving in opposite directions from each other," says Jeff Kleintop, strategist at LPL in Boston. Thus, bonds may offer some defensive protection if the stock market falters.

But others caution that after their recent rally, Treasuries yields will hardly keep pace with inflation. "That's not an ideal bond environment," warns Jim Stack of InvesTech.

What does that leave? Plain old cash, earning interest in a money-market account, or short-term certificates of deposit.