Tired of Stocks and Bonds? Try These Four Alternatives

Key Points

With stocks languishing and bonds possibly nearing a top, investors are looking for alternative investments. 

Among the most popular are grains, foreign currencies and emerging markets.

With the stock market bland and the bond market bubbling, investors may have to search elsewhere in the months ahead for return.

The Standard & Poor's 500literally did nothing all summer. Since the so-called Death Cross on May 27—when the 50-day moving average crossed below the 200-day—the broad market gauge has bounced around but held close to 1,100.

The bond market, meanwhile, has continued its meteoric rise, but so much so that many analysts are saying it has overheated and is in danger of collapsing.

So with the market's two most common options presenting challenges if not outright deterrents for investors, the temptation toward alternative plays becomes greater.

NYSE trader
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"The stock market's dead. Nobody's interested in it right now," says Darin Newsom, senior analyst at DTN, a commodities firm in Omaha, Neb. "Money is flowing back and forth through the commodities until such a time as the Dow Jones straightens itself out and we start seeing more bullish signs."

Here, then, are four alternative investment strategies gaining traction these days:

1. Going With the Grains

Gold's 8 percent gain since July 27 has been hard to miss, but grains also have done well in the commodities market.

In particular, corn has been one of the big stories as global shortages in Russia and Eastern Europe raise demand for US feed and push the grain back to highs it hasn't seen since June 2009.

Corn prices have jumped an eye-popping 39 percent since hitting $3.33 on June 29, and Newsom thinks the run is far from finished. He says open interest futures contracts are nearing the volumes of 2008, when corn went parabolic and sold for as high as $7.79 a bushel. The government has a crop estimate release on Friday that could help shape the market.

"You have strong investment buying coming in. You have strength in underlying fundamentals, particularly globally," he says. "So it's very supportive of the market if things continue down this path."

Investors can play corn either by buying contracts on the open market, or through a growing crop of exchange-traded funds for agricultural commodities.

The Teucrium Corn Fund debuted in June and seeks to replicate the moves of three corn futures contracts. Also, iPath has two commodities funds with significant corn weighting—the Dow Jones UBS Grains and Dow Jones UBS Agriculture—while Power Shares offers its Agriculture Fund , which is weighted about 12 percent with corn.

2. Forex, Part I: The Awesome Aussie

Speaking of eye-popping numbers, the Bank for International Settlements set off a shock-wave of its own last week when it released its three-year survey of foreign exchange activity. The review found that currency tradingswelled to $4 trillion per day, a stunning 21 percent rise from April 2007.

Spot transactions drove nearly half the growth, the BIS said, noting that such trades now account for 37 percent of total forex movement.

Australian and Canadian dollarswere among the leaders driving the increased currency trading, and many analysts expect the Aussie, backed by comparatively high interest rates, could be trading even with the US dollar soon.

"Admittedly, fluctuations in the value of the Australian dollar against the US dollar have historically been closely tied to fluctuations in commodity prices, and we generally expect the latter to fall back over the next year or so," John Higgins, senior economist at Capital Economics in London, said in a recent research note to clients.

"Nonetheless, we think interest rates in Australia are likely to rise by much more than markets currently expect," he continued. "If rates in the US also remain close to rock-bottom—as we suspect—such an outcome could push the Australian dollar up, not down."

The Australian dollar is the fifth most-traded currency on the foreign exchange, which is led by the US dollar.

More Tips: Yen and Emerging Markets

3. Forex, Part II: The Yen, an Unlikely Leader

The Japanese currency has long confounded the world's economy because of its relative weakness to that of other nations—an advantage when it comes to the sharp-elbowed world of global trade.

The currency's riseagainst the US dollar has been equally confounding. When the trend began to unfold in early August, most analysts wrote it off as a technical glitchunlikely to last, but they so far have been wrong.

The dollar has fallen 15 percent against the yen since its most recent high on May 3, and the trend shows little sign of abating.

"We are somewhat amused at the relentless urge on the part of traders to call the yen's top," said Dennis Gartman, writing Tuesday morning in The Gartman Letter. "The trend remains upward for the yen, despite the antipathy toward that trend by Japan's major exporters, who voice their opposition to this strength at every turn."

The trend remains upward for the yen, despite the antipathy toward that trend by Japan's major exporters, who voice their opposition to this strength at every turn.
The Gartman Letter
Dennis Gartman

Like commodities, currencies either can be traded directly in spot trades, through options contracts, or within a variety of ETFs that play either on the individual currencies or on pair trades on movements between various countries.

4. Emerging Markets, the Infrastructure Play

Though the sharp rise in US capital markets in 2009 somewhat dimmed the allure of emerging markets, the latter group is back in 2010 and has attracted more investor attention in the second half.

Investors this year are betting that the dire need for better infrastructure in places such as Brazil, India and South Africa will present investment opportunities.

"Transportation and logistics continues to be one of the largest areas of need for emerging markets," Kate Moore and Michael Hartnett, global equity strategists at Bank of America Merrill Lynch, told clients. "Over the next three years, we project that it will account for more than 30 percent of infrastructure investment."

The strategists advised clients to take a two-pronged approach: Owning a diversified mix of equity exposure, which the firm holds in its EM Infrastructure Index; and through the $24 billion high-yielding emerging market corporate bonds space.

"EM governments understand that infrastructure investments in energy, water, agriculture and transportation are necessary to sustain urbanization trends and will lay the groundwork for decades of economic growth and the development of private enterprise," Moore and Hartnett wrote.