These are the assets investors are turning to for protection in the market's latest rout

Published Sun, Sep 18 20227:27 AM EDT

This year's market volatility has left investors few places to hide, weighing on stocks and bonds. The decline has even hit other traditional safe-haven assets such as gold. For those who adhere to a traditional portfolio structure of 60% stocks and 40% bonds, the year has been painful. The iShares Core Growth Allocation ETF , which mirrors a 60/40 portfolio, has fallen more than 17% this year. Stocks suffered a sharp sell-off on Tuesday, with the Dow Jones Industrial Average shedding more than 1,200 points. The major averages failed to recover from the decline, accumulating sharp losses on the week. "This year has been quite challenging for portfolios across the board and [Tuesday's] sell-off was quite brutal," said Geetu Sharma, founder and investment manager of AlphasFuture in Minneapolis. Bonds haven't fared any better. The Bloomberg Global Aggregate Index, a key fixed income benchmark, fell into bear market territory – meaning more than 20% from its most recent high – in early September. The yield on the 10-year U.S. Treasury ended Friday at 3.455%, but the 2-year yield ticked above 3.9% earlier in the day. Bond yields move inversely to prices. "It's a tough go right now," said Kathy Jones, chief fixed income strategist at Charles Schwab. That's led investors to get creative with where they can turn for safety to preserve capital and hedge against volatility. Here are some assets they're turning to currently to shore up portfolios. Treasury bonds Even though bonds haven't performed well year to date, there is still reason to buy Treasurys going forward. First, short-term U.S. Treasury bonds can be used to offset interest rate risk in one's portfolio. Because of their short duration, they aren't as sensitive to the Federal Reserve's rate hikes as bonds out farther on the yield curve, said Sharma. In addition, if the U.S. does fall into a recession – which is possible as the Fed tightens policy to bring down high inflation – that should be positive for bonds going forward. Snapping up those longer-dated Treasury bonds may be a good idea to lock in rates while they're relatively cheap, according to Jones. Indeed, DoubleLine Capital CEO Jeffrey Gundlach recently revealed that his firm bought long-term Treasurys . There are also inflation-protected bonds that may make sense for investors looking to still get yield. These include I-bonds, which offer an initial interest rate of 9.62% for issues purchased through October. In addition, Treasury inflation-protected securities may also be a good idea for older investors looking for inflation protection, as long as they focus on shorter durations and don't take up too much of one's portfolio. Commodities One of the few sectors that have performed relatively well this year is commodities, mostly energy due to issues with supply and demand given Russia's invasion of Ukraine. Natural gas, for example, has surged this year. One fund that captures these gains is the Fidelity Advisor Energy Fund . It's currently up 45% year to date. "It's been a rock star this year," said Ron Tallou, founder and owner of Tallou Financial Services in Troy, Michigan, adding that the fund has performed relatively well in previous years also. "For anybody looking to diversify their portfolio, this might be a good place. To be sure, these assets may not outperform going forward, however. They generally don't do well in a recessionary environment in which the Fed is tightening, said Jones. These kinds of funds can be volatile, so keeping track of their performance is key. Liquid alternatives Liquid alternatives, which are mutual funds and exchange-traded funds that provide protection and diversification through sophisticated strategies, are also looking attractive. "We've got a pretty big focus in our outlook on alternative investments, even for individual investors," said Greg Bassuk, CEO of AXS Investments in New York. The firm's AXS Chesapeake Strategy Fund , a managed futures offering, is up more than 20% year to date. "It's one of the longest-running alternative mutual funds," said Bassuk. He also likes event-driven strategies – which take advantage of price inefficiencies around corporate events such as mergers and bankruptcies – because they generally aren't correlated with equity markets. The AXS Merger Fund is up more than 2% year to date and rated in the top 10% of its sector group by Morningstar. "It's been delivering nice absolute returns for the year," he said. In today's market environment, that can be a solid safety measure when stocks tumble. Investors exploring liquid alternatives should be mindful of fees, as expense ratios for these types of funds can surpass 1%. The strategies' use of derivatives and margin can drive up costs. The 60/40 portfolio still has its merits Many investors this year may be wondering if they should throw out the traditional split of 60% stocks and 40% bonds after getting hit hard. Experts caution against this, however. "I don't think that you throw out a strategy that's been a pretty good place to start for forty or fifty years because you had one bad year," said Schwab's Jones. "It's never been a perfect allocation, but I think it's a great starting place and I think over time, it will probably continue to work." Instead, in volatile times, it's particularly important to make sure you're watching your portfolio and rebalancing appropriately. Sharma of AlphasFuture recommends active management focused on providing more diversification and less volatility. That includes thinking about the macroeconomic backdrop in the coming months and picking assets that will win at different points in the cycle. "I think investors need to be a bit more selective and nuanced about investing and a simple 60/40 portfolio is not sufficient," she said, adding that investors should be picky about what goes into each portion of their portfolio.