These Surprising Investments Crushed the Dow in the First Quarter

The Dow Jones Industrials (DJINDICES: ^DJI  ) have disappointed many investors so far this year, with the average closing out the quarter Monday down modestly by less than 1%. Yet while few could argue that a mild pullback was unwarranted after such a huge bull-market rally over the past five years, what's particularly surprising is which investments managed to outpace the Dow -- in many cases by a substantial margin. Let's take a closer look at what worked for investors during 2014's first quarter.

Bonds
Few investors expected anything but further pain from the bond market in the first quarter, given the Federal Reserve's December decision to start reducing the amount of money it spends buying bonds. But the 10-year Treasury yield has actually fallen by about a quarter percentage point since the beginning of 2014, and that has sent bond ETF iShares 20+ Year Treasury (NYSEMKT: TLT  ) up almost 8% for the quarter.

Not all bond investments did that well, with shorter-duration bond funds suffering from the threat that short-term interest rates could rise sooner than most investors expected. Nevertheless, the resilience of the bond market, especially at the longer end of the yield curve, is a marked departure from the bearishness that hurt bonds in 2013.

Gold
Gold had such a terrible 2013 that most investors expected the yellow metal to keep plunging into the beginning of this year. But bottom-fishing gold investors jumped into the market during the early part of the first quarter, and even though gold has given back much of its rise in the past couple of weeks, the SPDR Gold Trust (NYSEMKT: GLD  ) still finished the quarter with a gain of more than 6%.

Image source: Wikimedia Commons, courtesy Lost Dutchman Rare Coins.

Like bonds, gold relies on low interest rates to make it easier for investors to bear the financing costs of holding bullion rather than owning income-producing investments. Although the Fed has started removing some of its stimulus from the economy, central banks in other regions continue to consider ways to encourage greater economic activity. Especially in Europe and Japan, central-bank policy will likely remain accommodative, and that in turn could provide a floor under gold prices despite skittish sentiment among investors.

Emerging markets
At the beginning of 2014, emerging market stocks plunged even more than the U.S. market did, with the iShares MSCI Emerging Markets ETF (NYSEMKT: EEM  ) posting a loss of 6% in January. Yet the ETF bounced back to gain more than 1% for the quarter.

That performance might not seem Dow-crushing, but for a sector that has performed abysmally for more than a year, even modest gains are cause to celebrate in the emerging-market world. The big question now is whether emerging markets can sustain their momentum even as they face new challenges to their growth, including reduced demand for natural resources and rising inflationary pressure. With value investors looking at relatively low P/Es, emerging markets still have substantial risk for investors to consider.

Bring on the rest of the year!
With the first quarter in the rearview mirror, investors can turn their attention to the remainder of the year and beyond. Even though the Dow got beaten up during the first three months of 2014, stocks could easily turn on a dime and produce impressive full-year returns for patient investors.

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