Alternative ETF Strategies To Reduce Portfolio Risk

ETF Trends

While some investors chase after outsized growth, others may just want to generate steady returns. Consequently, some investors are looking into alternative strategies and related exchange traded funds.

“One thing that comes up frequently in conversations with investors is they want less of a high-octane alpha generating product and more of something that helps deliver an outcome,” Ju-Hon Kwek, an associate principal at McKinsey & Co, said in a Bloomberg article, pointing to strategies like diversification or protection against inflation.

For instance, BlueMountain Capital Management LLC has found stability in alternative investments, such as hedge fund strategies and commercial real estate.

The company continues to “find good investment and trading opportunities, without betting red or black,” according to BlueMountain.

ETF investors can also gain exposure to these areas of the market. For example, the Vanguard REIT ETF (VNQ) provides broad exposure to the U.S. real estate market. Investors can also take targeted exposure to the space through the iShares Industrial/Office Real Estate Capped ETF (FNIO) , which focuses on industrial and office space.

Additionally, ETF investors can mimic hedge fund strategies like long-short styles that aim to generate returns regardless of broad market conditions. The ProShares RAFI Long/Short ETF (RALS) , which is based on strategies developed by the “father of fundamental indexing,” Rob Arnott, and the ProShares Hedge Replication ETF (HDG) both utilize long and short positions to diminish market risk. [Generate Low Risk-Adjusted Returns with Alt ETFs]

The alts space is growing. McKinsey calculates that alternatives make up 12% of the global industry assets and produced about a third of revenues in 2013. The firm projects alts will make up 15% of the industry and produce 40% of revenues by 2020.

“The broader asset-management industry has been stuck in the old world of traditional asset return products,” Kwek added. “Those are folks who are going to be squeezed” by alternative investments.

The ETF space is also catering the growing demand. The recently launched actively managed PowerShares Multi-Strategy Alternative Portfolio (LALT) is designed to mute portfolio volatility while boosting risk-adjusted returns. [A Liquid Alts ETF Idea for the Second Half]

For more information on investing with ETFs, visit our ETF 101 category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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