As we drift around all-time highs. some may be growing wary about a potential pullback or slower growth ahead. Consequently, investors may find that alternative investments and related exchange traded funds could help diversify a portfolio designed around traditional asset allocations.
Whether your objective is long-term diversification, or shorter-term tactical positioning, alternatives have an important role to play. Additionally, for the advisors who are interested in learning more about alternative investments and investing in ETFs, ETF Trends and RIA Database are hosting the annual ETF Virtual Summit, an online conference experience, on January 21.
Common liquid alternative funds cover a range of strategies, including bear market, multicurrency, single currency, long/short equity, market neutral, multialternative, managed futures and volatility, along with trading leveraged commodities, inverse commodities, leveraged debt, inverse debt, leveraged equity, inverse equity. These types of alternative ETF strategies diversify a portfolio since their returns are not closely correlated to stocks or bonds. Consequently, the alternative investments could help offset losses if equities or fixed-income assets begin to fall. [Investors May Be Overlooking Alternative Investments, ETFs]
The alternative investment ETF space is still relatively new but the nascent industry is growing. For instance, alternative investment providers like ProShares and Direxion have been expanding their line of ETF strategies to include investments beyond traditional broad stock market exposures. [Alternatives ETF in the Early Stages of Growth]
“Alternative investments have long been seen as an exclusive option of institutional investors, helping to enhance risk-adjusted returns,” according to ProShares. “Today, innovations in the mutual fund and ETF marketplace have made many of these alternative strategies available to a wider range of investors.”
Last year, ProShares launched the ProShares Morningstar Alternatives Solution ETF (ALTS) , which tracks ProShares alternative ETFs and was designed to enhance risk-adjusted returns when added to a traditional stock and bond portfolio. Specifically, ALTS includes exposure to long-short strategies, hedge fund replication, managed futures, global infrastructure, merger & acquisitions, private equities and Treasury spread.
Investors can also take a more focused approach by targeting specific strategies. For instance, investors can track the individual plays through the ProShares RAFI Long/Short ETF (RALS) , ProShares Hedge Replication ETF (HDG) , ProShares Managed Futures Strategy (FUTS) , ProShares DJ Brookfield Global Infrastructure ETF (TOLZ) , ProShares Merger Arbitrage ETF (MRGR) , ProShares Global listed Private Equity ETF (PEX) and ProShares 30 Year TIPS/TSY Spread (RINF) .
Moreover, along with its line of inverse and leveraged ETFs, Direxion offers some alternative investment strategies. For example, the Direxion S&P 500 Volatility Response Shares (VSPY) allocates and rebalances its exposure between equities and Treasury bills based on the recent volatility in the S&P 500, so that higher volatility will force the ETF to hold a greater position in conservative Treasuries to help offset potential losses.
Master limited partnerships have also acted as an alternative investment asset for investors seeking to generate some extra cash on the side. The recently launched Direxion Zacks MLP High Income Shares (ZMLP) tracks MLPs and the underlying benchmark also employs a quantitative-rules based indexing methodology that includes value, liquidity, short interest and dividend yield, among others. [Direxion’s Jacobs Talks Income Generation, Volatility Reduction]
Advisors interested in attending the upcoming ETF Virtual Summit on Wednesday, January 21 can register here.
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.