Manage Risk and Diversify with Alternative ETFs
February 27th at 12:10pm by Tom Lydon
Exchange traded funds have helped democratize exposure to the markets, allowing retail investors to manage risk and improve diversification through alternative exchange traded fund strategies.
Specifically, individual portfolios are beginning fill up with alternative asset classes like commodities, 130/30, long/short and non-traditional fixed-income strategies as the ETF industry produces a wider range of products, writes Aaron Levitt for Investopedia.
Depending on the type of advice, financial planners typically suggest investors should diversify 5% to 30% of their portfolio to alternative assets.
ETFs that cover alternative investments provide cost efficient, liquid and transparent access to alternative assets that were previously limited to large institutional investors or were difficult and costly to replicate.
For instance, hedge funds typically follow a “2 and 20″ scheme where investors would pay 2% a year to manage the money on top of a 20% performance fee on profits. In contrast, investors can take a look at the ProShares Hedge Replication ETF (NYSEArca: HDG), a type of hedge fund clone, that tries to mimic hedge fund picks, and it comes with a 0.95% expense ratio. [ETF Chart of the Day: Hedge Fund Index]
Managed futures are also a popular strategy within the investment world. ETF investors can take a look at the WisdomTreet Managed Futures (NYSEArca: WDTI) and the iShares Diversified Alternatives Trust (NYSEArca: ALT). The strategy takes advantage of price trends across various futures contracts, including commodities, currencies, bonds and stock derivatives. These ETFs generate uncorrelated returns to stocks and bonds.
Additionally, bear market protection is another popular alternative theme. For instance, the Direxion Daily Total Market Bear 1x Shares (NYSEArca: TOTS) takes the inverse daily exposure to changes in the broad market. The ProShares Large-Cap Core Plus (NYSEArca: CSM) and the Credit Suisse Long/Short Liquid Index ETN (NYSEArca: CSLS) provide access to long-short strategies to potentially maximize returns through long and short positions. [Bearish Short ETFs for a Pullback in Stocks]
For more information on asset classes, visit our asset class ETFs 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.