Alternative Asset ETFs Diversify Portfolios
April 10th, 2014 at 1:45pm by Tom Lydon
A diversified portfolio should include assets that zig when the market zags. As equities market start to stumble, investors can take a look at exchange traded funds that track real assets to help prop up investment portfolios.
For instance, real estate investment trusts and infrastructure master limited partnerships are some alternative assets that can help diminish portfolio volatility, writes Jeff Benjamin for InvestmentNews. [Rate-Sensitive REIT ETFs Rebound]
These types of investments are not about providing outuperformance and growth. Instead, the alternative assets allow investors to gain exposure to investments that have low correlations to traditional assets like stocks and bonds.
So far this year, real assets have helped bolster portfolio returns as equities languished. For example, the Vanguard REIT ETF (NYSEArca: VNQ) has gained 2.4% over the past month and 11.6% year-to-date, and the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) is up 2.8% over the past month and 3.7% year-to-date. In comparison, the S&P 500 index has dipped 0.2% over the last month and is only up 1.9% so far this year.
VNQ and AMJ also show attractive 12-month yields of 2.88% and 4.82%, respectively.
“The main thing about real assets is your getting the diversification of lower correlation to traditional assets, but you’re also typically getting some inflation protection,” James Cunnane, chief investment officer at Advisory Research Investment Management, said in the article.
Furthermore, economic growth will also strengthen REITS and MLPs. REITs will benefit from rising demand for housing and office space as the economy expands. Meanwhile, MLPs can also grow as the U.S. builds up its energy infrastructure to accommodate the new shale oil boom. [Shale Oil Boom Will Bolster MLP, Energy Infrastructure ETFs]
Investors can consider at commodities to diversify their stock and bond positions. The PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC), which tracks 14 of the most heavily traded commodities, is up 0.3% over the last month and up 2.8% year-to-date. The PowerShares DB Agriculture Fund (NYSEArca: DBA), which only tracks agricultural commodities, provides a more focused exposure to the space. DBA is up 1.3% over the last month and increased 18.5% year-to-date. [A Commodity ETF to Diversify Your Investment Portfolio]
“Commodities are a strong portfolio diversifier in most market environments because they are only loosely correlated with equities and fixed-income assets,” according to Morningstar analyst Abby Woodham. “From 1970 to 2004, commodities were negatively correlated with other asset classes like global equities and domestic bonds.”
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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.