Investors who bought “alternative” investments believed that these assets would have low correlations and great rewards, but some got burned by that thinking. Exchange traded funds (ETFs) are a viable and less risky way to gain access to this area of the market.
Alternative asset classes usually depend on sophisticated financial instruments and some produced higher returns by being exposed to high leverage, according to Reuters. As credit dried up, investors were left with assets that were valued at substantially lower prices. [The Pros and Cons of ETFs.]
There are a variety of ETFs that deal in alternative asset classes. For instance, commodity ETFs provide investors exposure to commodity investments without the necessity of taking delivery of the physical stocks. For private equities and infrastructure, investors may use ETFs that reflect a underlying index of the specific sector. [Commodity ETFs and Contango.]
The great thing about ETFs is the ease at which you can transition in and out of the investment, since most well-established ETFs are highly liquid and all ETFs can be traded like stocks on an exchange during normal trading hours.
However, investors need to be aware that ETFs also come with their unique set of costs. For example, less liquid ETFs will have higher tracking errors against their underlying index.
Additionally, in looking ahead, it is important to take notice of the impact the emerging markets will have on all market sectors. The billion or two people in the developing world will add to a growing middle class, and the greater demand will apply upward pressure on prices for many goods. Investors may capitalize on this momentum through ETFs holding the various private equity, sectors and commodities that will benefit from the future growth.
For more information on 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.