While becoming a little more tempered, growth in alternative investments and exchange traded funds still continue to expand, even as confidence in overall equities wanes in light of global macroeconomic pressures.
Morningstar ETF analyst Timothy Strauts notes that investment inflows into alternatives has slowed — alts ETFs brought in $11.6 billion in 2011, their lowest since 2006, writes Jerilyn Klein Bier for FA Magazine. [ETFs for Alternative Assets]
Nevertheless, “alternative ETFs are not about outperformance,” Strauts explained. “The allure is low volatility with more consistent returns.”
Strauts estimates that the annual return goal for several alternative ETF categories, such as long/short equities, managed futures and multialternatives, is about 6% to 8%, while market-neutral ETFs that match long and short positions should generate a consistent 4% to 6%.
Investors enjoy ETFs’ lower fees, greater liquidity and better transparency as an investment vehicle to access alternative assets. For instance, alts ETFs come with an expense ratio of 0.51% to 0.95%, whereas hedge funds have a typical 2% plus a 20% incentive and the 1.5% to 2.2% range in mutual funds – ETF fees are lower because most them are passively managed.
“It’s a little easier to track them and understand what’s under the hood,” said Douglas Wolfe, head of portfolio management and trading at Saddle River Capital Management LLC, who uses commodity real estate ETFs for 10% to 20% of its allocation to alternatives. “[ETFs are] structured with 50 to 150 holdings so there’s instant diversification.”
Richard Block, executive vice president of trading at QuantShares, a suite of passively-managed market-neutral and sector-neutral ETFs, notes that alts ETFs provide diversification to a traditional 60/40 stock and bond portfolio by generating uncorrelated returns to the broad market and diminish overall portfolio risk.
For more information on different assets, visit our asset class ETFs category.
On June 27, we are hosting an Alternative Investments Virtual Summit, which will help provide advisors with industry guidance on how alternative assets fit into an investment portfolio. The virtual conference will bring the conference experience to you at your own office, home or anywhere with Internet access as it is a virtual online experience.
Max Chen contributed to this article.