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]