Alternative exchange traded fund strategies are garnering a greater following as investors look for options other than traditional beta-indexing products to diversify their portfolios.
Alternative assets can be loosely defined as investments other than the traditional stocks, bonds and cash holdings. For instance, physical hard assets, like commodities or real estate, or varying investment styles, like hedge funds or private equity, fall under “alternatives.” Nevertheless, all these different investments share a goal of providing lower correlations to traditional holdings and even increase or stabilize portfolio returns.
Consequently, the low correlation provides investors with reduced exposure to systematic market risk factors, which include recessions, wars and interest rate risk, among others, that affect the entire market.
In a well diversified portfolio, investors should be able to vary holdings in a way that if one asset performs poorly, another asset may help offset the underperformer. Recently, more have begun to explore alternative assets as away to augment returns or diversify risk.
For instance, TD Ameritrade has found that their retail clients are increasing allocations to specialized markets, such as commodities and other alternative assets. [Online Broker Sees Demand for Alternative ETFs]
Moreover, investors are beginning to expand into alternative indexing schemes as they move beyond traditional market-capitalization weighted methodologies. [Rising Interest for Alternative, ‘Enhanced’ Index ETFs]