More investors are turning to alternative investments and exchange traded fund strategies to diversify their portfolios, but how much is enough?
Nadia Papagiannis, director of alternative investment strategy for global third party distribution at Goldman Sachs Asset Management, argued that anything less than 10% won’t be enough, with 20% as “pretty standard,” reports Daria Mercado for InvestmentNews.
Robert W. Baird & Co. research shows that replacing 20% of a traditional portfolio that is invested in 60% stocks and 40% bonds with a broad mix of alternative assets could help diminish volatility by about 10%, and even slightly increase returns, writes Klaas Baks, executive director of the center for alternative investments and an associate professor of finance at Emory University’s Goizueta Business School, for the Wall Street Journal.
Alts strategies are not intended to provided outsized returns. Instead, these assets should help smooth out investment portfolio swings during volatile market conditions, providing a non-correlated asset that should zig when other markets zag. [Advisors Seek Alternative Investments, ETFs to Diversify Portfolios]
Along with stocks and bonds, alternatives create the third leg of a stool, “a truly independent leg that isn’t correlated to the rest of the things in a portfolio,” Dorothy Weaver, chief executive officer of Collins Capital Investments. said in the InvestmentNews article.
Advisors would replace a portion of the traditional equity or fixed-income position with an alternative strategy, based on their clients’ goals.
“If your client has an income-oriented portfolio, you can add a fixed-income long-short strategy with a yield component to it, or a [master limited partnership]with a yield component to it or a [real estate investment trust]strategy,” Papagiannis said in the InvestmentNews article. “If you’re more growth-oriented, you want more long-short equity — something that gives you more of a return aspect.”
Investors can access alternative assets through ETF offerings. For instance, the ProSharse RAFI Long/Short ETF (NYSEArca: RALS) seeks to provide absolute return over a full market cycle through a long-short investment strategy.
Investors interested in a fixed-income option with exposure to the rapidly expanding U.S. energy sector can take a look at MLP exchange traded products, such as the UBS ETRACS Alerian MLP Infrastructure ETN (NYSEArca: MLPI), which has a 4.47% 12-month yield. [An ETN Option for MLP Investors]
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