Instead of relying on the traditional 60/40 equity and fixed-income split, investors should consider diversifying a portion of their investments with alternative exchange traded fund strategies to diminish portfolio volatility.
“The old 60-40 stock-bond paradigm is unlikely to work the way it has for the past 50 years,” Jason Schwarz, president of Wilshire Funds Management, said in InvestmentNews article, pointing to the currently high equities valuations and rising rate risks ahead.
Just five years ago, alternatives only made up 10% of average portfolio allocations, but they have since expanded to between 15% to 30%, according to Andrew Rice, vice president and chief financial officer of Money Management.
“Our clients like the liquidity,” Rice said in the article. “Then, with the interest rate environment, people are looking for non-correlated assets that can generate bond-like returns without the correlation to bonds and stocks. You have to have alternatives in there.”
However, market observers caution that since most alternative strategies have been launched since the start of the bull market, many have not been tested in bear cycles.
The ETF industry is also still coming out with new alternative investment strategies. For instance,the ProShares Morningstar Alternatives Solution ETF (NYSEArca: ALTS) and ProShares Managed Futures Strategy (NYSEArca: FUTS) were both launched in October. [ProShares Debuts Alternatives ETF]
Investors should not expect outsized returns with these types of offerings. Instead, hedge-fund-like strategies are intended to diversify, or like the the moniker suggests, hedge stock and bond exposure, providing returns that don’t mirror the performance of traditional equity and fixed-income assets.
The IQ Hedge Multi-Strategy ETF (NYSEArca: QAI), the largest hedge fund strategy ETF, tries to reflect the risk-adjusted return characteristics of hedge funds through various hedge fund investment styles, such as long/short equity, global macro, market neutral, event driven, fixed-income arbitrage and emerging markets.
The WisdomTree Managed Futures Strategy Fund (NYSEArca: WDTI) tries to achieve a positive total return in either rising or falling markets that are uncorrelated to broad market equity and fixed-income returns. The fund utilizes a combination of long and short positions in U.S. treasury futures, currency futures, non-deliverable currency forwards, commodity futures, commodity swaps, U.S. government and money market securities.