Most people have filled out their investments with a mix of stocks and bonds. However, investors can also add in exchange traded funds that track alternative assets to help diversify a portfolio.
“With the current bull market now in its sixth year and stocks appearing to be slightly overvalued (based on Morningstar analysts’ estimates), and with interest rates poised to rise, neither stocks nor bonds look particularly attractive right now,” writes Adam Zoll for Morningstar. “Plus, with the 2008 market swan dive still on many investors’ minds, some are seeking out funds designed to mitigate the potential damage of a repeat performance.”
Consequently, for those who are interested in diversify an investment portfolio, alternative assets can provide uncorrelated returns to traditional stocks and bonds.
Alternative funds, which track hedge fund-esque strategies, are comprised of a wide range of different investment styles designed to provide exposure to stocks in a nontraditional manner.
For example, investors can take a look at two recently launched alts strategies, the ProShares Morningstar Alternatives Solution ETF (NYSEArca: ALTS) and PowerShares Multi-Strategy Alternative Portfolio (NasdaqGM: LALT). [Alternative ETFs for Conservative Investors]
ALTS acts like a sort of fund-of-funds, tracking a Morningstar index comprised of ProShares ETFs. The ETF includes exposure to long-short strategies, hedge fund replication, managed futures, global infrastructure, merger & acquisitions, private equities and Treasury spread. [How an Alternative ETF Strategy Fits in Investment Portfolios]
The actively managed LALT tries to provide positive total return with a low correlation to broad securities and can be used as a fixed-income substitute. LALT holds a combination of equities, along with financial future contracts, forward currency contracts and other securities. The fund includes long and short positions in G-10 currency forwards, stocks and VIX index futures, along with a significant long position in interest rate futures. [Diversify with Liquid Alternative ETFs]
While slumping this year, commodities have helped dampen portfolio volatility and provided a hedge against inflation. For broad commodities exposure, the GreenHaven Continuous Commodity Index Fund (NYSEArca: GCC) follows an equal-weight methodology that covers 17 commodity positions, and the actively managed PowerShares DB Optimum Yield Diversified Commodity Strategy Portfolio (NasdaqGM: PDBC) is comprised of futures contracts on 14 heavily traded commodities. [An Active Commodity ETF That Optimizes Returns]
Among commodities, gold has stood out as a traditional portfolio diversifier and inflation hedge. Investors who want a more liquid alternative to storing physical bullion under their mattress can take a look at physically backed gold ETF options like the SPDR Gold Shares (NYSEArca: GLD) and iShares Gold Trust (NYSEArca: IAU), with shares representing a fractional ownership of gold bars stored in vaults.
Additionally, real estate investment trusts can act as a portfolio diversifier, although they have become more correlated to stocks in recent years, and provide an inflation hedge. The assets also help investors generate some extra cash on the side. The Vanguard REIT ETF (NYSEArca: VNQ) has a 3.13% 12-month yield and the Schwab U.S. REIT ETF (NYSEArca: SCHH) has a 2.27% 12-month yield. [REITs ETF: Attractive Yields in a Low-Rate Environment]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.