Financial advisors and investors may be getting too caught up in the market rally, forgoing alternative assets and exchange traded funds that could help diversify a portfolio and diminish volatility during a market correction.
According to Wealth Management, fewer financial advisors are recommending alternatives to clients this year than last year. Meanwhile, 24% of advisors said they are unlikely to recommend alternatives to clients, compared to 17% last year.
Alternative assets, as the name suggests, are comprised of investment options other than stocks and bonds, including precious metals, real estate, commodities, private equity investments and collectibles, writes Andrew Osterland for Investopedia.
Investors can access these various asset classes and other alternative asset or hedge-fund-esque strategies through an expanding group of ETFs. For instance, 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 includes exposure to long-short strategies, hedge fund replication, managed futures, global infrastructure, merger & acquisitions, private equities and Treasury spread. Additionally, the actively managed LALT holds a combination of equities, along with financial future contracts, forward currency contracts and other securities. [Alternative ETF Options to Diversify an Investment Portfolio]
These types of alternative ETF strategies diversify a portfolio since their returns are not closely correlated to stocks or bonds. Consequently, the alternative investments could help offset losses if equities or fixed-income assets begin to fall.
During a bullish market condition, though, alternative strategies can underperform. According to Morningstar data, seven categories of liquid alt funds have massively underperformed stocks over the past five years, whereas the S&P 500 has generated double-digit returns in every year but 2011.
However, when markets are volatile, alternative investments will shine. For instance, in 2008 when stocks plummeted during the financial downturn, most alt funds outperformed the S&P 500 index.
While it may be unpopular to act conservative and hedge market turns with an alternative investment with the markets in the midst of a bull rally, these alts strategies could help diversify against a potential turn. The S&P 500 has almost tripled from its 2009 low and has yet to experience a correction of 20% or more, which typically happens every three to five years.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.