ETF investors who are wary of potential risks in an extended bull equity market can consider an alternative strategy to limit potential swings.
“The past never perfectly reflects the future, but it does leave hints. Markets tend to move in cycles, from periods of extreme skepticism to periods of extreme conviction. The problem for investors is that it’s never really possible to know where you are on the timeline. So, you know things will change; you just don’t know when,” Salvatore J. Bruno, Chief Investment Officer and Managing Director for IndexIQ, said in a research note.
We are now in one of the longest bull runs in history as U.S. equities push toward new highs in a nine-year bull market. However, a significant correction has not reared its ugly head.
With volatility depressed and growing complacency, investors are increasingly fanning the flames of an extended rally, ignoring the potential for a sudden turn.
“History suggests that this may happen suddenly, and without much in the way of warning. Many liquid alternative funds were designed with exactly this in mind. By investing in non-correlated asset classes, they offer investors continued market exposure, paired with the potential to mitigate downside participation,” Bruno said.
Consequently, investors should think about alternative investments or strategies that could help better manage portfolio volatility in case of a swift correction.
For example, the IQ Hedge Multi-Strategy ETF (NYSEArca: QAI), the largest alternative strategy ETF on the market, provides a diversified mix of alternative strategies, including multiple hedge fund investment styles, such as long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets.
Related: Consider Alternative ETF Strategies to Hedge Market Risks
QAI is also expected to reduce its expense ratio to 0.76% from its current level of 0.98% on November 1.
The alternative ETF is up 4.9% year-to-date, while the S&P 500 has gained 16.4%. Nevertheless, potential investors should be aware that these types of investments are not meant as growth strategies to generate outsized returns in investment portfolios. In reality, these strategies are doing exactly what they were made for: diminishing volatility. Consequently, in bullish market conditions, the strategies may underperform, but if the markets turn, alts can shine.
During periods of market selling in traditional assets, these types of liquid alternative strategies can experience lower drawdowns or even positive returns, which may help buoy an investment portfolio during troubled times.
For more information on liquid alts, visit our alternatives category.