Behind the Rising Tide in Alternatives ETFs | ETF Trends

It looks like we are feeling good about markets these days, which are hovering at all-time highs, but not completely confident in what comes next.

The latest Brown Brothers Harriman Global ETF Survey captures this sentiment perfectly: “Our 2024 findings suggest that investors want to strike a balance between optimism and caution with their asset allocation in the year ahead.”

A look at ETF data corroborates that caution is indeed very much in vogue.

Alternatives to the Rescue

Consider asset category flows. In nominal terms, U.S. equity ETFs have led demand. They’ve captured more than 50% of the $271 billion in fresh net ETF assets so far this year. U.S. fixed income ETFs, too, are hauling it in. They’re taking in almost a quarter of all flows.

But in percentage terms, one of the fastest-growing ETF segments in 2024 is alternatives. New money headed into alternatives ETFs, as a percentage of total assets, represent more than 10% growth for the asset class.

Source: VettaFi PRO

It’s been interesting to see how alternatives ETFs are becoming a go-to category for more investors looking to express caution in their allocation.

What’s So Special About Alts?

These funds offer diversification, protection, focused risk management, additional income. Those are all the “other” types of exposures and paths of return beyond traditional equities and bonds.

The variety of flavors, which more broadly include things like commodities and digital assets, makes due diligence tricky in a space where so many funds are unique. That said, there are broad adoption themes behind the demand for alternatives ETFs, especially among the growing number of derivatives-based funds. Chief among them are risk management and income generation.

Some of the most popular funds this year as measured by flows as percentage of total assets reflect these themes:

Source: VettaFi PRO

In this list, you’ll find buffer, tail risk, hedged portfolios, income – a lot of derivatives-reliant plays that are helping investors manage risk and/or generate income.

Once the turf of professional traders, derivatives are increasingly finding their way to the core of ETF investor portfolios. We are living in the age of mainstreaming — or mainstreeting — alternatives.

Key Adoption Driver

According to Rob Scrudato, senior research analyst at Global X, one of the key drivers of adoption has been product development itself.

A fund like the Global X Nasdaq 100 Tail Risk ETF (QTR), for example, is delivering uncapped exposure to the Nasdaq-100 while offering some level of downside protection thanks to a put option strategy. Similarly, the Global X Nasdaq 100 Risk Managed Income ETF (QRMI) employs a collar strategy. It delivers downside protection through puts while generating income (double-digit income) through covered calls. Both funds came to market in the past three years.

More recently, Fidelity, for example, brought to market the Fidelity Hedged Equity ETF (FHEQ) and the Fidelity Dynamic Buffered Equity ETF (FBUF) — both options-based portfolios for risk management — that are already hitting their stride. The NEOS Nasdaq 100 High Income ETF (QQQI) aims to deliver alternative income. It’s not even four months old and already has almost $200 million in assets. Flip that ticker, and the ProShares Nasdaq-100 High Income ETF (IQQQ) is another income-generating ETF that came to market this past March, and is already off to the races. The list goes on.

Complexity Made Simple

The ETF wrapper has in many ways made complexity simple to implement, and simplicity translates to accessibility — the necessary condition for demand to materialize.

Today, investors can see, understand, and incorporate complex derivatives-based strategies that systematically take care of all of the noise best handled by a professional associated with the space — trade timing, liquidity, time decay, etc. As Scrudato put it, outside of keeping an eye on market volatility and interest rates, investors now can trust the ETFs to handle the rest. What’s more, alternatives ETFs are increasingly finding their way to the core of portfolios as we go from remedial risk management to preventive risk management with ETFs.

“We are no longer running out to buy a fire extinguisher 10 minutes after the house burns down,” he said. “Once the pandemic hit, suddenly there was major demand for risk management. Now there’s a fervor in the market for it, and the number of funds has blossomed. But it’s a space that’s only in its infancy.”

From Remedial to Preventive

To state the obvious, caution is all about managing risk. And managing risk in markets at all-time highs seems especially prudent.

Alternatives ETFs are empowering investors to do exactly that — bubble-wrap the core of their portfolios. Or at the very least, put some arm floaties on for satellite protection.

BBH, in its Global Survey, found that U.S. investors are as bullish in alts today, as an asset class, as they are on equities. That’s impressive.

Source: BBH

When the survey flipped that question to what asset classes investors thought the market was mispricing the most — “too bearish on” — alternatives was one of the key categories. It found that “ETF investors cite digital currency/Bitcoin (23%), alternatives (19%), and commodities (15%) as asset classes where the market is more bearish than it should be.”

Ask, Explore, and Learn More

If the enthusiasm over alternatives ETFs has caught your attention, or if you as an advisor, is faced with client questions about risk management, portfolio protection, and income generation through alts, we offer three ideas to help your due diligence efforts.

1. Do some research.

We have a lot of content diving into alternatives. Check it out. Our Alternatives ETF Channel has the latest news on product development, market views from the experts, and a lot of implementation ideas. We also carry Experts Insights on a variety of topics, alternatives ETFs included.

We are a resource of information and analysis. Use us.

2. Dive into the number with some data analytics.

We have plenty of data, powered by FactSet. It’s easy to access through our research tools. Dig into the numbers.

On our site, explore all the capabilities in the drop-down menu under “Tools” as seen below. Find the ETFs you are curious about, and dive into what makes them tick.

We also offer a robust data analytics tool called VettaFi PRO, with detailed and proprietary portfolio, performance, and charting functionality. Let us know if you’d like a tour of the platform – we’d be happy to show you around.

3. Join the conversation.

We are regularly talking and engaging with product providers, advisors and market participants. We are constantly learning the latest about the space. Join us. You can find a calendar of our upcoming webcasts and livecasts here.

Coming up next week, on May 30, we are hosting an Alternatives Symposium to talk about options, commodities, structured protection as well as unique assets such as catastrophe bonds and MLPs. We invite you to explore these themes and product ideas with us. Sign-up is a simple “count me in!

Parting Thought

As you explore alternatives ETFs as an asset class for the times we live in, consider a final thought. It’s courtesy of Toews Asset Management CEO Phil Toews. He said the following in a live radio interview this week: “We can predict as much as we want. But the last three big market events of the last 20 years were sort of surprises.”

No one has a crystal ball. Risks in investing abound. But alternatives ETFs can help navigate the uncertainty.

For more news, information, and analysis, visit VettaFi | ETF Trends.