Alternative investments, be it commodities, real estate and some income-generating assets, are often viewed as portfolio diversifiers and avenues for reducing correlations to traditional assets, such as stocks and bonds.
However, some investors are often light on alternatives due to lack of knowledge. Advisors can ameliorate that situation with the right allocations, including those offered by WisdomTree’s Endowment Model Portfolios. For example, the moderately aggressive model portfolios features exposure to six exchange traded funds tracking various alternative investments.
“For performance purposes, this strategy is benchmarked to a 50/30/20 combination of a broad-based global equity benchmark, a U.S. aggregate bond index and a benchmark that is a proxy for U.S. short-term cash,” according to WisdomTree.
Angles for an Alternative Model Portfolio
Some market observers note that various correlation-based and direct hedges come with certain risks. For instance, long-term Treasuries are not effective in periods of rising interest rates, trend-following strategies are not as effective in reversal markets, alternative risk premia is less effective during coincidental drawdowns, and direct hedges don’t work as well in a shallow decline.
Within the moderately aggressive Endowment Model Portfolio, assets such as gold and master limited partnerships (MLPs) are featured.
One of the ETFs in the alternatives sleeve of this model portfolio is the Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (SRVR).
SRVR is a strategy-driven ETF that aims to offer investors exposure to U.S. companies that generate the majority of their revenue from real estate operations in the data and infrastructure sector. There are significant real estate demands associated with the 5G rollout, enhancing the 5G ETF status of the Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF.
Another holding is the AGFiQ U.S. Market Neutral Anti-Beta Fund (BTAL).
BTAL tracks an equal-weighted index that takes long positions in low beta US stocks offset by short positions in high beta US stocks. It provides consistent exposure to the anti-beta factor by investing in the underlying index which reconstitutes and rebalances monthly in equal dollar amounts in equally weighted long low beta positions and equally weighted short high beta positions within each sector.
BTAL is considered an alternative investment and as such can act as an important portfolio diversifier and an avenue for reducing correlations. While not zero, BTAL’s correlations to broader benchmarks, such as the S&P 500, are low relative to pure beta instruments.
For more on how to implement model portfolios, visit our Model Portfolio Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
