In a week when we are all eagerly awaiting crucial insight from Jackson Hole — insight, I might add, many are saying could boost or derail the market’s upside momentum — it seems timely to revisit the importance of diversification. More specifically, let’s consider how investors have turned to alternatives to navigate so much uncertainty this year.
Alternatives are a diverse category, best described as the “other” outside of equity and fixed income. Depending on one’s view, it can focus exclusively on strategies like asset allocation, hedged and long/short portfolios, managed futures, or volatility plays, to name a few. Or, in an aggregate sense, it include other asset classes such as commodities and currencies.
If we look at the aggregate, putting everything that’s not equity or fixed income in the bucket, alternatives have taken in almost 10% of all asset flows this year. That’s noteworthy demand when you consider this broad category represents only about 3.7% of all ETF assets. They are raking in about 2.5x as many net new assets, as their market share would suggest.
Unsurprisingly, when we look under the hood of most popular “other” ETFs, gold and crypto ETFs loom large as diversifiers of choice.
Commodities Shining Beyond Metals
Gold has had a stellar run so far this year, outperforming both the S&P 500 and bitcoin, up 25% this year.
Gold ETFs have been in demand. In fact, every gold ETF in the market is net-new-asset positive this year. The SPDR Gold Trust (GLD), the iShares Gold Trust (IAU) and the SPDR Gold Minishares Trust (GLDM) lead asset-gathering in the category, taking in over $20 billion. Silver funds have also done well, taking in fresh new money.
But the appetite for diversification in commodities has gone beyond the metals. Broad commodity portfolios like the SPDR Bloomberg Enhanced Roll Yield Commodity Strategy No K-1 ETF (CERY) (up 6.5% YTD), the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC), and the abrdn Bloomberg All Commodity Strategy K-1 Free ETF (BCI) are also among the year’s net asset gainers. Natural gas funds have picked up new assets.
In all, commodity ETFs have snagged about 3.5% of the year’s total ETF asset flows thus far. That’s roughly 2x their market share, as investors turn to the category for its low correlation to other assets.
Crypto ETFs Growing
In a similar vein, and yet completely different when it comes to appetite for risk, crypto ETFs have benefited from the appetite for “other” types of exposure.
Year-to-date, bitcoin funds, for example, have taken in some $25 billion in assets. The iShares Bitcoin Trust (IBIT) and the Grayscale Bitcoin Mini Trust ETF (BTC) are among the year’s biggest gatherers. Other bitcoin-plus-something strategies like the NEOS Bitcoin High Income ETF (BTCI) have also been gaining momentum. Ethereum ETFs — the market’s apparent latest obsession in this category — have raked in about $10 billion.
Thanks to demand for diversification plus unique drivers in the form of new and evolving “friendly” regulation, robust product development, and growing institutional support, crypto ETFs continue to grow as a category. Grouped into the “currency ETFs” asset class bucket, these funds, along with their currency counterparts, already represent over 2% of all ETF assets in the U.S.
Other Alts Flavors Rising to the Diversification Call
One of the most popular “classic alternative” strategy types this year has been managed futures ETFs. This is also a segment where asset managers have been busy adding products. Funds like the Simplify Managed Futures Strategy ETF (CTA), the Invesco Managed Futures Strategy ETF (IMF) and the Fidelity Managed Futures ETF (FFUT) have taken in more than $1 billion in combined assets.
These funds are typically long/short baskets of futures contracts and other derivatives across all types of markets. Trend-following strategies are an example here of what they can deliver — funds like the Blueprint Chesapeake Multi-Asset Trend ETF (TFPN), for example.
They are massively diversified portfolios, and a compelling answer for investors seeking diversification. Asset flows confirm investors have turned to them this year.
Allocator Voice
In a year when markets have mostly defied expectations, but delivered plenty of ups and downs in a noisy environment, appetite for alternatives — in a narrow or broader context — makes a lot of sense. That’s because diversification is one way to manage portfolio risk.
To offer one more data point that reflects this investor appetite for alternatives, consider this advisor poll we ran this week, asking where they’ve put more money to work this year. Note the alts versus fixed income numbers.
This has indeed been a very interesting year for alternatives, however you define them.
Source: TMX VettaFi Data
For more news, information, and analysis, visit VettaFi | ETF Trends.
