Alternatives Open Whole New World For ETF Investors

ETF Investment Strategies: Tips On How To Buy The Best ETFs

Yes Virginia, you can have something besides chocolate and vanilla. In the ETF world, you can put your hard-earned money into something that invests in things besides traditional stocks and bonds.

Although they dominate the landscape, equity and fixed-income ETFs are not the only game in town.

A growing field of alternative ETFs invest in such areas as currencies, commodities, real estate and private equity, and employ such strategies as tapping mergers and acquisitions, asset arbitrage, inflation/deflation, leverage, and market neutral as well as multistrategies.

“The alternative investment ETF space is still relatively new, but the nascent industry is growing,” wrote Tom Lydon of ETF in a Jan. 13 article.

Alternative ETFs can provide a number of benefits for investors. “In theory, they’re going to offer some of the same benefits that alternatives can provide in other formats, such as greater diversification to your portfolio, improving potentially risk-adjusted performance, Josh Charlson, Morningstar’s director of manager research for alternative strategies, told IBD. “But the benefit in an ETF would be doing so at a lower cost than what you might get in a mutual fund or a private fund.”

Diversification is one of the biggest benefits of alternative ETFs. When the stock market gets into trouble, you don’t want to be holding things that are highly correlated to each other — those that generally move in tandem. At times, these can include gold and real estate.

Some alternative ETFs also offer exposure to areas like hedge funds or private equity that would otherwise be open only to professional investors or individuals with deep pockets.

But alternative ETFs do have drawbacks. One is that many issues are thinly traded. Some only trade a few thousand shares a day. So if you need to get out of your position, you’ll likely need to lower your selling price in order to get a fill.

Another thing is that alternatives are new to the market, so there’s no record of long-term performance to gauge.

ProShares, Direxion, WisdomTree, iPath and IndexIQ are some of the more popular providers of alternative ETFs out there.

Bethesda, Md.-based ProShares offers about 139 products that run the gamut from leveraged equity and fixed income to private equity and short volatility. In October, it teamed with Morningstar to launch the ProShares Morningstar Alternative Solutions ETF (ARCA:ALTS), which combines a broad range of alternative strategies.

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