Many investors are facing quite an interesting problem these days.
On one hand, they still need to generate consistent bond-like returns from a hefty portion of their portfolios. The need for income is very real for many retirees, while recent market events have only strengthened the safety appeal of bonds.
The problem is with investor’s staring down the gun at rising interest rates, bonds aren’t necessarily the best place to be. That’s because bond prices have a negative correlation to interest rates. As interest rates rise, bond prices will fall, causing some nasty portfolio loses.
And while short-term bonds may be a place to hide from rising interest rates, they aren’t exactly earning anytime in the meantime. For example, the SPDR Barclays 1-3 Month T-Bill ETF (BIL) yields a whopping 0%.
The solution? Taking a cue from institutional investors and plunging head-first into liquid alternatives.
Liquid alternatives encompass a wide range of asset classes and strategies that are designed to provide consistent, non-correlated returns in up or down markets. Basically, liquid alternatives can provide many of the same benefits of bonds — income and stability — without that interest rate risk.
What’s more, many liquid alternatives are now available with easy to use exchange-traded funds. Here are three liquid alternatives ETFs to buy today.
Liquid Alternatives ETFs to Buy #1: The IQ Hedge Multi-Strategy Tracker ETF (QAI)
Given the wide range of strategies that encompasses liquid alternatives, a broad approach could be best. Leading that multi-strategy charge is the IQ Hedge Multi-Strategy Tracker ETF (QAI).
QAI is actively managed to track a wide range of liquid alternatives and hedge fund approaches. These include long/short equity, global macro, market neutral, event-driven, fixed-income arbitrage and emerging markets tactics. While that all sounds like a mouthful, the basic idea is dampen a portfolio’s volatility, providing uncorrelated returns as well as consistent returns. Those returns allow QAI to be a fixed-income replacement.
The broad liquid alternatives ETF accomplishes its goals by going long or short other liquid ETFs. Currently, top holdings include iShares IBoxx $ Investment Grade Corporate Bond (LQD), PowerShares Senior Loan Portfolio (BKLN) and the Vanguard Short-Term Bond ETF (BSV). While that is a very fixed income set of top holdings, QAI can shift its portfolio quite rapidly and even daily.
On the returns side, the $1.06 billion liquid alternatives ETF has done alright. Since its inception in 2009, QAI has managed to produce a very bond-like average annual total return of 3.36%. That could make it a prime replacement for some core fixed exposure in a portfolio.
Expenses run 0.97% — or $97 per $10,000 invested — after including acquired fund fees.
Liquid Alternatives ETFs to Buy #2: WisdomTree Managed Futures Strategy ETF (WDTI)
At their most basic, managed futures are a variety of liquid alternatives that take advantage of price trends across a variety of asset classes. Investors employing the tactic can go long or short (or both) various futures and options contracts across sectors such as commodities, stock indexes, foreign currency or even U.S. government bond futures.
The idea is to generate positive and stable returns no matter what the market environment. You’re not looking for home runs, but consistent singles and doubles.
The $200 million WisdomTree Managed Futures Strategy ETF (WDTI) could be a way to capitalize on the type of liquid alternative. WDTI tracks the Diversified Trends Indicator Index. The DTI is considered the benchmark manage futures index and tracks a combination of U.S. treasury futures, currency futures, non-deliverable currency forwards, commodity futures, commodity swaps, U.S. government and money market securities.
Historically, managed futures and WDTI’s underlying index have provided steady positive returns. However, during the recent commodity collapse and surging dollar, returns for WDTI have been less than stellar. On the positive side, that highlights WDTI’s uncorrelated returns. The ETF should do better when the dollar once again resumes its fall.
Expenses for WDTI run 0.95%.
Liquid Alternatives ETFs to Buy #3: ProShares Large-Cap Core Plus ETF (CSM)
Several styles of liquid alternatives involve both shorting and going long various asset classes to achieve their “market neutral returns.” The ProShares Large-Cap Core Plus ETF (CSM) is the only ETF that allows investors to take advantage of a 130/30 approach.
Basically, a 130/30 fund will go long and short various stocks. The kicker is that the money raised by going short will be used to “boost” the long positons in the fund. At the end of the day, you end up overweight 30% of the portfolio and short 30% of the portfolio. There are various ways investment managers use to determine which stock to short and which to go long on.
CSM tracks the Credit Suisse 130/30 Index — which screens for momentum, profitability, growth and value metrics within the bread-n-butter S&P 500 to create its portfolio. CSM then uses rules to determine its short/long weightings and will try to keep its beta as close to 1 as possible. While that all sounds complex — which it is — it does create some pretty decent risk-adjusted returns.
CSM has managed to produce 17.65% annual total returns since its inception in 2009. That beats the S&P 500 by a few basis points. The real kicker is that the liquid alternatives ETF has done so with less risk and volatility.
All in all, CSM & 130/30 is a complex tactic, but it could be worth investors while over the long haul.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.