The premise of positive returns in any market is an alluring proposition for risk adverse investors. These types of alternative strategies were once the realm of sophisticated hedge funds and institutional portfolios. However, they are now starting to make their way into the accounts of mainstream investors via exchange-traded funds (ETFs).
Alternative strategies are generally given more flexibility than a traditional passive index tracking a basket of stocks or bonds. They may have the capability to own futures contracts, short positions, currency pairs, or even volatility-linked products. Put simply, these “go anywhere, do anything” investment styles have the freedom to select virtually asset classes they feel are most appropriate for the current market environment. Sometimes those strategies are rules-based, while other funds opt for an active mandate that allows the appointed portfolio manager leeway to make changes at their discretion.
This may be a blessing or a curse depending on how you view this controversial investing segment. Some perceive the introduction of new alternative ETFs as a positive, in that investors have greater flexibility to choose what asset classes and strategies they want to own. Nevertheless, some industry purists worry that over-crowding and over-complicating the field will tarnish the reputation of the ETF genre. One that is known for low-cost, simplicity, and transparency.
Alternative ETFs can be just about anything, but are generally not regarded as simple or inexpensive.
Those worries haven’t stopped the release of two new multi-asset ETFs geared towards absolute returns. The JP Morgan Diversified Alternatives ETF (JPHF) and QuantX Risk Managed Multi-Asset Total Return ETF (QXTR) are aiming to shake up the stigma in this space. While these funds share similar objectives, they execute their diversified strategies in far different ways.
JPHF debuted near the end of last year and was recently awarded the Best New Alternatives ETF and Best New Actives ETF by ETF.com for 2016. Despite its active designation, the fund touts its rules-based approach to selecting a diversified array of underlying holdings to mirror multiple hedge fund strategies.
JPHF takes the route of direct exposure to the investments it covets rather than selecting a smaller basket of underlying indexes to makeup the portfolio. That is conveyed through more than 800 individual holdings at present. The JPHF portfolio contains all manner of long and short positions in individual stocks, bonds, currencies, and futures contracts. The fund charges a net expense ratio of 0.85% for access to its strategy.
With so many positions, it’s difficult to grasp the true notional exposure of the portfolio without the aid of JP Morgan’s analytics. Their dedicated ETF website breaks down how the fund is arrayed and what investors can expect in its aggregate asset allocation.
The goal of this type of extreme multi-asset diversification is to capture smaller segments of up and down price action. Thus, minimizing the peaks and valleys of the portfolio in an effort to tread a steady path. At the same time, this strategy will likely underperform more conventional funds that directly participate in a bull or bear market trend.
QXTR, by contrast, takes a different approach to its portfolio strategy in several ways. The fund is made up of a small universe of other exchange-traded funds that include stocks, bonds, commodities, cash, and real estate. It only invests in long positions and favors the notion of minimum and maximum exposure limits in each asset class. The result is a more traditional multi-asset portfolio that is governed by a rules-based index construction criteria.
The proprietary index rebalancing allows for QXTR to monitor and adjust its holdings quite frequently, even as much as daily if needed. In down markets, QXTR will “de-risk” the portfolio by moving towards more cash and fixed-income versus stocks and commodities. The goal is to continually be hunting for the assets showing the greatest promise to try and drive absolute returns.
However, it’s worth noting that access to this strategy comes at a steep cost. The listed expense ratio of QXTR is 1.51%, which likely includes the pass-through expenses of the underlying funds it owns at any given time. That hefty price tag immediately targets this fund as one of the more expensive in its class.
The Bottom Line
Despite the failures of many alternative-style funds that have come before then, JPHF and QXTR have already accumulated over $60 million in assets each. Most of that money is the result of bespoke capital that was allocated soon after they debuted.
These funds both offer intriguing risk dynamics and performance potential for those who view future returns in dedicated stock or bond funds to be sub-optimal. The alternative ETF category is ripe for a leader to emerge with consistent returns and my hope is that portfolio expenses will be incrementally lowered over time as well.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
