At a time like this when investors are growing increasingly wary about stock market corrections and risks of rising rates, the need for some alternative assets or multi-strategy ETFs is undeniable as only these could sit tight in the ongoing market volatility (read: 3 Low Risk ETFs for a Stormy Market ).
The Fed has been steadily withdrawing its QE stimulus. In fact, the Fed is expected to wrap up tapering by this year-end. Stock markets have been broadly mixed this year. The U.S. economy contracted in Q1 though is showing signs of improvement in Q2. Interest rate risks are looming large. In such a situation, a smart multi-strategy approach would go a long way to protect investors' money (read: Volatility ETFs Crash Signaling Further Volatility? ).
Probably having sensed that, PowerShares introduced a fund in the multi-strategy ETF space on May 29. The fund will trade under the name of Invesco PowerShares Multi-Strategy Alternative ETF with the ticker symbol of LALT.
LALT in Focus
This actively managed ETF intends to deliver higher risk-adjusted returns and shun volatility by investing in a blend of equity securities, financial futures contracts, forward currency contracts and other securities. In order to do this, the fund looks to outperform the Morgan Stanley Multi-Strategy Alternative Index through a quantitative process.
In a nutshell, the fund's strategy is to generate return by investing in diverse asset classes with low correlation to the broader markets. LALT has 109 holdings in its basket.
The benchmark index mainly works on three principles - Quantitative/Stylistic Strategies, Volatility Risk Premium Strategies and Carry Strategies. This exposure isn't exactly cheap though, as the fund looks to charge investors 96 basis points a year in fees.
This is true when compared to the average expense ratio charged by other long-short ETFs in the market. An active management approach might result in even higher expenses which will add to the expense ratio.
How might it fit in a portfolio?
LALT could be an interesting choice for those seeking a broad income play that goes across asset classes (read: 3 Multi-Asset ETFs for Juicy Yields and Stability ). The fund offers minimal exposure to equity and bond markets and puts investors' money to work in alternative asset classes.
Taking long and short positions in various currencies, interest rate futures and VIX index future contracts for hedging purposes will help the fund offset volatility in equity markets, currency fluctuations and various risks associated with an investment.
By investing in diverse asset classes which have low correlations with conventional asset classes, the fund will likely reduce volatility and offer stability to the portfolio (read: First Trust Launches High Yield Long/Short ETF ).
ETF Competition
Unfortunately for LALT, it may have some heavy competition in the long-short and hedge fund ETF world. Currently, there are a handful of other products in these segments with ProShares RAFI Long/Short ETF(RALS) and AdvisorShares' Accuvest Global Long Short ETF (AGLS) gaining popularity in long-short space and IQ Hedge Multi-Strategy Tracker (QAI) garnering significant assets in the hedge fund ETF space.
Some other funds like WisdomTree Managed Futures Strategy Fund (WDTI) and SPDR Multi-Asset Real Return ETF (RLY) also deserve mention in the multi-strategy space. Most of these ETFs charge lower than the newly launched LALT, so it will be interesting to see if this new fund can compete in this cutthroat space.
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PRO-RAFI L/S (RALS): ETF Research Reports
ADVSR-ACC GLS (AGLS): ETF Research Reports
IQ-HEDGE MUL-ST (QAI): ETF Research Reports
WISDMTR-MF SF (WDTI): ETF Research Reports
SPDR-SSGA MA RR (RLY): ETF Research Reports
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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.
