Understanding the benefits of alternative ETFs in investment portfolios

As innovation paves the way for greater accessibility to alternatives through ETFs, the opportunity for investors is vast. To understand the significance of alternative ETFs in today’s investment landscape, Dan Petersen, Director, Product Management at New York Life Investments shares on Zephyr's Adjusted for Risk Podcast his take on liquid alternatives and the impact that ETFs had on them.

Understanding liquid alternatives

Dan Peterson describes liquid alternatives as alternative exposures available in a liquid form. Traditionally, alternatives were associated with hedge funds or private investment vehicles, often obstructed by high expenses and limited transparency. Liquid alternatives break down these barriers and offer a more democratised approach, which make them accessible to common retail investors.

The impact of ETFs on alternatives

Meanwhile, ETFs have grown in popularity, providing diverse investment opportunities, including alternatives. As alternatives become more prevalent in ETF wrappers, investors and advisors start to gain a deeper awareness of their potential benefits. However, this doesn't overshadow traditional vehicles like hedge funds, which continue to thrive alongside the rise of alternatives in ETFs.

Debunking misconceptions about alternatives

A misconception about alternatives is the assumption of inherent illiquidity, but it is not a defining feature of all alternatives. Private equity, for example, might appear less volatile than public markets, attempts to replicate its performance in public markets come with different challenges.

Benefits of ETFs in investment portfolios

ETFs offer a powerful way to diversify portfolios, especially amid macroeconomic uncertainty. While fixed income investments are heavily influenced by interest rates, alternatives in ETFs provide a way to hedge against market volatility without relying on such factors, enriching the diversification process.

Low volatility, liquidity, and potential tax advantages are some standout features that make ETFs a preferred choice for integrating alternatives into investment portfolios.

Balancing expectations and headwinds

While alternative ETFs offer numerous advantages, Dan Peterson acknowledges potential headwinds. These include understanding the broad and complex nature of alternatives and maintaining effective client communication. Advisors must balance high-level asset allocation discussions with detailed knowledge of individual ETF components.

When faced with the choice between a liquid alternative ETF and a hedge fund, each option offers its distinct advantages. ETFs provide transparency, ease of execution, and tax efficiency, making them appealing for many advisors and investors. However, specific active management strategies in hedge funds still have their place for those seeking unique exposure.

Explore ETF innovations at IMpower FundForum this June!