Investors suffered higher-than-expected losses throughout 2022 as stock-bond correlations turned positive thanks to a rare combination of persistent inflation driving interest rates higher, hurting both bonds and stocks.
Over the past two decades, investors have benefited immensely from the historical negative correlation of bonds with stocks. When stocks sold off, as they did during times of market crisis like the Great Recession, bonds rallied to help pick up the slack.
Thanks to this phenomenon, portfolio strategies like “60/40,” referring to an allocation of 60% in stocks and 40% in bonds, became popular for their ability to deliver impressive risk-adjusted returns. This all changed in 2022, when the 60/40 portfolio strategy suffered one of its worst years.
To further fortify a diversified portfolio, some investors have pursued alternative assets. “Simply put, alternatives are any investment other than long-only stocks, bonds or cash,” says Johann Lee, director of research at AlphaCore Wealth Advisory. “Therefore, alternatives can be an array of assets, strategies and structures, including private equity, hedge funds, private credit, venture capital and real assets, such as real estate, commodities and infrastructure.”
The flexibility and broad nature of alternative assets and strategies can help investors offset risk in their portfolio. “Most investors look to alternatives to improve the diversification of their portfolio, which over time should lead to more consistent returns,” says Bob Elliott, co-founder, CEO and CIO of Unlimited, an asset management firm. “Typically, these strategies or assets achieve improved diversification through lower correlation with traditional investment assets.”
By zigging when stocks and bonds zag, alternative assets can therefore buoy portfolios and potentially reduce both volatility and drawdowns when traditional assets experience headwinds. In a situation like 2022 where stocks and bonds fell in tandem, investors who held alternative investments were able to significantly blunt their losses.
“Think managed futures, global macro, tail-risk and market neutral strategies,” says Jerry Prior, COO, senior portfolio manager and managing partner at Mount Lucas Management. “These are often viewed as risk mitigating strategies – sources of uncorrelated returns that, when paired with traditional assets, can help smooth out long-term expected returns of a portfolio.”
Accessing alternative assets isn’t always straightforward or cheap. Some options, like hedge funds, impose requirements for net worth and charge high management and performance fees. These structures can also be illiquid, meaning that it can be difficult for investors to buy and sell due to restrictions on redemptions and a lack of a market for the underlying assets.
However, investors now have affordable and transparent access to a broad range of alternative assets and strategies through exchange-traded funds, or ETFs. “ETFs provide an effective means of democratizing access to alternative strategies previously only available to high-net-worth and institutional assets,” Prior says. “They offer transparency at both the fee and position level.”
Elliott agrees with Prior, noting, “The ETF structure provides many important benefits compared to other alternative structures like limited partnership funds – they are typically transparent, have lower cost, possess intraday liquidity and don’t involve onerous paperwork.”
Here’s a look at nine of the best alternative ETFs to buy in 2023:
| ETF | Expense ratio |
| iMGP DBi Managed Futures Strategy ETF (ticker: DBMF) | 0.85% |
| Simplify Managed Futures Strategy ETF (CTA) | 0.75% |
| KFA Mount Lucas Managed Futures Index Strategy ETF (KMLM) | 0.9% |
| Unlimited HFND Multi-Strategy Return Tracker ETF (HFND) | 1.03% |
| First Trust Long/Short Equity ETF (FTLS) | 1.41% |
| IQ Merger Arbitrage ETF (MNA) | 0.76% |
| The RPAR Risk Parity ETF (RPAR) | 0.5% |
| abrdn Physical Precious Metals Basket Shares ETF (GLTR) | 0.6% |
| Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) | 0.59% |
iMGP DBi Managed Futures Strategy ETF (DBMF)
“Managed futures are a systematic investment strategy that seeks to deliver absolute returns by implementing a variety of trend-following models,” AlphaCore’s Lee says. “This allows for investors to gain cross-asset exposures and potentially provides the ability to generate returns in both rising and falling markets.”
An example of a managed futures ETF is DBMF, which is able to take actively managed long and short positions across a broad spectrum of equity, fixed-income, currency and commodity market futures. This ETF charges a 0.85% expense ratio and seeks to replicate the gross pre-fee returns of the SG CTA Index.
Simplify Managed Futures Strategy ETF (CTA)
Another managed futures ETF worth considering is CTA, which targets a positive absolute return that has a low correlation to stocks, while reducing drawdowns during “risk-off” events like a market crash. The ETF employs a systematic trend-following model and charges a 0.75% expense ratio.
“As a true diversifier to equity and duration factors, the trend factor exhibits a unique correlation profile that offers near-zero long-term historical correlation to both,” Lee says. Thanks to this trait, trend-following managed futures ETFs potentially can help investors offset the risks of both stocks and bonds.
KFA Mount Lucas Managed Futures Index Strategy ETF (KMLM)
“Managed futures ETFs typically invest in liquid exchange-traded futures markets, where the underlying position liquidity is often greater than the ETF liquidity,” Prior says. A great example is KMLM, which is benchmarked to the long-standing KFA MLM Index, a portfolio of 22 liquid futures contracts.
Currently, KMLM systematically invests in 11 commodities, six currencies and five global bond markets weighted by historical volatility. The ETF is sub-advised by Mount Lucas Management, which established the first index for managed futures in 1988. The ETF charges a 0.9% expense ratio.
Unlimited HFND Multi-Strategy Return Tracker ETF (HFND)
“The performance of alternative strategies often comes down to whether managers can generate high-quality returns relative to the fees,” Elliott says. “It’s very hard to know what managers are able to do from traditional metrics, like who has the biggest assets under management.”
For investors interested in hedge funds, Unlimited offers HFND, which uses machine learning to reverse-engineer a portfolio that matches and aggregates the recent returns of each major hedge fund style. This feature can lessen manager-specific risk. HFND charges a 1.03% expense ratio.
First Trust Long/Short Equity ETF (FTLS)
“Long-short equity strategies employ an investment process that takes both long and short positions in equity securities to generate returns in a variety of market environments,” Lee says. “By managing a portfolio of both longs and shorts, managers are generally carrying lower overall market risk, or beta.”
As a long-short ETF, FTLS seeks to be 80% to 100% long and 0% to 50% short using a systematic portfolio construction process. As of Aug. 11, the ETF has around 98% net long exposure, with technology sector stocks being its largest long position.
IQ Merger Arbitrage ETF (MNA)
MNA is a unique alternative ETF that employs the merger arbitrage style of investing, which seeks to exploit price discrepancies between acquiring and target companies during mergers. This strategy analyzes factors like the likelihood of deal completion and regulatory hurdles to ensure good odds.
By tracking the IQ Merger Arbitrage Index, MNA looks to invest in companies that have been targeted for takeover by an acquirer via a systematic, rules-based approach, with a notable current holding being World Wrestling Entertainment Inc. (WWE). MNA currently charges a 0.76% expense ratio.
The RPAR Risk Parity ETF (RPAR)
Risk parity is an investment strategy that allocates capital based on risk, aiming for equal risk contribution from all portfolio assets. This approach seeks to achieve consistent returns regardless of the market environment, often using leverage to enhance returns on lower-risk assets.
Investors interested in a risk parity strategy can choose RPAR. This ETF allocates between global equities, commodity producer equities, Treasury bonds and Treasury inflation-protected securities, or TIPS, so that each provides an equal contribution to the ETF’s overall volatility. It charges a 0.5% expense ratio.
abrdn Physical Precious Metals Basket Shares ETF (GLTR)
One of the simplest ways of investing in alternative assets is via precious metals. For example, gold has historically rallied during recessions and periods of high inflation, helping to offset losses from stocks and bonds. To include these assets in a portfolio, investors can buy various precious metal-backed ETFs.
A highly diversified example is GLTR, which tracks an underlying basket of gold, silver, platinum and palladium. The ETF holds physical bullion bars, stored in audited vaults with inspection letters and bar lists posted online for investors to review. GLTR charges a 0.6% expense ratio.
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC)
For protection against high inflation, investors can invest in a broad basket of commodities. Beyond precious metals, energy and agriculture, commodities such as gasoline, natural gas, crude oil, sugar, soybeans, corn and wheat can potentially provide additional diversification benefits.
By buying PDBC, investors get exposure to 14 commodities across the precious metals, industrial metals, energy and agriculture markets via futures contracts. PDBC’s structure also eliminates the need to file a Schedule K-1, which is a tax form used by partnerships to report a shareholder’s portion of income, deductions, credits and other tax items. This can greatly simplify tax reporting for many investors. The ETF charges a 0.59% expense ratio.
