Jules Staniewicz has worked in the financial industry for 30 years.
He has been the co-head of alternative investments for a major Wall Street brokerage firm and worked for 15 years with a multi-billion alternative investment manager
Alt – Who goes there?
The ETF world has certainly matured over the course of the nearly 20 years since the first funds were launched. Originally developed as an inexpensive way to access broad market indices more frequently than the once-a-day-at-closing index mutual funds, the universe now is a veritable candy store of choices from which an investor can choose almost anything he or she wants.
Plenty of paper and electrons have been spent on the equity side of ETFs, somewhat less so with Fixed Income ETFs (though there is certainly no shortage). But the financial wizards (read: fund purveyors) did not stop at the boundary of these traditional investments, rather they expanded beyond that boundary into the world of alternative investments. These Alternative, or “Alt”, ETFs give investors the opportunity to populate their portfolio with a panoply of things that have little or nothing to do with the stock of bond market. In theory, these Alt ETFs can broaden the exposure to profits while simultaneously protecting the portfolio.
But where an investor can easily drown in advice pertaining to equity-based ETFs, the guidance on how to use these Alt ETFs is relatively scarce. Whether this is a simply a numbers game (more equity/fixed income-based ETFs translates naturally into more coverage), or a function of the broad dispersal of Alt ETFs (think “herding cats”) doesn’t really matter. The fact remains that there is a need for more coverage in this area. That’s what this column aims to provide.
The goal over time is to provide a clear, understandable framework for using Alt ETFs. This includes what they are, how they work and why they fit into a portfolio. Later, topics such as which Alt ETFs fit with which investment goals, the pitfalls of using Alt ETFs (yes, there are pitfalls waiting, even once one understands them) and other advanced topics will be broached. Throw in a dollop of portfolio structuring theory and perhaps there might be some interesting reading.
One of the advanced topics is the use of active management. The most recent development within the ETF universe is the offering of ETFs that employ either a specific active strategy, or which bundle several separate managers using their strategy. In this column these will be referred to as “Active” Alt ETFs (and, as mentioned, will be covered as an advanced topic later). Unless specifically mentioned otherwise, the generic term Alt ETFs will refer to the larger number of “Passive” ETFs that are not equity-based, though the Active Alt ETFs are certainly Alternative Investments. (This definitional ground is covered because you may run across people who refer only to the actively managed strategies as Alt ETFs.)
One last defining point, this column will not refer to inverse stock or bond market ETFs as Alts. These may be discussed in the advanced topics, but we will leave the bulk of the discussion to the more general ETF world. Thanks, and here’s to gleaning a better understanding of the Alt ETF world.