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
In the ETF world, a growing number of funds have been launched in the Alt space. Today we want to take a quick “tour of the grounds”, examining the different types of Alt ETFs, what access they provide and what (general) motivation an investor might have to buy these funds.
The first matter of business is to remind readers that these discussions of Alt ETFs deals with funds based on an underlying asset that is not the stock and bond market. Too often, these are lumped under (translation, dismissed as) “commodity funds”. While this is an important part of Alt ETFs, a) there are other, non-commodity related ETFs to consider; and b) the term ‘commodity’ is too broad to have meaning. The earliest (and largest and most well-known) of the Alt ETFs is SPDR Gold Trust (GLD), which was launched in late 2004.But almost 50 Alt funds have been in existence since before 2008. They fall into a few main categories – Commodities, Currencies and Strategies.
Commodity-based ETFs include sub-categories of Metals (both precious, in which GLD falls, and base metals), Agricultural Commodities and Energy. The sub-sectors shows clearly why the general ‘commodities’ label is meaningless, as copper and livestock are clearly not the same thing. Investors can specify exactly what they want exposure to, and eliminate those areas they don’t. If an investor is very concerned about rising energy prices, the energy sector offers funds to specify Crude Oil or Natural Gas, for example. This expresses a very different exposure than would the purchase of a Gold or Silver fund.This is not to say that they won’t both go up (or down) at the same time, but rather that the drill down (no oil joke intended there) yields disparate reasons why each of these funds move.
Why would an investor want to invest in one of these sub-sectors? One was already mentioned, namely as portfolio protection against the deleterious effects of rising energy prices. These negative effects are eventually manifest in the stock market, through demand destruction, higher producer costs, and ultimately, less money in consumers’ pockets. Another reason is the general protection against inflation. While the Fed denies it, some still expect the launch of QE3. Most of the commodity subsectors will provide a measure of protection here. However, if that is the extent of the reason, there are Alt ETFs that offer a basket of commodities across all of these subsectors. The largest of these is PowerShares DB Commodity Index Tracking Fund (DBC), but there are others.
Another reason is protection against erosion of the dollar’s buying power. For this, an entire other category of Alt ETFs are specifically suited—currency ETFs.There are close to 40 different ETFs that invest in foreign currencies. By so doing, investors benefit from the appreciation of that currency relative to the dollar (which is the same thing as saying the depreciation of the dollar in terms of another currency). This can be the major currencies (Japanese Yen, Euro, British Pound, etc.) or more exotic currencies, like those of the BRIC countries (Brazil, Russia, India and China). Again, there are baskets for investors that do not want to be country-specific.
Strategy Alt ETFs, which offer one or more manager’s specific strategy applied to the market, will be referred to as Active Alt ETFs. These categories can and will be explored in more depth over time.
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
The Alt ETF Menu – Choices, choices
In the ETF world, a growing number of funds have been launched in the Alt space. Today we want to take a quick “tour of the grounds”, examining the different types of Alt ETFs, what access they provide and what (general) motivation an investor might have to buy these funds.
The first matter of business is to remind readers that these discussions of Alt ETFs deals with funds based on an underlying asset that is not the stock and bond market. Too often, these are lumped under (translation, dismissed as) “commodity funds”. While this is an important part of Alt ETFs, a) there are other, non-commodity related ETFs to consider; and b) the term ‘commodity’ is too broad to have meaning. The earliest (and largest and most well-known) of the Alt ETFs is SPDR Gold Trust (GLD), which was launched in late 2004. But almost 50 Alt funds have been in existence since before 2008. They fall into a few main categories – Commodities, Currencies and Strategies.
Commodity-based ETFs include sub-categories of Metals (both precious, in which GLD falls, and base metals), Agricultural Commodities and Energy. The sub-sectors shows clearly why the general ‘commodities’ label is meaningless, as copper and livestock are clearly not the same thing. Investors can specify exactly what they want exposure to, and eliminate those areas they don’t. If an investor is very concerned about rising energy prices, the energy sector offers funds to specify Crude Oil or Natural Gas, for example. This expresses a very different exposure than would the purchase of a Gold or Silver fund. This is not to say that they won’t both go up (or down) at the same time, but rather that the drill down (no oil joke intended there) yields disparate reasons why each of these funds move.
Why would an investor want to invest in one of these sub-sectors? One was already mentioned, namely as portfolio protection against the deleterious effects of rising energy prices. These negative effects are eventually manifest in the stock market, through demand destruction, higher producer costs, and ultimately, less money in consumers’ pockets. Another reason is the general protection against inflation. While the Fed denies it, some still expect the launch of QE3. Most of the commodity subsectors will provide a measure of protection here. However, if that is the extent of the reason, there are Alt ETFs that offer a basket of commodities across all of these subsectors. The largest of these is PowerShares DB Commodity Index Tracking Fund (DBC), but there are others.
Another reason is protection against erosion of the dollar’s buying power. For this, an entire other category of Alt ETFs are specifically suited—currency ETFs. There are close to 40 different ETFs that invest in foreign currencies. By so doing, investors benefit from the appreciation of that currency relative to the dollar (which is the same thing as saying the depreciation of the dollar in terms of another currency). This can be the major currencies (Japanese Yen, Euro, British Pound, etc.) or more exotic currencies, like those of the BRIC countries (Brazil, Russia, India and China). Again, there are baskets for investors that do not want to be country-specific.
Strategy Alt ETFs, which offer one or more manager’s specific strategy applied to the market, will be referred to as Active Alt ETFs. These categories can and will be explored in more depth over time.