While most advisors or even affluent self-directed investors are familiar with the large number of Equity and Bond ETF options, many don’t realize just how expansive the ETF “jungle” of a universe really is. Whether it be theme-based, strategy-based, hedges or even annuities, you name it and there is likely an ETF for that!
Let me first admit that in general, I am a big fan of ETFs! It might be the millennial in me that’s always looking for a discount, or the “general distrust” I’m supposed to have for the markets that the transparency of ETFs lend well to. But the idea of achieving instant diversification, tax benefits, generally low cost including many at 0% commission, all quite literally at the click of a button is music to my ears.
Though not all ETFs reign as kings, especially during times of market volatility, taking a look at alternative ETF investment types or strategies could offer additional diversification or protection to your portfolios. In addition, during times of sharp market declines such as this one triggered by the COVID 19 coronavirus, alternative ETFs could also give a sense of how these alternative markets are performing in general.
Here are 5 alternative investment areas and some related ETFs to consider or rule out:
Real Estate
If you don’t have a large amount of capital you want to dump into physical property, and/or if being a landlord doesn’t sound appealing to you, ETFs provide a great alternative to direct real estate investments. Most real estate ETFs invest in various types of REITS (Real Estate Investment Trusts). REITs are companies that own, develop, or manage income generating properties. Since by law, REITs have to disburse at least 90 percent of their taxable income to shareholders each year in the form of dividends, they tend to be good for income generation strategies. VNQ, Vanguard’s Real Estate ETF is one of the larger, highly liquid funds that invests broadly across 12 different types of REITs. It has a low expense ratio of 0.12, a decent dividend yield of 4.61%, and is ranked #3 in Real Estate ETFs in PortfolioWise. PortfolioWise tracks underlying stocks as well as ETF price trends and uses that data to predict where the ETF’s price might be headed in the future. While it currently has negative returns and low relative strength vs the S&P 500 (specifically, SPY), it may be worth considering if the dividends adequately make up the performance.
Gold
A more traditional investment option is owning gold. Gold has been around even prior to the stock market; its longevity is unquestionable, and I assume it doesn’t need a description. Buying gold in my opinion however is more complicated than buying a gold ETF. Let’s look at GDX, the Vaneck Vectors Gold Miners ETF—this highly liquid ETF with a decent expense ratio is currently rated #2 in PortfolioWise. GDX tracks the overall performance of companies that are involved in the gold mining industry, including Newmont Corporation and Barrick Gold Corporation to name the top two. Since earlier this year, GDX started to outperform the S&P 500 (SPY) in relative strength, and it is currently up just under 70% over 1 year. For more details on including gold ETFs in your portfolio, you can read What about Gold, Marty? by my colleague Carlton Neel.
Peer to Peer (P2P) lending
So this one actually surprised me, but yes, as of May last year, Amplify launched a peer-to-peer and crowdfunding ETF, LEND, which holds 34 companies that operate platforms that facilitate P2P lending or provide the technology that enables operation of these platforms. Crowdfunded peer-to-peer lending is a relatively new concept that has grown in popularity over the last 15 years. Crowdfunding is considered to be a higher risk investment, as the individuals or companies that seek crowdfunding are often looking for these types of loans because they might not have been able to qualify through more traditional methods, which implies they might have a higher risk of defaulting. In order to compensate for the higher risk, investors are rewarded a higher interest rate, but as stated before, their chances of repayment are not as high.This riskiness might be why, since inception, LEND is down almost 50%. While LEND doesn’t yet have enough history to have a rating in PortfolioWise, Consumer Finance as an industry (in which many of LEND’s top holdings lie), is currently weak according to PortfolioWise.
Long/Short strategy
Less of a theme, but one strategy that can be used as an alternative to holding long positions in the market, is a long/short strategy. ETFs employing this investment strategy take a long position in underpriced stocks while at the same time selling short overpriced stocks. One example that is particularly applicable during the social-distancing mandate is CLIX, the Proshares Long Online/ Short Stores ETF. This ETF takes 100% long positions in leading retailers that primarily sell online or through other non-store channels and combines that with a 50% short position in those that rely primarily on physical stores. This ETF in particular has been up over 30% over the past year, and has a very strong relative strength vs the S&P 500 (SPY). While this type of strategy isn’t a direct alternative to the market, it offers a hedge that could protect a portfolio against the losses that an ETF long on retail would not be able to do. This also doesn’t have a rating in PortfolioWise given its more complex structure, but I can see from the underlying holdings that it leans bullish.
“Annuities”
Most ETFs track a specific index or benchmark. However, there is a unique group of defined outcome ETFs that are managed more actively and act more like structured notes or certain annuities than traditional index funds. These types of ETFs are also called “structured” or “buffered” ETFs. The Innovator defined outcome ETFs function similar to structured notes to buffer against losses at three levels. For example, the base option protects against a 9% drop. The catch however, is that while there is a cap in losses, there is also a cap on gains. Therefore, the holder doesn’t earn more than a certain amount even if the market goes higher. Also there is no guaranteed return similar to a traditional annuity structure. PAPR, Innovator S&P 500 Power Buffer ETF—April is one such ETF with a fairly large AUM. The expense ratio at 0.79 is somewhat higher than other ETFs, so advisors will need to assess if it’s worth the tradeoff.
This is just the tip of the iceberg! Outside of fine art, for which I actually couldn’t find an ETF, most alternatives to the market have an equivalent ETF that offers some exposure along with the innate benefits of lower costs and ease of purchase that comes with ETFs. With a robust screening tool, you can slice and dice the ETF universe to find less popular alternatives that might offer the diversity, exposure, or protection that fits what you’re looking for.