Financial Advisors Lean Into Alternative ETFs

As equity markets hover near records—in stride with bond yields remaining stubbornly high as part of the Fed’s battle with inflation—financial advisors are making an easy case for diversification into alternative investment strategies.

“I believe alternative investments are one of the best ways to have a truly diversified portfolio,” said Scott Bishop, managing director at Presidio Wealth Partners in Houston, Texas.

While every investor portfolio is unique, savvy financial advisors are finding strategies within the exchange-traded funds space that can help tamp down volatility or increase performance as needed.

Bishop referenced the anomaly of 2022 when both stocks and bonds finished the year in negative territory, which left much of the financial planning industry questioning the value of the traditional portfolio of 60% stocks and 40% bonds.

“The traditional non-correlation between stock and bonds is gone, so you get no traditional hedge by holding just traditional stock and bond investments,” Bishop said. “The same can be said between domestic and international stock investments.”

Alternative ETFs Gain Appeal

While stock and bond markets today aren’t moving in lockstep as they did two years ago, a lot of advisors and portfolio managers are learning from the past and searching for opportunities to enhance performance or hedge risk.

As an example of what the alternatives space has to offer, the VS Trust -1X Short VIX Futures ETF (SVIX), which is betting against market volatility, is up nearly 15% this year and has gained 130% over the past 12 months.

Source: etf.com

Two other ETFs betting against volatility represent the second- and third-best alternative ETF performers over the past 12 months.

The Volatility Shares -1X Short VIX Mid-Term Futures Strategy ETF (ZIVB) is up 15% this year and up 78% over the past 12 months.

The ProShares Short VIX Short Term Futures ETF (SVXY) is up 12% this year and up 68% over the past 12 months.

Of course, alternative investing is a vast category that goes well beyond just shorting market volatility.

The Simplify Interest Rate Hedge ETF (PFIX), which uses options to bet on rising interest rates, is up 24% this year and up 42% over the past 12 months.

Then, there’s the Convergence Long/Short Equity ETF (CLSE), which is an active strategy that includes long and short exposure to the equity market, is up 22% this year and up 41% over the past 12 months.

Cole Wilcox, chief investment officer at Longboard Asset Management in Phoenix described the trend toward alternatives as “portfolio climate change.”

“Due to inflation and other macro factors, we have seen rising correlations between stock and bond markets around the world, which is reducing portfolio diversification,” he said. “Building an all-weather portfolio of multiple alternative investment strategies can bring back unique sources of returns and reliable diversification to portfolios.”

But this isn’t to suggest anyone should be casually jumping into the alternatives universe, which can include some of the most aggressive strategies.

Consider, for example, the other side of the bet against market volatility. The VS Trust 2X Long VIX Futures ETF (UVIX), which offers leveraged exposure to increased market volatility, is down 47% this year and has lost 93% of its value over the past 12 months.