Alternative Strategies In ETFs Vs Mutual Funds

November 17, 2016

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article features Clayton Fresk, CFA, portfolio management analyst at Georgia-based Stadion Money Management.

As is probably no surprise to readers of this website, the push toward using ETFs over mutual funds in a portfolio is ever-growing. Asset flow data exhibits a rather large swing in assets away from mutual funds toward ETFs. And with added pressures from fee compression and the Department of Labor, along with continued innovation in the ETF market, this trend does not appear to be slowing.

However, there are some asset classes that are not currently well-represented in ETF-land; namely, alternatives. When I speak of “alternatives” here, I am not referring to products like alternatively weighted equity ETFs. Rather, I am looking at what Morningstar classifies at the global level as an alternative, which includes categories such as:

  • Long/Short Equity
  • Managed Futures
  • Market Neutral
  • Multi-alternative
  • Option Writing

While there has been innovation in alternative ETFs, usage thus far is not to the level of their mutual fund counterparts. In the following, I will compare and contrast the ETF versus mutual fund universe, and highlight some potential areas where the mutual fund universe may have an advantage over ETFs and vice versa.

When looking at the percentage of assets in alternatives in both the mutual fund and ETF universes, the numbers appear somewhat close, with 1.31% of mutual fund assets in alternatives compared to 1.91% of ETF assets.

However, the alternative classification also includes trading tools, which encompasses leveraged/inverse ETFs and volatility ETFs. Since these are not normally held as part of a long-term allocation, we can narrow the scope of this comparison to include only the previously mentioned categories.

After applying this filter, alternatives make up about 1.10% of the mutual fund universe as compared to only 0.12% of the ETF universe. These are not exactly staggering numbers on either front, but based on these standards, alternative ETF usage as a whole is miniscule compared to mutual funds.

Even based on just the number of funds available in these categories, there are many more options (for better or worse) in mutual fund land:


  Mutual Fund ETF
Long/Short Equity 127 19
Managed Futures 54 5
Market Neutral 50 9
Multi-Alternative 140 8
Option Writing 50 5
TOTAL 421 46


However, as can be said about many things in life, it is about quality, not quantity.


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