Alternative Strategies In ETFs Vs Mutual Funds

November 17, 2016



Here, the ETFs have a better range of volatility and correlation characteristics. Therefore, there may be a better opportunity to use an ETF than a mutual fund.

Stepping back to take a broader view, as I stated when holistically looking at an alternative, the goal often is to have a low correlation to equity markets without adding undue volatility.

Based on these criteria, there are a number of funds and ETFs that fall into the lower and left parts of the chart, meaning they: 1) have a negative correlation to the S&P 500 Index; and 2) have less than two-thirds the relative volatility of the S&P 500. 

  Mutual Fund ETF
Long/Short Equity 1 0
Managed Futures 3 1
Market Neutral 10 1
Multi-Alternative 4 0
Option Writing 1 0
TOTAL 19 2


That translates into an even lower number of ETFs that may meet the diversification qualities important to an alternative solution.

The last aspect that I will touch on is fees. In light of the continued pressure from the DOL, in many arenas, the switch from a mutual fund to an ETF can be warranted, or can almost be a no-brainer, given the (lack of) characteristic differentiation between the two.

However, in the alternative space, there does not seem to be the same 1:1 trade-off.

Said differently, there may be a very valid case to allocate to a mutual fund rather than an ETF in the alternative space, given the more beneficial factors a mutual fund can deliver despite what may be an only slightly higher fee versus what is available in ETF form.

While this may not always be the case as more ETFs come to market and the existing ETFs build a longer track record, at least for now, this could be one area where ETFs have not yet caught up to their mutual fund brethren.

The above constitutes the personal, professional opinion of Clayton Fresk, CFA, and does not necessarily reflect the views of Stadion Money Management LLC. References to specific securities or market indexes are not intended as specific investment advice. At the time of writing, Stadion did not own any of the securities referenced. Founded in 1993, Stadion Money Management is a privately owned money management firm based near Athens, Georgia. Via its unique approach and suite of nontraditional strategies with a defensive bias, Stadion seeks to help investors—through advisors or retirement plans—protect and grow their “serious money.” Contact Stadion at 800-222-7636 or


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