Alternatives ETFs Offer Bright Spots in Tough Market

Alternatives exchange-traded funds are doing largely what they are supposed to—and then some. 

These ETFs are diversifying investors’ portfolios this year. They are also handily beating the performance of mainstream rivals.  

All but three of the nearly 50 U.S.-listed alternatives ETFs have outperformed the Vanguard Total Stock Market ETF (VTI) this year, often by wide margins. Most broad asset classes have declined steeply in value this year. For example, VTI is down nearly 24% year to date as rising interest rates, inflation and war batter global equity markets.  

Alternative investments—things like hedge funds, commodities, options strategies and private equity—have largely been overlooked. Hedge funds and private equity funds typically require big upfront payments, while investing in options and commodities may be more complex for those who aren’t professionals  

U.S.-listed ETFs have pulled in roughly $425 billion year to date, but only $2.3 billion of that has flowed into the alternatives category, according to ETF.com data. This is despite top-performing alternatives ETFs notching returns as high as 80%. Investors are potentially missing out. 

Top Performers 

The $350.4 million Simplify Interest Rate Hedge ETF (PFIX) tops the alternatives category with a gain of nearly 81% so far this year. The actively managed fund is designed to hedge against increases in long-term interest rates through a portfolio of over-the-counter interest rate options. 

The fund performed unremarkably after it launched in May 2021 as there was nothing to hedge. Once the Federal Reserve started raising rates in March, PFIX took off.  

With the Fed appearing to likely to push ahead with further interest rate hikes, the fund may still have fuel in the tank.  

KraneShares, known for its ETFs that focus on China’s markets, also issues funds with alternative exposures through its KFA Funds white label unit.  

The $284.6 million KFA Mount Lucas Index Strategy ETF (KMLM) offers an index-based long/short managed futures strategy that provides exposure to the performance of futures contracts on 11 commodities, six currencies and five global bond markets. The individual contracts are equally weighted within their respective categories, with weights assigned to each of the three categories based on relative historical volatility. 

KMLM has returned 46% so far this year, crushing the S&P 500’s decline. The fund has been boosted by exposure to commodities and currencies, while the global bond market’s struggles have prevented gains as high as PFIX’s.  

KMLM began its passively managed strategy April 1, and the switch from an active long/short managed futures strategy has helped it beat the equity markets. Currently, its portfolio has short positions in six commodities futures and has short positions in all its currency and fixed income exposures.  

The $944.4 million iMGP DBi Managed Futures Strategy ETF (DBMF) is a long/short managed futures ETF that implements an active strategy seeking to mimic the performance of the largest commodity trading advisor hedge funds. The fund is up nearly 32% year to date.  

Like KMLM, the futures contracts it holds represent a variety of commodities and currencies, though its portfolio currently also includes futures on global equities and domestic fixed income securities. As of yesterday, it was short everything but S&P 500 futures. 

Final Thoughts 

With markets in turmoil, safe havens are hard to find. Adding to the global miseries, the International Monetary Fund, in its new outlook for next year, is predicting the weakest global growth since 2001. The “worst is yet to come,” IMF said. 

Now may be the time for investors to look beyond traditional asset classes in hopes of some return.  

Contact Heather Bell at [email protected]