Liquid-alternative exchange traded funds (ETFs) comprise only a small part of the ETF universe. Estimated assets under management for the group are just about $2 billion, with roughly $1 billion of that total in the IQ Hedged Multi-Strategy Tracker ETF (QAI) from IndexIQ.
The investment options for this category are expanding, though.
In October, Morningstar teamed with ProShares to launch the ProShares Morningstar Alternatives Solution ETF (ALTS). It’s a still a very small fund with $19 million of AUM in mid-February, according to the Morningstar data. But it’s an interesting development that signals growing interest in the category.
What’s intriguing from a portfolio construction perspective is that the two funds include different asset classes in their portfolio weightings. That variation could provide additional flexibility when considering alternative ETFs for client portfolios.
Alt Fund Overview
IndexIQ’s QAI aims “to replicate the risk-adjusted return characteristics of hedge funds using various hedge fund investment styles, including long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets,” according to its website.
QAI’s top fund holdings (as of Feb. 12) are Vanguard Total Bond Market, 20.0% weight; PowerShares Senior Loan, 9.2%; Vanguard Short-term Bond ETF, 9.2%; iShares Russell 2000 Growth, 6.7%; and iShares Core U.S. Aggregate, 5.9%.
The Morningstar Diversified Alternatives Index, on which ALTS is based, “is designed to provide diversified exposure to alternative asset classes while enhancing risk-adjusted portfolio returns when combined with a range of traditional investments.”
It allocates its holdings among several ProShares alternative ETFs that employ a range of strategies: hedge fund strategies (strategic weight: 20%); long/short equity (18%); merger arbitrage (17%); managed futures (10%); breakeven inflation (10%); global infrastructure (9%) and listed private equity (16%).
Why use only ProShares funds?
According to John Faustino, head of product management for Morningstar’s indexes business, it was a pragmatic decision. ProShare’s lineup of liquid alt ETFs fit with Morningstar’s goal of creating an investible product “on top of the index” and ProShares was “well-suited to execute on that,” he says.
The ProShares funds used in the strategy include: RAF Long/Short (RALS), with a current weight of roughly 21%; Hedge Replication (HDG), 19%; Managed Futures Strategy (FUTS), 24%; DJ Brookfield Global Infrastructure (TOLZ), 15%; Merger (MRGR), 15%; Global Listed Private Equity (PEX), 2%; and 30 Year TIPS/TSY Spread (RINF), 3%.