Alternative ETFs: Always Know What You’re Buying

Three exchange-traded fund industry experts recently discussed how alternative ETFs work and what investors should look out for.

Jackie Chin, Managing Director of ETF Platform Management at Charles Schwab; Kevin DiSano, Executive Vice President at IndexIQ; and Mike McGlone, Head of Research at ETF Securities were a part of Charles Schwab’s most recent “Every Third Friday” conference call.

“In this market environment with stocks at all-time highs, bonds at all-time highs with interest rates where they are, it’s certainly a good opportunity to look at these types of investments,” DiSano said.

Alternative ETFs, which Chin describes as “a type of investment that’s uncorrelated to the market,” provide returns that are opposite of more traditional long-equity and fixed income investments.

“In short, it offers investors an opportunity to hedge risks and diversify their portfolio,” she said. Adding, “ETFs can democratize investing, making it easier to access alternatives.”

To explain alternative ETFs, Chin broke them down into two broad categories: commodities — the “more basic type of alternative investment” that includes things like precious metals, energy and agriculture — and “more sophisticated” products in the alternative space, like long-short strategy, hedge fund replication and merger arbitrage.

“It’s important that investors know that [ETFs] are not all created equal,” she said. “With any ETF, investors should really understand not only the strategy but the product structure before they buy. These products tend to be more complex and they can use things like futures, leverage, so they’re not for all investors.”

McGlone agreed with Chin on this, and added “Always know what you buy.”