Risk aversion and steady income are on investors’ radars this year thanks to the elevation of risk-off trade sentiments in the investing world. The year started on a weak footing thanks to a harsh winter and geo-political issues, and eventually succumbed to deflationary worries in Europe, slowdown in China, QE wrap-up and speculation on interest rate rise in the U.S. All these stoked concerns about the future of the stock and bond markets.
In such a backdrop, investors are increasingly looking for low-risk and alterative products to safeguard their portfolio from volatility. Probably, sensing the market nerves, ProShares recently rolled out Morningstar Alternatives Solution ETF (ALTS) on October 9, 2014 (read: Endure Market Volatility with These ETFs).
ProShares Morningstar Alternatives Solution ETF
The ETF looks to track the Morningstar Alternatives Index. This index gives investors exposure to alternative asset classes in order to strengthen risk-adjusted portfolio returns against a basket of traditional investments.
The index has exposure to an inclusive set of alternative ETFs involving strategies like long/short equity, merger arbitrage, managed futures, hedge fund replication, private equity, infrastructure or inflation-related investments.
In short, the product is an ETF of ETFs. As of October 7, 2014, the index invested 24.14% of its assets in ProShares RAFI Long/Short ETF (RALS), 22.1% in ProShares Hedge Replication ETF , 18.1% in ProShares Global Listed Private Equity ETF ), about 16.1% in ProShares DJ Brookfield Global Infrastructure ETF (TOLZ) and about 11.1% in Merger ETF (MRGR) (read: New Tax Inversion Rules Put Merger Arbitrage ETFs in Focus).
The utmost exposure of an ETF in the index is capped at 30%. The ETF charges 95 bps in expenses on a yearly basis.
How Does It Fit in a Portfolio?
Alternative solutions have become the name of the game lately as the ETF industry is fast developing and niche themes are taking over plain vanilla equity funds.
The global economy has been shaky this year with heightened geo-political concerns, rough recovery, varied monetary policies of developed nations, fading craze for the emerging countries, end of the massive monetary stimulus in the largest global superpower, and strength in the greenback and the resultant weakness in commodities.
Thanks to this backdrop, investors just can’t be content with market-cap oriented ETFs that normally fail to ride out market upheavals. Equity and bond markets are showing extreme responsiveness to the Fed’s interest rate policy.