EC These Alt ETPs Are Proven Diversifiers

The actively managed Invesco Multi-Strategy Alternative Portfolio Fund (Nasdaq: LALT) is the linchpin of our fifth-place asset mix and relies on a combination of hedged equity and volatility strategies, currency forward plays and outright debt futures to keep correlations to a minimum.

In the table’s sixth slot is a portfolio constructed with the AGFiQ U.S. Market Neutral Size ETF (NYSE Arca: SIZ), a fund that buys small stocks and shorts large-cap names. Over the past two years, owning SIZ would have ratcheted down overall alpha to the greatest extent among the most-diversified portfolios.

Yet another long/short equity fund anchors the seventh-place portfolio, but the offsetting positions in the ProShares RAFI Long/Short ETF (NYSE Arca: RALS) include individual stocks that make up the RAFI 1000 Index and short exposure to the Russell 1000 Index. Essentially RALS is a bet on the outperformance of fundamentally weighted names over cap-weighted issues.

Sitting on our table’s eighth tier is a portfolio that includes the iPath U.S. Treasury Flattener ETN (Nasdaq: FLAT), a note that tracks the inverse strategy plied by STPP. FLAT’s objective is capital appreciation when the Treasury 2- to 10-year yield curve flattens.

The diversifying element for our ninth-place portfolio is the ProShares Inflation Expectations ETF (NYSE Arca: RINF), which tracks an index that sets long exposure to Treasury Inflation-Protected Securities (TIPS) against short positions in conventional T-notes of the same maturity. RINF tries to capture gains as inflationary expectations rise.

Last on our table is the only portfolio with primarily futures exposure. The First Trust Morningstar Managed Futures Strategy (NYSE Arca: FMF) is actively traded and allocates long and short positions among commodity, currency and equity futures.

What’s it all mean?

One thing is clear from our top-10 table: Diversification has NOT resulted in better gross returns. Not over the past two years anyway. The best three-asset portfolio’s average annual return lagged the benchmark’s by 89 basis points. Adding alternative exposures did, however, reduce portfolio volatility across the board and improve portfolio alpha half the time.

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Disclosure: None.

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