Financial advisors are turning to this asset class for diversification and stability as uncertainty rocks markets

A recent survey indicates growing adoption of alternative investments among financial advisors seeking diversification amid geopolitical and market volatility, with increased allocation to options (17%), REITs (23%), and private debt (19%). Advisors are increasingly viewing alternatives as a complement to traditional 60/40 stock/bond allocations, with some shifting to models like 50/30/20 to incorporate structured notes, private credit, and commodity ETFs; ETFs like BTAL and CBLS offer retail investors access to these strategies, though fees and correlation to other asset classes remain key considerations.

Analysis

Financial advisors are increasingly integrating alternative investments into client portfolios, driven by a search for diversification amid rising geopolitical tensions, uncertain tariff policies, and a lackluster S&P 500 performance, which has only gained 2% year-to-date. A survey conducted by the Financial Planning Association and the Journal of Financial Planning between March 23 and May 4 revealed significant year-over-year growth in this area: over 17% of advisors now use options (nearly double from last year), 23% utilize individually traded REITs (up from 14.9%), and approximately 19% incorporate private debt (up from 12.5%). This shift is viewed as a natural evolution of traditional asset allocation models, such as the 60/40 stock/bond split, which is adapting to include alternatives to enhance portfolio consistency and reduce volatility. For example, some practices, like Ulin & Co. Wealth Management, have moved to a 50/30/20 model, allocating 20% to strategies including structured notes, private credit, private equity, real estate, and commodity ETFs. Key considerations for these investments include their correlation to other asset classes, use of leverage, liquidity, and fees. For retail investors, ETFs offer an accessible route into alternatives. Examples include the AGF U.S. Market Neutral Anti-Beta Fund (BTAL), which aims for negative beta and rose approximately 20% in 2022 as the S&P 500 fell over 19% (though it is down about 1% this year), and the Clough Hedged Equity ETF (CBLS), a long/short fund up over 8% this year after an 11% loss in 2022. Fee structures vary, with BTAL at 0.45% and CBLS at 1.90%, underscoring the need for careful selection based on strategy and diversification role.

Key Decisions for Investors

• Investors should consider allocating a portion of their portfolios to alternative investments to enhance diversification and potentially reduce volatility, particularly given current market conditions of modest equity returns and heightened geopolitical risk.
• Thorough due diligence is crucial when selecting alternative investments, focusing on their correlation with existing assets, the implications of leverage, liquidity constraints, and the impact of fees on net returns.
• For those seeking accessible entry points, evaluate alternative ETFs such as BTAL for negative market correlation or CBLS for hedged equity exposure, carefully analyzing their specific strategies, historical performance across different market cycles, and expense ratios before investing.