Alternative exchange-traded funds (ETFs) are minimally correlated to the broader market. The concept is that these ETFs have the potential to appreciate regardless of which way the market moves. While 2014 was kind to alternative ETFs, 2015 was not. Only three alternative ETFs delivered a positive total return for the year. What about 2016?
Market Neutral Momentum
QuantShares U.S. Market Neutral Momentum (MOM) was the best-performing alternative ETF in 2015, delivering a return of 23.5%. This ETF tracks the Down Jones U.S. Thematic Market Neutral Momentum Index, which is a long-short index that tracks momentum and is dollar neutral. (For more, see: Investing in Alternative Mutual Funds and ETFs.)
Before your interest piques and you think this could be a way to play the market regardless of which way it moves, there are few facts you should know. One, MOM depreciated 8.4% in 2014, indicating that there are no guarantees. Two, the expense ratio is 1.49%, which is considerably higher than the average ETF. Three, the average daily trading volume is miniscule at 7,154, making this an illiquid ETF. This means it will be difficult to get in and out when you want. These three factors are reason enough to avoid MOM in 2016, as well as beyond unless volume increases.
ProShares Global Listed Private Equity (PEX) delivered a total return of 3.5% for investors in 2015. This was the second best performance for all alternative ETFs, which isn’t inspiring. If you can’t find a way to return 3.5% per year regardless of what the market is doing, then you might want to turn your investment portfolio to a financial advisor. If your financial advisor can’t return 3.5% in a year regardless of what the market is doing, then it’s time to start looking for a new one. (For more, see: Top 3 Private Equity ETFs.)
As far as PEX is concerned, it tracks the LPX Direct Listed Private Equity Index, which tracks up to 30 qualified private equity companies. PEX depreciated in 2015, but the massive yield made up for that weakness. PEX currently offers a dividend yield of 12.54%. The expense ratio of 0.60% is also fair. On the other hand, the private equity market is overinflated, and the average daily trading volume for PEX is just 3,376. This is not an ETF you want to dance with in 2016.
The only other alternative ETF to deliver a positive total return in 2015 was PowerShares Active U.S. Real Estate ETF (PSR), which delivered a total return of 1.0%. This ETF tracks the performance of REITs and ROCS, the latter referring to Real Estate Operating Companies. (For more, see: What Are the Potential Pitfalls of Owning REITs?)
PSR comes with a dividend yield of 2.04%. The expense ratio is relatively high at 0.80% and the average daily trading volume is incredibly low at 1,981. The biggest problem, however, is that real estate is a deception at this time. Many investors will move from equities to real estate, not realizing that many of the bigger cities in the United States are in insane bubble territory due to speculators driving up prices. Once those speculators leave the market, the demand will plunge, leaving an oversupply and depressed prices. While equities isn’t where you want to be in 2016, it’s a safer alternative because they’re liquid, allowing you to move your money in and out when you deem appropriate.
The Bottom Line
Alternative ETFs might present a logical structure, but they lack liquidity, which will be imperative in 2016. The only thing worse than losing money on an investment is losing money on an investment and not being able to get your money out. As far as alternative ETFs not mentioned here, not one of them presents an intriguing investment opportunity at this time. (For more, see: Top Alternative Investments to the Stock Market.)
Dan Moskowitz does not have any positions in MOM, PEX or PSR.