Using ETFs to invest in alternative assets
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As consumer interest in alternative investments grows, financial advisors say it’s important to find the right way to invest.
Alternative investments are a broad category that encompasses many assets beyond the traditional assets of cash, stocks, and bonds. Altcoins include private market assets, real estate, commodities such as gold and oil, and cryptocurrencies, among others.
Investing in these products may entail additional risks and complexities, advisors said. A smart way to gain exposure to these is through a more traditional vehicle: exchange-traded funds.
The strategy represents the intersection of investor interests. State Street Investment Management said investors have invested more than $1 trillion in U.S.-based ETFs so far this year, setting a new annual record. he said earlier this month. Other analysts recently told CNBC that much of this inflow is going into gold and crypto ETFs.
Young people, in particular, are expressing frustration with traditional conglomerates, a phenomenon experts call “financial nihilism.”
Two-thirds of Americans surveyed said investment success requires backing traditional assets. a new survey From Charles Schwab. Nearly half of respondents, 45 percent, said they were interested in owning alternatives such as private equity, real estate trusts and hedge funds.
Schwab’s survey, conducted this spring, surveyed 2,400 people: a sample of 2,000 adults plus 200 Gen Z respondents and 200 cryptocurrency investors.
Changing regulations could also allow more people to access a wider range of alternative assets.
President Donald Trump signed an executive order in August to make it easier to include alternative products in workplace retirement plans. Meanwhile, the U.S. Securities and Exchange Commission recently made changes that could accelerate the launch of spot crypto ETFs.
‘Boring investments still work’
Using ETFs to gain exposure to altcoins can help you avoid some risks. Cathy Curtis, founder and CEO of Curtis Financial Planning in Oakland, Calif., cited the complexity of investing directly in such assets, namely the lack of liquidity.
“These [private] “Investments often have multi-year lock-in periods, limited redemption windows or are tied to the underlying fund liquidating its assets before investors are paid out,” said Curtis, a member of CNBC’s Council of Financial Advisers.
But ETFs holding these less liquid assets can generally be freely traded throughout the day and for extended hours.
Curtis recommends limiting alternative investments to 10% to 15% if you have a large portfolio, or less than 5% if you have a smaller nest egg.
Andy Reed, Vanguard’s head of behavioral economics research, said those investing to buy a home, send their kids to college or someday retire may find that traditional stocks and bonds are still a better bet for the bulk of their portfolios.
“While there is constant noise in the investment landscape, chasing fads or the latest headlines can negatively impact an investor’s portfolio in the short and long term,” Reed said.
History shows that investing money in a broad basket of stocks is highly profitable in the long run. If you had invested just $1,000 in the S&P 500 on February 1, 1970, you would have had more than $379,000 as of October 20, according to Morningstar Direct. A $1,000 investment in the index on January 1, 2020 will be worth over $2,200 on October 20.
“Boring investments still work,” Curtis said.
