Disclaimer: We are reader supported. We may be compensated from the links in this post, if you use products or services based on our expert recommendations.
In recent years, exchange-traded funds (ETFs) have gained popularity among investors as a way to diversify their portfolios. While they are mostly used as a way to invest in stocks and bonds, they are increasingly being used as alternative investments. This is because they provide exposure to a range of alternative assets, such as real estate, commodities, precious metals, and infrastructure, allowing investors to diversify their portfolios and potentially earn higher returns. In this article, we will explore the world of ETFs as alternative assets, their benefits, risks, and limitations, and their role in the future of investing.
Protect Your Wealth & Get Huge Tax Saving!
ETFs as Alternative Investments
Alternative investments are assets that do not fall under traditional categories like stocks, bonds, or cash. These typically have unique characteristics that make them different from traditional options. Some of their distinctive features are their potential for higher returns and increased diversification but they also come with drawbacks like lack of liquidity or high volatility. Common examples of these assets include real estate, commodities, precious metals, hedge funds, private equity, and venture capital.
Exchange-traded funds, or ETFs, were first introduced in the early 1990s in the United States. It is a fund that trades like a stock on a stock exchange, with the objective of tracking the performance of an index, commodity, or asset class. Because of the benefits they offer, they are becoming increasingly popular due to their low costs, diversification benefits, and ease of trading.
Some exchange-traded funds can be considered alternative assets because they offer exposure to a variety of asset classes that are different from traditional options such as real estate. This allows investors to gain access to these asset classes without having to invest directly in them, which can be costly or difficult to do for individual investors. ETFs as alternative assets also provide increased liquidity, transparency, and lower fees compared to traditional alternative options like hedge funds or private equity.
Examples of ETFs as Alternative Investments:
Commodity ETFs
These are funds that delve into physical commodities such as gold, oil, or agricultural products. They are a viable option for those who want to further diversify their portfolios and minimize risk as they offer potential inflation protection. Commodities tend to have a low correlation with traditional asset classes like stocks and bonds.
If you are interested in learning more about this type of fund, you can check out exchange-traded funds that track or invest in precious metals. They can be an attractive option for those looking for alternative assets that can potentially offer a hedge against inflation, currency fluctuations, and geopolitical risks. Aside from this, their benefits include:
Gold Companies to Work With
Overall, while precious metals may not offer the same level of liquidity as other alternative assets, they can still be an appealing option for their long-term store of value and a way to diversify their portfolio. If you are not sure where to start, we recommend that you contact our top three recommended gold companies. They can guide you in opening an IRA account where you can hold different assets such as precious metals and ETFs. They are the best in the industry and you can be assured you are in good hands.
Augusta Precious Metals (WINNER)
Augusta Precious Metals provides a variety of bullion for retirement accounts. They have a team of experts who provide guidance to their customers. Thus, it’s a no-brainer that their standout feature is their customer service and educational material on precious metals investing. This is perfect for those who are just starting out in this industry as the company has staff that can help in formulating a sound strategy.
#2. Goldco
Goldco specializes in gold and silver IRAs. Aside from their high-quality gold and silver bullion, they pride themselves on their transparency in fees and their free rollover process. Those who are looking to cut their costs can check out this company as they also waive fees for new members in their first year.
American Hartford Metals is a well-loved company for their no minimum initial investment required. You can also enjoy their services without paying anything upfront. Aside from this, it provides gold and silver bullion products that are IRS approved. If you are on the fence about putting your money into the industry, you can go with this company as there is no specific minimum order for their Gold IRAs.
Real Estate ETFs
These invest in real estate investment trusts (REITs) and other companies that own or manage properties. These funds allow you to place your money on the real estate market without having to buy your own physical land or properties. They can provide diversification and potentially higher returns than traditional real estate investments, they are perfect for those who rather not own properties that they need to maintain and manage.
Infrastructure ETFs
Infrastructure ETFs depend on companies that build, own or operate assets such as airports, highways, or utilities. These can provide steady income and potential for capital appreciation, as infrastructure assets tend to have long-term revenue streams. Thus, consider placing your money in these if you’re looking for a steady cash flow.
ETFs and the Future of Alternative Investments
As the popularity of exchange-traded funds continues to rise, experts predict that these funds will play an increasingly important role in the future of alternative investments. This is because they can be used to invest in a wide range of assets, including those that are typically associated with alternative assets. Because of their flexibility, they are likely to become an even more important part of the investment landscape in the years to come.
To add, technology is changing the way we invest, and ETFs are no exception. One of the most significant impacts of technology on these funds is the ability to trade them online, which has made it easier than ever for people to access these financing options. Additionally, technology has made it possible for these funds to track increasingly complex indices, which has allowed for the creation of new and innovative ETFs that invest in a wide range of assets. Thanks to this, it will be easier to put money into these funds and alternative assets in the years to come.
Other Types of ETFs
Index ETF
This is the most common type and it tracks the performance of a specific index, such as the S&P 500 or Nasdaq. It offers broad market exposure to different sectors of the economy or geographical regions. Aside from this, many prefer this type of fund since they are typically passively managed. This means they aim to replicate the performance of the underlying index rather than beat it.
Sector ETF
It is a fund that focuses on a specific sector, such as technology or healthcare. Also, It is a popular way to invest in a particular industry or sector without having to buy individual stocks. Thus, these can be useful for those who want to support specific sectors based on their market performance.
Currency ETF
For those interested in taking advantage of foreign currencies, currency ETF can be used for hedging or speculation purposes. It provides exposure to a particular currency without having to open a foreign bank account or trade currency futures.
Bond ETF
If you are interested in fixed-income securities, such as corporate bonds or government bonds, consider placing your money in bond ETFs. Through these, you gain access to the bond market without having to buy individual bonds. They can also be used to generate income or diversify a portfolio. Lastly, they also offer intraday liquidity, which means they can be traded throughout the day on an exchange.
Difference between ETFs and Mutual Funds
Similar to ETFs, a mutual fund pools money from multiple investors to purchase a portfolio of stocks, bonds, or other assets. The fund is managed by a professional portfolio manager who makes decisions on behalf of those participating in the fund. However, there are significant differences between these two types of funds that you should be aware of.
Trading Mechanism
Mutual funds are bought and sold through fund companies at the end of the trading day and at the net asset value (NAV) price. On the other hand, ETFs are traded on an exchange like a stock during the trading day and their prices fluctuate throughout the day based on supply and demand.
Cost
Mutual funds have higher management fees and transaction costs, which can add up over time and reduce overall returns. Exchange-traded funds have lower management fees and transaction costs due to their structure and trading mechanism.
Flexibility
ETFs offer greater flexibility in terms of trading and investing. They can be traded throughout the day at market prices, allowing you to take advantage of short-term market movements.
Benefits of ETFs
Diversification
One of the primary benefits of exchange-traded funds is their ability to provide diversification to portfolios. By investing in these funds that track a wide range of assets, investors can reduce their exposure to risk and increase their chances of achieving long-term returns. Additionally, they can be used to gain exposure to specific asset classes or sectors, which can help you to target your financial goals more effectively. All in all, diversification can help to reduce risk by spreading your money across different asset classes which is possible through exchange-traded funds.
Low Fees
ETFs are known for their low fees compared to other alternative assets such as those that invest in hedge funds or private equity. Thus, they can be an affordable way to hold alternative commodities, especially for those with little capital.
Tax Efficiency
They are typically more tax-efficient than traditional alternative assets such as mutual funds or hedge funds. This is because they generally have lower turnover rates, which can reduce the amount of capital gains taxes that an investor may owe.
Accessibility
They are accessible to a wide range of investors, including those with limited capital. This is because many ETFs can be purchased for the price of a single share, which makes them an affordable option for new
Easy to Buy and Sell
This kind of asset is easy to buy and sell since it can be held in most brokerage accounts. Thus, this makes them an accessible and convenient option for both individual and institutional investors.
Risks and Limitations of ETFs
While ETFs have gained popularity in recent years as an alternative investment, there are still risks and limitations to consider before investing. Here are some potential risks to keep in mind:
Market Volatility and Liquidity Risks
Like any investment, ETFs are subject to market volatility and can experience significant price swings. Additionally, some may have lower trading volumes and are not as liquid as other assets, which can make it harder to sell at a desired price.
Liquidity Risks
These funds trade on stock exchanges, and their liquidity depends on the trading volume and market conditions. Generally, they are liquid but In some cases, you may experience liquidity issues, which could lead to price fluctuations.
Hard to Understand
While they are generally considered more transparent than other investment vehicles like mutual funds, they can still be complex and difficult to understand for some. Additionally, some funds may hold underlying assets that are not as transparent, such as derivatives or foreign securities.
Regulatory Risks
They are subject to regulatory risks and may be affected by changes in tax laws or regulations. For example, changes to the tax treatment of certain assets could impact the performance of ETFs that hold them. While they are generally tax-efficient, you may still incur taxes on capital gains and dividends. In addition, funds that invest in foreign securities may be subject to foreign withholding taxes, which could reduce overall returns.
Tracking Error
Index ETFs, which aim to replicate the performance of their underlying index, may not be able to do so perfectly due to factors such as trading costs. As a result, there may be a difference between the fund’s performance and the index it tracks.
What Should You Do?
ETFs can be a great way for investors to gain exposure to alternative investments and diversify their portfolios. However, it's important to do your due diligence and understand the risks and limitations of these investments before making any decisions.
You should consider consulting with a financial advisor or doing extensive research before investing in these. It's also important to regularly monitor your portfolio and adjust your holdings as necessary to ensure that it remains aligned with your goals and risk tolerance.
Conclusion
ETFs have become increasingly popular as alternative investments due to their numerous advantages, such as low fees, tax efficiency, and diversification benefits. They offer individuals the ability to gain exposure to a wide range of asset classes and strategies, including real estate, commodities, and infrastructure.
However, you should be aware of the risks and limitations of investing in ETFs, including market volatility and liquidity risks, lack of transparency, and regulatory risks. It's important to carefully consider one's investment goals, risk tolerance, and time horizon before putting money in these funds as alternative assets.
Overall, they have the potential to be an important component of a well-diversified portfolio. As technology continues to advance and new funds emerge, investors can expect the growth of ETFs as alternative investments to continue.
