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Using ETFs to invest in alternative assets
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Amid growing consumer interest in alternative investments, financial advisors say it’s important to find the right way to invest.
Alternative investments are a broad category that covers many assets outside traditional holdings of cash, stock and bonds. Alts include private-market assets, real estate, commodities such as gold and oil, and cryptocurrencies, among others.
Investing in these products can entail added risks and complexities, advisors said. One smart way to get exposure to them is a more traditional vehicle: exchange-traded funds.
The strategy represents an intersection of investor interest. Investors have put more than $1 trillion into U.S.-based ETFs so far this year, on pace to set a new annual record, State Street Investment Management said earlier this month. Much of that inflow has gone to gold and crypto ETFs, other analysts recently told CNBC.
Younger people, especially, are expressing disillusionment with conventional holdings, a phenomenon experts have dubbed “financial nihilism.”
Two-thirds of Americans surveyed said investing success requires supplementing traditional assets, according to a new survey from Charles Schwab. Nearly half of respondents, 45%, said they are interested in owning alternatives, such as private equity, real estate partnerships and hedge funds.
Schwab’s survey, conducted this spring, polled 2,400 people: a sample of 2,000 adults, plus an additional 200 Gen Z respondents and 200 cryptocurrency investors.
Shifting regulations may also allow more people to access a wider variety of alternative assets.
President Donald Trump signed an executive order in August designed to make it easier to get alternative products into workplace retirement plans. Meanwhile, the U.S. Securities and Exchange Commission recently made changes that could speed the launch of spot crypto ETFs.
‘Boring investing still works’
Using ETFs to get exposure to alts can help you sidestep some of the complexities of investing in such assets directly — namely, a lack of liquidity, said Cathy Curtis, the founder and CEO of Curtis Financial Planning in Oakland, California.
“These [private] investments often have multi-year lockup periods, limited redemption windows or depend on the underlying fund liquidating its holdings before investors can get paid out,” said Curtis, a member of CNBC’s Financial Advisor Council.
ETFs that hold these less-liquid assets, however, can typically still be traded freely throughout the day and during extended hours.
Curtis recommends limiting alternative investments to between 10% and 15% if you have a large portfolio, and to less than 5% if you have a smaller nest egg.
Those who are investing to buy a house, send their children to college or retire one day may find traditional stocks and bonds are still a better bet for the bulk of their portfolio, said Andy Reed, head of behavioral economics research at Vanguard.
“Although 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 putting money into a broad basket of stocks is highly profitable over the long term. If you invested just $1,000 in the S&P 500 on Feb. 1, 1970, you’d have more than $379,000 as of Oct. 20, according to Morningstar Direct. A $1,000 investment in the index on Jan.1, 2020 would be worth over $2,200 on Oct. 20.
“Boring investing still works,” Curtis said.
