Advisers plan to increase their use of alternative ETFs at twice the rate of alternative mutual funds over the next two years; overall alternatives use slipping.
Advisers are increasingly turning their attention to exchange-traded funds for their alternative strategies even as interest in alternatives seems to be slowing down, according to a new report by Cogent Research.
The use of alternatives ETFs among advisers with $5 million or more in assets under management is expected to increase by 17% over the next two years, according to Cogent's 2012 Alternative Investment Trends report. The use of alternatives in mutual funds is only expected to increase by 9% over the same time period.
The same features that drive advisers to use ETFs in traditional asset classes, like stocks, are seen as driving the preference for alternatives ETFs, said Steven Sixt, senior project director at Cogent. Those attractive features are typically lower costs, increased liquidity, and greater transparency.
Long/short commodity and currency strategies were the two alternatives advisers showed the most interest in accessing through an ETF, according to the report.
The preference for currency ETFs could be driven by the amount of control they give an adviser versus a currency mutual fund.
“If you're going to use a currency ETF you have to have a view on which currencies you think are going to outperform,” said Nadia Papagiannis, an alternatives analyst at Morningstar Inc. “There aren't any actively managed currency ETFs or diversified currency ETFs so it's up to the adviser to pick the right currency,” she said.
Multi-strategy and managed futures funds are the two strategies advisers prefer to use mutual funds to access, perhaps because of the noticeable lack of those strategies in an ETF.
There's only one managed futures ETF available today, the $149 million WisdomTree Managed Futures ETF ticker:(WDTI), while there are dozens of managed futures mutual funds on the market.
Ms. Papaginnis doesn't expect there to be a rash of ETF launches in those categories anytime soon. The Securities and Exchange Commission has banned the use of derivatives, which alternatives strategies use heavily, in ETFs since 2010. Until that's lifted, it's unlikely many ETF sponsors will roll out those types of alternatives strategies.
Overall, Cogent found the use of alternatives falling slightly among advisers.
According to Cogent, 74% of advisers with more than $5 million in assets are currently using alternatives, down from 78% last year.
