Financial advisers are increasingly using 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 LLC.
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 expected to increase only by 9% over the same time period.
The same reasons advisers use ETFs in traditional asset classes, such as stocks, are seen as driving their preference for alternatives ETFs, said Steven Sixt, a senior project director at Cogent.
Those features typically are lower costs, increased liquidity and greater transparency.
Long/short commodity and currency strategies were the two alternatives in which advisers showed the most interest in accessing through an ETF, according to the report.
The preference for currency ETFs could be explained 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.”
Multistrategy and managed-futures funds are the two alternatives strategies that advisers prefer to use mutual funds to access, perhaps because of the noticeable lack of those strategies in an ETF.
There is only one managed-futures ETF available, the $149 million WisdomTree Managed Futures ETF (WDTI), while there are dozens of managed-futures mutual funds on the market.
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Ms. Papagiannis doesn't expect there to be many 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 is lifted, it is unlikely that 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 using alternatives, down from 78% last year.
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