Equity markets have had a good run lately. However, this good news obscures a basic fact: equity markets have not been kind to buy-and-hold investors over the past thirteen years. While the recent bull market is welcome, it would be a mistake to assume we are now facing a period of sustained low volatility. Instead, investors need to adapt, much as institutional and high-net-worth investors have over the past several years, by adopting strategies and utilizing tools like alternative ETFs that are designed to smooth out the ride even in bumpy markets.
To understand the perspective of today's investors, it is important to recall that investors who bought and held a portfolio that tracks the S&P back in 2001 would barely be ahead today, even after the recent run-up. That reality has pushed many out of the markets entirely. According to the Investment Company Institute, the percentage of American households invested in domestic stocks has fallen every year since 2008 to a low in 2011 of 46.4 percent.
Many investors have fallen into a dangerous trap of waiting for things to return to “normal” - that is, the market environment of the 1980s and 1990s. The reality, of course, is that the double digit returns and historically low levels of volatility of this period were outliers. The fair weather conditions for stocks we saw in those years may now be marked by bigger and more frequent market hurricanes.
To thrive in this environment, investors need access to new tools that allow them to build modern portfolios capable of weathering market storms. Finding the true diversification needed to do so isn't easy. The old mix of stocks and bonds certainly doesn't cut it. Many asset classes once considered to be “non-correlated” have recently moved in lock step with traditional assets.
Real diversification strategies require alternative investments—asset classes and strategies that provide exposures that are less correlated with stocks, U.S. bonds or cash. Alternatives include asset classes like real estate, commodities, precious metals, currencies, volatility, and private equity; and strategies that are dynamic and focused on absolute returns, such as equity long/short, relative value, and merger arbitrage.
Investment portfolios with alternatives have helped investors manage risk while pursuing their return objectives or aim for a higher expected return for a target risk level. Historically, such alternative investments were the exclusive domain of institutional investors and high-net-worth individuals who could overcome the traditional barriers of entry like long lock-up periods and large minimums. That is slowly changing.
Alternative ETFs give investors access to alternative investment strategies with the liquidity, transparency and low costs investors have appreciated in traditional ETFs. The rise of these products is leading to a welcome rise in the adoption rates of alternatives among advisors and investors. A recent Morningstar survey found that 65% of advisers surveyed said that alternatives are as important as or more important than traditional investments.
At ProShares, we have been providing alternative investment strategies to investors seeking to manage risk and enhance returns since 2006 across a range of asset classes. Recently we have significantly expanded our alternatives line-up to include new asset classes like global fixed income, volatility and inflation, and added ETFs that deliver dynamic alternative strategies. For example, we have a hedge fund replication ETF, a merger arbitrage ETF and an ETF that provides an alternative means of getting large cap equity exposure through an index that uses long and short positions to outperform the market.
In our opinion, accessing alternatives isn't just the smart thing to do – we believe it is the right thing to do. There is a moral imperative on the part of the industry to help investors and their advisors adjust to the reality of today's financial markets. The smooth ride of the 1980s and 1990s is unlikely to return anytime soon. By embracing strategies that improve portfolio management, educating investors on the benefits of alternatives and the ways in which they can be accessed, the industry can help investors navigate the choppy waters of today's market and build wealth for stronger financial futures.
Michael Sapir is the Chairman and CEO of ProShare Advisors LLC, ProShares' investment advisor. ProShares offers the nation's largest lineup of alternative ETFs.
Investing involves risk, including the possible loss of principal. ProShares are non-diversified and entail certain risks, including risk associated with the use of derivatives (swap agreements, futures contracts and similar instruments), imperfect benchmark correlation, leverage and market price variance, all of which can increase volatility and decrease performance. For more on correlation, leverage and other risks, please read the prospectus. There is no guarantee any ProShares ETF will achieve its investment objective.
Carefully consider the investment objectives, risks, charges and expenses of ProShares before investing. This and other information can be found in their summary and full prospectuses. Read them carefully before investing. Separate ProShares Trust II prospectuses are available for Volatility, Currency and Commodity funds.
Michael Sapir is chairman and chief executive of ProFund Advisors LLC.
