Morningstar, one of the investment-industry’s most trusted names, partnered with Maryland-based ProShares, the biggest issuer of leveraged and inverse exchange-traded funds, to launch the ProShares Morningstar Alternatives Solution ETF (ALTS).
The new ETF is a “fund of funds” and invests in other ProShare products, thus providing a wide exposure to the liquid “alternative investment” niche with a single exchange-traded fund.
The passively-managed fund tracks the Morningstar Diversified Alternatives Index, an index that employs a broad range of alternative strategies based on a proprietary momentum-type model that is rebalanced monthly to better respond to changing market conditions.
Current allocations include exposure to seven different alternative investment strategies including long/short equity (24.46 percent), hedge fund replication (22.19 percent), managed futures (18.18 percent), global infrastructure (15.87 percent), merger arbitrage (10.89 percent), global listed private equity (5.84 percent) and 30-Year TIPS/Treasury Spread (2.58 percent).
The weightings can vary between 5-10 percent from their long term targets and the maximum exposure to an index component is capped at 30 percent. The current overweighting suggests long-short equity is most attractive niche among the strategies. The small allocation to breakeven inflation (TIPS-Treasury spread) show inflation in the US is expected to remain benign in the near-term.
While managed-futures have historically provided risk-adjusted returns comparable to equities with low correlation to stock and fixed-income markets, long/short equity have proven effective in damping market risks.
ALTS can be attractive to investors that are looking to allocate a portion of their portfolios to alternative strategies that are generally uncorrelated to conventional asset classes, but lack the resources and capability to sift through the plethora of products and strategies available out there.
The fund is likely to face competition from existing products such as PowerShares Multi-Strategy Alternative Portfolio (LALT) and IQ Hedge Multi-Strategy Tracker (QAI).
The fund has an annual expense ratio of 0.95 percent. However, in an attempt to boost after-fee returns and attract potential investors, all investment advisory and management fees have been waived till 9/30/2016.
Disclosure: No holdings