Before discussing non-equity (non-stock) investment alternatives, it is best to lay the groundwork on the investment vehicle that RPM uses to purchase alternative securities, namely Exchange Traded Funds (ETFs). ETFs were first introduced in 1993. Since then, the number of available funds will has surpassed 1200. It should be mentioned that ETFs are available in almost every investment category (asset class) imaginable, including several varieties of bond/fixed income such as short term corporate bonds or long term treasury bonds. Within the last 10 years, there has been a profound shift by investment advisers away from mutual funds into ETFs. A few of the primary reasons for this change is because of their flexibility, clarity and tax management features.
Similar to individual stock trading, ETFs are priced/valued in real time and can be traded any time during the session, even non-stock ETFs. Advanced trading techniques can be executed with an ETF such as “Limit” or “Stop” orders. With a mutual fund, no advanced trading is allowed and regardless of when the buy/sell order is placed during the trading session, the fund is not priced or valued in exact terms until after the market closes. Thus, most clients are not aware of trade values until the following day.
ETFs provide a very clear picture of what the client owns vs. mutual fund ownership. This is because an ETF usually tracks a well known market sector or index such as U.S. Steel Manufacturers or Gold/Silver Bullion Holding Trusts. ETFs may also participate in very specific commodity futures such as Copper or Sugar. Whether the ETF is index or futures contract related (sometimes called an ETN or Exchange Traded Note), a client knows what they own in a much more transparent manner versus a mutual fund. Many consider this a key advantage in retirement portfolio diversification.
When speaking with prospects or clients that hold mutual funds external to RPM, it is always interesting to hear the responses when they are asked “what are the investments inside their mutual fund.” Almost no one knows this answer, except for the very savvy investor. Some owners of a mutual fund may recall the names of a couple particular holdings within the fund; however this can be deceptive. The reasoning is because of the high turnover (selling) ratios of many funds, which makes for a potentially unstable ever-changing porfolio. When a client owns a Precious Metal, Government Bond, or Agriculture related ETF, for example, the confusion just doesn’t exist because the portfolio is fixed and doesn’t change unless there is a formal announcement.
Generally speaking, ETFs allow your retirement investment advisor to more effectively manage capital gains taxes. This is because with ETFs, turnover (intra-fund trades) are usually quite low. With mutual funds, cash must be raised to handle shareholder redemptions. Thus, tax consequences are extremely difficult to control.
ALTERNATIVES TO THE STOCK MARKET
As we begin a brief discussion of alternative investments available through ETFs, its important to keep in mind that no matter which strategy is used (e.g. foreign currencies), there is a degree of risk associated with each investment, and only projected (not guaranteed) rates of return.
Sometimes called “Bear Funds” or “Short ETFs”, these inverse investments are designed to move in a contrary manner to the daily pricing of an index, such as the U.S. Dollar Index. In moderation, these investments can help investors make the best of a down market. Conversely however, the value of the investment will also decrease as the index it tracks is increasing in value. Although the investor reduces downside risk without enduring the tax consequences of selling, this strategy may not be suitable for everyone.
Opposite to a Short ETF/ETN strategy is a long (buy and hold) effort that can include investment categories such as farm land, corporate bonds, or even precious metals. Case in point, “commodity” ETFs may track a particular commodity index, or a specific commodity futures contract. A few examples of specific commodity indices would include Gold, Silver, Crude Oil, U.S. Gasoline, Copper, Sugar, or even Livestock.
Traditional investments (stock related) generally have a low correlation to common types of commodity investments. For example, if technology stocks are falling in value, there is little bearing on how agricultural ETFs will perform. This is not necessarily true when advisors purchase commodity equities (stocks) for their clients — exposure to commodities through ownership of firms that grow/manufacture or distribute the commodity. The most conservative approach to commodity investing, in the author’s opinion, is through the passive (non-active) strategy behind commodity indexes. These ETFs do not profit from short term or negative (short) price movements, and are related to long term exposures only.
In conclusion, many factors affect separate ETFs and commodities differently, such as supply and demand, market rates of interest/inflation, and the value of the U.S. dollar. As with any investment style or asset class, it is always recommended by Retirement Portfolio Management, LLC to diversify. We utilize an ETF portfolio mix of various commodities, fixed income/bonds, and Master Limited Partnerships while keeping our clients out of riskier type stock market securities. This provides our investors a moderately conservative way to achieve above average returns without the riskiness associated with owning high volitility investments.
NO PART OF THIS WORK MAY BE REPRODUCED OR TRANSMITTED IN ANY FORM, ELECTRONIC OR OTHERWISE, WITHOUT PRIOR WRITTEN PERMISSION OF RETIREMENT PORTFOLIO MANAGEMENT, LLC.