Cutting Through the Noise: Putting Alternative ETFs to Work

Every week brings a new reason to second-guess portfolios, whether it’s inflation, geopolitics, the “AI trade” or an unwind in something that looked stable until it didn’t. The noise is constant, and it can push investors into the wrong decisions at the wrong time. 

That’s why it can be helpful to look beyond traditional broad equity, style, sector, bond, and credit ETFs and consider additional exposures that better fit specific portfolio needs. Today’s deep ETF market offers a wide range of options designed to deliver distinct sources of risk and return, tools that can be deployed differently depending on the market environment and an investor’s objectives. Alternative ETFs, for example, can provide differentiated return drivers with daily liquidity, transparency, and the flexibility to size and rebalance as needed. The goal isn’t simply to have an “alternatives” allocation. To maximize these tools, they should be used intentionally, as precise exposures selected for a specific role in the portfolio. 

How Non-Traditional ETFs Can Be Used as Portfolio Enhancers

With the explosive growth in ETF offerings, product options are plentiful, but investor education on implementation has not always kept pace. A simple framework can help.

1. Clearly define the goal

Alternatives are not a single bucket. They are strategies with different return drivers. Common approaches include managed futures, option-based income or buffers, long-short, market neutral, commodities or real assets, and alternative credit. The key question is what the allocation is meant to do. Is it meant to diversify core stock and bond risk, hedge a specific vulnerability, generate income with defined trade-offs, reduce drawdowns, or smooth overall volatility? When the job is clear, the right product becomes easier to identify, and the chance of disappointment is reduced.

2. Don’t assume correlation is constant

Diversification is regime-dependent. Sometimes bonds hedge equities; sometimes they don’t. The same is true for alternative ETFs: Some behave defensively in one environment and pro-cyclically in another. The discipline requires focusing on what actually drives returns such as equity beta, credit spreads, carry/liquidity, trend persistence, or volatility risk premia. Rather than asking whether an ETF is “non-correlated” in general, ask non-correlated to what, in which regime, and why? That framing helps investors avoid “false diversifiers” that look helpful in calm markets but converge with risk assets under stress.

3. Know what you own and manage it

Alternative ETFs are accessible, but they’re closer to strategies in a wrapper with moving parts than simple building blocks. Know the exposure engine (options, futures, swaps, cash securities), expected behavior in stress (convexity, crisis alpha, correlation drift), structural costs (fees, roll costs, option premia, financing), and how the strategy rebalances (rules-based, discretionary, volatility-targeting). Most importantly, be explicit about its role in your portfolio, whether it’s a core diversifier, tactical sleeve, income overlay, or drawdown tool. This clarity helps with sizing and sets the right standard for evaluating success.

Tools Worth Considering

I have had the opportunity to manage the strategy behind New York Life Investment Management’s flagship passively managed alternatives ETFs, QAI and MNA, both launched in 2009 and subsequently modernized to reflect today’s investment landscape. As markets have evolved and the set of investable building blocks has expanded, we have continually updated our approach by incorporating newer investment tools, advances in machine learning and other statistical techniques, and improved hedging and risk-management methods.

• QAI is a multi-strategy ETF designed to resemble a hedge fund portfolio, packaging a broad mix of alternative exposures in a single vehicle. It can serve as a core alternatives holding for investors seeking smoother returns and diversified sources of risk. Because it aims to reflect broad hedge fund trends, its beta and correlations can shift meaningfully as market conditions change.

• MNA is an event-driven strategy focused on global merger deal spreads, with returns driven mainly by deal factors such as timing, financing, and regulatory approvals rather than broad market trends. In more typical environments with steady deal flow and stable spreads, it can deliver smoother, carry-like returns than long-only equities. Sized appropriately, it can serve as a diversifier or defensive equity complement rather than a directional growth position.

Implementing the three steps outlined above, defining the objective, understanding regime-dependent correlations, and knowing the mechanics of what you own, can be challenging for the average investor due to complexity and the need for ongoing monitoring. This is where thoughtfully designed ETFs like QAI and MNA can help bridge the gap by packaging institutional style strategies into accessible, transparent vehicles.

Put the Framework to Work

The ETF landscape continues to evolve rapidly, bringing more creative and sometimes more confusing choices for investors. A simple framework helps cut through the noise: Start with the job, understand the drivers, and evaluate the mechanics. The goal is not complexity for its own sake, but exposures that can add differentiated return streams and, in the right role and sizing, potentially improve the portfolio’s risk experience over time.

To access the most up-to-date information about a specific fund, simply click on the fund’s name. This will take you to a detailed page that includes the prospectus, the fund’s investment objectives, its performance history, key risk factors, Morningstar ratings, and other essential details.