The Next Investing Frontier: Liquid Alternative ETFs
Think back to your desires five years ago. As you’ve changed and the world around you has shifted, chances are your desires have also evolved. Similar progressions can be seen in the investing realm.
As investors have become more sophisticated, they have sought securities that provide:
- Enhanced transparency
- Lower fees
- Increased liquidity
This changing behavior paved the way for emerging investment opportunities, including liquid alternative ETFs. In today’s infographic from IndexIQ, we explain what liquid alternative ETFs are, explore their benefits, and discuss how to use them in a portfolio.
What Are Liquid Alternative ETFs?
In order to define liquid alternative ETFs, it’s easier to break the term into two parts: liquid alternatives and ETFs.
Liquid alternatives are baskets of securities with exposure to alternative strategies. They can be accessed through ETFs, mutual funds, or closed-end funds with daily liquidity. Alternative investments are any asset that is not a stock or bond, such as commodities, real estate, or private equity.
ETFs are baskets of securities that trade on an exchange. They can contain various asset classes including stocks, bonds, commodities, or a mixture.
The benefits of ETFs have been combined with the benefits of liquid alternatives to form a relatively new investment opportunity: liquid alternative ETFs.
Liquid alternative ETFs are the subset of liquid alternatives that trade on an exchange. However, they are not widely used yet. In a recent survey, only 8% of institutional investors currently use them, or have used them in the past. Why aren’t more investors adding them to their portfolios?
Misconceptions about Liquidity
Simply put, there’s limited usage because investors lack understanding of the asset class. In fact, institutional investors view “liquidity during market stress” as the #1 disadvantage of liquid alternative ETFs.
In reality, liquid alternative ETFs are sufficiently liquid in most market conditions. ETFs benefit from two layers of liquidity: the liquidity of the ETF itself, and the liquidity of the underlying securities, known as implied liquidity.
Implied liquidity is accessed through market makers, typically large banks, that facilitate investor fund flows. If there is:
- Excess demand: Market makers buy the underlying securities, and sell ETF units.
- Excess supply: Market makers buy ETF units, and sell the underlying securities.
When investors sell ETF units for extended periods of time, market makers have many options at their disposal:
- Sell the individual underlying securities, adjusting their pricing to ensure profitability
- Hold ETF units and their underlying securities until the selling pressure dies down
- Hedge their risk by purchasing derivative instruments or ETFs from other market segments
This range of options ensures liquid alternative ETFs remain liquid, even in volatile markets.
Liquid alternative ETFs offer several key benefits for investors looking to branch out from their traditional portfolios.
The average expense ratio for all 55 U.S. alternative ETFs is just 1.04%. In comparison, hedge funds charge an average management fee of 1.3%—plus a 20-30% performance fee.
In contrast to some alternative investments, liquid alternative ETFs provide a high degree of transparency in terms of investment strategy, holdings, reporting, and fees.
Liquid alternative ETFs have exhibited low correlations with traditional asset classes. Historically, this has provided increased diversification and mitigated risk.
In addition to their many benefits, liquid alternative ETFs are quite versatile in their applications.
Liquid Alternative ETFs in Practice
Institutional investors use this asset class in three main ways.
- Core Component: Investors use liquid alternative ETFs strategically as a long-term, diversifying portfolio component.
- Transition Management: While cash and money market funds are the most common transition vehicles, alternative ETFs provide efficient market exposure at a reasonable cost.
- Fund-of-funds replacement: Many institutional investors use fund-of-funds in their alternative portfolios, but this strategy brings additional fees, a lack of transparency, and potential overdiversification. Liquid alternative ETFs are a compelling replacement.
Whether an investor has short-term or long-term needs, liquid alternative ETFs are a useful tool.
Poised for Growth
With numerous benefits and applications, liquid alternative ETFs are gaining traction. In fact, the market is expected to grow nearly 2.5x by the end of 2020, from $47 billion to $114 billion.
As more institutional investors gain an understanding of this versatile asset class, they will be poised to implement a powerful tool that helps them achieve their clients’ goals.
Visualizing Copper’s Global Supply Chain
Copper is a global industry, from the mines of South America to refineries in Asia. However copper’s supply chain has several inherent risks.
Copper is all around us: in our homes, electronic devices, and transportation.
But before copper ends up in these products and technologies, the industry must mine, refine and transport this copper all over the globe.
Copper’s Supply Chain
This infographic comes to us from Trilogy Metals and it outlines copper’s supply chain from the mine to the refinery.
Copper Deposits Around the World
Copper is a mineral that comes from the Earth’s crust. However, natural history did not evenly distribute it around the world. There are certain geological conditions that need to happen to make an economic deposit of copper.
There are two primary types of copper deposits:
- Porphyry Copper Deposits
These copper ore deposits form from hydrothermal fluids coming from magma chambers below the copper deposit. These are currently the largest source of copper in the world.
- Sediment-hosted Copper Deposits
These are copper deposits that occur in sedimentary rocks that are bound by layers. They are formed by the cooling of copper-bearing hydrothermal fluids.
Copper-containing rock or ore only has a small percentage of copper. Most of the rock is uneconomic material, known as gangue. There are two main copper ore types in mining: copper oxide ores and copper sulfide ores.
Both ore types can be economic, however, the most common source of copper ore is the sulfide ore mineral chalcopyrite, which accounts for ~50% of copper production.
Sulfide copper ores are the most profitable ores because they have high copper content, and refiners easily separate copper from the gangue. Sulfide ores are not as abundant as the oxide ores.
Copper Trade Flows
While copper is a global business, there are clear leaders in the production and refinement of copper based on geology and demand. Chile is the major source for copper, exporting both mined and refined copper.
In a list of the 20 biggest copper mines, 11 reside in Chile and Peru accounting for 40% of mined copper. Meanwhile, China is a leading importer and exporter of refined copper, and it’s home to 9 of the 20 biggest copper smelters in the world.
However, this concentrated geography of supply creates risks for the the copper trade.
While Chile is one of the richest sources of copper in the world, the mining industry has exploited copper deposits to the point where the grade or quality of the copper ore is declining.
Codelco, the national copper miner of Chile and the world’s largest producer of copper, plans to spend $32B by 2027 to extend the life of its current mines and maintain its copper output.
In addition to declining grades, the geography of copper mining exposes the risk of supply disruption by natural forces.
The borders of Chile and Peru overlap the intersection of the Nazca and the South American Tectonic plates. Movement of these plates can produce powerful earthquakes.
According to one study, regions in Chile and Peru face a greater than 85% chance of a serious earthquake in the next 50 years, potentially disrupting copper mining operations. And according to Wood Mackenzie, a 15-day closure of copper mines in Chile and Peru could wipe out 1.5% of global annual production, or 300,000 tons of copper.
Falling grades and tectonic risk suggest that mining costs are likely to increase, making copper production more expensive and new discoveries more valuable.
Copper for the Future: New Discoveries
As economies grow and infrastructure needs increase, the demand for copper will grow. However, without new discoveries and sources of production, the world could face a shortage of the red metal.
According to data from S&P and the London Metals Exchange, the discovery of copper has not kept up with investment in copper exploration. If this trend persists, there will not be enough copper to replace current resources. On top of this, production from already producing copper mines face resource exhaustion and declining grades.
In order to maintain copper’s supply chain, the world needs new copper discoveries to ensure everyone has access to the materials and products that make modern life.
The Evolution of Higher Education: 5 Global Trends To Watch
Higher education is facing a new wave of change during the pandemic. What are the new priorities of 2,200 students and staff worldwide?
Higher education has gone through tremendous change during the COVID-19 pandemic.
In the face of uncertainty, it’s become evident that institutions with prior investment in digital technologies are emerging more agile and resilient. For example, online communities have helped 30% of students feel more connected with other students during this time.
Below we look at key data from the Global Higher Education Research Snapshot from Salesforce.org—in partnership with market research firm Ipsos—which reflects the new attitudes and priorities of 2,200 students and higher education staff worldwide.
To understand the shifting landscape across higher education, the survey explores five key trends: connection, trust, wellbeing, flexibility, and career.
1. Communications Help Students Feel Connected
In a typically isolating time, 75% of students wanted to receive weekly (or even more frequent) pandemic-related updates.
Why? These consistent communications from institutions actually help students feel more close and connected than in previous years.
This valuable sense of belonging is increasingly happening through online communities and other digital channels, but institutions have significant room left to grow in this area.
2. Has The Pandemic Fractured Trust?
The pandemic has worsened existing trust gaps that exist between university leadership, students, and staff. Part of this may be due to a lack of resources provided during imposed COVID-19 restrictions.
From personal protective equipment such as masks/hand sanitizer to transparent COVID-19 response plans, students also expect a myriad of resources from their universities to help put them at ease.
3. Juggling Wellbeing Concerns
Months of lockdowns and persistent social distancing have understandably shaken up students’ university experiences.
This is further compounded by various well-being challenges, from financial anxieties to juggling familial responsibilities.
On the bright side, such demand creates an opportunity for institutions to provide more tailored well-being support through digital-first channels.
4. Students Are Drawn to Online Learning
As the pandemic seemingly creates new challenges by the day, many students are seeking more flexible options for when and how they learn.
The good news? There’s already evidence of this shift. Over half (57%) of staff say their institutions are investing in new modalities or revenue streams to attract new students, including more flexible learning options.
5. Uncertainties Remain Around Future Plans
Economic changes are causing over half (51%) of students to reconsider their education plans. In addition, of the staff that expect to see an increase in adult learners’ enrollment, a majority believe it will come from pandemic-influenced needs to reskill or upskill in this climate.
This uncertainty also affects students’ future plans—60% are concerned about finding employment after graduation. They want to be set up for career success in all areas, yet only a handful of them have the appropriate resources available.
How The Trends Intersect
These above trends aren’t disparate to the student and staff experience. Rather, they are intricately linked with one another, as the following question illustrates.
The pandemic has reshaped expectations of higher education—but it’s also created an opportunity for institutions to accelerate their digital transformation.
By providing more wellbeing resources, career support, and flexibility, universities can drive trust and support their students’ needs in the new normal.
Want more details?
Visit Salesforce.org’s Global Higher Education Research Snapshot to learn more.
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