ETF 101 News:

Alternative exchange traded fund strategies are garnering a greater following as investors look for options other than traditional beta-indexing products to diversify their portfolios.

Alternative assets can be loosely defined as investments other than the traditional stocks, bonds and cash holdings. For instance, physical hard assets, like commodities or real estate, or varying investment styles, like hedge funds or private equity, fall under alternatives. Nevertheless, all these different investments share a goal of providing lower correlations to traditional holdings and even increase or stabilize portfolio returns.

Consequently, the low correlation provides investors with reduced exposure to systematic market risk factors, which include recessions, wars and interest rate risk, among others, that affect the entire market.

In a well diversified portfolio, investors should be able to vary holdings in a way that if one asset performs poorly, another asset may help offset the underperformer. Recently, more have begun to explore alternative assets as away to augment returns or diversify risk.

For instance, TD Ameritrade has found that their retail clients are increasing allocations to specialized markets, such as commodities and other alternative assets. [Online Broker Sees Demand for Alternative ETFs ]

Moreover, investors are beginning to expand into alternative indexing schemes as they move beyond traditional market-capitalization weighted methodologies. [Rising Interest for Alternative, ‘Enhanced’ Index ETFs ]

Nevertheless, potential alternative investors should be aware that these assets tend to be less liquid than most stocks and bonds. Additionally, while some alternative assets may help a portfolio weather a downturn, these assets could constrain upside potential during a strong bull rally in equities or bonds.

Some examples of the broadly defined alternative asset class include:

• PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC )
• iPath ETN AIG Commodity Index Total Return Medium-Term Notes Series A (NYSEArca: DJP )
• iShares GSCI Commodity-Indexed Trust (NYSEArca: GSG )

• PowerShares DB US Dollar Index Bullish Fund (NYSEArca: UUP )
• PowerShares DB G10 Currency Harvest Fund (NYSEArca: DBV )
• WisdomTree Emerging Currency Fund (NYSEArca: CEW )

• Vanguard REIT ETF (NYSEArca: VNQ )
• SPDR Dow Jones REIT ETF (NYSEArca: RWR )
• iShares FTSE NAREIT Mortgage REITs Index Fund (NYSEArca: REM )

• iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX )
• VelocityShares Daily Inverse VIX Short-Term ETN (NYSEArca: XIV )
• ProShares Ultra VIX Short-Term Futures ETF (NYSEArca: UVXY )

Advisors who are interested in learning more about alternative investments may sign up for the Alts Virtual Summit conference slated for May 15, 2013. The conference will provide information on various alternative investment strategies at the comfort of your own home or office.

For more information on ETFs, visit our ETF 101 category .

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.