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Alternative ETFs and Risk-Adjusted Performance

Stocks in this article: BDCS CSM CSMA SPY

NEW YORK ( ETF Expert) -- In this commentary, I am choosing to look at some alternative asset exchange-traded funds. They are often misunderstood, rarely discussed in detail and they may go the furthest toward reducing overall portfolio risk.

If the "fit hits the shan" the way it did in the financial collapse of 2008, then most asset classes (e.g., most stock types, most bond types, most REITs, most currencies, most commodities, etc.) could depreciate significantly. Alternative assets may or may not do much better, but when it comes to a world where the Fed is likely to remain exceptionally accommodative, "alt assets" are worthy of discussion.

Here are three exchange-traded investments for tapping into a world of alternative possibilities:

1. ETRACS Wells Fargo Business Development Company Index Note (BDCS). Business Development Companies (BDCs) are similar to venture capitalists and private equity firms. In particular, there are roughly 30 or more publicly traded corporations that engage in lending at high yield rates to smaller up-n-comers; BDCs often garner equity stakes as well.

The Securities and Exchange Commission requires these BDCs to invest 70% of assets in U.S. companies, while distributing a minimum of 90% of taxable income in the form of dividends. Those distributions often lead to annual yields in the 7%-9% range for shareholders.

Not surprisingly, there are exchange-traded vehicles for BDCs. The unleveraged ETN from UBS E-TRACS, ticker symbol BDCS, is a means for accessing the alternative asset class. Capital appreciation may be a little light in 2013, though the 7% annualized yield is a nice offset; rising interest rates in the May-June period did not hurt BDCS more than the market at large. Moreover, the 50-day moving average has remained above the 200-day moving average since early in 2012.

Courtesy of StockCharts.com

2. ProShares Large Cap Core Plus (CSM). Before fees and expenses, CSM pursues the results of Credit Suisse's 130/30 Large Cap Index. The 130/30 paradigm has become increasingly popular in the alternative arena, where an index has total long exposure of 130% and total short exposure of 30%. In this vehicle, the 500 largest stocks comprise the universe where a rules-based ranking system determines which companies will make up the "long" and which will make up the "short."

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