Fidelity and BlackRock Are Creating More Alternative Investment Funds – Here’s Why

For decades, many retail investors spread their portfolios among standard choices like stocks, bonds and mutual funds that have exposure to those traditional asset classes. Currently, many traditional rules, including the 60%/40% stock/bond portfolio, are becoming somewhat outdated.

Looking to diversify away from traditional markets and beat inflation, investors, financial advisors and traditional brokerages are turning to alternative investments. These options may include derivatives such as commodity futures; private capital; blockchain; environmental; social and governance (ESG); and international investments.

Because of these factors, liquid alternative funds are on track to break last year’s record of $38.3 billion in net inflows.

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Alternative investments may justify higher fees

A few decades ago, it was not uncommon for stockbrokers to charge 8% per trade. The Internet, index funds and robo-advisors have changed the model, with most major brokerages offering commission-free trading in US stocks and ETFs.

Many financial advisors charge assets under management (AUM) fees, which can range from 0.20% to 2% to manage a client’s portfolio.

Currently, many advisors have to deal with fee compression, as the average client account fee in 2021 was 0.69%. Some investors rely on their own research or robo-like advisors IMPROVEMENT for financial planning. Betterment charges a fraction of the AUM fees that an advisor would charge, starting at 0.25%.

Many alternative investments, including private equity and real estate, require more strategy and can carry higher risks. Unlike index funds, alternative investment ETFs can be actively managed.

One of the main reasons brokerages are creating these funds is that they can justify higher management fees along with performance-based fees.

For example, ProShares Global Listed Private Equity ETF PEX is a popular ETF that invests in private equity companies and carries a great expense ratio of 2.67%.

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Brokers can diversify income streams

American stock mutual funds were very common in investors’ portfolios. Because of high fees, commissions and poor performance, many investors are choosing low-cost ETFs and index funds instead.

As a result, net inflows into long-term U.S. mutual funds have been negative for seven of the past eight years, according to the Investment Company Institute. A good portion of these inflows are being allocated to lower-cost ETFs and index funds, which are less profitable for brokerages.

Offering alternative investment funds provides these companies with different and more profitable revenue streams. Unlike the old mutual funds, alternative investment funds are seeing higher demand from both investors and advisors.

According to a 2022 CAIS Group survey, 34% of participating advisors felt that a traditional mix of stocks and bonds is no longer effective for investing.

Fidelity launched two alternative investment funds

Fidelity has recently established Fidelity Advisor Risk Parity Fund FAPZX AND Fidelity Macro Advisor Opportunities Fund (FAQFX).

Fidelity Advisor Risk Equity Fund (FAPSX)

This fund invests in US stocks, bonds, international equities and debt, exchange-traded products and mutual funds. It also has exposure to commodity futures.

The five classes of this fund – A, M, C, I and Z – have expense ratios ranging from 0.64% to 1.69%.

Fidelity Advisor Macro Opportunities Fund (FAQFX)

Like the Equity Risk Fund, the Macro Opportunity Fund has five classes – A, M, C, I and Z, with different expense ratios for the fund class. These range from 0.80% to 1.85%. It also seeks to provide investors with diversification from the traditional 60%/40% stock-to-bond portfolio.

The Macro Opportunity Fund differs from the Equity Risk Fund because it involves more leverage and uses a mix of long and short positions across asset classes. These strategies ensure that it is minimally linked to traditional capital markets.

Other asset managers are following Fidelity’s lead

In addition to Fidelity, other major financial institutions, including BlackRock and Invesco, have created more alternative investment funds. Some of these focus on specific points, known as blockchain or ESG.

For example, BlackRock recently launched iShares Blockchain and ETF Tech IBLC. This ETF invests in US and foreign companies that are involved in the development and innovation of blockchain, along with crypto-based technology.

Some of its greatest properties include Coinbase Global Inc. coins AND Marathon Digital Holdings Inc. MARA. Unlike other actively managed ETFs, it has a relatively low expense ratio of 0.47%.

In addition to blockchain, ESG is another growing area. It is becoming even more popular due to a growing interest in environmental sustainability and social causes.

A third of Millennial investors and 19% of Gen Z investors prefer to invest in companies that favor positive social change, innovation and sustainability. Some family names like Microsoft Corp. MSFT AND Apple Inc. AAPL qualify as ESG companies.

While companies must meet many criteria to be considered ESG, the main one is that the company is not involved in business activities in the following industries – alcohol, cannabis, weapons, gambling, nuclear power, oil and gas and tobacco.

of Invesco ESG NASDAQ 100 ETF QQMG tracks the Nasdaq-100 ESG Index and some of its holdings include Apple, Microsoft, DocuSign Inc. DOCU AND Zoom Video Communications Inc. PA. Since it is an index fund, it has a relatively low expense ratio of 0.20%.

In addition to this ETF, which launched in late 2021, Invesco offers other ESG ETFs, including ESG Nasdaq Next Generation 100 ETF QQJG AND Equal Weight ESG S&P 500 ETF RSPE.

Traditional brokerages are increasingly creating unique, alternative investments

The world and markets are changing rapidly. Traditional investment strategies like the 60% stock/40% bond portfolio are becoming obsolete, especially as this model is projected to have its worst quarter since 2008.

New industries including blockchain and ESG offer more innovation and investment opportunities, which explains why BlackRock has launched the iShares Blockchain and Tech ETF.

Other funds such as the Fidelity Macro Opportunities Fund are being used to provide diversification from standard asset classes such as US stocks and bonds, which have seen significant losses this year.

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