When I have a little extra money to invest, I like the idea of trying something a little different. While most of my investments are very boring (think index ETFs and dividend aristocrats), I do have a few somewhat alternative investments in my portfolio — just for fun.
ETFs make it a little easier to get a bit out of your comfort zone and mix it up in your investment portfolio. If you have a little play money, and you are looking for some alternatives to stocks and bonds, exotic ETFs and alternatives can be one way to go.
Adding Commodities and Currencies to Your Portfolio
This year, I’ve been participating in an investment challenge with several other bloggers. It’s been a lot of fun, and I’ve been able to play around a little bit, trying things I wouldn’t normally do. One of the things I did was to buy shares of a commodity ETF.
Not only does this commodity ETF provide me with portfolio exposure to precious metals, but it also pays dividends. It’s been kind of a fun way to go about things. Unfortunately, it hasn’t been doing all that well, thanks to the fact that a relatively strong U.S. dollar has meant that commodities aren’t seeing a lot of gains. But it was a fun experiment on hedging, just in case things went south.
You can use ETFs to easily gain exposure to asset classes you wouldn’t normally trade, and do it with relative ease, since ETFs are traded like stocks on exchanges.
Another possibility is trading currencies using ETFs. There are a number of currency ETFs that allow you to add this bit of diversity (and volatility) to your portfolio. Boosting your inclusion of these somewhat alternative asset classes has the potential to add growth to your overall portfolio. It can be one way to further diversify, and step a little outside what’s considered “normal” with today’s investing portfolios.
However, it’s important to be careful when investing in commodities and currencies using ETFs. It’s important to understand that you aren’t actually investing in the commodities and currencies themselves. These ETFs follow certain investments, but they are derivatives and not direct investments. Additionally, it’s important to understand that you can run into trouble through something called contango.
Because commodities are futures-based, there is a chance that near-month futures end up being less expensive than futures that expire later on. This can mean that, during a roll in the ETF, there is a chance to sell low and then buy high. This is one of the risks you run into when you get a little more into these exotic ETFs that go beyond stocks and bonds.
If you decide to go this route, it’s important to understand the possibility of contango, and be prepared for it. You also need to be prepared for the fact that the underlying assets, especially currencies, are often viewed as more volatile than “standard” investments like stocks and bonds. You need the risk tolerance to handle these swings, which is why it makes sense to use money that you can afford to lose. It’s why I used “fun” money as part of the challenge, rather than committing funds that I’m planning to use to build my retirement future.
Real Estate ETFs
It’s also possible to add real estate to your portfolio through ETFs. Even if you don’t want to buy the property yourself, it’s possible to get exposure to real estate — including real estate in other countries — with the help of real estate ETFs. It’s even possible to find real estate ETFs based on REITs, allowing you access to a diverse set of real estate investments.
As with commodity and currency ETFs, though, it’s important to understand that you aren’t actually buying real estate. ETFs might following the underlying investments, and you might be getting exposure to real estate companies, but you aren’t actually buying real estate. It’s important to make that distinction.
ETFs make it easier to diversify your portfolio through exposure to asset classes that you might not normally gain exposure to. Because they are easy to buy and sell, there aren’t the same barriers to entry that you might see if you were actually investing in commodities or real estate. But there are still risks, and it’s important to understand them before you move forward. Rather than putting a large portion of your portfolio in these assets, it might make sense to limit your exposure to 10 to 15 percent devoted to alternative ETFs.