For years, many financial advisers recommended a mix of stock and bond investments to their average retail clients, including the standard 60/40 stock-to-bond portfolio.
Because of record high inflation and plunging markets, this age-old rule of thumb is becoming less relevant. To help their clients generate higher yields and diversify their portfolios, many financial advisers recommend key alternative investments like commodities exchange-traded funds (ETFs), business development companies (BDCs) and private equity.
According to a July 2022 Cerulli Associates study, polled advisers reported allocating an average of 14.5% of client assets to alternative assets, with many seeking to increase this amount to 17.5% over the next two years.
One of the highest performing sectors this year is energy, especially oil. The West Texas Intermediate (WTI) oil index is trading at approximately $90, despite trading at negative prices in April 2020. Another commodity that has seen increasing demand and prices is wheat.
Teucrium Wheat Fund WEAT is an ETF that invests in wheat futures contracts. Because it’s an ETF, investors can gain exposure to wheat via a brokerage account and trade commission free. Because of farmland shortages and the war in Ukraine, demand for wheat has skyrocketed. As a result of these factors, WEAT is up 14% year to date (YTD).
Invesco’s Dynamic Energy Exploration & Production ETF PXE invests in companies that are involved in extracting and refining crude oil. Some notable holdings include Valero Energy Corp. VLO and Phillips 66 Co. PSX. Despite the current bear market, this ETF is up an astounding 54% YTD.
See also: How to Buy Gold Bars
Business Development Companies (BDCs)
Despite rapidly rising interest rates, many corporate bonds still pay 2% to 3% yields, which are being greatly outpaced by inflation. Per the recent Cerulli Associates study, BDCs are one of the more popular alternative investments among advisers.
FS KKR Capital Corp. FSK is a popular BDC that is up approximately 4% since the beginning of the year. Like other BDCs, it offers an extremely enticing yield, which is currently 12%.
Many of these BDCs invest in private companies that the average investor doesn’t have access to. Because they’re publicly traded, this makes it easier to gain exposure to these up-and-coming private companies with sufficient liquidity.
Like BDCs, private equity investments have exposure to up-and-coming private companies like startups. In the past, this asset class has been traditionally reserved for wealthy, accredited investors because private equity companies have high management fees, high investment minimums and defined lock-up periods, which can be five years or more.
One of the main benefits of this illiquidity is that these investments are less susceptible to wild market swings. Luckily, you don’t have to be an accredited investor or have tens of thousands of dollars to invest in private equity.
StartEngine is a popular startup crowdfunding platform that lets investors invest in various industries including software as a service(SaaS), artificial intelligence (AI) and biotech for a low minimum investment of $100.
Related: How to Invest in Startups
Alternative Investments Booming During Current Bear Market
It’s no secret that the markets have been extremely volatile in 2022. High inflation, rising geopolitical tensions, record interest rate increases and plunging markets have prompted investors to seek refuge in other investments.
Traditional rules of thumb including the 60/40 stock-to-bond portfolio are becoming less relevant, especially because this model portfolio is set to have its worst-performing quarter since 2008.
Instead, advisers are recommending under-the-radar alternative investments, including commodities ETFs, business development companies and private equity.
Looking for ways to boost your returns? Check out Benzinga’s coverage of Alternative investments:
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