A guide to the 143 ETFs, LICs/LITs and REITS that can help diversify your portfolio

Alternatives have long been the domain of high net worth and institutional investors, with everyday investors effectively ‘locked out’ of these assets due to regulatory restrictions, high minimum investment amounts, and long lock-up periods for capital. But that’s been changing in recent years, as the advent of listed alternative products have made access to these products easier than ever.

Alternatives are an incredibly broad class though, often fuzzily defined and at times, complex or opaque. This guide aims to bring clarity to the various types of alternatives, provide insights on how they can be used in portfolio construction, and share a comprehensive list of listed alternatives available on the ASX and CBOE. 

What are alternatives?

Simply put, ‘alternatives’ generally refers to any assets that don’t fall under the three main traditional asset classes – listed equities, fixed income, and cash. Listed alternatives refers to vehicles providing access to these assets, which are traded on a securities exchange. In this case, either the ASX, or the CBOE.

There are two main types of vehicles that offer this access. Listed Invest Companies and Trusts (LICs and LITs), and Exchange Traded Funds (ETFs). The primary difference is that ETFs can create and redeem units at will, usually with the help of a market maker, which helps keep the Net Tangible Assets (NTA) and the unit price very close together. LICs and LITs, however, generally need to engage in a buyback or issue new capital in order to increase or decrease the number shares or units, which is not an automatic process. As such, the share price of LICs and LITs can differ markedly from their NTA.

For less liquid assets such as private equity or debt, an LIC or LIT structure may be preferable. When the underlying assets can be easily traded however, an ETF structure may be more attractive.

The landscape for listed alternatives

The first listed alternatives available in Australia pre-date the ASX itself. Australian Real Estate Investment Trusts (A-REITs) date back to 1971, when General Property Trust – now known as GPT Group – was listed. But with the exception of A-REITs, the sector was little changed for the next 40 years.

But in the early part of last decade, two key factors combined to kick off growth in the space:

1. The growing popularity of ETFs provided a new vehicle to access alternatives.
2. Low interest rates in the post-GFC world led to lower rates from traditional assets, creating interest in alternatives.

Across the ASX and the CBOE today, there are 69 ETFs and ETPs offering access to alternatives. Additionally, there are 43 A-REITs, 4 infrastructure funds, and 29 LICs and LITs.

Why consider alternatives?

The key benefit of alternatives is their low correlation to traditional asset classes – even those with similar risk profiles. One of the main goals of portfolio construction is to mix together assets that will perform differently in a wide range of market conditions, which helps to ‘smooth’ returns, ideally without sacrificing the overall performance of the portfolio. In academic terms, this means a higher risk-adjusted return.

Many alternative assets can be directed compared to a traditional asset class. Private equity and listed equities, for example, both offer part ownership of a company. But as private equity is not traded on an open market, prices are not subject to the whim of share traders on any given day.

Some alternatives have no direct comparison among traditional assets though, such as commodities and digital assets. Despite often being highly liquid (unlike private assets), they often have low or even negative correlations to listed equities and fixed income.

Additionally, some alternatives may offer high levels of growth or income. Investors in digital assets such as Bitcoin have seen stunning returns over the last decade, and gold has rallied over 30% in AUD terms this year. Private credit may offer higher yields than publicly traded fixed income, while strategies such as covered call ETFs can provide exposure to share, but use derivatives to sacrifice some growth for higher income.

Fundamentally, the attraction of alternatives is that they are different to traditional asset classes. And adding differentiated assets to your portfolio makes it more diversified.

The risks in alternatives

As with all things investing, there are downsides. Given the breadth of alternatives, it’s impossible to list every idiosyncratic risk, but these are some common risks not generally seen with traditional asset classes:

1. Illiquidity risk. Sometimes the underlying assets cannot be easily bought and sold, even if the listed product itself can be. If the fund or company needs to sell an asset to raise cash, it may not be able to do so quickly, or may have to accept a discount to the carrying value. This is generally more relevant to LICs and LITs rather than ETFs.
2. Repricing risk. Similar to illiquidity risk, this arises due to the lack of public market trading. If a public market doesn’t exist for an asset, it must be valued, usually by a professional valuer. This is often a somewhat subjective process, and may not align with what a buyer is willing to pay.
3. Derivatives risk. Some funds employ the use of derivatives such as options, futures, and total return swaps. While these instruments are often used to manage risk, the potential for loss can sometimes exceed the value of the investment.
4. Short selling risk. Many hedge funds engage in short selling – borrowing a share and selling it, with the intention to buy it back and return it later, hopefully after the share price has dropped. Short selling can produce theoretically infinite losses. In practice, the fund would receive a margin call after the losses become significant, but these can be destructive to returns.

In addition to the risks that are specific to alternatives, the risks seen in traditional assets often apply too.

Types of listed alternatives available in Australia

A spreadsheet containing the full list of funds mentioned below is available for download at the bottom of this article. 

Commodities

Commodities ETFs

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Source: ASX. As at 30 September 2024. Past performance is not an indicator of future performance. 

Real assets

Another straightforward class of alternatives, these funds provide exposure to three sub-classes:

1. Real estate. From houses to office buildings, warehouses, and shopping centres, real estate is one of biggest and most diverse areas within alternatives.
2. Infrastructure. This includes assets such as toll roads, power generation and distribution, and communications networks. The essential nature and wide use of these assets offers a unique return profile.
3. Natural resources. Rather than investing in commodities themselves, this involves investing in mining and energy companies. This is often undertaken by specialist managers with extensive experience in resources production.

Real Assets ETFs

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Source: ASX, CBOE. As at 30 September 2024. Past performance is not an indicator of future performance. 

Real Assets LICs and LITs

Hedge funds

This is another broad class of products with a diverse range of products within. While these products often hold traditional assets – or derivatives that relate to them – it’s their investment strategies that make them alternatives.

1. Long/short, market neutral, and absolute return. These are closely related strategies that usually invest in listed equities or debt. However, they also engage in short selling to reduce market risks or increase profits.
2. Geared. Geared funds usually hold equities or fixed income, but also borrow additional funds to increase market exposure. Some have moderate gearing levels, aiming to improve long term wealth generation, while others can be highly levered products aimed at short-term traders.
3. Short. These products aim to produce returns that negatively correlate with a given asset class or market. They offer investors a way to reduce risks if they own those assets already, and they allow traders to ‘bet against’ a group of assets. These often use derivatives such as futures to achieve this exposure.

Hedge Fund LICs/LITs

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Hedge Fund ETFs

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Source: ASX. As at 30 September 2024. Past performance is not an indicator of future performance. 

Private equity

Traditional private equity funds are usually divided into venture capital, growth equity, and leveraged buyouts. Within Australian listed alternatives however, it’s more diverse and mixed.

Among LICs and LITs, there are several private equity funds that have simply been packaged up into a listed structure. There are also several LICs that invest in a mix of private and listed equities – usually a mix of small cap growth, and direct investments in small unlisted growth companies. And finally, diversified trusts that hold a mix of funds and direct investments.

For those that prefer the ETF structure, the lone private equity ETF, issued by VanEck, is heavily weighted towards the world’s largest private equity managers such as Blackstone, KKR, Apollo Global Management, and Partners Group.

Private Equity ETFs

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Source: ASX. As at 30 September 2024. Past performance is not an indicator of future performance. 

Private Equity LICS/LITS

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Source: ASX, Morningstar. As at 30 September 2024. Past performance is not an indicator of future performance. 

For the purposes of the list above, LICs that invest in both public and private equity have been included if:

1. At least 30% of the portfolio is held in private equity, and
2. The company intends to make further investments in unlisted equities in future.

Private Credit

Private credit similarly has just one ETF, again issued by VanEck. Technically, this ETF doesn’t invest directly in private credit (which would be impractical in an ETF structure), but instead in companies that hold private credit in their portfolio.

Among LITs, the choice is greater. Of the half a dozen private credit LITs on the ASX, all but one were listed between 2017 and 2019 as yields on listed fixed income fell close to zero. These trusts tend to offer higher yields than traditional credit and bonds, with each one generally having a specialised niche they operate in, such as secured property lending, corporate loans, and residential mortgage-backed securities.

Private Credit ETFs

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Source: ASX. As at 30 September 2024. Past performance is not an indicator of future performance. 

Private Credit LICS/LITs

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Source: ASX, Morningstar, 360 Capital. As at 30 September 2024. Past performance is not an indicator of future performance. 

Digital assets

‘Digital assets’ is simply another name for cryptocurrencies. There are just five ETFs and no LICs or LITs that provide exposure to cryptocurrencies specifically. Four of these ETFs aims to track the price of Bitcoin, with the remaining one tracking the price of Ethereum.

While there are other ETFs that invest in listed companies in this sector, these don’t technically fall under alternative assets. 

Digital Assets ETFs

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Source: ASX, CBOE. As at 30 September 2024. Past performance is not an indicator of future performance. 

Diversified funds

While not a specific strategy itself, the final entry on our list includes LICs and LITs that invest in a range of alternatives – including any of the categories discussed above.

Diversified Alternatives LICs

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Source: ASX, Morningstar. As at 30 September 2024. Past performance is not an indicator of future performance. 

The value of listed alternatives

As alternative investments become more accessible, they open the door to new possibilities for everyday investors looking to diversify and strengthen their portfolios. By gaining a deeper understanding of the various options available, you can make informed choices that not only enhance your portfolio’s resilience but also potentially improve long-term returns.

Whether you're seeking growth, income, or simply a way to balance out traditional assets, listed alternatives provide a range of tools to tailor your investment approach. With the right mix of assets, you're better equipped to navigate changing market conditions and stay on course towards your financial goals.