Fact checked by Vikki Velasquez
Key Takeaways
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True diversification requires more than just a portfolio of stocks and bonds.
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Alternative assets can be useful since they don’t respond to the same market impulses.
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Managed futures follow price trends across global markets and are driven by momentum.
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Commodity ETFs are tied to real-world supply and demand for physical goods and tend to move with inflation or resource scarcity.
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Each has its own pros and cons, so be sure you understand fully before investing.
Stocks and bonds have historically moved in opposite directions, which is why spreading money across both has long been considered a smart diversification strategy. But in those unusual times when both fall together, like in 2022, a traditional portfolio becomes vulnerable.
That’s why investors look to alternatives: investments designed to behave differently from stocks and bonds, with the goal of helping a portfolio weather the storm when markets get tough. The aim isn’t to beat everything—it’s to make sure everything doesn’t get hit at once. And that’s where products like managed futures, commodities, and volatility ETFs come in.
The Need for Alternatives
The 60/40 portfolio recommended for most investors has long run on a simple assumption: stocks and bonds move in opposite directions, so when one falls, the other cushions the blow.
Although that’s held up for decades, it’s become less reliable. Since the pandemic era, bonds are increasingly moving in tandem with equities—a shift that is especially pronounced during sharp equity selloffs, according to the International Monetary Fund.
Inflation shocks, like the one that hit in 2022, force monetary authorities to raise interest rates, which push down both stock and bond valuations, upending the inverse relationship.
“The key distinction was that the macroeconomic force was not a growth shock, but an inflation shock accompanied by rapid monetary tightening,” says Kayla Rae Fernandez, CFP, Financial Advisor at California Financial Advisors.
The upshot is that relying solely on stocks and bonds leaves a portfolio exposed to shocks if both move in tandem. The fix comes from assets with structurally different return drivers—investments whose performance is tied to entirely different economic forces, not just a different slice of the same market.
Important
“An investor should always start by understanding their desired role for alternatives in their portfolio, not the desired return,” according to Fernandez.
Managed Futures: Trend Followers in Any Market
Managed futures are systematic strategies that aim to capture market trends, up or down, across global asset classes, rather than relying on traditional buy-and-hold investing, according to Fernandez.
Managed futures can go long when prices are climbing and short when they’re falling, making them one of the few strategies that can benefit in either direction. For instance, they have shown competitive returns during market crises while the S&P 500 suffered.
“Managed futures tend to hold up, and sometimes gain ground, when stocks fall,” says Mark Fonville, CFP, president and CEO of Covenant Wealth Advisors, who describes them as one of the few alternative categories with decades of real research behind them.
The catch is that managed futures tend to struggle in flat, range-bound markets where no clear trends emerge. They work best as a complement to a core portfolio, not a replacement for them.
Commodities: Real-World Price Exposure
Commodities like oil and metals usually matter more when prices are rising or when there are supply problems, like energy shortages. If the price of gas or food jumps, commodities may move in ways that help offset some of the pain elsewhere in a portfolio, according to CME Group.
That said, they’re volatile and cyclical, so the relationship isn’t always clean.
“They worked well in 2022, when supply problems pushed prices up,” Fonville said. “They worked less well in other kinds of inflation.” Over long stretches, commodity prices have barely kept up with inflation, which makes them a portfolio diversifier, not a way to build wealth over time, he said.
The distinction matters: commodities aren’t a general hedge against everything, but rather a shock absorber for sudden, supply-driven price spikes.
Note
Commodities aren’t a general hedge against all types of inflation. Products like TIPS may also be needed.
Volatility Products: Insurance With a Cost
Volatility surges when markets hit turbulence, so ETFs that bet on volatility effectively move in the opposite direction of a falling stock market. The most common version is a VIX-linked ETF, which tracks the CBOE Volatility Index.
While that sounds like useful insurance, the trade-offs to owning these funds are significant enough that most financial advisors view them as short-term tactical tools rather than permanent portfolio holdings.
VIX-linked ETFs don’t actually own the VIX—no one can, it’s an index like the S&P 500.
“Instead, they hold VIX futures contracts and roll them forward over time,” Fonville said. “In most market conditions, the future-dated contracts cost more than the near-dated ones, so every roll loses money.”
That structural drag quietly erodes the value of these funds month after month, even when markets are calm. The result is that timing matters enormously, and getting it wrong is easy.
Warning
A VIX-linked ETF is a timing tool, not a hedge an investor should hold. It is a short-term bet on a spike in fear and market volatility that requires being right on timing.
What Makes These Assets Different
Each of the alternative categories covered here responds to a different set of economic forces. They are uncorrelated assets that behave differently precisely when traditional portfolios are under the most stress.
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Managed futures follow price trends across global markets and are driven by momentum.
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Commodity ETFs are tied to real-world supply and demand for physical goods and tend to move with inflation or resource scarcity.
It’s important to know that not all should be afforded similar weightings.
“Managed futures have decades of academic research behind them,” Fonville says. “Volatility products don’t have that kind of foundation. Most of them are structurally designed to lose money over time.”
Understanding what’s actually driving each one is the only way to know whether it’s earning its place in a portfolio.
Using Alternative ETFs in a Portfolio
The goal of adding alternatives to a portfolio is to complement core stock and bond holdings, not replace them. Even a modest allocation can meaningfully change how a portfolio behaves under stress, which is why how much to allocate matters as much as what you choose.
Fonville suggests allocating 10% to 20% of a portfolio to alternatives in order to make a difference in a downturn.
The other trap to avoid is buying alternatives because they recently outperformed. An alternative that had a strong year can look attractive for the wrong reasons, and buying in after the run has already happened is the kind of performance chasing that tends to hurt investors most.
“The whole point of adding alternatives to a retiree’s portfolio is to reduce the risk of running out of money in retirement, not to take a tactical position on where fear is heading next month,” said Fonville.
Important
Start by defining the job you want alternatives to do in your portfolio before deciding which ones to buy.
The Bottom Line
Traditional diversification has limits, and 2022 made that obvious. Managed futures, commodities, and volatility products each respond to different economic forces than stocks and bonds, which means they can diversify a portfolio when it matters most.
ETFs have made these strategies more accessible than ever, but accessibility doesn’t simplify the decision. Pair alternatives with your core holdings rather than replacing them, size them to actually matter, and resist the urge to chase whatever worked last year. Done right, alternatives can help a portfolio hold up when markets aren’t cooperating.
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