Alternative Equity ETFs - Do They Deliver Value?

by: Brian Dightman

There are many alternative equity ETF investments available today but most have a limited history; only one was trading during the 2008 bear market. The limited trading history should not stop investors interested in the concept from investigating these investments further. This article will review the performance data between alternative equity ETFs and the SPDR S&P 500 (NYSEARCA:SPY) and iShares Core Total US Bond (NYSEARCA:AGG) ETFs.

The ETFs covered were selected based on the following criteria. Only investments structured as ETFs were considered. The ETF needed to be included in the 3 different databases I used for this article. Three years of history was preferred but one ETF was included with a shorter history based on its strong net asset growth since its launch in 2012. Trading volume and net assets were also a consideration.

The ETF investments covered in this article incorporate very different investment approaches. Here are short introductions of the ETFs:

The IQ Hedge Multi-Strategy Tracker ETF (NYSEARCA:QAI) tracks the IQ Hedge Multi-Strategy index which attempts to replicate the risk-adjusted return characteristics of hedge funds using multiple hedge fund investment styles. ETFs are the primary underlying investment.

The ProShares Large Cap Core Plus (NYSEARCA:CSM) tracks a long/short index of large cap stocks based on a set of rules to assign weights that add up to 130% long and 30% short exposure.

The Powershares S&P 500 Buy-Write ETF (NYSEARCA:PBP) invests in a portfolio of large cap common stocks it writes covered calls against which generate additional income but caps upside appreciation.

The AlphaClone Alternative Alpha ETF (BATS:ALFA) attempts to mimicking hedge funds' positions in US equities and can add a broad equity hedge if triggered by a sustained drop in equity prices.

Note: ALFA sounds a lot like the Global X Guru (NYSEARCA:GURU) ETF which tracks an equal-weight index that attempts to mimic concentrated equity positions taken by large hedge funds. GURU was not included in this report because it does not include a risk-management element.

There are many additional details to understand about each of these investments. Interest parties are encouraged to visit the sponsor's website for more detail.

We start by looking at some basic data for these ETFs. Definitions for data characteristics are provided at the end of the article.

Alternative ETFs Ave. Day Vol.* Closing Price* 2/28/14 Ave. Day $ Vol. Net Assets (Million)* Expense Ratio* Spread%*
QAI 138,200 $29.35 $4,056,170 $673 0.94% 0.90%
CSM 23,700 $88.78 $2,104,086 $233 0.45% 0.11%
PBP 120,100 $21.15 $2,540,115 $206 0.95% 0.20%
ALFA 28,300 $39.39 $1,114,737 $63 0.95% 0.20%
Data provided by, Marketsmith,    


  • The expense ratio for QAI, PBP & ALFA are each nearly 1%, very expensive for an ETF.
  • Average daily trading volume is really small for CSM and ALFA; somewhat improved when calculated based on dollar volume.
  • QAI is the only ETF that has been able to attract significant net assets. ALFA is off to a good start but will need to move above $200 million to be taken seriously, and even at that level will have limited liquidity.
  • The largest spread for the most liquid ETF, QAI really jumps out. At 0.90% investors that trade this ETF need to be careful, especially for larger quantities. Limits orders might be helpful trading QAI. For comparison, the spread on SPY is 0.01%.

A note on liquidity and ETFs: I understand the creation/redemption process for ETFs and realize that it is the liquidity of the underlying securities that really drive liquidity. That dynamic may not favor some of the alternative equity ETFs listed given the unique nature of their underlying investments. Even when the underlying securities are very liquid I would rather purchase and sell securities from a large pool of market participants versus a few market makers and authorized participants. Despite what ETF sponsors might communicate, I believe ETF liquidity ($ trading volume) is important.

Here is a look at the performance of each ETF as well as SPY and AGG.

Alternative ETFs Total Returns            
  2008 2009 2010 2011 2012 2013 2014 YTD
QAI     2.6% 3.8% 5.5% 1.3% 1.3%
CSM     14.2% 0.5% 16.7% 35.3% 1.0%
PBP -29.3% 24.0% 4.9% 4.5% 4.5% 12.9% 1.9%
ALFA           36.4% 4.6%
SPY -36.2% 26.4% 15.1% 1.9% 16.0% 32.3% 0.9%
AGG 7.4% 3.0% 6.4% 7.7% 3.8% -2.0% 1.9%

Here is a summary of the annual performance data over three years with max drawdown added.

Alternative ETFs 3 Year Return Data 3 YR CAGR TTL RT 3 YS Max Drawdown
QAI 2.9% 12.8% 7.20%
CSM 15.3% 80.4% 19.99%
PBP 6.7% 30.8% 14.35%
ALFA# N/A N/A 8.96% Vs. 7.35%
SPY 15.0% 78.4% 18.60%
AGG 4.2% 18.6% 5.14%
Data provided by  
# - Max Drawdown since inception May 31st, 2012 for both ALFA & SPY


  • CSM delivered returns that closely resembled SPY.
  • QAI delivered a max drawdown close to AGG but could not match AGG for 3 year performance. It also underperformed SPY by a very wide margin.
  • PBP underperformed significantly on the upside and only delivered a slightly smaller max drawdown.
  • ALFA has a great year in 2013 and is off to the strongest start in 2014.
  • It is not surprising that ALFA saw a larger max drawdown versus SPY for the same period given the underlying stocks held but it will be important for their hedging rules to perform well if the ETF is going to provide protection during sustained declines.

Here is a look at additional performance data for each ETF as well as SPY and AGG.

Alternative ETFs Yield SPY Corr AGG Corr Sharpe Ratio Volatility
QAI 1.25% 0.52 0.03 0.30 6.8%
CSM 1.21% 0.86 -0.33 0.86 16.8%
PBP 6.50% 0.87 -0.27 0.50 12.1%
ALFA 0.98% 0.80 -0.09 1.86 14.9%
SPY 1.80% 1.00 -0.33 0.84 16.7%
AGG 2.28% -0.33 1.00 1.05 3.5%
Data provided by      
Based on full calendar trading since 2010, except ALFA May 31, 2012


  • A significant amount of the returns from PBP appear to come in the form of yield, currently at 6.5%.
  • The lowest correlation to SPY comes from QAI which is exactly what you would expect from a hedge fund like ETF.
  • The highest Sharpe Ratio comes from ALFA and in its short history this ETF is on track to become a top performer on the upside. We will have to see if ALFA can minimize the impact of a sustained decline in the future.


QAI - Appears to be delivering what many traditional equity hedge funds are delivering; a low volatility, low return experience. To better evaluate this investment we would need to look at hedge fund index returns but so far it appears to be performing as expected. Traditional equity hedge funds indexes have also reported disappointing upside participation in the equity rally over the last three years.

CSM - With essentially 100% equity exposure (130% Long - 30% short) you would expect CSM to closely track SPY. The value in CSM is the indexes ability to identify the best set of stocks to lever up 130% and the best 30% of the index to short. If they deliver a superior selection process on both sides CSM should be able to deliver strong performance over SPY. To date it appears they have not been able to meet that goal.

PBP - Appears to be giving up a lot of the upside for only slightly less downside volatility. 2008 return was -29.3% versus 36.2% for SPY and max drawdown during the last three years was 14.35% versus 18.60% for SPY. Giving up so much upside performance seems like a very high price to pay for a 6.5% yield. You may find better results with a high-yield bond ETF.

ALFA - This is an ETF to watch. Similar in approach to Global X Top Guru Holdings on the long side, we will have to wait to see if ALFA and deliver downside protection when the time comes. There is some concern around the increased popularity of following hedge fund holdings.

There are other ETFs in the alternative equity category I would like to have featured. The iPath (Barclays) S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VQT) is the largest exchange traded product in the alternative category database at with an asset size at $835 million. I am uncomfortable with the ETN structure, essentially an unsecured debt of the issuer, in the current environment. The ProShares RAFI Long/Short ETF (NYSEARCA:RALS), based on the fine work of Rob Arnott and his team at Research Affiliates, would have been great to include but with asset size of just $43 million and average trading under 20k shares a day the ETF is not included in all the databases I referenced.

Of the ETFs reviewed QAI and ALFA appear to be the most promising. Two very different ETFs, neither of which has faced a sustained market decline. QAI is already delivering low volatility performance and appears to be structure well to withstand a sustained market decline. The key for ALFA's downside protection may be it's rules-driven relative price targets. Overall, I didn't find anything super compelling in any of the ETFs reviewed here. My favorite for the category is VQT, but I don't want to own unsecured debt from a British bank.

Data Category Definitions

Spread - uses the following definition: The difference between the highest price paid at which a market participant is willing to buy an ETF, and the lower price at which a market participant is willing to sell and ETF, averaged over the past 60 days, as a percent.

Correlation (NYSE:CORR) - The degree to which securities move in relation to each other from represented from +1 to -1. Perfectly positive correlated securities move in the same direction, perfectly negative correlated securities move in the opposite direction.

Sharpe Ratio - uses the following definition: Measures the reward per unit of risk. It is calculated as the annualized avg. Excess Return/Std Deviation of Excess Return. Excess Returns are calculated using the cash ETF Specified (SHY default). A negative Sharpe Ratio indicates that the mean return of the strategy was less than the mean cash return.

Volatility - uses the following definition: Volatility is the annualized standard deviation of daily returns.

Expense Ratio - uses the following definition: The net annual fee a fund holder pays to the issuer.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: No investment recommendations have been made in this article. Investing involves risk including the loss of capital. Conduct your own research before making any investment decision.