Alternative ETFs are on a tear this year, with Morningstar reporting $10.7 billion of net inflows through July. This comes as some semiliquid alternative funds, particularly private credit, struggle
Investors and financial advisors this year have turned to exchange-traded funds that invest in a variety of alternative strategies, even as many investors and advisors decide to flee alternative funds that have far fewer opportunities for investors to sell and cash out.
According to fund tracker Morningstar Inc., alternative ETF estimated net asset flows totaled $10.7 billion for the first seven months of the year, or more than four times the total amount of new money tallied last year.
Meanwhile, customers and clients of financial advisors sold back or redeemed $5.9 billion of shares to nontraded business development companies in the second quarter, according to alternative fund tracker Robert A. Stanger & Co. Inc., raising the total of investor funds sold back to companies to $12.7 billion this year.
Nontraded BDCs, sold for their high yields, have been an extremely popular alternative investment with advisors and clients in the past few years. Unlike ETFs, nontraded BDCs and other semiliquid alternative funds sold today have a redemption cap each quarter; that means clients can sell typically 5% of the fund’s NAV back to the company every three months. ETFs are traded on exchanges.
Industry executives said there was no one over-arching reason for the different directions in alternative funds flows – a huge increase for ETFs and sizable outflows for nontraded funds; but the disparity is an indication that clients and advisors are skittish about traditional bond investments, particularly as many believe interest rates could rise.
“People are freaking out about the traditional 60/40, stock/bond mix,” said Jason Kephart, senior principal, multi-asset manager research at Morningstar. “The 40 hasn’t worked for a while now.”
“It’s the story of people diversifying away from traditional fixed income,” Kephart said. “One of the reasons private credit funds and BDCs got so popular was due to traditional fixed income being challenged by rising interest rates.”
“The broader market has gone to cash for the short term,” said an alternative investment industry executive who spoke privately to InvestmentNews about the matter. “There’s a lot of noise in world, with Iran the loudest.”
Indeed, liquid alternative ETFs are having a renaissance; a few years ago it was a wasteland, executives noted. But will they perform?
“To my mind, the broader story is, yes, there’s a lot of money going to alternative ETFs, but will the returns be any good?” the executive said. “Remember back to the push of liquid alternatives after the credit crisis, and all the focus on long/short mutual funds.”
“None of them performed because they held too many public securities and too much cash,” the executive noted. “We’re in the same spot with these current ETFs.”
As investors and their financial advisors buy alternative ETFs, a few prominent funds in 2026 have emerged, according to industry executives.
Prominent among them is IALT – the ticker symbol for iShares Systematic Alternatives Active ETF.
Launched in December, the fund invests in “a range of global asset classes and a diversified set of alternative − or nontraditional − strategies that seek to provide total return in both periods of strong returns and periods of market stress,” according to Morningstar.
Not even a year old, the fund already had $5.6 billion in assets on August 24.
And Wall Street has taken a shine to ETFs with alternative strategies, which means financial advisors will see more pitches for such products from asset managers in the future.
Goldman Sachs Asset Management in August said it was expanding its footprint in options-based ETFs, agreeing to acquire NEOS Investments, a $30 billion income-ETF specialist, deepening a buildout that began with its purchase of Innovator Capital Management last year.
The combined platform from the deal will place Goldman among the top 10 active ETF providers by assets, according to the company.
The transaction, worth up to $2.25 billion in cash and equity, will fold NEOS’s 19 systematic options-based income ETFs into a platform that already includes Innovator’s defined-outcome lineup.
“As investor demand for active ETFs grows, NEOS’ disciplined investment approach is highly complementary to our capabilities across buffer, managed outcome, and income strategies,” Goldman Sachs’ chair and CEO David Solomon said in a statement. “Together, we will give investors a diverse toolkit for different market environments.”
Meanwhile, the differences – particularly expenses – between nontraded or semiliquid alternative funds like private credit BDCs and alternative ETFs or mutual funds remain stark.
“Investors used to mutual funds and ETFs who look at semiliquid options are in for sticker shock,” according to a report this June from Morningstar. “The average annual report net expense ratio, adjusted for borrowing costs, for semiliquid funds was just over 3 percent.”
“That number, however, understates the true costs on account of inconsistently disclosed incentive fees and, at funds of funds, acquired fund fees and expenses,” the report added.
“Semiliquid funds have more complex fee structures than mutual funds or ETFs,” according to the report. “First, many employ leverage or use debt or debtlike instruments to increase their asset bases. That leverage comes with costs. Semiliquid funds also often charge incentive fees, which can rival− or even exceed− management fees.”