Download The Morningstar® Diversified Alternatives IndexSM

The Morningstar Diversified Alternatives Index
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There was a time when investing involved mostly stocks,
bonds, and cash. Today, hedge funds and other
alternative strategies have found their way into registered
mutual funds and exchange-traded funds available
to average investors. While a powerful option for
improving portfolio-wide risk adjusted returns, alternative
investments remain difficult for average investors to
define and implement as part of a diversified portfolio.
Alternatives: Definition and Properties
Morningstar defines alternatives as those strategies
(alternative alpha) or asset classes (alternative beta)
that provide:
r Unique sources of risk and return
r Correlation benefits with traditional stocks and bonds
r The potential for a superior Sharpe ratio (or risk-adjusted
return) in a portfolio
There are several takeaways from analyzing the various
alternative asset classes over the past 10 years. The
rotation in performance leadership across alternative asset
classes, as well as the notable divergences in risk and
correlation metrics, makes diversification among alternative
strategies essential. Our studies also show that once
alternative assets are introduced into an investment
opportunity set, the efficient frontier of possible portfolios
shifts outward and upward—that is, portfolios become
more efficient from a risk/return perspective.
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The Morningstar® Diversified Alternatives Index
The Morningstar® Diversified Alternatives Index
addresses the complexities of identifying an appropriate
mix of liquid alternative investments. Providing
diversification beyond traditional asset classes, the strategy
behind the index may be viewed as a completion
portfolio, which, if added to a portfolio of traditional asset
classes has the potential to improve the risk-return
profile of the whole portfolio. The index combines both
strategic and tactical asset allocation and includes
exposure to a diversified set of seven alternative asset
classes. It is a multi-alternative, optimized solution built on
Morningstar investment research, asset-allocation
expertise, and indexing experience that investors can use to
construct an alternatives allocation or analyze performance.
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Index Methodology
The Morningstar Diversified Alternatives Index integrates
groundbreaking optimization techniques developed
by the Morningstar’s Investment Management group. The
Morningstar Indexes team built this index using a
rules-based, five-step construction process, as shown in
Figure 1. The Index is constructed using seven alternative
ProShares exchange-traded funds to implement the
target asset class model. This opportunity set may expand
in the future under the authority of our Index Committee.
Figure 1: Index Construction Process
Step 1
Develop Capital Market
Assumptions
Step 2
Determine Strategic
Weights
Step 3
Apply Momentum
Overlay
Step 4
Construct the
Portfolio
Step 5
Monitor and Rebalance
the Index
©2015 Morningstar, Inc. All rights reserved. Morningstar and the Morningstar logo are either trademarks or service marks of Morningstar, Inc. Reproduction by any means is prohibited. While data contained in this report are gathered
from reliable sources, accuracy and completeness cannot be guaranteed. The publisher does not give investment advice or act as an investment advisor. All data, information, and opinions are subject to change without notice.
The Morningstar® Diversified Alternatives Index
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Momentum Overlay
At each monthly rebalancing, the index is tilted toward
asset classes that exhibit positive momentum signals in
their return distributions. This dynamic strategy recognizes
the tendency of returns to follow market patterns and is
designed to capitalize on these movements.
Monitor and Rebalance
The Index constituents are reviewed annually, adjusting
the policy weights based on updated capital markets
assumptions. The Index is rebalanced monthly, with the
base weights adjusted by a momentum signal. Adjustments
are made at the close of trade on the fifth business day
of each month and effective on the next business day. The
index is reconstituted each April.
About Morningstar Indexes
Because of our consistent and stable methodology,
objective rules, and a name that evokes trust
and confidence, investors use Morningstar Indexes to
understand and monitor global market performance.
Morningstar Indexes are licensed by institutions to create
distinct index-linked investments, such as exchange-traded
products, structured notes, collective investment trusts,
and derivatives, as well as to analyze performance and
make asset-allocation decisions across geographic regions.
Covering all major asset classes, our indexes include
global equity, fixed-income, and alternative index families
that are combined to form multi-asset class indexes.
Morningstar Diversified Alternatives Index
Asset Class
Index Constituent
Risk Mitigator/
Return Enhancer
Weights%
Annual
Return
Annual
Volatility
Sharpe
Worst
Ratio Drawdown
Breakeven Inflation
ProShares 30 Year TIPS/TSY Spread ETF (RINF)
Risk Mitigator
10
–2.9
9.5
–0.4
–35.2
Global Infrastructure
ProShares DJ Brookfield Global Direct
Infrastructure ETF (TOLZ)
Return Enhancer
9
14.9
12.7
1.1
–43.7
Hedge Funds
ProShares Hedge Replication ETF (HDG)
Risk Mitigator
20
4.7
5.6
0.6
–19.3
Listed Private Equity
ProShares Global Listed Private Equity ETF (PEX)
Return Enhancer
16
8.5
26.3
0.4
–81.1
Long/Short Equity
ProShares RAFI Long/Short ETF (RALS)
Risk Mitigator
18
5.0
10.7
0.4
–35.9
Managed Futures
ProShares Managed Futures Strategy ETF (FUTS)
Risk Mitigator
10
4.6
6.4
0.5
–12.2
Merger Arbitrage
ProShares Merger ETF (MRGR)
Risk Mitigator
17
4.4
4.6
0.7
–10.1
Morningstar Diversified
Alternatives Index
60% stocks
40% bonds
54% stocks
36% bonds
10% diversified alternatives
48% stocks
32% bonds
20% diversified alternatives
Annual Return
8.20
7.80
7.90
7.90
Annual Volatility
6.70
8.60
8.20
8.00
Sharpe Ratio
0.99
0.75
0.78
0.81
–17.80
–32.50
–31.10
–29.70
0.39
0.61
0.58
0.56
Worst Drawdown
Beta
Data from 01/2003 to 12/2014