Alternative Investments
Energy programs
If you want to capitalize on emerging market demand for oil, natural gas, solar energy, and other natural resources, sector and industry-targeted funds (both mutual funds and ETFs) and separately managed accounts offer you exposure to the asset class. Alternative energy funds have popped up in the investment landscape as well, investing in stocks of progressive companies as a long-term play. Of course, these funds can be remarkably sensitive to commodity price swings.
Master Limited Partnerships (MLPs)
MLPs are “pipeline businesses” involved in the storage or transport of oil, natural gas or other refined petroleum products. They attract income-focused investors who want a hedge without a lot of risk. MLPs combine the tax structure of a limited partnership and the liquidity of a publicly traded security. You can invest in ETF’s and mutual funds devoted to them. From 2002-2011, the average yearly total return for MLPs neared 16%, compared to less than 5% for the S&P 500 and the Dow. They pay out nearly all of their free cash flow to investors in the form of quarterly distributions.
Principal-protected notes (PPNs)
These investment contracts guarantee the return of your invested principal as long as you hold the note until it matures. Risk-averse investors with medium or long-term time horizons look at PPNs, whose return at maturity is typically linked to the performance of an index fund or stock portfolio. The drawbacks of PPNs are their lack of dividend and interest payments and the tradeoff many of the investors end up making—forgoing some capital appreciation in exchange for the principal protection. PPNs and similar products can also carry high fees.
Real Estate Investment Trusts (REITs): allow you to invest in commercial real estate without getting involved in property management. An equity REIT offers you a fractional ownership share of a real estate portfolio that may include shopping malls, apartment buildings, office complexes and other kinds of high-quality commercial properties. REITS have no investment minimums, so the small investor is welcome.