Where alpha meets access: unlocking alternatives in active ETFs

Key points:

• Investors face a growing need for new sources of return as historic market concentration and persistent macro uncertainty challenge portfolios.
• Liquid alternative strategies unlock differentiated sources of return that are less dependent on the direction of broad markets.
• The iShares Systematic Alternatives Active ETF (IALT) is a multi-strategy liquid alternative within an accessible ETF structure, aiming to deliver consistent returns across market cycles.

More concentration, less diversification today

Equity market concentration has reached historic levels. The top 10 companies now represent roughly 40% of total market capitalization in the S&P 500 Index, up from 29% in 2020 and just 19% in 2010. Shown below, the composition of market leaders has also shifted from a more balanced, sector-diverse mix in prior decades to a narrower group dominated by technology and communication services firms at the forefront of the AI-driven transformation. From a portfolio perspective, the breadth and diversification that have long made index exposures central to equity allocations—the “60” in the 60/40 portfolio—have diminished in an increasingly top-heavy market.

Beyond equity allocations, portfolio balance has been challenged by structural changes in the macroeconomic and policy environment following the pandemic. The post–Global Financial Crisis (GFC) era of low inflation and highly accommodative policy supported strong asset-class returns, relatively low volatility, and reliably negative correlations between stocks and bonds. Today, uncertainty remains over how swiftly monetary policy can ease amid persistent inflation and rising fiscal demands that have pushed long-term borrowing costs higher.

As shown below, since 2020, fixed income returns have been negative in 16 of 18 months when equities declined by 2% or more—highlighting how cross-asset diversification has weakened and reinforcing the need for return sources that are independent of market direction.

Dispersion creates opportunities within and across markets

This environment poses challenges for beta-oriented exposures, but it also creates opportunities for strategies able to capitalize on higher dispersion, or the widening differences in returns across and within markets.

At the micro level, a variety of structural and cyclical forces are unfolding simultaneously, affecting companies in distinct ways. The most prominent driver is the AI revolution, which has created a wider divide between the mega-cap leaders at the center of the theme and the rest of the market. Beyond AI, companies within and across sectors vary in their ability to pass higher costs to consumers, manage uncertain financing costs, rewire supply chains amid geopolitical shifts, or harness ongoing technological change. In the post-GFC period, these dynamics were largely absent, resulting in generally less separation between market leaders and laggards.

A similar trend is visible at the macro level. Country-level dispersion has been rising as inflation, growth, and policy paths diverge across economies. Following the initial shock of the pandemic, policy paths have separated more sharply as central banks and governments contend with distinct local realities. These differences are reflected across currencies, interest rates, and equity markets, creating opportunities for investors to capitalize on a more uneven global environment.

The charts below illustrate this change in micro and macro dispersion since the forces of the new post-COVID regime have taken shape. This fuels new opportunities for active managers to generate alpha through security selection.

Expanding alpha potential through alternatives

While rising dispersion creates new opportunities, it also raises a critical question: how effectively are investors positioned to take advantage of it? Long-only portfolios tied to broad market direction face challenges, as concentrated leadership leaves allocations dominated by a handful of large companies, diminishing the contribution of underweights in lagging stocks.

This requires a broader toolkit that can invest both long and short to more effectively harness dispersion. By holding long positions in expected outperformers and short positions in expected laggards, these strategies can isolate idiosyncratic alpha as a return source. In a market neutral structure, balanced long and short exposures greatly reduce market beta, providing a differentiated and diversifying return stream that is independent of broad market moves.

Historically, access to these types of strategies was largely confined to institutional investors through traditional hedge fund structures with high minimums and limited liquidity. Liquid alternatives have expanded that access through daily-liquid structures, yet adoption in advisor-managed portfolios remains limited. Analysis from BlackRock’s Investment and Portfolio Solutions team shows that less than 30% of advisor portfolios hold an allocation to alternatives. Additionally, this gap reflects not only limited ownership overall but also smaller allocation sizes among those that do invest: the average advisor portfolio allocates about 9% to alternatives—well below allocations among more narrow segments, including high-net-worth wealth portfolios at 15% and family offices at 54%.¹

One reason for this gap may be the complexity of navigating the wide range of liquid alternative strategy types designed to target different market dynamics or return opportunities. With such a broad spectrum of approaches, determining how best to integrate and adjust allocations over time can be challenging.

IALT: Multi-strategy alternative in an active ETF

One way to address this is through liquid alternatives designed to dynamically allocate across strategies as market conditions evolve. The iShares Systematic Alternatives Active ETF (IALT) applies this multi-strategy approach within a single ETF that can serve as a core component of an alternatives allocation.

IALT invests across equity, fixed income, and macro asset classes, combining three complementary strategy types: market neutral, dynamic macro, and strategic premia.

Market neutral strategies aim to generate returns at the individual security level by capturing relative performance differences. The goal is to identify securities expected to outperform or underperform their peers by leveraging a breadth of data-driven insights. These approaches are designed to pursue idiosyncratic alpha that is largely independent of market direction and, in some cases, provide a defensive return profile during periods of market stress.

Building on these idiosyncratic sources of potential alpha, the dynamic macro strategies seek to generate returns by taking relative positions across asset classes, allocating between country equity markets, interest rates, currencies, commodities, and credit. By exploiting differences in valuation, sentiment, growth, inflation, and policy, these strategies seek to capture cross-sectional and directional macro opportunities that add diversification and return potential to the portfolio.

Finally, the strategic premia component adds another dimension of return by targeting directional opportunities in equity, credit, and term premia. Distinct from static market beta exposure, these positions are actively adjusted over time based on economic, valuation, and sentiment indicators, delivering a complementary and differentiated return stream tied to market upside potential.

Together, these strategies leverage distinct return sources through a dynamic approach built to capture opportunities across market cycles.

Unlocking access to alternatives with IALT

In an environment where traditional diversification is under pressure and market leadership has become more concentrated, investors need access to alternative return sources that go beyond directional market drivers and benefit from underlying dynamics such as rising dispersion. IALT’s multi-strategy approach integrates these opportunities within an accessible ETF, helping to pursue more consistent returns across a range of market environments.