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 can 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 these market leaders has shifted from a more balanced, sector-diverse mix in prior decades to a narrower group at the forefront of the ongoing 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 and cross-asset diversification have 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 the ability of monetary policy to ease amid persistent above-target inflation, more frequent supply-driven shocks, and rising fiscal demands that have pushed long-term borrowing costs higher. These forces have contributed to more frequent periods in which stocks and bonds decline in tandem.

As shown below, since the start of 2020, fixed income returns have been negative in 17 of 19 months when equities declined by 2% or more. This illustrates how the diversification benefits historically provided by fixed income have weakened, reinforcing the need for additional sources of return that are less dependent on 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, growing differentiation in company performance has become a defining feature of markets. 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. For example, dispersion in country exposures has been rising, marking a departure from the relatively synchronized economic performance, inflation, and policy backdrop of the past. 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.

The charts below illustrate how micro and macro dispersion have evolved since the forces of the post-COVID regime took hold, creating new opportunities for active managers to generate alpha.

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 returns that are independent of the broader market while adding differentiated, diversifying exposures to portfolios.

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. 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 This underscores meaningful room for growth in incorporating alternative strategies into portfolios.

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. Given the breadth of available options, investors may struggle to determine which strategies to allocate to and when, making implementation challenging. A multi-strategy approach can help simplify implementation by combining complementary sources of alpha within a single solution.

IALT: Multi-strategy alternative in an active ETF

IALT combines diverse alternative strategies in an ETF designed to simplify access to alternatives. The portfolio invests across equities, fixed income, and macro markets, targeting two distinct sources of alpha. The first is market-neutral alpha, which seeks to identify relative return differences while limiting exposure to broader market movements. The second is market-exposure alpha, which seeks to capture directional opportunities across markets.

These alpha sources are pursued across three complementary strategies: security selection, dynamic macro, and directional allocation.

Security selection

The security selection strategy seeks to generate returns independent of broad market direction and capitalize on micro-dispersion through market-neutral stock selection across more than 2,000 global equities.

Positioning within the strategy is informed by multiple insight groups, including company fundamentals, sentiment, macroeconomic, and credit-oriented signals. These insights are derived from both structured and unstructured data sources and are evaluated systematically to help identify relative return opportunities while managing unintended factor exposures.

Risk is allocated across insight groups with the goal of generating idiosyncratic alpha, or returns driven by stock-specific characteristics, while remaining responsive to equity market tail events.

Dynamic macro

The dynamic macro strategy seeks to capture macro dispersion across and between asset classes and geographies. Machine learning-based models analyze a broad macro feature set—including growth, inflation, policy, valuation, trend, and market sentiment measures—seeking to identify the most effective ways to express those views across currencies, equities, rates, credit, and commodities globally.

By integrating information across asset classes rather than focusing on each asset class in isolation, the strategy aims to broaden the traditional macro opportunity set and target relative return opportunities where they are most attractive.

Systematic trend signals help complement this approach by identifying persistent market trends. These insights seek to generate returns while supporting portfolio resilience, particularly during extended market declines where such approaches have historically been most effective.

With its focus on macro-driven alpha, the dynamic macro strategy complements the stock selection-based approach of the security selection strategy, which targets micro dispersion.

Directional allocation

Directional allocation seeks to provide a dynamic, market exposure-driven return source within the portfolio by identifying directional opportunities across equities, credit, and alternative assets through a dynamic asset allocation framework.

The strategy evaluates a broad range of economic, valuation, sentiment, positioning, and risk indicators to assess where market risk is most likely to be rewarded. By adapting exposures as market conditions evolve, the strategy seeks to participate in upside opportunities while reducing risk during periods of elevated volatility, providing a flexible source of market exposure within the portfolio.

Together, IALT's three strategies bring together distinct sources of potential alpha within a single portfolio. By balancing persistent return seeking with multiple sources of downside resilience, the portfolio is designed to pursue more consistent outcomes across market environments.

Unlocking access to alternatives with IALT

Built on decades of systematic investing expertise and innovation, IALT provides investors with an accessible way to incorporate diversified alternative return sources into portfolios, helping navigate concentrated markets, rising dispersion, shifting macro regimes, and today's portfolio construction challenges.