What is FAAR? (Pros, Cons, and Strategies)

If you're interested in diversifying your portfolio or seeking alternative investment strategies, it's worth considering FAAR. FAAR stands for First Trust Alternative Absolute Return Strategy ETF. Today, we'll explore what FAAR is, including its key features, pros and cons, and some strategies for investing in this ETF.

What is FAAR?

FAAR is an ETF designed to achieve positive absolute returns in varying market conditions. It does this by investing in a diversified portfolio of financial instruments, including futures, options, and other derivative instruments. FAAR aims to provide a return that is independent of the major market cycles, making it a compelling choice for those looking for portfolio diversification and risk mitigation.

Key Features of FAAR

• Exposure to Alternative Assets: FAAR offers access to asset classes that are not typically found in traditional equity or bond portfolios.
• Risk Management: Designed to achieve positive returns regardless of market conditions, FAAR incorporates various hedging strategies.
• Diverse Strategies: Utilizes multiple strategies, including long/short positions and investing in derivatives, to achieve absolute returns.

FAAR aims to be a low-correlation investment, independent of the typical market movements, making it an excellent option for portfolio diversification.

FAAR Composition

FAAR is composed of a mix of alternative investments. This may include positions in commodity future contracts, currency strategies, and using derivatives for hedging purposes. The goal is to create a diversified strategy that delivers steady returns independent of the traditional equity and bond markets.

Pros of FAAR

Diversification

FAAR provides access to asset classes and investment strategies that are generally not available to retail investors through traditional funds or ETFs. This diversification can help reduce overall portfolio risk.

Absolute Return Focus

FAAR aims for positive returns in all market conditions, which can add a layer of stability to your portfolio. This makes it particularly attractive during periods of high market volatility or economic uncertainty.

Risk Management

FAAR employs various risk management techniques, including hedging and tactical asset allocation. By actively managing risk, the ETF seeks to minimize losses and protect capital, even when traditional markets are underperforming.

Cons of FAAR

Complexity

The investment strategies employed by FAAR are complex and may not be easily understood by all investors. This can make it challenging for investors to evaluate performance and risks effectively.

Higher Costs

FAAR typically has a higher expense ratio compared to traditional equity or bond ETFs. These higher costs can eat into the returns, making it less attractive for cost-conscious investors.

Performance Risk

While FAAR aims for positive returns in all market conditions, there is no guarantee that it will achieve this goal. The effectiveness of its strategies depends on the skill of the fund managers and market conditions.

FAAR Investment Strategies

Investing in FAAR requires an understanding of its unique attributes and how it fits into your overall investment strategy. Here are some strategies to consider:

Long-term Investment Strategy

FAAR can be a valuable part of a long-term investment strategy due to its diversification and risk management characteristics. By holding FAAR as part of a broader portfolio, you can potentially reduce overall volatility and improve risk-adjusted returns.

• Hedge Against Market Volatility: FAAR can serve as a hedge against downturns in traditional asset classes, providing a level of protection during bear markets.
• Complementary Asset: Use FAAR alongside more traditional equity and bond investments to achieve a more balanced and diversified portfolio.

Tactical Allocation

For investors with a shorter time horizon or more specific objectives, tactical allocation to FAAR can provide targeted exposure to alternative investment strategies.

• Market Timing: Allocate to FAAR during periods of high uncertainty or when traditional markets are overvalued.
• Active Management: Constantly evaluate and adjust your allocation to FAAR based on market conditions and the relative performance of different asset classes.

Risk Management

Utilize FAAR as a risk management tool to protect against specific risks within your portfolio.

• Diversify Portfolio Risks: FAAR’s inclusion can help in diversifying away from concentrated risks in traditional equity and bond markets.
• Sector and Asset Class Hedging: Use FAAR to hedge against specific risks in sectors or asset classes that may be underperforming.

Conclusion

FAAR offers a unique investment opportunity with its focus on absolute returns and diversification into alternative assets. While it comes with complexities and higher costs, its potential to provide stability and reduce risk in your portfolio can make it a valuable addition. Before investing, thoroughly understand its strategies and consider how it aligns with your investment goals and risk tolerance.