What are alternative investments?

Commodities

A commodity is a good that’s interchangeable with the same good from another producer. For example, wheat, oil, beef, and coffee are commodities.

While it's possible to invest directly in commodities (say, by buying 10,000 pounds of sugar), most commodities are traded through a “futures contract”—a promise to buy or sell a certain amount of the commodity at a specified price on a certain date.

Buying gold, silver, platinum, or other precious metals is sometimes touted as a way to hedge the risks of more traditional investments. However, the prices of these metals can be extremely unpredictable and volatile.

Trading in commodities and futures is very specialized and not available through Vanguard.

Real estate

Investing directly in real estate can mean buying, selling, and maintaining a collection of properties—which is expensive and time-consuming.

Many people already have exposure to real estate through owning a home. For most investors, this plus an investment in a broad portfolio of stocks and bonds, which can include real estate investment trusts (REITs) and mortgage-backed securities, offers plenty of exposure to real estate.

Master limited partnerships (MLPs)

MLPs exist mostly in the energy industry. Direct investments in MLPs could provide more favorable tax treatment than you’d get by investing in an energy fund or by buying a specific energy company’s stock.

However, MLPs typically come with high costs and added tax complexity.

What risks can I expect with alternative funds?

Vanguard classifies these types of funds as aggressive funds, which means they can be subject to extensive fluctuations in share prices. At a high level, here are some of the risks involved with alternative funds:

• Derivatives risk: Direct and indirect commodity-linked investments subject the fund to risks associated with derivatives.
• Nondiversification risk: There’s a chance the fund’s performance may be affected disproportionately by the performance of relatively few investments. Nondiversified funds may invest a greater percentage of assets in securities of particular issuers than diversified mutual funds.
• Leverage risk: There’s a chance that any leveraged losses will exceed the principal amount invested by the fund. Returns from a leveraged investment can be more volatile than returns from traditional stock and bond investments, which exposes the fund to heightened risks.

Depending on the funds, the associated risks may differ. You can read more about a specific fund’s risks under the Portfolio & Management tab in the fund profile.