First Trust, the Wheaton, Ill.-based fund provider known for niche strategies, filed paperwork with U.S. regulators to market an actively managed futures-based ETF that would invest in commodity, currency and financial futures with the aim of generating total return.
The First Trust Morningstar Diversified Futures Fund will benchmark its performance to a Morningstar index that’s designed to reflect market trends—in either direction—all the while finding returns that are not directly correlated to broad equity and fixed income, the filing said.
To do so, the portfolio will comprise futures contracts that serve up long, short and flat exposure to commodities, equities and currencies including the euro, the Canadian and Australian dollars, the yen, the British pound and the Swiss franc. Half of the fund will be allocated to commodities futures, while the other half will be equally split between currency and equity futures, the filing said.
The strategy is unique in that it blends various futures-linked segments that are often tapped into separate though narrowly focused funds.
The exposure mix will be rebalanced quarterly, according to the filing.
“The fund attempts to capture the economic benefit derived from rising and declining trends based on the ‘moving average’ price changes of commodity futures, currency futures and equity futures,” the company said in the filing.
The new fund will join the likes of the $5.87 billion PowerShares DB Commodity Tracking Fund (DBC - News) and the $406 million United States Commodity Index Fund (USCI - News), though both of these existing funds aren’t actively managed but are rather rules-based strategies.
The filing didn't appear to contain any explanation about how the fund might minimize the deleterious effects on returns of futures-market "contango."
Contango—also described as a “normal” futures curve—occurs when nearby contracts are cheaper than those expiring on more distant dates, which means a futures-based fund must pay more for new contracts than it fetches for the contract it must sell before it expires. Such a “negative roll yield” can badly hamper returns over time.
Turning To Derivatives
The fund will also rely on commodity-linked and equity-linked derivatives, including swaps to achieve its objective. Its exposure to derivatives will be done through what it called the First Trust Cayman Subsidiary.
What’s more, First Trust will use fixed-income instruments such as U.S. government and agency securities and money market instruments to collateralize its commodity-linked derivatives exposure.
First Trust is known for niche strategies, such as its First Trust Dow Jones Internet ETF (FDN - News) as well as its 30-plus roster of AlphaDex funds that apply a quasi-active element to security selection in portfolios tapping into everything from country-specific to sector, size and style methodologies.
First Trust didn’t disclose tickers or fees in the filing.
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