The managed futures marketplace was once the realm of institutional investors and hedge fund managers.
Now, with several ETF options available, the average investor can instantly access these sophisticated strategies in their brokerage account.
The goal of managed futures ETFs is to provide non-correlated returns, by investing in a wide array of asset classes designed to offset various risks.
Risk management is a central theme touted by these funds, because of their wide diversification and access to unconventional markets. However, this style of management can often lead to head-scratching performances as well.
The WisdomTree Managed Futures Strategy Fund (NYSE: WDTI) invests in a wide array of futures markets that include treasuries, currency contracts, commodity futures and money market securities. The current expense ratio of WDTI is 0.95 percent.
This ETF is driven by a rules-based strategy that shifts the underlying asset allocation in response to changing market trends. In addition it can hold short positions in the underlying futures contracts, when conditions warrant such an approach.
Over the last year, the performance of WDTI has been essentially flat, with the underlying futures holdings creating a tug-of-war that has yet to resolve in a discernible trend.
Another relative newcomer to this space is the First Trust Morningstar Managed Futures Strategy Fund (NYSE: FMF). This ETF is an actively managed fund that seeks to provide returns in excess of the Morningstar Diversified Futures Index. It invests in long and short positions in currency, commodity and equity futures contracts according to the managers’ selection criteria.
FMF differentiates itself from WDTI by including equity futures in its holdings and excluding treasury securities. However, it charges a similar expense ratio of 0.95 percent.
The underlying strategy implemented in FMF is to try and capture the momentum (both up and down) of these various asset classes, by using historical trends and research. The goal is to reduce volatility by providing a diversified portfolio of holdings that will offset downside risks.
Investors that are considering these ETFs should be aware that non-correlated returns can often outperform in down markets and underperform in up markets. They may not be suitable for all types of portfolios, but can be successful under favorable circumstances that support an unconventional approach.
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