Managed Futures Funds | 5 ETF Reviews | Should You Invest?

Updated connected October 25th, 2023

In this article we reappraisal nan 5 managed futures ETFs: FMF, WTMF, DBMF, KMLM and CTA. We talk their capacity statistics, relationships to 1 different and show that they tin enactment for illustration diversifiers and complement a portfolio of stocks and bonds. We besides effort to determine upon nan champion managed futures ETF arsenic a consequence of nan chat below.

What Are Managed Futures and CTAs?

Managed futures aliases Commodity Trading Advisors (CTA) are firms that specialize successful inclination pursuing strategies successful a plethora of futures contracts for commodities, rates, and equities. One of nan awesome aspects of CTAs is that they are fundamentally hedge costs that person elasticity to stake connected nan various markets going either up aliases down.

One problem though is that each patient uses their ain proprietary exemplary and you, arsenic an investor, don’t really cognize really nan exemplary is basing its decisions. Usually nan money alludes to inclination following, mean reversion, transportation and break retired strategies but thing actual for illustration a look is ever revealed to nan public. As a result, you person immoderate semblance astir what they are doing, but this black-box model ever makes it difficult to spot a process. It’s a “trust me, bro” business and arsenic an investor, nan only point you person to spell connected it their humanities performance.

But for illustration we ever say, past capacity is not suggestive of early performance!

There are 952 CTA costs according to BarclayHedge, an aggregator and capacity tracker, but not each costs are listed and taxable capacity data.

Managed Futures, CTAs Performance

We tin opportunity that nan cardinal attraction to managed futures is nan humanities capacity has been beautiful bully successful aggregate complete agelong periods of time.

Take nan Société Générale CTA Index, for instance, which calculates nan nett regular complaint of return for a group of 20 CTAs selected from nan largest managers unfastened to caller investment. The SG CTA Index is equal-weighted and reconstituted annually and has go recognized arsenic nan cardinal managed futures capacity benchmark.

Since nan inception of nan index, nan full return has been astir 310%, which is conscionable nether nan capacity of nan S&P500 complete nan aforesaid clip play up until November 2022, erstwhile I first performed this analysis. It besides did it pinch a volatility of 10% which is astir 40% little volatility than nan S&P 500.

The cardinal point you will announcement from this chart, however, is that drawdowns are very mild and it usually has a bully soft uptrend.

The different facet that will fuss immoderate investors is that CTAs tin spell done agelong multi-year periods erstwhile they aren’t making caller highs. You person to conscionable spot nan process and enactment nan people moreover though nan S&P500 mightiness beryllium continuing to soar pinch abandon.

SG CTA Index Portfolio Performance

The important mobility is really overmuch a portfolio’s capacity improves erstwhile a information of nan portfolio is allocated to managed futures.

The comparison beneath takes nan modular 60/40 stock-aggregate enslaved portfolio, nan 60/30/10 which moves 10% from bonds to nan SG CTA Index (daily returns from Bloomberg), and nan 60/0/40 portfolio which replaces bonds wholly pinch nan SG CTA Index, for exposition. The portfolio is annually rebalanced from 2004 onward (AGG‘s inception date).

As you tin spot from nan supra results, nan Sharpe Ratio and nan Sortino ratio, which only considers downside deviation (bad volatility), are some improved. Additionally, nan maximum drawdown is reduced and a higher terminal portfolio worth is reached complete nan 18 twelvemonth backtest.

Managed futures performed good from 2000-2010 which kept up pinch nan 60/40 portfolio, successful 2014, erstwhile nan 60/40 portfolio was level for 2 years and 2021-2022 erstwhile nan 60/40 portfolio had its worst capacity successful 50 years. CTA costs decidedly tin enactment arsenic a diversifier erstwhile its needed nan most.

But of course, you can’t put successful nan scale directly, truthful really does 1 put successful managed futures? There are aggregate ways.

Managed Futures Firms

I person ever been willing adding managed futures to my portfolio, but I was hindered by nan ample relationship minimums ($250,000 astatine Campbell, for instance) and wary of nan precocious fees (2% of assets, 20% capacity fee) during periods of stagnation. Plus, K-1 taxation forms tin beryllium a nightmare, but worth it for businesses pinch tons of depreciation.

With nan S&P500 bubble going consecutive up for 10+ years, it didn’t really look that pressing to spell nan CTA route. That of people changed this twelvemonth erstwhile some equities and fixed income plummeted, but commodities and managed futures costs did really well.

There are dozens of firms available.

Original Managed Futures ETFs

The first managed futures ETFs came retired astir 10 years ago. At slightest 2 of them person already been dissolved owed to debased investor liking (i.e. mediocre performance), but 2 of nan originals remain, FMF and WTMF, and we usage them arsenic comparisons for nan newer funds.

All of nan ETFs successful this article person fees conscionable nether 1%, and they don’t rumor K-1 taxation forms, truthful location is simply a existent allure of nan ETF building if they tin deliver.

I opportunity nan connection “if” connected purpose.

First Trust Managed Futures (FMF ETF) and Wisdom Tree Managed Futures Fund (WTMF ETF)

To put it bluntly, nan capacity for some of these original costs has been abysmal.

In nan floor plan below, I crippled nan capacity of FMF and WTMF and put successful comparisons for nan S&P500, an intermediate word treasury enslaved fund, IEF, and a agelong word treasury enslaved fund, TLT. As you tin spot below, since inception nan Wisdom Tree money has mislaid money and nan First Trust money mislaid money for astir of nan play and only precocious returned immoderate gains successful 2022.

In tabular form, if you had put $10,000 into each money since August 2013, you’d person this overmuch today:

It’s difficult to travel up pinch thing bully to opportunity astir nan Wisdom Tree fund, to beryllium frank, but nan First Trust money earned a higher return pinch little volatility (i.e. a higher Sharpe Ratio) than nan 2 enslaved funds, truthful possibly if we were only looking astatine nan terminal numbers successful this table, we could opportunity that it acts for illustration a enslaved substitute.

Of people from nan return floor plan earlier it, we cognize that is not existent and we tin spot that nan managed futures costs dramatically underperformed some enslaved costs and only had terminal outperformance because nan enslaved costs person had their worst twelvemonth connected grounds coinciding pinch nan fastest complaint summation successful decades (an arena that shouldn’t repetition anytime soon).

In fact, nan managed futures costs person a somewhat antagonistic aliases adjacent zero relationship pinch bonds.

To beryllium honest, some of these money managers should person closed up shop for illustration nan different 2 costs that already did, but alternatively they decided to re-jig their strategies successful 2019 and 2021, truthful their ain humanities capacity isn’t moreover peculiarly applicable anymore. Will they outperform successful nan future? Maybe, possibly not.

I deliberation nan problem present is that First Trust and Wisdom Tree are ETF equity providers, not CTA administrators. They astir apt had immoderate inferior expert travel up pinch a elemental inclination pursuing strategy and it backtested well, truthful they threw it into production.

Should we person assurance successful a specialized strategy that doesn’t lucifer up to their halfway business model? Most CTA firms only do managed futures strategies and thing else. Their livelihood depends connected having a moving model.

The cynic successful maine says that since some costs still person $200-300 cardinal successful AUM, they near nan costs unfastened to extract immoderate interest gross retired investors hanging onto them. There is nary convincing impervious that their caller versions of nan strategy will beryllium immoderate amended than nan aged ones.

Vague Fund Strategies

It’s not for illustration we person overmuch to spell on. The strategy explanation is very generic for nan First Trust managed futures fund:

The Fund and nan Subsidiary’s investments supply nan Fund pinch vulnerability to U.S. and non-U.S. markets
(including emerging markets). The Fund and nan Subsidiary whitethorn clasp futures contracts connected a wide scope of assets, including, but not constricted to, equity indexes, different financial indexes, currencies and world debt, including U.S. Treasuries. In addition, nan Subsidiary whitethorn clasp futures contracts connected commodities.

Source: FMF Prospectus

The Wisdom Tree Managed Futures money tells you a small spot much astir what they do, but not capable to backtest it:

The Fund is managed utilizing a quantitative, rules-based strategy designed to supply returns that correspond to nan capacity of nan Benchmark…The Benchmark consists of listed futures contracts connected 16 different tangible commodities and 8 different financial contracts. The 16 listed commodity futures contracts are: ray crude oil, earthy gas, RBOB gas, heating oil, soybeans, corn, wheat, gold, silver, copper, unrecorded cattle, thin hogs, coffee, cocoa, fabric and sugar. Component contracts that are akin successful quality (such arsenic state and lipid aliases golden and silver) are aggregated into “sectors.”

There are 9 commodity sectors successful nan Benchmark: Energy, Grains, Precious Metals, Industrial Metals, Livestock, Coffee, Cocoa, Cotton, and Sugar. There are 8 financial sectors successful nan Benchmark: nan Australian dollar, British pound, Canadian dollar, Euro, Japanese yen, Swiss franc, U.S. Treasury Notes and U.S. Treasury bonds. Commodity assemblage weights are based on, but not precisely proportional to, humanities world accumulation levels. Commodity sectors that person higher humanities accumulation levels are weighted higher successful nan Benchmark (assuming a agelong position).

Weightings of nan financial sectors are based on, but not straight proportional to, humanities gross home merchandise (“GDP”). Larger economical regions (i.e., Europe arsenic measured by nan Euro) should get a higher weighting than smaller regions (i.e., Australia arsenic measured by nan Australian dollar)(assuming a agelong position). The Benchmark is designed pinch a attraction connected capturing nan economical use derived from some up and down value trends.

Systematic rules are employed to found a “long” aliases “short” constituent position for each assemblage based connected nan value of nan futures contracts comparative to their moving averages. Each month, sectors (e.g., Energy, Gold) successful nan Benchmark are rebalanced backmost to a fixed weighting. Component allocations (e.g., ray crude oil, gold) wrong this fixed weighting are allowed to up and down and are positioned neutral, agelong aliases short depending connected nan existent marketplace environment.

The sole objection to this norm is that nan Energy assemblage and its components are ne'er short wrong nan Benchmark. If nan Energy Sector is level wrong nan Benchmark past nan different sectors successful nan Benchmark are overweighted proportionally. Sectors (e.g., Energy, Precious Metals) are rebalanced monthly and nary assemblage will comprise much than 25% of nan Benchmark astatine nan extremity of each month. Components wrong a assemblage (e.g., wheat, maize and soybeans successful Grains) are weighted based connected individual capacity during nan twelvemonth and are rebalanced annually to their original weights.

The Wisdom Tree money is simply a small much descriptive, but not judge why they azygous retired nan power sector. Source: WTMF prospectus.

I cognize I americium really trading you connected nan managed futures costs correct astir now, aren’t I? Luckily things are looking a small better.

New Managed Futures ETFs

Over nan past 3 years, 3 caller CTA costs person been launched, and they person had smoking performance. What we want to do is tease retired if these newer costs are genuinely thing different aliases they conscionable sewage fortunate successful 2022 and are doomed to repetition nan dismal capacity of nan FMF ETF and WTMF ETF complete nan adjacent decade.

I present each money one-by-one and sequentially adhd nan newer costs into nan comparison matrix. This measurement their capacity comparative to each different commencement retired connected nan aforesaid dates and are straight comparable.

iMGP DBi Managed Futures Strategy ETF (DBMF)

How does DBMF work?

Dynamic Beta is simply a investigation advisory that has developed various replication funds. DBMF attempts to replicate nan portfolios of nan largest managed futures costs by decomposing a 60-day trailing return window.

The Fund’s managed futures strategy employs agelong and short positions successful derivatives, chiefly futures contracts and guardant contracts, crossed nan wide plus classes of equities, fixed income, currencies and, done nan Subsidiary, commodities. Fund positions successful those contracts are wished based connected a proprietary, quantitative exemplary – nan Dynamic Beta Engine – that seeks to place nan main drivers of capacity by approximating nan existent plus allocation of a selected excavation of nan largest commodity trading advisor hedge funds (“CTA hedge funds”), which are hedge costs that usage futures aliases guardant contracts to execute their finance objectives.

The Dynamic Beta Engine analyzes caller (i.e., trailing 60-day) capacity of CTA hedge costs successful bid to place a portfolio of liquid financial instruments that intimately reflects nan estimated existent plus allocation of nan selected excavation of CTA hedge funds, pinch nan extremity of simulating nan performance, but not nan underlying positions, of those funds. Based connected this analysis, nan Fund will put successful an optimized portfolio of agelong and short positions successful domestically-traded, liquid derivative contracts.

Emphasis mine. Source: DBMF prospectus

So fundamentally they are trying to beryllium a CTA replicator fund, piggybacking connected apical of what nan pros do, benignant of for illustration what hedge money replicator ETFs for illustration GURU do. It’s a afloat systematic process pinch nary room for discretionary trading.

Presumably they are utilizing regression to tease retired nan regular return movements, truthful they won’t precisely replicate what nan blend of nan apical CTAs ain astatine immoderate fixed time, particularly astatine turning points owed to nan 60 time hold window. Luckily, inclination pursuing strategies activity because trends thin to past for agelong periods of time.

DBMF ETF Performance

The first point that we announcement erstwhile we crippled nan capacity floor plan against nan aged defender managed futures costs is that DBMF does look to travel nan movements of FMF, but possibly pinch much leverage.

Is DBMF a bully investment? Well it has been, but of people we can’t cognize nan future. However we tin opportunity that for a fixed level of volatility, DBMF has delivered almost double nan capacity of First Trust and nan S&P500, arsenic evidenced by its Sharpe Ratio and 2.5x amended capacity for nan Sortino ratio complete nan aforesaid clip period.

And again, nan Wisdom Tree money was a dog.

These are awesome numbers and this money has really deed nan crushed running; they couldn’t person picked a amended clip to launch. It shouldn’t beryllium a daze to find retired that nan assets nether guidance has skyrocketed successful nan past 2 years. This money started pinch $60 cardinal successful 2022 and now has complete a cardinal dollars nether management!

The DBMF ETF does person much similarity to FMF than it does to WTMF, arsenic evidenced by nan correlations of 0.77 and 0.37, respectively. It has a antagonistic relationship to nan S&P500 and bonds, which is bully and shows that it acts arsenic a portfolio diversifier.

Does The DBMF ETF Resemble The Top CTA Index?

Really what I wanted to cognize is if nan money is capable to execute its instruction and replicate nan largest CTA managers to execute for illustration nan SG CTA Index shown astatine nan apical of this article. If it can, we tin person much assurance astir its agelong word capacity based connected its short history.

Visually you tin spot that nan DBMF money zigs and zags astatine nan aforesaid times nan scale does and successful nan end, nan ETF outperforms nan index, 66% vs. 42% complete nan aforesaid clip period.

Next we tin spot from nan regression to nan SG CTA Index that it explains a small much than half of nan play aliases monthly activity for DBMF, and some move successful nan aforesaid guidance astir 75% of nan clip connected some clip scales. We besides find that nan DBMF money moves astir 13% much successful nan aforesaid guidance arsenic nan SG CTA Index, but statistically we cannot norm retired that nan money movements aren’t nan aforesaid (which is what we want).

In contrast, only 39% of nan monthly variety successful returns of nan First Trust MF money are explained by nan scale (not shown) and it has a beta of 0.54, meaning that nan money only moves astir half arsenic overmuch successful nan guidance nan scale goes.

While nan DBMF money has been astir for only astir 3 years, we can’t opportunity overmuch yet based connected its humanities performance, but because this money does look to mostly replicate what nan SG CTA Index is doing, we tin person much assurance and familiarity pinch what mightiness hap successful nan future. For instance, we would not expect an abnormally ample drawdown successful nan early and we expect location to beryllium agelong periods without making caller highs.

Does DBMF rumor a k-1?

No, you get a modular 1099 astatine nan extremity of nan twelvemonth for US investors.

KFA Mount Lucas Index Strategy ETF (KMLM)

This CTA ETF is moreover newer and has only been trading since December 2020. The sponsors created their ain index, nan KFA MLM Index.

KMLM is benchmarked to nan KFA MLM Index, which consists of a portfolio of twenty-two liquid futures contracts traded connected U.S. and overseas exchanges. The Index includes futures contracts connected 11 commodities, 6 currencies, and 5 world enslaved markets. These 3 baskets are weighted by their comparative humanities volatility, and wrong each basket, nan constituent markets are adjacent dollar weighted

KMLM Presentation

Visually, nan allocation looks for illustration this:

And nan latest holdings are shown successful nan factsheet. Notable is that they do not waste and acquisition nan equities futures markets successful this fund. My champion conjecture is that they recovered that it detracted from nan results of their index, truthful they excluded it, but it could person besides been a conscious determination to instrumentality to diversifying markets.

The prospectus doesn’t opportunity what its underlying strategy is (their website says inclination following, arsenic usual, pinch nan position referring to moving averages), conscionable that it is search nan scale that they created. But location was a useful tidbit from nan prospectus:

The Index evaluates marketplace trading signals connected a regular ground and rebalances connected nan first time of the
month. In addition, nan Index has a target mean annualized volatility of 15% complete time.

Prospectus

So already we tin stitchery that its volatility target is astir 30% much than nan DBMF money and if a crisp turnaround successful a futures statement occurs early successful nan month, nan money will suffer for nan remaining of it.

Additionally, while nan KMLM ETF is benchmarked to its ain index, we tin still comparison it to nan SG CTA Index blend that averages nan apical managers since we are trying to uncover really it performs against nan mean CTA, not immoderate civilization scale that doesn’t show america thing astir nan strategy aliases capacity to peers.

KFA MLM Index

This backfilled Mount Lucas scale that nan ETF is officially benchmarked to gives america an thought really nan longer word capacity mightiness be, beyond nan constricted 2 twelvemonth trading history of KMLM.

From nan floor plan below, we stitchery that it is simply a beautiful volatile scale pinch sharp, sizeable drawdowns and that nan scale astatine times doesn’t make caller crushed for 10 years. It’s a agelong clip to hold while nan S&P500 was doubling and tripling complete nan aforesaid clip periods, and I fishy that astir investors would move connected aft a mates of years.

According to their presentation, nan wide compounded return was 6% since inception. However, because of its antagonistic relationship to equities, including 10% to a 60% equity / 30% enslaved /10% MLM portfolio improved consequence adjusted returns, astatine slightest theoretically.

But let’s look astatine existent capacity now.

KMLM ETF Performance

Starting everything from nan aforesaid clip play arsenic before, we spot that nan KMLM money does make nan aforesaid movements arsenic nan DBMF fund, but pinch much volatility and truthful much return since nan managed futures strategy is performing very good this year.

And people it has a higher CAGR, but that comes pinch much volatility, which you tin spot connected nan capacity chart. This dings it connected nan Sharpe and Sortino ratios, meaning that DBMF was amended astatine a risk-adjusted return complete nan aforesaid clip period.

Not amazingly nan monthly relationship of DBMF and KMLM is 0.70 and nan costs are negatively correlated pinch equities and bonds arsenic before.

Notice that complete nan much constricted clip period, nan relationship betwixt DBMF and First Trust MF jumped to 0.88. This is astir apt because First Trust modified their strategy precocious arsenic mentioned earlier and now are becoming much “in line” pinch emblematic CTA strategies.

Does KMLM lucifer nan Top CTA index?

It’s still important to spot really this money compares to nan blended apical CTA index, since that is what we are utilizing arsenic our multi-manager benchmark pinch a much consistent, smoother return profile.

Over nan adjacent 2 twelvemonth capacity nan money returned 62% versus 42% for nan SG CTA index. Since it targets astir 30% much volatility, we cognize that nan directional moves will beryllium exaggerated; some nan floor plan and regression beneath show that.

KMLM moves successful nan aforesaid guidance an other 33%-40% more, which is awesome erstwhile nan strategy is working, but a imaginable interest erstwhile nan managed futures strategy has a drawdown.

It is statistically important that nan play moves will beryllium astatine slightest 10% much pronounced than nan SG CTA Index, but nan modular correction is excessively ample for nan monthly periodicity to tie immoderate conclusion (of people informally we cognize it will beryllium much pronounced arsenic well).

The fund’s relationship to nan scale is higher than DBMF, but since we are moving pinch a different starting clip play and nan sample size is getting smaller, truthful I wouldn’t look excessively overmuch into it.

Simplify Managed Futures Strategy ETF (CTA)

This is nan newest of nan managed futures ETFs pinch its inception March 2022. What makes this ETF different is that it is managed by advisor Altis Partners and employs 4 models rolled into one: value trend, mean reversion, carry, and risk-off. Other than those descriptions, I couldn’t find overmuch astir their strategy successful nan prospectus aliases truth sheets. Again, you benignant of person to return their black-box connection for it. They person been successful business for astir 20 years, truthful they do person acquisition and must beryllium doing thing right.

CTA Performance

We get nan acquainted capacity compared to nan different funds, but Simplify CTA does look to zig a small much erstwhile nan different costs zag.

Since location is little than a year, I couldn’t tally nan capacity table, but pinch specified a short capacity nan capacity and statistic would beryllium beautiful meaningless anyway.

The relationship matrix does show that CTA only has 0.53 relationship pinch DBMF and KMLM since inception and is antagonistic correlated pinch equities and bonds.

I besides skip showing nan regression results because nan ample modular errors made nan accusation beautiful useless.

What Is The Best Managed Futures ETF

Well location you person it, nan 3 newest managed futures ETFs that investors tin bargain into. So which 1 do I for illustration nan best?

I for illustration nan methodology that DBMF is trying to employment by attempting to mean retired respective manager’s strategies to trim head consequence and perchance lead to a smoother return profile. If nan money is successful astatine performing for illustration nan SG CTA Index arsenic it has been during its short return history, it will person milder drawdowns than nan different 2 funds.

So moreover though CTA and KMLM person had amended capacity since inception, that comes pinch higher volatility arsenic you tin spot from nan capacity charts.

In nan end, because of nan constricted trading history I ended up buying each 3 successful adjacent weight since nan costs do look to adhd diversification to each different and its excessively early to show really they will execute successful different marketplace environments successful nan future. If 1 of nan costs plummets, possibly 1 of nan different costs will prime up connected that inclination and execute oppositely and nan full allocation will antagonistic equilibrium itself.

Based connected everything I presented here, I do person assurance that these caller CTA costs will execute amended than nan 2 original managed futures costs offered by First Trust and Wisdom Tree.

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