First Trust, the money manager known for its specialized sector index exchange traded funds, is adding an actively managed commodity strategy later this week.
Commodities provide a historically low correlation to traditional asset classes, like stocks and bonds. With an uncorrelated asset, such as commodities, investors can increase diversification and potentially diminish portfolio volatility.
Additionally, commodities provide investors with an inflation hedge as commodity prices typically rise during periods of high inflation.
FTGC tries to generate attractive risk adjusted returns through commodity futures contracts and commodity-linked exchange traded instruments, according to an updated SEC filing.
Specifically, 25% of the holdings will be in futures contracts and exchange traded instruments. The remainder of the fund's assets will be invested in short-term investment grade fixed-income securities, money market instruments, ETFs and other instrument companies and cash.
"Commodity investments have traditionally provided investors with attractive total returns and strong diversification characteristics, especially during periods of high inflation," Rob Guttschow, CFA and Senior Portfolio Manager of the fund, said in the press release. "By tactically rotating between different commodity investments and managing the overall portfolio volatility, the fund may provide investors commodity exposure in a more attractive manner. Additionally, by attempting to pick the most attractive maturity futures contract for each commodity, FTGC may provide higher returns over a market cycle."
Guttschow is referring to diminishing the negative effects of rolling front month contracts in a contangoed market - a fund can lose money if it sells a front month contract before maturity and purchases a more expensive later-dated contract.
The active ETF has a 0.95% expense ratio.
Max Chen contributed to this article.
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