In the recent financial crisis, investor portfolios took a huge hit. It was a wake-up call for investors: their portfolios need more hedge-fund type diversification.
Recently, ETFs that invest in this alternative area have been introduced. Managed futures ETFs tap into managed-futures strategies that are popular among hedge funds and commodity-trading advisors. These strategies have been utilized by hedge funds and other large, sophisticated investors to direct futures-based strategies for years. The following 3 managed ETF funds can provide an effective avenue for retail investors:
Elements S&P CTI ETN (LSC) is based on the S&P Commodity Trends Indicator index. The index is designed to apply a long/short strategy to six commodity sectors comprised of sixteen traditional, physical commodity futures contracts. It is a total return index that reflects the performance of a fully collateralized investment in the futures contracts.
WisdomTree Managed Futures ETF (WDTI) employs a similar quantitative, rule-based strategy designed to provide returns that correspond to the performance of the S&P Diversified Trends Indicator (DTI). The index is a composite of 24 highly liquid futures grouped into 14 sectors, with an even split between financials (i.e., currencies and interest rates) and physical commodities. The positions of each sector are either long or short (except for energy) based on price behaviour relative to a moving average (if energy is not positioned long, the sector weight is allocated to other sectors). Sector weights are determined by global production for commodities, and by GDP tiers for financials. DTI is actually a superset of CTI.
On this page, readers can find a document on the description of DTI and CTI, provided by S&P.
iShares Diversified Alternative ETF (ALT), on the other hand, is linked to the performance of a portfolio of foreign currency forward contracts and exchange traded future contracts that may involve commodities, currencies, interest rate and certain eligible stocks or bonds indices while seeking to reduce the risks and volatility inherent in those investment by taking long and short positions in historically co-related assets.
Please find below the table of Managed future ETFs:
Description | Symbol | 1 Yr | 3 Yr | 5 Yr | Avg. Volume(K) | 1 Yr Sharpe |
Elements S&P CTI ETN | 14.43% | NA | NA | 38 | 74.1% | |
iShares Diversified Alternative | 2.24% | NA | NA | 24 | 46.83% | |
WisdomTree Managed Futures | NA | NA | NA | 46 | NA |
Clearly the best performer is LSC with a return of 14.43% over the past year followed by ALT with a return of 2.24%. The expense ratio of LSC is 0.75% which is also the least compared with the other ETF’s. The following table shows the the May 2011 long/short positions of CTI sectors as well as the long/short positioning of the prior month.
Sector | Previous Position | Current Position | Weight* |
Energy | Long | Long | 37.50% |
Grains | Short | Long | 23.00% |
Industrial Metals | Long | Short | 10.00% |
Precious Metals | Long | Long | 10.50% |
Livestock | Long | Short | 10.00% |
Softs (by Commodity) | |||
Cocoa | Short | Long | 2.00% |
Coffee | Long | Long | 3.00% |
Cotton | Long | Short | 2.00% |
Sugar | Short | Short | 2.00% |
Investors can implement both CTI & DTI indices by using PowerShares DB Commodity ETFs (DBA) (DBP) (DBB) (DBE) (for CTI) as well as other financials (Treasury IEF) and currency related ETFs including Euro (FXE), Yen (FXY), Swiss Franc (FXF), Pound (FXB), Austrialian dollar (FXA) and Canadian dollar (FXC).
Name Portfolio 1 year's AR 3 year's AR 5 year's AR S and P Diversified Trend Indicators P S and P Diversified Trend Indicators 7.19 3.4 NA S and P Commodity Trend Indicators P S and P Commodity Trend Indicators Strategy 17.61 4.65 NA
P S and P Commodity Trend Indicators Strategy outperforms LSC (17.6% vs. 14.43%). With such a big margin, even if one takes trading commissions into account, implementing the strategy yourself is still a winner.
The strategies have performed well during the previous financial crisis. The following table shows year by year performance:
P_3212 P S and P Diversified Trend Indicators P_3348 P S and P Commodity Trend Indicators Strategy
Symbol 2007 2008 2009 2010 2011 1 Yr 3 Yr 5 Yr Inception AR(%) P_3212 9.1 20.19 -0.93 0.89 3.28 7.19 3.4 NA 8.67 P_3348 15.94 23.77 2.28 3.19 4.91 17.61 4.65 NA 13.59 SharpeRatio(%) P_3212 86.8 151.44 -10.56 10.61 34.37 86.52 31.48 NA 80.68 P_3348 91.83 107.57 14.05 23.72 29.29 119.88 26.39 NA 76.89 DrawDown(%) P_3212 0.024 0.07 0.061 0.08 0.048 0.055 0.123 NA 0.123 P_3348 0.038 0.149 0.102 0.168 0.079 0.089 0.193 NA 0.193
It is thus beneficial to add such ETFs or implenment these strategies in a portion of one's portfolio to diversify. This is even true for a retirement portfolio that demands lower volatility.
Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
Disclosure: I am long DBA.
