In 2013, First Trust launched the actively managed First Trust Global Tactical Commodity Strategy ETF (NASDAQ:FTGC), a fund that takes long positions in commodity futures. The time since has been difficult for commodities markets, and as a result, FTGC's performance has suffered along with other funds in the category: For the year ending January 31, for instance, the ETF has returned -20.52%. However, these returns ranked in the top quintile of funds in its category.
Long and Short Positions
Perhaps in response, First Trust's second actively managed commodity ETF - for which it filed paperwork with the Securities and Exchange Commission ("SEC") on January 28 - will pursue an absolute returns strategy. This means the fund will take both long and short positions in pursuit of positive returns, irrespective of benchmarks, while aiming for lower volatility than traditional funds. The ability to take short positions will obviously help the fund produce positive returns, should commodities remain in a bear market.
A long/short approach in the commodity sector has been very effective for the LoCorr Long/Short Commodity Strategy Fund (MUTF:LCSAX), one of the few long/short commodity fund competitors in the mutual fund and ETF space. That fund has bucked the downdraft in the commodities markets and has generated annualized returns of 12.79% over the past 3-years through January 31.
Like FTGC (and many other funds that use commodity futures), the new fund will invest up to a quarter of its assets in a subsidiary based in the Cayman Islands. This subsidiary will invest in commodity-based futures contracts, with certain tax advantages, while the remainder of the fund's assets will be invested in cash and short-term debt.
Commodities markets have been struggling, largely due to the extreme bear market in crude oil, but this has actually led to increased interest in actively managed commodity funds. As pointed out by ETF.com, Elkhorn and Van Eck have both filed for such funds over the past few months, but First Trust's new fund is the first to include a short component. This, combined with the firm's pedigree as the first to launch an actively managed commodities ETF of any kind lends gravitas to the new fund, which will be known as the First Trust Alternative Absolute Return Strategy ETF.
Jason Seagraves contributed to this article.