WisdomTree Launches Managed Futures ETF

by on January 5, 2011 | ETFs Mentioned:

WisdomTree, known for its fundamentally-weighted equity ETFs and currency products, became the first issuer to offer a managed futures ETF with the debut of the Managed Futures Strategy Fund (WDTI) on Wednesday. The new actively-managed ETF will employ a quantitative, rules-based strategy designed to provide returns that correspond to the performance of the Diversified Trends Indicator (DTI). The DTI is a long/short managed futures strategy that incorporates a diversified group of 24 liquid components of exchange-traded commodity and financial futures contracts.

The managed futures strategy is nothing new; hedge funds and other large, sophisticated investors have been using quantitative methodologies to direct futures-based strategies for years. But the introduction of WDTI democratizes this strategy, making it accessible to all types of investors without incurring significant fees or reaching a minimum investment threshold. “WisdomTree is very excited to bring the first managed futures strategy ETF to the marketplace,” said WisdomTree President & COO Bruce Lavine in a press release. “Managed futures has been an increasingly important asset class as investors look for less correlated assets that can profit in many different market environments.”

While the majority of ETF assets are in funds offering exposure to “plain vanilla” asset classes such as stocks and bonds, exchange-traded products have also been instrumental in making previously hard-to-reach asset classes or strategies more accessible to all types of investors. The best example is perhaps commodity ETFs, though volatility products and various quant-based ETFs have also expanded the universe of investable assets in recent year.

The Diversified Trends Indicator was developed by Alpha Financial Technologies founder Victor Sperandeo, and began live calculation in 2004. 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 behavior 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.

Because the DTI allows for both long and short positions, it has the potential to deliver positive returns in both rising and falling markets. In 2008, when equity and commodity markets cratered, the DTI was up more than 8%. Since live pricing began in 2004, the DTI has beaten both the S&P 500 and the BarCap Aggregate Bond Index (formerly the Lehman Aggregate Bond Index) while exhibiting lower volatility than both [see more on the DTI].

While WDTI is managed using a rules-based strategy designed to provide returns that correspond to the performance of a benchmark, the new fund will be actively-managed. That allows flexibility in determining how to achieve exposure to certain asset classes (e.g., through swaps, futures, or forward contracts) and how far out to go along the maturity curve when utilizing futures. It also allows WisdomTree to package the strategy within the ETF structure, making the exposure more accessible and efficient for investors.

WDTI is one of only a handful of exchange-traded products to offer exposure to the Alternatives asset class. iShares offers a Diversified Alternatives Trust (ALT) that takes long and short positions in futures contracts in an attempt to generate absolute return. Unlike WDTI, ALT is taxes as a partnership for U.S. federal income tax purposes, and as requires a Schedule K-1 at the end of each year. There are also a handful of hedge fund replication ETFs from IndexIQ, including a broad-based option (QAI) and more targeted funds focusing on strategies such as merger arbitrage (MNA).

Current Composition

Given the impressive rally in commodity markets over the last several months, it isn’t surprising that WDTI’s positions in commodities are all long. Energy accounts for the largest allocation (18.75%, split between crude, gasoline, heating oil, and natural gas), followed by grains (11.5%), precious metals (5.25%), industrial metals (5%), livestock (5%), and softs (4.5%).

On the financial side of the portfolio, exposure is split more evenly between long and short positions. WDTI is long the Australian dollar, Swiss franc, Canadian dollar, and Japanese yen, while being short the euro and British pound. There are also short positions in both 10-year and 30-year Treasuries, positioning WDTI to profit from interest rate hikes that could hurt long-dated fixed income securities.

WDTI will charge an expense ratio of 0.95%.

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Disclosure: No positions at time of writing.