A Closer Look At Managed Futures ETPs

by on February 19, 2013 | ETFs Mentioned:

While it was once just full of index tracking funds, the exchange-traded fund universe has continued to grow and evolve over the years. Today, investors not only have access to cheap stock and bond funds, but also to various strategies once reserved for the uber-wealthy or institutional-sized accounts. From covered calls to long-short strategies, regular retail investors now have the ability to compete with the big boys [see Free Report: How To Pick The Right ETF Every Time].

One such alternative strategy that was expensive and once reserved for larger investors was using managed futures; however, the ETF boom has now made it possible for mom and pop portfolios to get in on the absolute return tactic.

Managed Futures 101

At their core, managed futures strategies take advantage of price trends across a variety of different asset classes. Investors employing the tactic–via specialized funds–may go long or short (or both) various futures contracts in sectors such as commodities (gold, corn, oil, etc), equity indexes (S&P futures), foreign currency or even U.S. government bond futures. These funds are operated by commodity trading advisors (CTAs) or commodity pool operators (CPOs), who are regulated by the Commodity Futures Trading Commission and the National Futures Association [see A Closer Look At Merger Arbitrage ETPs].

Managed futures accounts may be traded using any number of strategies, but the most common is trend following. Trend following involves buying in sectors that are moving higher and selling short those markets that are drifting lower. Other strategies employed by managed futures managers include fundamental strategies (supply vs. demand, debt levels, etc.), option writing, pattern recognition and arbitrage strategies. Despite the variety, trend following and variations of trend following are the predominant strategy implemented by most CTAs and CPOs.

By taking these calculated bets, managers hope to lower portfolio risk while generating positive returns in any market cycle. Generally, as an asset class, managed futures funds are largely inversely correlated with stocks and bonds; this helps to smooth out overall volatility. Additionally, the ability to shift among various asset classes and markets gives managed futures managers more flexibility for how they generate returns [see How To Swing Trade ETFs].

Those returns have been pretty good, too. From 1980 to 2010, the average annual return for an equal weighted portfolio of managed futures funds was 14.52%. That compares to just a 7.04% return for the S&P 500 during that time.

For regular retail investors, the ETF boom has now made adding a dose of managed futures to a portfolio as simple as placing a buy order in their brokerage account.

iShares Diversified Alternatives Trust (ALT, n/a)

The grand-daddy ETF in the sector is the iShares Diversified Alternatives Trust ( ALT). Launched back in 2009, the fund hopes to profit from the mispricing of financial instruments by capturing spreads between assets that deviate from the fair value. ALT will seek to take advantage of interest rate and futures contract price differentials by simultaneously entering into long and short positions in various bond, equity, currency and interest rate futures. Basically, that’s a fancy way of saying it uses a trend-following managed futures strategy and will go both long and short [see ETF Technical Trading FAQ].

Unlike many of iShares’ other offerings, the fund is actively managed and does not track a specific index. The fund is basically split 50/50 long/short among its three target areas–global equities, currencies and bonds. Strangely absent from ALT is the use of commodity futures.

Expenses aren’t cheap at 0.95%, but that’s way cheaper than the average fees associated with owning a managed futures fund. ALT managed to produce a 4.1% return during 2012.

WisdomTree Managed Futures Strategy Fund (WDTI, B+)

Seeking to achieve positive total returns in rising or falling markets that are not directly correlated to broad market equity or fixed income returns, the WisdomTree’s Managed Futures Strategy Fund (WDTI) has been the most successful managed futures ETF launched so far. The ETF has accumulated more than $100 million in assets. Part of that success could be from the fact that its tracking index–The Diversified Trends Indicator (DTI)–is the gold standard benchmark for manage futures funds [see Actively-Managed ETF Portfolio].

WDTI invests in a combination of U.S. treasury futures, currency futures, non-deliverable currency forwards, commodity futures, commodity swaps, U.S. government and money market securities to achieve its goal of absolute returns.

At just over a year old, returns for WDTI have been less than stellar. The fund has managed to lose roughly 9.75% since its inception. Expenses for WDTI are 0.96%.


For investors looking to hone in on just commodities, the ELEMENTS S&P CTI ETN (LSC) tracks a subset of popular DTI the Commodity Trends Indicator. LSC buys futures contracts of sectors that have been moving up–assuming prices will keep rising–and bets against commodities with falling prices. The ETN has positions in energy, industrial metals, precious metals, livestock, grains and softs, and has been pretty much ignored by investors over the last few years. Returns have roughly matched the broad Dow Jones-AIG Commodity Index since the note’s inception; however, there have been times when LSC has managed to outperform this benchmark. For investors with large commodity holdings, LSC could be used as a hedge against downside.

Backed by HSBC under the Elements brand of ETNs, LSC charges just 0.75% in expenses.

PowerShares S&P 500 Downside Hedged Portfolio (PHDG, B)

The PowerShares S&P 500 Downside Hedged Portfolio (PHDG) is the latest entrant to the managed futures ETF sector. While it’s technically not a “true” managed futures future strategy, the ETF does use futures to create absolute returns. Launched this past December, PHDG uses a combination of active management and passive indexing. PHDG tracks the S&P 500 Dynamic VEQTOR Index, which is designed to provide investors with broad equity market exposure with an implied volatility hedge. The fund will do this by dynamically allocating between equity, volatility and cash. The index allows investors to receive exposure to the equity and volatility of the S&P 500 Index at the same time [see Low Volatility Portfolio].

This basically means that PHDG will own all the stocks within the S&P 500, and will go long/short future contracts on the CBOE VIX Index and S&P 500.

While the product is new, PowerShares may have a hit on its hand. Expenses run a cheap 0.39%, making it the cheapest managed futures product on this list.

The Bottom Line

Once reserved for only the super rich or institutional investors, managed futures are now available for the masses. The ETF boom continues to democratize alternative asset classes for the retail investing set. The strategy can provide some zig when the markets zag, and the funds mentioned above are the best ways to add that exposure.

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Disclosure: No positions at time of writing.