ETF of the Week: KFA Mount Lucas Index Strategy ETF

Managed futures have historically been a strategy utilized by hedge funds but there are an increasing number of ETFs that have brought the strategy to the lower fee vehicle and made it available to retail investors.

“Today we have the folks at Mount Lucas who are world renowned in this managed futures space, who partnered up with the folks over at KraneShares to come to market with an ETF with all of the benefits of managed futures, along with the tax efficiency of an ETF,” Lydon explained.

The rise in popularity of alternatives has been driven by the underperformance of equities and bonds, with managed futures strategies in particular performing strongly amidst volatility. The flexibility within a managed futures fund comes from its ability to go long or short on a variety of spaces. In the case of KMLM, the fund goes long or short on commodities, currency, and global fixed income.

“If you look at the trend among commodities, currencies, and government bonds, and based on where the trend is, allocate appropriately to the futures market, that basically describes what this strategy is all about,” Lydon said. “It’s great performance year-to-date, but also it’s pretty diversified within its own structure as far as covering all those areas.”

Managed futures have historically performed well during times of market volatility and year-to-date has seen that trend continue, providing “crisis alpha” for portfolios. Because of its negative correlation to both equities and bonds, managed futures ETFs like KMLM have become a great diversifying option for portfolios.

KMLM is a fund that can be invested in utilizing trend following and based on its moving average, but because it is tracking trends on commodities, currencies, and government bonds, there are many components of trend following across a variety of sectors that go into the overall strategy of the fund.

“There are a lot of concerns about people going into these types of strategies now, thinking that they’re buying the pop. We’re probably going to continue to see inflation in above average numbers, which means there’s going to be more pressure on commodities; commodity prices will increase,” Lydon explained.

With the Fed committed to bringing inflation down at all costs, bond prices are going to continue to climb higher, Lydon believes, while within currencies the dollar is almost even with the euro, something not experienced in over two decades.

“These are really exciting times individually for all of these areas. I would say that these types of strategies are not going to finish being popular because more and more in this rising rate environment, there’s concerns about equities; there’s huge demand to diversify into alternative strategies and we’re seeing that with flows,” Lydon said.

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