First Trust, the Wheaton, Ill.-based fund provider known for
niche strategies, filed paperwork with U.S. regulators to market an
actively managed futures-based ETF that would invest in commodity,
currency and financial futures with the aim of generating total
return.
The First Trust Morningstar Diversified Futures Fund will
benchmark its performance to a Morningstar index that's designed to
reflect market trends-in either direction-all the while finding
returns that are not directly correlated to broad equity and fixed
income, the filing said.
To do so, the portfolio will comprise futures contracts that
serve up long, short and flat exposure to commodities, equities and
currencies including the euro, the Canadian and Australian dollars,
the yen, the British pound and the Swiss franc. Half of the fund
will be allocated to commodities futures, while the other half will
be equally split between currency and equity futures, the filing
said.
The strategy is unique in that it blends various futures-linked
segments that are often tapped into separate though narrowly
focused funds.
The exposure mix will be rebalanced quarterly, according to the
filing.
"The fund attempts to capture the economic benefit derived from
rising and declining trends based on the 'moving average' price
changes of commodity futures, currency futures and equity futures,"
the company said in the filing.
The new fund will join the likes of the $5.87 billion
PowerShares DB Commodity Tracking Fund (NYSEArca:DBC) and the $406
million United States Commodity Index Fund (NYSEArca:USCI), though
both of these existing funds aren't actively managed but are rather
rules-based strategies.
The filing didn't appear to contain any explanation about how
the fund might minimize the deleterious effects on returns of
futures-market 'contango.'
Contango-also described as a "normal" futures curve-occurs when
nearby contracts are cheaper than those expiring on more distant
dates, which means a futures-based fund must pay more for new
contracts than it fetches for the contract it must sell before it
expires. Such a "negative roll yield" can badly hamper returns over
time.
Turning To Derivatives
The fund will also rely on commodity-linked and equity-linked
derivatives, including swaps to achieve its objective. Its exposure
to derivatives will be done through what it called the First Trust
Cayman Subsidiary.
What's more, First Trust will use fixed-income instruments such
as U.S. government and agency securities and money market
instruments to collateralize its commodity-linked derivatives
exposure.
First Trust is known for niche strategies, such as its First
Trust Dow Jones Internet ETF (NYSEArca:FDN) as well as its 30-plus
roster of AlphaDex funds that apply a quasi-active element to
security selection in portfolios tapping into everything from
country-specific to sector, size and style methodologies.
First Trust didn't disclose tickers or fees in the filing.
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