Pros And Cons: First Trust Managed Futures Strategy


Shutterstock photo

First Trust Morningstar Managed Futures Strategy ( FMF ) offers individual investors access to an investing strategy that's mainly available to institutional investors, hedge funds or high-net-worth clients.

FMF is an actively managed ETF that holds long and short positions in futures contracts for commodities, currencies and foreign and domestic stock indexes.

At its Aug. 1 debut, FMF held 30 positions with short exposure -- a bet that prices will fall -- to agricultural commodities, the yen and other currencies, precious metals and copper. It held long futures contracts of the S&P 500 , oil, euro and a few foreign stock indexes.

"Managed futures strategies have historically had low correlation to stocks, bonds, and other investment strategies, moderate volatility, lower drawdowns than equities and positive returns in a variety of economic environments," First Trust said in a statement.

They "have been successfully implemented by institutional investors for nearly three decades, but have been typically offered in hedge funds or private accounts until recently."

FMF will compete withWisdomTree Managed Futures Strategy ( WDTI ), which has gathered $140 million in assets since launching January 2011. The major difference is that FMF holds long U.S. and foreign stock index futures while shorting some commodity and currency futures. WDTI holds futures in a variety of currencies, commodities and U.S. Treasuries but no stock indexes.

Last year WDTI lost 11%, while the S&P 500 returned 16%. It's gained 5.5% year to date vs. 20% for the S&P 500.

"Managed futures tend to have positive returns when the stock market is down and have negative returns when the market is up," David Cowles, director of investments at Mosaic Financial Partners in San Francisco, said in an email. "So long as managed futures average a positive return over time, it makes an ideal diversification tool since it dampens the volatility of the higher returning stock portion of the portfolio."

Both FMF and WDTI charge shareholders 0.95% of their assets a year, which is expensive for ETFs but cheaper than mutual funds using the same strategy.

Guggenheim Managed Futures Strategy , a mutual fund, has an expense ratio of 1.36% to 2.36% depending on asset class. On top of that, its sales commission runs as high as 5% for class A shares. The fund is down 3.10% year to date. It's down nearly 4.45% in the past year, up an average annual 1.61% in the past three years and down 13.46% in the past five years.

AQR Managed Futures Strategy Fund has a 1.5% expense ratio and requires a $1 million minimum investment for individual investors. With only three years of history, it's returned an average annual 3.35% in that period. It's added 5.01% year to date and 6.81% in the past year.

"Investors have placed about $200 billion in managed futures, so there is certainly a desire for access to this asset class," Ron Rowland, founder of All Star Investors in Austin, Texas, said in an email. "However, to date, no one has delivered a product that lives up to the concept."

"FMF might be an option going forward when the monetary fur hits the fan (perhaps soon)," George Luciani, CEO of Yardley, Pa.-based Capital Planning Advisory Group, said in an email. "Managed futures need market volatility, which is currently nonexistent."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs
More Headlines for: FMF , WDTI

More from Investor's Business Daily


Investor's Business Daily

Investor's Business Daily

Follow on:

Find a Credit Card

Select a credit card product by:
Select an offer:
Data Provided by