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ETF News And Commentary

The wave of ETF launches continues, with First Trust seeking to get in on the game as well. The company has just announced a novel product targeting the managed futures market, seeking to give investors a new option for investing seeking uncorrelated returns in today’s somewhat uncertain investing climate.

New ETF in Focus

The product, the First Trust Morningstar Managed Futures Strategy Fund (FMF - ETF report), is an actively managed ETF that looks to give investors positive total returns regardless of what is happening in the fixed income or equity markets. The product does look to beat out the performance of the Morningstar Diversified Futures Index, while charging investors 95 basis points a year in fees.

This benchmark seeks to reflect trends in the commodity, currency, and equity futures markets. The index is also fully collateralized, and includes highly-liquid, exchange-listed contracts in the above asset classes (see Three Overlooked Active ETFs).

While FMF will not follow this benchmark, it will seek to hold instruments that are similar to those included in the index. However, the managers of the fund will manage the contract selection and roll periods in order to beat out this benchmark.

Portfolio

The portfolio consists of 34 different futures positions, with 19 different commodities, 9 equity index futures, and 6 currency futures represented. Roughly half of the benchmark goes to commodities, while 25% is in equities, and 25% is in currencies.

The commodities included are 19 of the most liquid contracts on U.S. commodities, while currencies include six of the most widely traded currencies in the world including the Canadian dollar, Japanese yen, Australian dollar, British pound, Swiss franc, and the euro (see 3 Currency ETFs Hit Hard By Taper Talk).

In terms of equities, index futures are included for many of the most widely-traded benchmarks in Western and developed Asia-Pacific markets. These include the S&P 500 and the TSX, European indexes (DAX, CAC 40, FTSE 100), and Asia-Pacific benchmarks as well (ASX, Nikkei).

Investors should also note that the managers have the ability to go both long and short in the various futures positions. This could allow the fund to outperform if it is short as asset prices are falling, though underperformance could be the result if the wrong bet is made at an incorrect time.

How does it fit in a portfolio?

This new ETF could be appropriate for investors who like the idea of alternative asset class investing, but have had trouble implementing this in their portfolios, due to traditional high barriers to entry by all but the wealthiest investors. Additionally, this product could be ideal for those seeking low-correlation assets that have the potential to add no matter what the current market conditions are (see Three Hedge Fund ETFs for Uncorrelated Returns).

On the other hand, this ETF may not be a good choice for those seeking a low cost choice, as its 95 basis point cost is higher than what many investors see in some leveraged ETFs. Furthermore, due to its uncorrelated, low volatility strategy, big gains seem unlikely in this fund, suggesting it is probably a poor choice for those seeking huge levels of outperformance, at least in bull markets.

ETF Competition

There are very few other products in the managed futures market, as most of the ETFs currently on the market take either a less active or less involved approach. However, there is one direct competitor that could be a foe for the new First Trust product, the WisdomTree Managed Futures Strategy Fund (WDTI - ETF report).

This ETF follows the Diversified Trends Indicator, charging investors 96 basis points a year in fees for exposure. WDTI also invests in a variety of futures, with U.S. Treasury bonds, currencies, commodities, and money market securities all being represented in the portfolio (read the Key to Investing in a futures Backed ETF).

By doing this, the fund looks to achieve positive total returns in rising or fall markets that are not directly correlated to broad market returns, be it in the equity or fixed income worlds. Over the past year, the product has added a little over 5%, though it has done so with extremely low levels of volatility, suggesting it could be a solid pick for uncorrelated gains with minimal risk.

Bottom Line

WDTI has accumulated about $140 million in assets, and is probably a minor money maker for WisdomTree at this level. The amount invested also implies that there is plenty of interest in the product and that the space may be popular enough to house a few names.

First Trust is undoubtedly hoping that this is the case with the launch of its competitor in the space, FMF. The fund will have to show some level of outperformance and see a low level of both correlation and volatility to attract assets though, as its single basis point cost advantage seems unlikely to be the difference maker in this corner of the ETF market.

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