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Many advisors are already familiar with or using managed futures strategies in client portfolios. These market-neutral offerings have been around awhile and are now more accessible (and more favorably priced) thanks to exchange traded funds.
Before delving into the benefits of managed futures ETFs, here’s a quick refresher on the asset class is comprised of and aims to accomplish. As the name implies, a managed futures products invest in futures contracts with the aim of reducing risk in a way that isn’t attainable with an individual stock or bond. However, market neutrality doesn’t necessarily mean capped profit potential.
“Market-neutral strategies look to profit from spreads and arbitrage created by mispricing. Investors who employ this liquid alternative strategy frequently look to mitigate market risk by taking matching long and short positions in a particular industry in an attempt to achieve profit from both increasing and decreasing prices,” according to Investopedia.
As for managed futures ETFs, the universe is fairly small, but most of the ETFs in the space have done an admirable job of attracting assets and some are issued by familiar names, including First Trust and WisdomTree. The largest member of the group is the iMGP DBi Managed Futures Strategy ETF (DBMF), which has more than $1 billion in assets under management.
Managed Futures ETFs in Client Portfolios
Owing to the ability of managed futures products, including ETFs, to manage risk, there’s a clear case for at least considering the asset class. That case is enhanced when noting that many of the other options for limiting downside, are flawed.
“When the going gets tough, it’s important to remember why one would bother with managed futures in the first place: diversification,” according to Morningstar research. “Managed-futures funds seek to deliver positive absolute returns in all market environments, and they have historically delivered protection in stress markets—evidenced by excess return spikes around major crises against the Morningstar Global Markets Index. In the long run, they have maintained low correlation to traditional, long-only asset classes.”
One way of looking at the above is that in a universe of shall we say “quirky” downside protection offerings, managed futures ETF merit a look. Then there’s the correlation case. As in managed futures ETFs are an excellent avenue for reducing a portfolio’s correlations – something that’s become harder to do in recent years.
“Managed-futures strategies’ correlation to major traditional asset classes have largely remained low in absolute terms, whether negative or positive,” adds Morningstar. “Their uncorrelated performance to a classic 60/40 portfolio can be crucial in periods when stocks and bonds start to move in lockstep. This will not always be the case for all managed-futures strategies, depending on their positioning. But it has proved valuable in many instances when stock-bond correlation rises, such as during the 2008 financial crisis and in 2022.”
Managed ETFs Have Momentum
As noted above, there aren’t a lot of managed futures ETFs on the market today, but the ones that are live are broadly successful in AUM terms. There’s just eight funds in the group, but at the end of the second quarter, they had a combined $2.1 billion in AUM.
Obviously, a significant percentage of that tally is attributable to advisors. Plus, data confirm managed futures ETFs are experiencing a growth spurt – one likely driven in part by wealth management firms.
“They grew assets nearly tenfold and doubled their count over the past three years. Some of that owes to legislation, as the SEC’s Derivatives and ETF Rules cleared regulatory hurdles for these products,” concludes Morningstar. “But the real breakthrough came in 2022, when managed futures flourished as both stocks and bonds tumbled. That momentum stalled in 2023 but resumed in 2024; investors plowed roughly $420 million into the ETFs in the first half of 2024.”
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