Why This ETF Is Having A Stellar Year

Why This ETF Is Having A Stellar Year
Russell Burns

over 1 year ago3 mins

  • The iMGP DBi Managed Futures Strategy ETF aims to replicate CTA trend-following strategies and has done so successfully this year.

  • The DBMF ETF could be a useful addition to diversify your stocks-and-bonds portfolio, and would likely see further gains if current trends in financial markets continue.

  • If inflation eases and interest rates stabilize, the DBMF ETF might stumble – at least temporarily – as markets shift direction. But once a new trend emerges, the DBMF ETF will likely find its feet again.

The iMGP DBi Managed Futures Strategy ETF aims to replicate CTA trend-following strategies and has done so successfully this year.

The DBMF ETF could be a useful addition to diversify your stocks-and-bonds portfolio, and would likely see further gains if current trends in financial markets continue.

If inflation eases and interest rates stabilize, the DBMF ETF might stumble – at least temporarily – as markets shift direction. But once a new trend emerges, the DBMF ETF will likely find its feet again.

With literally thousands to choose from, deciding which exchange-traded fund (ETF) to invest in can be a bit like choosing just one cake from the bakery: overwhelming. But this one stands out: the iMGP DBi Managed Futures Strategy ETF (ticker: DBMF US; expense ratio: 0.85%) has gained 33% this year, even with stocks and bonds both broadly struggling. Let’s have a look at what it’s been doing and whether it might be a good addition to your portfolio.

What is the DBMF ETF?

It essentially uses futures contracts (agreements to buy or sell an asset at a predetermined price) to mimic the returns of the 20 biggest commodity trading advisor (CTA) hedge funds, but without the big fees they charge. It’s easy to see the allure of this strategy: CTAs identify trends in financial markets as they’re building momentum and buy or sell depending on the direction of the trend. This year, that’s been working exceptionally well, as I explained here.

The three-year-old DBMF ETF had just $60 million in assets under management at the beginning of the year, but with lots of new investors, that’s now topped $1 billion. See, while its benchmark SG Trend Index is up 28%, DBMF’s put up a stellar 33% return so far this year, suggesting its managers seem to know what they are doing. What’s more, the ETF, which has a five-star rating from Morningstar, pays a dividend and/or a capital gains payment to shareholders at the end of the year, depending on performance.

Why’s it doing so well this year?

The ETF has been doing so well this year in part because of its profitable long position in the US dollar against both the Japanese yen and the euro, and its long position on crude oil. It has also benefited from short positions in US Treasuries, and in US and international stocks, which came under pressure as interest rates began to climb and inflation became persistently high. In their most recently published quarterly review, the managers explain they believe the era of low inflation, near-zero interest rates, and asset price inflation is over. And while they admit they don’t know precisely what the world will look like in a few years, they say they’re confident that when opportunities appear, hedge funds will be in a position to profit.

The ETF runs a concentrated portfolio, currently only 14 positions. The fund managers update their positions on the firm’s website, which is great, as transparency is important in making any investment decision. In theory, you could just try to copy the fund’s positions by trading each one individually in real time, but it’d be risky and time-consuming. What’s more, while the expense ratio of 0.85% is on the expensive side for an ETF, for this kind of bespoke strategy, it looks like it could offer good value.

What are the opportunities and risks from here?

With inflation still stubbornly high in the US and elsewhere, central banks are likely to continue raising interest rates, and that’s likely to keep financial markets more or less where they are: with stock and bond markets under seemingly constant pressure. And so far, the DBMF ETF has shown it can post strong returns in that scenario.

Mind you, these trends won’t continue forever. When inflationary pressures start to ease and interest rates stabilize, the DBMF ETF might stumble – at least temporarily – as the trends in the stock, bond, and currency markets shift direction. But once a new trend emerges, the DBMF ETF will likely find its feet again.

You see, the DBMF ETF and trend-following strategies don’t care which direction the market goes in – as long as it heads in one direction over a period of time. The key challenge for trend-following strategies is if markets stay range-bound – i.e. remain in a narrow price band. Even then, they likely won’t lose much, since their risks are managed. It is meant to be like a hedge fund, after all.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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