Managed Futures ETFs: A Hedge Against Market Volatility?

Investor interest in managed futures products has increased amid rising stock market volatility and higher correlations between stocks and bonds. These strategies came into the spotlight in 2022, when many of them surged as both stocks and bonds nosedived.

What are Managed Futures?

Managed futures ETFs provide investors with exposure to futures contracts across asset classes, including commodities, currencies, stocks and bonds. These funds use systematic strategies to identify market trends and adjust their positions accordingly. They can go long when prices are rising and short when prices are falling, allowing them to potentially profit in both bull and bear markets.

In many ways, these ETFs offer individual investors access to strategies traditionally used by Commodity Trading Advisors (CTAs). Many CTAs employ systematic trend-following strategies based on quantitative models. Despite the name, CTAs are not limited to commodities.

Large institutional investors, including major pension funds, have allocated to managed futures strategies for decades. Managed futures ETFs bring these strategies to individual investors in a low-cost, liquid wrapper.

Why Invest in Managed Futures?

Portfolio diversification: One of the biggest attractions of managed futures ETFs is their potential to diversify traditional stock and bond portfolios.

Crisis alpha: These strategies have historically performed well during certain periods of market stress, particularly when stocks and bonds have declined together. However, performance depends on market conditions, and these funds can struggle in choppy, directionless markets where trends frequently reverse.

Inflation hedge: Managed futures ETFs can also help investors hedge against inflation and rising interest rates, depending on their positioning across commodities, bonds and other futures markets.

The iMGP DBi Managed Futures Strategy ETF DBMF takes long and short positions in derivatives, primarily futures contracts and forward contracts, across equities, fixed income, currencies, and commodities.

The KFA Mount Lucas Index Strategy ETF KMLM tracks an index of long and short managed futures contracts on 11 commodities, 6 currencies, and 5 global bond markets.

The Fidelity Managed Futures ETF FFUT seeks to profit from price trends observed across equity, fixed income, currency and commodity markets. The iShares Core S&P 500 ETF IVV, NVIDIA (NVDA) and Microspft MSFT are among its top holdings.

To learn more about these ETFs, please watch the short video above.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research