Should You Include Managed Futures ETFs in Your Portfolio?

Managed Futures ETFs: Benefits, Costs, and Best Funds

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Managed futures ETFs are exchange-traded funds that passively invest in a managed futures index. People often buy managed futures ETFs as a diversification tool because the funds' performance isn't linked with a broad market stock index, such as the S&P 500. The average expenses for these ETFs are 0.75% or $7.50 for every $1,000 invested.

Managed futures ETFs are most commonly used to achieve positive returns, no matter which direction the stock market is headed (up or down in aggregate pricing). These ETFs are not ideal investments for some people, but they can be used wisely as part of a diversified portfolio or as a short-term hedging plan.

Before you invest in managed futures ETFs, it's wise to know how they work, the risks that come with them, and how you can benefit from them.

What Are Managed Futures?

The term "managed futures" refers to a portfolio of futures contracts managed by a professional. Futures, or "futures contracts," are contracts where a buyer is bound to purchase, or a seller is bound to sell, a security or asset at a predetermined price. Futures are purchased either for speculation (betting on a certain direction in price movement) or for hedging reasons, such as offsetting a loss from one asset or investment with a gain from the futures contract.

With speculation as the purpose, buyers of futures contracts expect that the price of the underlying security or asset will increase. On the other hand, sellers of futures expect that a price will decline. Most often, people who want to use futures for hedging reasons will buy managed futures funds (MFFs). Managed futures ETFs are investment tools that can help meet that goal.

Top Managed Futures ETFs

Buying managed futures ETFs can be a simple and easy means of gaining access to the managed futures market without dealing with some of the complex aspects of futures contracts, such as fees and rollovers. If you're thinking of getting into one of these ETFs, here are some of the best examples:

  • WisdomTree Managed Futures ETF (WTMF): This fund is the oldest and largest managed futures ETF on the market today. Formerly trading with the ticker symbol WDTI, WTMF seeks to achieve positive total returns in rising or falling markets that are not directly linked to broad market equity or fixed income returns. Expenses for WTMF are 0.65%, or $6.50 for every $1,000 you invest, lower than the category average of 0.75%.
  • First Trust Morningstar Managed Futures Strategy ETF (FMF): Unlike most ETFs, FMF is actively managed, which means it seeks to do better than its benchmark index, the Morningstar Diversified Futures Index. To do that, FMF management selects investments from the benchmark and manages contracts in a strategy that can beat the index as a whole. The expense ratio for FMF is 0.95%.
  • ProShares Managed Futures Strategy ETF (FUT): This fund is an actively managed ETF that uses the S&P Strategic Futures Index as a target benchmark. It aims to provide positive returns in rising and falling markets. It does that by taking long and short positions in futures in various asset classes, including commodities, currencies, and fixed income. FUT is unique for a managed futures ETF in that it weighs risk so that each asset type equally affects the portfolio's risk. The fund management rebalances the portfolio monthly. Expenses for FUT are 0.75%.

Caution on Getting Into Managed Futures ETFs

These ETFs may use hedging strategies that involve investing in assets that don't relate to the stock market. The end result can produce good returns when the stock market is falling. Still, depending on the fund strategy, managed futures ETFs may produce negative returns when stocks may be doing well.

If you want to invest here, you may best be served by investing in a diversified portfolio of mutual funds or ETFs that invest in a balanced group of stocks and bonds that is right for your risk tolerance and time horizon.