In a blow to equities and the outlook for another Fed interest rate hike, June’s private sector jobs doubled expectations. Major equity indexes dropped, and the 2-year Treasury soared to highs not seen since 2007. It’s a sharp reminder of the uncertainty that continues to drive markets this year and underscores the need for diversification.
Jobs in the private sector grew by 497,000 in June according to data from ADP. Dow Jones expectations were a gain of 220,000 jobs, reported CNBC. It’s worth noting that the ADP data is notoriously volatile.
Equities dropped in trading on Thursday ahead of Friday’s non-farm payrolls report. Continued gains in the services sectors lend credence to a higher probability of another interest rate increase this month.
Higher rates for longer will likely weigh heavily on equities in the second half and beyond. Advisors and investors looking to diversify risk and seek a non-correlated return stream would do well to consider managed futures strategies.
Managed futures funds remain attractive for the portfolio diversification they provide. Because they are non-correlated to stocks and bonds, they prove particularly appealing when one or both asset classes face challenges. Given the Fed’s clear indication of further rate hikes this year, the outlook for equities remains clouded. The Fed currently predicts a recession in the fourth quarter of this year and the first quarter of next.
Fed Rate Hike Uncertainty Underscores Need for Diversification
The KFA Mount Lucas Index Strategy ETF (KMLM) from KFAFunds, a KraneShares company, invests in futures contracts in commodities, currencies, and global bond markets. Its diversified exposures across a number of futures carried the ETF higher in July when major equity indexes fell. The fund is up 2.2% in July and up 1.93% YTD.
KMLM’s benchmark is the KFA MLM Index. The index uses a trend-following methodology and is a modified version of the MLM Index. The index weights the three different futures contract types by their relative historical volatility. Within each type of futures contract, the underlying markets are equal dollar-weighted.
The index and KMLM have demonstrated a negative correlation to both equities and bonds in bull and bear markets. Investing in managed futures offers diversification for portfolios by their ability to invest long and short on asset classes. Carrying them within a portfolio can potentially help mitigate losses during market volatility and sinking prices.
Futures contracts in the index include 11 commodities, six currencies, and five global bond markets. These are rolled forward on a market-by-market basis as they near expiration.
Currently, the fund is long on gold, copper, the euro, Japanese bonds, and other assets. Short positions include crude oil, natural gas, the yen, European bonds, and the U.S. 10-year Treasury Note.
The index evaluates the trading signals of markets every day and rebalances on the first day of each month. It invests in securities with maturities of up to 12 months and expects to invest in ETFs to gain exposure to debt instruments.
KMLM carries an expense ratio of 0.92%.
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