Hedging Portfolio Risk With Managed Futures and KMLM | ETF Trends

Markets continue to be up and down as investors absorb the ever-increasing inflation data reports and analysts discuss where the peak might be. Tech stocks have been hit particularly hard, the fixed income space is in flux facing the reality of multiple interest rate increases, and Omicron continues to be a background pressure affecting global supply chains.

Equities could see a rally with earnings season starting this week with the banking sector, and analysts will be paying close attention to the 2022 forecasts coming from companies, reports CNBC.

“What we are excited about is earnings season is right around the corner. We expect another solid showing by corporate America, while it will also be a chance to stop focusing so much on the Fed and policy, but instead get under the hood and see how the economy is really doing,” said Ryan Detrick of LPL Financial.

While equity performance could help buoy markets even higher, ultimately it’s investor sentiment that drives the market movements, and for now, inflation is front and center. Investing in the midst of inflationary pressures has investors reconsidering their 60/40 allocations within the bond space in particular and looking for alternatives.

Managed futures could be one solution due to their potential to add diversification and decreased volatility within traditional portfolios. They provide a potential hedge on risk within equities, bonds, and commodities and are classed as an alternative investment.

Mount Lucas Management was the first to create a price-based index on futures returns that utilizes a trend-following algorithm to simulate investor behavior and involvement in futures markets.

The KFA MLM Index seeks to offer moderate returns during low volatility times in markets by being cost-efficient with fees and low turnover and leaning on the returns from equity assets. During rapid movement and volatility by markets, the algorithm seeks to continue returns without pinpointing market fluctuation points or reducing exposures.

Investing in Managed Futures With KMLM

The KFA Mount Lucas Index Strategy ETF (KMLM) from KFAFunds, a KraneShares company, offers investment with managed futures.

KMLM’s benchmark is the KFA MLM Index, and the fund invests in commodity currency as well as global fixed income futures contracts. The underlying index uses a trend-following methodology and is a modified version of the MLM Index, which measures a portfolio containing currency, commodity, and global fixed income futures.

The index weights the three different futures contracts types by their relative historical volatility, and within each type of futures contract, the underlying markets are equal dollar-weighted. Futures contracts will be rolled forward on a market-by-market basis as they near expiration.

The index evaluates the trading signals of markets every day, rebalances on the first day of each month, 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 0.90%.

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