Once again, it’s time to take a closer look at an ETF hitting its three-year milestone. Traditionally, that marks the moment when an ETF receives new attention and access to certain brokers. In this case, however, the ETF in question, KMLM, doesn’t just appeal due to its age. Its managed futures ETF approach is delivering for its investors, which presents a great opportunity to take a look at why.
The KFA Mount Lucas Managed Futures Index Strategy ETF (KMLM) tracks an index of long and short managed futures. In doing so, it allocates to commodity, currency, and global fixed income futures per its total return approach. The managed futures ETF does not hold the futures contracts themselves but acquires exposure to them via a Cayman Islands subsidiary for tax reasons. The index picks its 22 contracts from three broad categories weighted by historical volatility.
The Merits of a Managed Futures ETF
While other managed futures strategies may use active approaches, KMLM’s index offers its own advantages. Indexes remove management biases and typically become more cost effective. The ETF’s index includes futures contracts on 11 commodities, six currencies, and five global bond markets, but not equities.
Why look to managed futures? Considered an alternative investment, they can provide portfolio diversification thanks to limited correlation to stock or bond markets. That diversification doesn’t mean, however, that a managed futures ETF sees tepid performance – far from it.
For a 90 basis point (bps) fee, KMLM has returned 10.7% over the last three years, per VettaFi data. That has more than doubled the average performance of the long/short ETF Database Category over that time, with the average sitting at about 1.9%. KMLM’s three-year performance outpaced its FactSet Segment Average by an even larger margin, with the segment average hitting about 1.6% over three years.
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While the U.S. market may have survived significant rate hikes in 2023, volatility remains a concern for investors. Geopolitical risks abound, while markets could yet feel lagging impacts from rate hikes next year. KMLM presents an option to address ongoing volatility for investors on the lookout, with its managed futures approach able to deliver solid long-term performance, too.
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