Markets are cooling from last week’s relief rally as more major companies announce large lay-offs and speculation as to the Fed’s trajectory continues. Managed futures remain a compelling case for their ability to not only ride out volatility but also capitalize on it, although their uses in portfolios extend beyond just times of market stress.
The KFA Mount Lucas Managed Futures Index Strategy ETF (KMLM), formerly KFA Mount Lucas Index Strategy, is a fund that is positioned to capitalize on continuing changes in currencies, commodities, and global fixed income markets. KMLM’s benchmark is the KFA MLM Index, an index that uses a trend-following methodology and the fund is a modified version of the MLM Index, which measures a portfolio containing currency, commodity, and global fixed income futures.
To say managed futures strategies have performed exceptionally well this year would be a massive understatement: to date, KMLM is up 33.09% and is currently trading above its 200-day simple moving average (SMA). KMLM was priced at $35.12 as of 11/11/2022 and was trading above its 200-day SMA at $34.76 but is under its 50-day SMA of $37.50.
“When correlations move toward 1 in a crisis, and you are constrained long only, you only get to choose from one side of the return distribution; you need the asset to go up,” Mt Lucas wrote recently in a blog post. “Managed futures allow exposure to the big negative correlations also, and in more places than investors typically have exposure – like currency markets.”
“To our eye, this is a huge improvement over long-only methods of portfolio construction, and why we think Managed Futures strategies warrant a place in all types of portfolios,” Mt Lucas explained.
Managed Futures Capitalize on Long and Short Exposures
The index and KMLM offer possible hedges for equity, bond, and commodity risk and have demonstrated a negative correlation to both equities and bonds in bull and bear markets. Investing in managed futures offers diversification for portfolios, and carrying them within a portfolio can potentially help mitigate losses during market volatility and sinking prices.
“Managed Futures, in a crisis, hones in on the big flows and macro uncertainty that hurts equity markets whether those moves are caused by other markets going up or going down. 2022 is a great example of the need for both long and short exposures,” Mt Lucas wrote.
The index weights the three different futures contract 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.
Futures contracts in the index include 11 commodities, six currencies, and five global bond markets.
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 does not issue a K-1 for its commodities exposures come tax time, a point of relief for many advisors and investors as K-1s can add a level of complexity that can be frustrating during tax season. Instead, the fund issues a 1099 for reporting.
KMLM has an expense ratio of 0.92%.
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