This quarter’s earnings season is a good reflection of the complexity that markets are grappling with: mostly positive earnings from the financial sector buoyed hopes in the first week, only to have sentiment take a hard left when Big Tech began reporting large misses, surrounded by disappointments from major companies across sectors. Continued market volatility creates an opportunity for trend-following strategies, particularly managed futures that have outperformed this year in the market regime change.
Bank earnings mostly missed on revenue but made up the difference in income from interest, enough to inspire optimism for investors as markets rose for multiple days in a row, a rarity this year. As corporate earnings began trickling in, it seemed to be a mixed bag at first, with wins from companies such as P&G and GM, but increasingly large misses from companies like Boeing, Microsoft, and Alphabet quickly dragged markets downward once more.
Shares of Alphabet dropped 6.4% on news of the company’s miss on both its top and bottom line, while Microsoft shares also dropped 6% on weaker-than-expected cloud revenue and a reduced guidance for the fourth quarter. The Nasdaq fell 2% in trading during the day Wednesday while the S&P 500 and Dow Jones both slid, reversing from their recent three-day uptrend.
“The intraday action of the day is kind of a microcosm of what we’ve been feeling as investors over the past several weeks,” Keith Buchanan, portfolio manager at GLOBALT Investments, told CNBC. “The optimism is built almost entirely on a pessimistic outlook. The optimism of the Federal Reserve pivoting only occurs in a scenario where things deteriorate more quickly, from a macroeconomic standpoint.”
“The volatility is here, and it’s been here for a while and I think it’s probably here to stay,” Buchanan said. “Not on a day-to-day, week-to-week, but on an intraday basis, just because of the position that investors are in now.”
Investing for Prolonged Market Volatility With DBMF
Investors looking for a fund that removes sentiment from investing and focuses solely on current trends should consider the iMGP DBi Managed Futures Strategy ETF (DBMF), a managed futures fund designed to capture performance no matter how equity markets are moving.
The fund seeks long-term capital appreciation by investing in some of the most liquid U.S.-based futures contracts in a strategy utilized by hedge funds and has 34.40% returns year-to-date as of 10/25/2022. It has over $1 billion in AUM and is the largest of any managed futures ETF.
DBMF allows for the diversification of portfolios across asset classes that are uncorrelated to traditional equities or bonds. It is an actively managed fund that uses long and short positions within derivatives, mostly futures contracts, and forward contracts. These contracts span domestic equities, fixed income, currencies, and commodities (via its Cayman Islands subsidiary).
The position that the fund takes within domestic managed futures and forward contracts is determined by the Dynamic Beta Engine. This proprietary, quantitative model attempts to ascertain how the largest commodity-trading advisor hedge funds have their allocations. It does so by analyzing the trailing 60-day performance of CTA hedge funds and then determining a portfolio of liquid contracts that would mimic the hedge funds’ performance (not the positions).
DBMF takes long positions in derivatives with exposures to asset classes, sectors, or markets that are anticipated to grow in value and takes short positions in derivatives with exposures expected to fall in value. Under normal market conditions, the fund seeks to maintain volatility between 8%–10% annually.
DBMF has a management fee of 0.95%.
For more news, information, and strategy, visit the Managed Futures Channel.