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Eyeing Alternatives With A Managed Futures ETF

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One of the many asset classes exchange traded funds (ETFs) have made more accessible to a broader swath of investors is managed futures.

The managed futures industry is more than three decades old and is typically comprised of money managers known as commodity trading advisors (CTAs). Managed futures strategies and ETFs are usually comprised of futures on asset classes including bonds, commodities, currencies and commodities. For its part, the JPMorgan Managed Futures Strategy ETF (JPMF) includes a variety of asset classes including equities, fixed income, currency and commodities based on relative attractiveness.

Managed futures are considered alternative investments and one of the key components of alternatives is reduced correlations to traditional asset classes, such as bonds and equities.

“Managed futures funds have proven to be uncorrelated to stocks and bonds, as well as other alternative asset classes, over time, thus offering true diversification to a portfolio,” according to 361 Capital. “In fact, of all the alternative mutual fund categories, the managed futures category has provided the greatest correlation benefit over the last five years (a period chosen to correspond with the growth in alternative mutual funds).”

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Reduced Correlations, Lower Volatility

By reducing correlations to other investment vehicles, managed futures strategies can reduce overall portfolio volatility. As an actively managed fund, the JPMorgan Managed Futures Strategy ETF (JPMF) take a proactive approach to reducing correlations to traditional assets while mitigating volatility. The JPMorgan Managed Futures Strategy ETF (JPMF) is just over a year old and its maximum drawdown since inception is 7.89 percent.

Over the same period, the maximum drawdown for the ICE U.S. Treasury 20+ Year Bond Index was about 140 basis point’s higher than JPMF’s drawdown while the maximum drawdown for the S&P 500 over that time was 17 percent.

The ability of managed futures strategies to reduce correlations and volatility does not guarantee these products will rise when broader markets tumble, but it is reasonable to expect less poor performances from managed futures when stocks decline. Year-to-date, the JPMorgan Managed Futures Strategy ETF (JPMF) is slightly outperforming the S&P 500 after JPMF hit an all-time high on Friday, Dec. 28th.

Another benefit to JPMF’s methodology is the implementation of the momentum factor, which the fund’s managers use to identify quality opportunities with commodities, foreign currencies and developed markets equity and fixed income futures.

A Good Deal

One of the primary reasons some advisors and investors have been reluctant to embrace managed futures strategies is high fees. Even the AAQR Managed Futures Strategy I, one of the largest managed futures mutual funds, carries a minimum investment of $5 million and an annual fee of 1.22 percent, according to Morningstar data.

Five years ago, Bloomberg ran an article noting that fees consumed 89 cents of every $1 in profit turned by managed futures strategies.

Fortunately, the fee landscape in the managed futures space is changing in investors’ favor. With an annual fee of just 0.59 percent, or $59 on a $10,000 investment, the  JPMorgan Managed Futures Strategy ETF (JPMF) is helping drive that change.

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