Should You Include Managed Futures ETFs in Your Portfolio?

Managed Futures ETFs: Benefits, Costs, and Best Funds

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Managed futures ETFs are exchange-traded funds that passively invest in a managed futures index. Investors typically buy managed futures ETFs as a diversification tool because the performance usually has a low correlation with a broad market stock index, such as the S&P 500. The average expenses for managed futures ETFs are 0.75 percent or $7.50 for every $1,000 invested.

Managed futures ETFs are most commonly used to achieve positive returns no matter which direction the stock market is headed (up or down in aggregate pricing). These ETFs are not ideal investments for everyone but they can be used wisely as part of a diversified portfolio or as a short-term hedging strategy.

Before investing in managed futures ETFs, it's wise to understand how managed futures work, the risks associated with them, and how investors can benefit from them.

What Are Managed Futures?

The term, managed futures, refers to a portfolio of futures contracts managed by a professional. Futures, aka futures contracts, are contracts where a buyer is obligated to purchase or a seller is obligated to sell an investment security or asset at a predetermined price. Futures are either purchased for speculation (betting on a certain direction in price movement) or for hedging purposes (offsetting a loss from one asset or investment with a gain from the futures contract).

With speculation as the purpose, buyers of futures contracts are expecting the price of the underlying security or asset to increase, whereas sellers of futures are expecting a decline in price. Increasingly, investors wanting to use futures for hedging purposes will buy managed futures funds (MFF). Managed futures ETFs are investment tools that can meet this investment objective.

Top Managed Futures ETFs

Buying managed futures ETFs can be a simple and convenient means of gaining access to the managed futures market without having the hassle of dealing with some of the complex aspects of futures contracts, such as fees, rollovers, and expirations. If you're thinking of investing in a managed futures ETF, here are some of the best available.

  • WisdomTree Managed Futures ETF (WTMF): This fund is the oldest and largest managed futures ETF on the market today. Formerly trading with the ticker symbol WDTI, WTMF seeks to achieve positive total returns in rising or falling markets that are not directly correlated to broad market equity or fixed income returns. Expenses for WTMF are 0.65 percent, or $6.50 for every $1,000 invested, which is lower than the category average of 0.75 percent.
  • First Trust Morningstar Managed Futures Strategy ETF (FMF): Unlike most ETFs, FMF is actively-managed, which means it seeks to outperform its benchmark index, which is the Morningstar Diversified Futures Index. To do this, FMF management actively selects investments from the benchmark and manages contracts in a strategy that can beat the index as a whole. The expense ratio for FMF is 0.95 percent.
  • ProShares Managed Futures Strategy ETF (FUT): This fund is an actively-managed ETF that uses the S&P Strategic Futures Index as a target performance benchmark. The fund strategy is to provide positive returns in rising and falling markets by taking long and short positions in futures in various asset classes, including commodities, currencies and fixed income. FUT is unique for a managed futures ETF in that it uses a risk-weighting so that each asset type contributes equally to the portfolio's risk. To do this the fund management rebalances the portfolio monthly. Expenses for FUT are 0.75 percent.

Caution on Investing in Managed Futures ETFs

Managed futures ETFs may use hedging strategies that involve investment in assets that have low correlation with the stock market. The end result can produce positive returns when the stock market is falling but, depending on the fund strategy, managed futures ETFs produce negative returns when stocks are otherwise positive.

Most investors are best served investing in a diversified portfolio of mutual funds or ETFs that invest in a balance of stocks and bonds with an allocation that is suitable for the investor's risk tolerance and time horizon. 

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.