The WisdomTree fund is based on a proprietary of index of 24 futures contracts focused on commodities and currencies, but not equity indexes. From there, four futures contracts are excluded based on volatility measures. “The most volatile funds are likely to deviate from the trends we are trying to follow,” says Gannatti.
Whether a position is held short or long is determined by three-, six- and 12-month trends in specific futures categories. Mixed signals among those return time frames will result in less than full allocations to those positions.
Analysis from Yao Hua Ooi, a portfolio manager with AQR Capital, found that "trend-following has delivered strong positive returns and realized a low correlation to traditional asset classes each decade for more than a century."
But Issakainen concedes that as of late this form of active management hasn’t produced superior returns relative to the benchmark, and attributes that to the recent market environment that has produced unclear futures contracts trends. As trend following signals strengthen, the fund’s returns might also strengthen.
The First Trust and WisdomTree funds also hold a tax advantage by offering taxable returns as 1099 income, rather than K-1 income. That’s because the futures contracts at each fund are actually bought in a Cayman Islands subsidiary, removing their direct exposure to the trades.
Despite their recent poor performance, managed futures funds shouldn’t be thought of as money-losers when stocks rise. Their poor performance is instead the result of low volatility. A Harvard University study that covered the period from 1993 through 2002 found that stocks rose 9.3 percent annually (with a great deal of volatility) during that time frame versus a 6.9 percent annual gain for managed futures.
So you don’t need to consider these ETFs solely on the basis of an expected market slump. Instead, also focus on these funds if you think we’ll eventually exit the current era of ultra-low volatility. With ongoing bickering in Washington, along with potential for clashes in Syria, North Korea and elsewhere, the current quiet in the markets may not last.