DBMF - CTA: A Promising Diversifier
2023-11-06 07:22:38 ET
Summary
- Managed futures strategies are worth considering during a potential recession and market volatility.
- The Simplify Managed Futures Strategy ETF is an interesting active strategy with low correlation to equities.
- CTA uses a systematic investment approach and has shown superior performance compared to other managed futures ETFs.
Managed futures strategies have been out of favor for some time, but I think there's a good case for them here as we enter a potential recession and on-going market volatility. The Simplify Managed Futures Strategy ETF ( CTA ) is a newer fund designed to tackle the space. It's an interesting active strategy worth looking at deeper.
ETF Overview
CTA, an actively managed fund, was designed with a specific purpose - to seek long-term capital appreciation. It aims to achieve this by systematically investing in futures, thereby attempting to create an absolute return profile. An absolute return strategy seeks to produce positive returns irrespective of the direction of financial markets over time.
One of the striking features of the CTA is its low correlation to equities, making it a valuable diversification tool in an investor's arsenal. In other words, the performance of the CTA is largely independent of stock market movements. This characteristic becomes particularly valuable during risk-off events, periods when investors tend to shift away from riskier assets towards safer ones.
Investment Strategy Employed
CTA uses a systematic investment approach that is rules-based and eliminates human bias, thereby providing a disciplined and consistent investment process. The fund's strategic focus is on US and Canadian commodities and rates, deliberately excluding equity futures to ensure low correlations with equity-dominated portfolios. The foundation of the CTA's investment approach is built on systematic models, including strategies such as 'price trend', 'mean reversion', 'carry', and 'risk-off'.
Price Trend: This principal strategy predicts market trends and invests based on these forecasts, both in long and short positions. It capitalizes on sustained price movements to yield returns.
Mean Reversion: This strategy is designed to check the trend system from overexposure to a market that seems to trade above or below its intrinsic market value.
Carry: This approach aims to "roll down" bond yield curves and exit positions before maturity, thereby consistently securing the roll.
Risk-Off: This strategy's goal is to safeguard a portfolio from an equity drawdown by swiftly purchasing bonds in weaker equity markets, while avoiding bonds in stronger equity markets.
ETF Holdings
As of September 30, 2023, the fund's holdings include a mix of commodity futures and rates.
| Position | Allocation |
|---|---|
| B 01/11/24 Govt | |
| 60.50% | |
| LCZ3 Comdty | |
| 26.75% | |
| B 10/03/23 Govt | |
| 18.50% | |
| SBH4 Comdty | |
| 12.73% | |
| LCG4 Comdty | |
| 7.82% | |
| B 12/21/23 Govt | |
| 7.78% | |
| SBK4 Comdty | |
| 4.08% | |
| CLX3 Comdty | |
| 3.57% | |
| CLH4 Comdty | |
| 3.43% | |
| CLJ4 Comdty | |
| 2.22% | |
| Cash | |
| 11.15% |
It's important to note that the fund's holdings are subject to change without notice, in line with its active management approach.
Performance Analysis
CTA came out of the gate weak in the initial month of its launch but really outperformed nicely during the 2022 dual stock/bond sell-off. Since then, its underperformed and looks like its lagging, which by the way isn't a bad thing because that's what makes it a diversifier.
Peer Comparison
In a comparison of various ETFs employing the "managed futures strategy", the Simplify Managed Futures Strategy ETF ((CTA)) has shown superior performance over the iMGP DBi Managed Futures Strategy ETF ( DBMF ) and the KFA Mount Lucas Strategy ETF ( KMLM ). The CTA's success can potentially be attributed to its unique rule construction compared to the other funds. While the shorter duration of this trend warrants cautious optimism, the noteworthy performance of the CTA cannot be ignored.
Conclusion
The Simplify Managed Futures Strategy ETF ((CTA)) offers an innovative perspective on portfolio diversification and long-term wealth enhancement. Its unique strategy, robust performance, and prospect for lasting capital growth render it a compelling investment option. This is a diversifier and one worth considering in my view.
For further details see:
CTA: A Promising Diversifier