DBMF - DBMF Should Only Be Seen As A 'Hedge Play' In Your Portfolio

2023-07-10 13:07:59 ET

Summary

• The iMGP DBi Managed Futures Strategy ETF aims to mimic hedge fund strategies, trading stocks, bonds, commodity futures, and precious metal futures in a long-short fashion.
• The fund is not intended to be a major part of an investor's portfolio, but rather a hedge play, with a performance generally uncorrelated to general stock performance.
• As long as investors understand what this fund's main purpose is and what goals it can serve, it wouldn't hurt to have a small position in this fund.

iMGP DBi Managed Futures Strategy ETF ( DBMF ) is an interesting fund that tries to imitate strategy of hedge funds at a low cost. The fund trades stocks, bonds, commodity futures, precious metal futures in a long-short fashion where it can either go long or short with each asset class at a given time. It's not net bullish or net bearish at any given time but some of its main plays could be slightly bullish or bearish. Since most hedge funds have large minimum investment requirements most retail investors don't have access to those hedge funds and this fund could play a role in getting some exposure to hedge fund strategies, but I don't think this fund should be a big part of one's portfolio but rather should exist as a hedge play.

Let me explain what I mean by that. Most investment portfolios typically have 2-3 main components. There is the "main" part of the portfolio where the biggest plays are. Investors make big bets on certain stocks, bonds, funds or other assets that make up anywhere from 60-80% of their portfolio. If we are thinking of it like a war, this is your main attack force. These are the assets you are more confident on and you expect most of your performance to come from these. For example, if you are a young and aggressive investor, you might put most of your money into tech and growth stocks or an ETF like Nasdaq-100 index ( QQQ ). If you are closer to retirement or already retired, the main part of your portfolio could be in bonds or other income plays and you would expect most of your performance to come from there.

The second component of most portfolios is one-off plays. These are very small plays where you put about 1% of your portfolio or less and see as "lottery tickets". You believe these stocks could either go up 10x or lose it all in the next 10 years so you don't put a majority of your money in them but you still make a small play in them just in case. These could be tech start-ups, pre-revenue biotech companies, crypto currencies and similar volatile assets. A typical portfolio could have 6-7 of such plays making up about 5-8% of the portfolio's total value.

The third component of many portfolios is hedging. This is where you buy insurance in case your main plays don't turn out well. People use different types of hedging such as buying put options as insurance, selling calls against their existing stocks, buying bonds, buying inverse/short ETFs or buying other assets that appear to have low or negative correlation with stocks such as gold, silver or precious metals. Some people might also short sell some stocks but it's not recommended for most investors since downside risk is unlimited.

Here is where DBMF comes in play. This ETF isn't meant to be a main part of your portfolio, but more of a hedge. Last year, when stock indices like the S&P 500 and Nasdaq were down anywhere from -18% to -32%, DBMF was up 21%, performing greatly as a hedge.

Meanwhile this year, it's underperforming in a similar fashion where it's down while stock indices are having a great year overall. This is why it's not meant as part of your main portfolio but more of a hedge play within your portfolio.

Of course, this doesn't mean that the fund will always have an inverse relationship to the performance of the stock market. In 2020, the stock market was up by double digits, mostly driven by its performance from March to September and DBMF was up 2% during the year. In 2021, stock markets were up about 20% while this fund was up 10%. The fund's performance seems to be mostly uncorrelated to the stock market performance as we've seen years where both are going in the same direction or opposite directions. This is expected since the fund invests in many different types of assets including stocks, bonds, commodities and precious metals. In fact, stocks make up about 10% of the fund's total portfolio so we'd be actually surprised if its performance correlated strongly with the performance of stock markets. In the long run, the fund's overall performance seems to keep up with the performance of stock markets but it's mostly driven by last year's outperformance. If it wasn't for last year's outperformance where it was up 21% while SPY was down -15%, this fund would have underperformed with a large margin.

The fund is actively managed so its holdings constantly change. Last year, the fund's short positions were very successful, resulting in beating the market's overall performance but it also created this year's underperformance because fund managers entered the year with a slightly-to-moderately bearish overall position as they expected the bear market to continue. To their surprise, the stock market had one of the strongest first half years in history even though bonds, commodities and several other asset types continued to underperform. Year to date, stock indices were up anywhere from 15% to 38% while commodities were down, gold and silver are flattish and bonds were barely flat. This is why most multi-asset hedge funds have been underperforming this year as well.

When we look at the fund's current holdings (which are subject to change without notice) we see a lot of long and short positions. In the table below, anything shown in red and with a negative sign indicates a net short position. The table contains far more red lines than non-red which indicates there are more short positions than long positions but the size of the long positions actually appear to be bigger. For example, currently the fund's biggest holding is long treasuries which is $539 million in size followed by a long in Euro currency futures with a size of $221 million. We see the fund long in S&P 500 index futures with a size of $145 million. The fund's biggest short position with a size of $182 million is Three-Month SOFR futures which stands for Secured Overnight Financing Rate. This is basically a bet on where interest rates will be a few months from now. The fund is shorting 2-year notes but longing 10-year notes which means they expect yield curve to come in favor of longer term bonds in the near future. The fund also has a small short position against the Japanese yen. Also notice that the fund has a very small long position in gold and a decent short on crude oil.

The fund had particularly hard time last March during the midst of regional banking crisis. The fund's NAV took a dive from almost $30 to below $26 within a couple weeks and the fund had to exit or reverse several positions. Since then things have been improving for the fund and its NAV performance has been recovering.

The fund also has a dividend policy where it passes a significant portion of its trading gains as dividend. Since the dividend relies heavily on trading gains, it tends to be volatile. In the last 5 years dividends ranged from $0 to $2.68, yields ranging from 0% to close to 10%. Keep in mind that the dividends are paid once per year at the end of each year so we won't know what the dividend will be for 2023 (if any) until December. For this reason, this fund shouldn't be used as an income play.

This fund best serves as a hedge play and most likely deserves a small place in your portfolio. I wouldn't recommend a large position in this fund and I wouldn't recommend it as part of your "main attack force" or main income play. As long as you recognize this for what it is and what purpose it serves, you won't be disappointed in the long run, in my view. I own a very small position in this and I intend on holding it and reinvesting dividends as they come but not much beyond that.

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