LSC Elements S&P Commodity Trends Indicator -- Total Return Etn

The turmoil never seems to end in Europe as a rash of downgrades of major economies in the region and now the bailout fund itself could point to more uncertainty in the weeks ahead. Thanks to these events clouding the market outlook for equities, many investors are considering ramping up exposure to alternatives. Beyond plays on volatility and hedge funds, an increasingly popular choice is what is known as managed futures.

This segment consists of investment professionals who manage a portfolio of futures contracts across a variety of asset classes and sectors. While managers often use a specific trading system to do this, an index-based methodology—which is often based on a strategy—can be used as well. The goal of putting money to work with these investors is to help diversify portfolios out of traditional stock and bond investments and into alternatives which can have low correlations with other asset classes. Many times, managed futures accounts will be both long and short contracts, potentially reducing overall volatility in a portfolio as well (see Is USCI The Best Commodity ETF?).

While this strategy is currently available to a number of ultra-rich traders and investors, the masses now have access to similar techniques thanks to a few products from the exchange-traded fund industry. These ETPs seek to give investors access to a number of managed futures strategies but at a fraction of the cost and without minimum investment levels. Thanks to these differences, the products have caught on with a number of investors who have been dismayed by equity market performance as well as those who are growing increasingly concerned over a brewing bond bubble. With this in mind, we take a closer look at the three options investors have in this increasingly popular space below, hopefully giving you a better idea of the key differences, as well as the pros and cons, that can be expected in the managed futures ETF world:

ELEMENTS ETN Linked to the S&P Commodity Trends Indicator (LSC)

This ETN provides exposure to the S&P Commodity Trends Indicator a benchmark of 16 highly liquid commodity futures across six sectors. This index, which is rebalanced monthly, utilizes long and short positions across a variety of sectors in order to establish exposure to a number of commodities. Currently, the energy sector makes up zero percent of the fund while livestock is the only long holding at this time. In fact, the rest of the commodity groups make up short positions dominated by a -36.8% allocation to grains (read Commodity ETFs Plunge On Supply Forecast).

Despite the fund’s solid allocation strategy and monthly rebalancing, the product has severely underperformed its counterparts over the past 52 weeks, losing about 14.3% in the time period. Nevertheless, the fund does charge 20 basis points less in fees and has a beta of just -0.08 making it both the cheapest and least correlated to broad markets. However, investors should note that the product does hold the least amount of total holdings suggesting that it may not be the most diversified product out there.

WisdomTree Managed Futures Strategy Fund (WDTI)

This ETF tracks the Diversified Trends Indictor which looks to give investors positive total returns in rising or falling markets that aren’t correlated to broad market performances. The fund seeks to do this by investing in a combination of fixed income futures, non-deliverable currency forwards, commodity futures, and commodity swaps. Currently, the fund has heavy exposure to euro futures (15.7%) Japanese yen forwards (14.9%), as well as good sized holdings to Treasury bond and grain futures as well (read Time To Buy The Rare Earth Metals ETF?).

In terms of performance, WDTI has had a rough first year on the market as the product has slumped by 9.6% in the past 52 weeks. However, the fund does have a beta of just -0.14 with SPY suggesting that it moves almost completely independent from the broad market. This means that despite the fund’s lackluster performance it could be a solid way to diversify a portfolio in a more liquid way than its counterparts.

iShares Diversified Alternatives Trust (ALT)

iShares’ entrant in the space looks to maximize absolute returns from investments with historically low correlation to traditional asset classes. The product seeks to do this while also controlling the risks and volatility inherent in futures and forward contracts by taking long and short positions in historically correlated assets. Overall, the fund looks to maintain a nearly flat spread among long and short assets in order to accomplish this task with the biggest holdings in futures contracts. Currently, the largest holdings are long positions in mid-term Treasury futures and German euro bund futures, while the largest short positions are in 10 year Australian T-Bond futures as well as CAD/USD forwards (read A Closer Look At The Canadian Energy Income ETF).

ALT has had the best performance of the three losing 4.4% over the past 52 weeks. However, the product does have the lowest volume and a beta of 0.64, suggesting it is reasonably correlated with broad markets. This suggests that for investors seeking high returns ALT could be the top pick but for those looking for low correlations either of the other two funds are likely to be better choices. Although, it should be noted that this could change if broad markets begin to slide once again in 2012 and push futures and forward contracts to have different relationships with markets.

 

Category	LSC	WDTI	ALT
Expenses	0.75%	0.95%	0.95%
Total holdings	16	29	36
Volume	43,000	59,600	24,300
Returns (one year)	-14.3%	-9.6%	-4.4%
Beta (with SPY)	-0.08	-0.14	0.64

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