As investors seek to diversify beyond traditional stocks and bonds amid ongoing market volatility, managed futures have gained increased attention. The iMGP DBi Managed Futures Strategy ETF (DBMF), a key player in this sector, has demonstrated the value of managed futures through its performance and accessibility. Launched in 2019, DBMF has become the largest managed futures ETF, offering a compelling case for this investment strategy.
The Evolution of Managed Futures
Managed futures strategies, once primarily available to institutional investors and high-net-worth individuals, are now more accessible thanks to advancements like ETFs. Traditionally, these strategies were managed by commodity trading advisors (CTAs) who used futures contracts across various asset classes—such as equities, commodities, and currencies—to exploit market trends. This approach, known for its technical and trend-following nature, was once associated with high entry barriers and significant management fees.
In the past decade, managed futures struggled due to the Federal Reserve’s policies, which suppressed market volatility and propelled equities to record highs. However, the introduction of the first managed futures mutual fund in 2007 and subsequent innovations like DBMF have revitalized interest in this asset class.
The Launch and Impact of DBMF
The iMGP DBi Managed Futures Strategy ETF (DBMF) launched in May 2019, marked a turning point by making managed futures accessible to a broader range of investors. DBMF employs a replication approach, leveraging an ETF structure to reduce management fees and offer lower barriers to entry compared to traditional managed futures investments.
DBMF’s performance during the COVID-19 pandemic was notable. The fund excelled amid the market turmoil of 2020, demonstrating its value in providing diversification and maintaining low correlations with traditional asset classes. This success was further evidenced in 2022, when DBMF was among the few ETFs to show positive returns while stocks and bonds faltered. The fund’s assets under management (AUM) surpassed $1 billion, highlighting its growing popularity.
Performance and Challenges
Despite its strong performance in 2022, DBMF faced challenges in 2023. The fund encountered volatility due to market uncertainty surrounding recession risks, interest rates, and inflation. For instance, the abrupt unwinding of the yen carry trade—an opportunity DBMF had capitalized on—led to a temporary decline. Nevertheless, the fund demonstrated resilience and recovered, maintaining a year-to-date return of 6.95% as of August 14, 2024. DBMF crossed the $1 billion AUM threshold again and received a 5-star rating from Morningstar, underscoring its continued relevance.
DBMF’s Strategy and Approach
Andrew Beer, co-founder of DBi and co-portfolio manager of DBMF, explains that diversification is a primary reason for investing in DBMF. The fund’s strategy involves using a proprietary quantitative model called the Dynamic Beta Engine, which analyzes the performance of the 20 largest CTA hedge funds over the previous 60 days. This model helps DBMF replicate the average performance of these funds without directly mirroring their positions.
By achieving a 0.88 correlation with the SocGen CTA Index, which tracks major managed futures hedge funds, DBMF effectively captures the performance of leading strategies in the space. This replication approach minimizes single-manager risk and reduces fees compared to traditional hedge funds, resulting in what Beer terms “fee alpha”—greater net returns for investors.
Conclusion
Five years after its launch, DBMF has proven the value of managed futures as a diversification tool. The fund’s ability to provide non-correlated returns to traditional asset classes, combined with its lower fee structure, makes it an attractive option for investors seeking stability and diversification. As managed futures gain traction, DBMF exemplifies how innovative financial products can democratize access to sophisticated investment strategies and deliver consistent performance amidst market fluctuations.
