DBMF: A top ETF outperformer in 2022

A brief introduction to managed futures

Managed futures are a type of alternative investment managed by Commodity Trading Advisors (CTA's). As per their name, they offer exposure to multiple asset classes (equities, commodities, fixed-income, currency, etc.) using futures contracts. Like hedge funds, they're free to use leverage and employ strategies such as long/short, market neutral, global macro, and trend-following. 

These funds can be quite costly. Some use a hedge-fund fee structure like the "2% and 20%", which means a flat percentage fee based on the assets under management and a percentage of any outperformance over a benchmark, subject to possible high-water marks. 

They're also actively managed. Albeit, mostly rules-based, in that they use a quantitative methodology for making trading decisions. Still, it’s a bet on the quality and consistency of the CTA's knowledge, skills, and model. There is the risk of style drift over time if the team and their strategy change. 

Finally, managed futures can perform inconsistently. Prior to 2022, many posted years of flat returns, exacerbated by their high fees. These funds tend to "melt up," meaning that outperformance tends to come in bursts. As such, it can be difficult for investors to justify holding them during bull markets. 

Why DBMF is so unique

DBMF targets the gross (pre-fee) returns of the SG CTA Index, which tracks the performance of the top 20 CTA's and hedge funds. The ETF's quantitative "Dynamic Beta Engine" reverse-engineers the trailing 60-day performance of the SG CTA index to determine what its constituents are invested in. 

Then, the ETF takes positions in futures contracts designed to mimic this allocation, which can include equities, fixed income, currencies, and commodities. Last quarter, DBMF was short the Euro and Yen, while remaining long in crude oil, which helped them outperform the SG CTA index by 2.9%. 

DBMF's "replicator" strategy highly minimizes managed-specific risk. With DBMF, investors are no longer at the mercy of a single CTA team's strategy or model-specific risk. They can now target the average returns and risk of the top CTAs and hedge funds before all the high fees are factored in. 

This approach is nothing short of revolutionary. For a flat 0.85% expense ratio, investors can basically invest in what amounts to a hedge fund for indexes. Much like how index ETFs mitigate the security-specific risk of stock-picking, DBMF minimizes much of the risk associated with hedge funds. 

Much of the alpha captured by hedge funds gets eaten up by high fees. DBMF avoids this by targeting the gross returns of the SG CTA index and charging a flat, relatively low expense ratio. With DBMF, you're betting on the average gross performance of the hedge fund industry, and not a single manager. 

As shown in the backtest below, since inception DBMF has met all of its goals: a positive absolute return, a low correlation with stocks and bonds, and a target annual volatility of between 8-10%. 

Please note this article is for information purposes only and does not constitute investment advice.