DBMF Deserves A Place In Your Portfolio Next To KMLM

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We’ve written earlier about managed futures successful wide and the KFA Mount Lucas Index Strategy ETF (KMLM) successful particular. We get rather immoderate questions astir the astir fashionable ETF successful this category, the iMGP DBi Managed Futures Strategy ETF (NYSEARCA:DBMF). While we instrumentality a look astatine this money we re-check the backdrop for managed futures aft its stellar show successful 2023.

Our preferred managed futures ETF remains KMLM, but the quality with DBMF is small.

Managed aboriginal support deserving a spot successful your portfolio. We expect the macro backdrop with precocious volatility to proceed adjacent twelvemonth and this paves the mode for different twelvemonth with a bully performance. And some DBMF and KMLM tin springiness you the needed exposure.

2022 successful review

2022 is simply a atrocious twelvemonth for the accepted 60/40 portfolio. Both equities (including existent estate) and bonds are down. Only commodities are up.

Figure 1: Total instrumentality illustration (Yahoo! Finance, Author)

Besides commodities besides the dollar had a affirmative year. But adjacent amended is the show of managed futures successful wide and KMLM successful particular!

Figure 2: Total instrumentality illustration (Yahoo! Finance, Author)

This show is akin to those during the bursting of the dot-com bubble and the Global Financial Crisis and provided managed futures the statement “crisis alpha”.

The lawsuit for managed futures

But what should we bash aft specified a year? Take our wealth and run? Is the situation over? Do we nary longer request this clip tested diversifier for bonds and equities?

The reply is no!

Let’s archetypal cheque the agelong word inclination for the large plus classes.

Figure 3: Trend (Yahoo! Finance, Author)

None of the large plus classes (including commodities) is successful a wide uptrend. This calls for adding uncorrelated assets similar managed futures to your portfolio. This points besides to continued volatility successful markets. Managed futures execute champion erstwhile determination are wide trends successful the markets, similar this year. This often coincides with specified macro volatility.

According to AQR determination is simply a tenable accidental that the precocious macro volatility inclination volition continue. Periods of important macro volatility thin to beryllium followed by continued elevated macro volatility. Good quality for managed futures!

Figure 4: Macro volatility persistence (AQR)

Research by AQR shows besides that determination is so nary inclination for managed futures to underperform pursuing periods of beardown performance.

Figure 5: Performance persistence (AQR)

The bleak outlook for bonds and equities (based connected their agelong word trend), the expected continued precocious macro volatility and the past show of managed futures aft a beardown show are 3 bully reasons to stay invested successful managed futures.

DBMF

The iMGP DBi Managed Futures Strategy ETF is the astir fashionable managed futures ETF with astir $1 cardinal successful assets nether management. The money is managed by Dynamic Beta investments (DBi). The money managers usage their alleged “Dynamic Beta Engine” is designed to place the main drivers of show of the SG CTA index. That’s an scale published by Société Générale that is designed to bespeak the show of a excavation of Commodity Trading Advisor (CTAs) hedge funds. The Dynamic Beta Engine analyses the caller (i.e., trailing 60-day) show of those hedge funds successful bid to place a portfolio of liquid fiscal instruments that intimately reflects the estimated existent plus allocation of the selected excavation of CTA hedge funds, with the extremity of simulating the performance, but not the underlying positions, of those funds. Then, DBMF takes positions successful futures contracts (equities, fixed income, currencies, and commodities) designed to mimic this allocation.

Figure 6: Asset allocation (iMGP Funds)

DBMF vs KMLM

Both DBMF and KMLM are managed futures ETFs, but their attack is simply a spot different.

KMLM follows a (hedge money like) inclination pursuing strategy, portion DBMF wants to mimic the strategies followed by the biggest inclination pursuing hedge funds.

Managed futures are successful essence a passive trend-following strategy that cancels retired the affectional broadside of investing and is purely based connected information alternatively of e.g. capitalist sentiment. KMLM falls perfectly into this category. DBMF falls determination betwixt passive and progressive arsenic it seeks to simulate the show of the 20 largest managed futures hedge funds. The Dynamic Beta Engine is simply a spot of a achromatic container and uses a 60-day lookback model to accommodate its strategy. The rebalancing frequence of DBMF (weekly) is besides much progressive than that of KMLM (monthly).

This antithetic attack is besides disposable erstwhile look astatine the correlation betwixt the 2 ETFs. Currently that correlation is rather high, but connected mean the 2 are alternatively uncorrelated. This information unsocial is already a valid statement to person a presumption successful some ETFs.

Figure 7: KMLM-DBMF correlation (Portfolio Visualizer)

Because managed futures are expected to beryllium uncorrelated to bonds and equities it’s worthwhile to cheque the correlations. And indeed, some DBMF and KMLM person a antagonistic correlation with some bonds and equities. The correlation betwixt KMLM and bonds and equities is simply a spot little compared to DBMF.

Figure 8: Asset correlations (Portfolio Visualizer)

Concerning portfolio composition, we tin accidental that DBMF is much concentrated with presently lone 14 antithetic futures successful portfolio, compared to 22 for KMLM. One could accidental that KMLM is much diversifying and much diversified.

Let’s besides instrumentality a look astatine the show successful this managed futures year. KMLM and DBMF are the champion performing managed futures ETFs, but KMLM is the wide victor here.

Figure 9: Total instrumentality illustration (Yahoo! Finance, Author)

We get the aforesaid representation erstwhile we look astatine the agelong word trend.

Figure 10: Trend (Yahoo! Finance, Author)

Finally, the disbursal ratios are rather comparable: 0.85% for DBMF and 0.90% for KMLM.

Conclusion

Managed aboriginal merit a spot successful your portfolio and determination is nary crushed to expect that its stellar show this twelvemonth should mean-revert adjacent year. We expect the existent situation with precocious macro volatility besides adjacent year.

The champion performing managed futures ETFs are KMLM and DBMF and some merit a spot successful your portfolio. If we had to take betwixt them, we would prime KMLM. The past show is better, the agelong word inclination is better, the correlation with bonds and equities is amended and the portfolio is much diversified. But connected each levels the quality is small.

Bottom line: our reply to the question what we deliberation astir DBMF is clear. It’s a buy!

Hi, I’m a backstage capitalist and a teacher. I similar to programme and the banal markets are a fertile playground for information investigation and visualisation and this helps maine instrumentality well-informed decisions.