US-based exchange-traded fund provider First Trust Advisors has launched an actively managed ETF that seeks to profit from either long or short positions in select exchange-listed commodity futures contracts. The First Trust Alternative Absolute Return Strategy ETF (FAAR) has begun trading on the Nasdaq Exchange.
As of 18 May 2016, the fund has significant long exposure to futures contracts in soybeans (7.2%), cattle feeder (5.0%), corn (4.0%), and Brent Crude (3.3%). The largest short exposures were to natural gas (6.4%), KC hard red winter wheat (6.1%), WTI Crude (3.3%) and wheat (3.2%).
Futures contracts are agreements between participants to buy or sell a particular commodity or financial instrument at a predetermined price and date in the future. The owner of a “long” position in a futures contract has effectively agreed to buy the underlying asset at a predetermined price and date, and may profit from an increase in the price of the underlying commodity. Conversely, this investor will incur a loss if the underlying commodity declines in price.
The owner of a “short” position in a futures contract has effectively agreed to sell the underlying asset at a predetermined price and date, and may profit from a decrease in the price of the underlying commodity. Conversely, this investor will incur a loss if the underlying commodity increases in price. The flexibility of the First Trust Alternative Absolute Return Strategy ETF to take either long or short positions provides the potential to generate positive returns over time in both rising and falling markets.
“Absolute return offers the potential to provide long-term total return in a variety of market environments,” said John Gambla, Senior Portfolio Manager for the Alternatives Investment Team at First Trust.
Gambla further notes that the ETF may provide significant diversification benefits when combined with an investor’s core portfolio. The alternative nature of the fund’s investment strategy may potentially smooth out the volatility experienced in traditional portfolio allocations.
“Additionally, the strategy may offer low or no correlation to equities, bonds, real estate and long-only commodities,” he said. “Global capital markets are increasingly integrated, correlations are rising among the major asset classes, and volatility is reverting back to long-term norms. In such an environment, absolute return strategies with lower correlation profiles can provide the robust diversification that is a cornerstone of modern portfolio theory.”
Typically, ETFs that invest in commodity futures contracts generate a form K-1 for tax reporting, which may create complications for investors at tax time. The fund, on the other hand, does not issue K-1s for tax purposes. Instead investors will receive a Form 1099 with distributions reported as ordinary income, avoiding the potential complications of K-1 reporting.
Rob Guttschow will also serve beside Gambla as Senior Portfolio Manager of the fund. The two will primarily be responsible for daily investment decisions under the direction of an Investment Committee.
As of 18 May 2016, the fund has significant long exposure to futures contracts in soybeans (7.2%), cattle feeder (5.0%), corn (4.0%), and Brent Crude (3.3%). The largest short exposures were to natural gas (6.4%), KC hard red winter wheat (6.1%), WTI Crude (3.3%) and wheat (3.2%).
The fund has a total expense ratio of 0.95%.