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First Trust, a global provider of exchange-traded funds and one of the top ten providers in the US, has unveiled its sixth actively managed ETF, providing investors with a cost-effective way to gain exposure to commodities in addition to offering daily liquidity and full transparency.
Listed on the Nasdaq stock market, the First Trust Global Tactical Commodity Strategy ETF (FTGC) aims to offer investors a positive absolute return while maintaining a relatively stable risk profile.
It seeks to achieve this objective by investing up to 25% of its total assets in commodity futures and exchange-traded commodities. The remainder of the fund’s assets will primarily be invested in short-term investment-grade fixed income securities, money market instruments, ETFs and other investment companies and cash and other cash equivalents.
The allocation to commodities is an important feature of the fund. Commodities are a unique asset class that offer the potential for reduced risk through improved diversification, may act as a hedge against rising inflation, and may provide the potential for attractive returns.
Underlying this are three factors. First, commodities have typically exhibited low correlation with traditional asset classes such as stocks and bonds. Combining uncorrelated asset classes in an overall portfolio increases diversification and may potentially smooth out volatility. Second, commodities are real assets and have historically had a higher positive correlation with inflation than financial assets such as stocks and bonds. This makes them useful hedges against inflation. And third, global growth and rapid urbanization in emerging markets are contributing to increased global consumption and boosting the demand for commodities. Increasing demand is putting upward pressure on prices, creating opportunities for capital gains.
Unlike index-based commodities ETFs, the fund is actively managed and takes a risk-managed approach to commodities investing that aims to provide an improved risk/return relationship. The weightings of the underlying commodities in the fund will be rebalanced by the fund’s managers, Rob Guttschow, CFA, and John Gambla, CFA, FRM, PRM, in an attempt to capitalize on historical pricing and volatility relationships in commodities while maintaining stable risk levels. As commodity market volatility rises, the portfolio managers will reduce exposure to relatively riskier assets seeking to keep the portfolio risk within its targeted range. Conversely, as commodity market volatility falls, the portfolio managers will add exposure to relatively riskier assets seeking to keep the portfolio within its targeted range.
Commenting on the launch, Guttschow said: “Commodity investments have traditionally provided investors with attractive total returns and strong diversification characteristics, especially during periods of high inflation. By tactically rotating between different commodity investments and managing the overall portfolio volatility, the fund may provide investors commodity exposure in a more attractive manner. Additionally, by attempting to pick the most attractive maturity futures contract for each commodity, FTGC may provide higher returns over a market cycle.”
The fund has an expense ratio of 0.95%.