Managed Futures and the ETF Revolution

In case you missed it, PIMCO- bulwark of the mutual fund sect- is aligning with the enemy. Via Reuters:

Pacific Investment Management Co has received approval from the Securities and Exchange Commission to launch its total return exchange-traded fund on March 1, Pimco said on its website..

The company announced plans last year for the actively managed ETF, which will mimic the strategy of Pimco’s Total Return Fund.

The firm expects that the fund will eventually be one of the biggest ETFs available, Bill Gross, co-chief investment officer of Pimco and the manager of the mutual fund and ETF, told attendees of the ETF Virtual Summit, an online conference held on Tuesday.

“Here is an opportunity for the small investor to get into a Pimco product,” Gross told attendees. “The Total Return fund is the largest in the world … We expect for the Total Return ETF to be the biggest as well.”

When we say enemy, we mean enemy of mutual fund diehards. The ETF structure, generally speaking, has been a little more fee friendly historically, and investors have been  clamoring for them to open up further for some time now. To be frank, we don’t really care that much. After all, until they start making mutual funds or ETFs that are noncorrelated to traditional asset classes, it’s just more of the same. What is perhaps more notable is that, should this be the beginning of the end, as Brown proclaims, it will be occurring just as the underperforming managed futures mutual fund attempts to make its big push.

As a general recap, we don’t particularly care for these managed futures products. For one, they’re not really managed futures, as they don’t boast anywhere near the level of transparency or liquidity of managed accounts. In some cases, like the Wisdom Tree Managed Futures ETF (WDTI), the product is managed futures in name alone, as the ETF doesn’t actually track managed futures but a commodities index (see here for further explanation). Even if it does track the performance of a portfolio of CTAs, the fees associated with mutual funds like load fees and admin fees are not included in the published performance of those funds, while the fee structures associated with CTAs are included in their reported performance. End result? You get less bang for your buck via a managed futures mutual fund than you would investing in managed accounts.

Assuming Brown is right, and the PIMCO transition is the shot heard round the world in the slow death of mutual fund popularity, will this mean that managed futures mutual fund proponents will need to shift to the ETF wrapper? Can they? We’ve yet to see anything resembling an actual managed futures portfolio in the ETF space. Since the Wisdom Tree product is not actually managed futures, the closest thing has been found across the pond, where managers like QBasis have developed ETFs that track the performance of their programs, but these ETFs still only track a single fund, and not a host of programs from a variety of managers.

Developing an ETF to track such a grouping of programs could prove very challenging,  given that ETFs trade like stocks – giving investors the ability to get in and out minute by minute. What happens when the managed futures programs comprising the ETF trade in $500,000 increments (i.e. one contract per $500k), and the outflows over the past hour are $300K? Does the ETF reduce the position size by one contract, or do nothing at all? This all boils down to rounding errors and the fact that managed futures trade exchange traded futures, where you can’t go smaller than a single contract. Saying you just want to trade 0.31 contracts, for instance, isn’t going to fly. In contrast, a stock based ETF could add just 1 more share of stock, or 31 shares, and so on.

If the ETF is in the billions, these granularity issues disappear somewhat, and really do become just a rounding error – but how much will such margins of error add up to negatively affect performance is the question.

In our opinion, the best way to gain managed futures exposure is still via managed accounts, and that probably won’t change any time in the near future. Gross and the PIMCO crew may be making waves with their ETF business moves, but until they find a way to offer a managed futures product that actually lives up to the performance the name implies, it’s just a ripple in the tide pool on our end.


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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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