First Trust is probably best known for its lineup of AlphaDEX funds which seek to pick better stocks in a variety of countries or sectors. This ‘smart indexing’ approach has long been the mainstay of the company, and it is responsible for a huge chunk of the firm’s assets under management.
However, First Trust has also begun to branch out into various other, more active strategies as of late, pushing out products in the senior loan market (FTSL), and the managed futures space with their (FMF) fund. The trend isn’t stopping there though, as the company has just released its latest active fund, the Global Tactical Commodity Strategy Fund .
This new fund takes a unique approach to commodity investing, looking to take a risk-managed approach to commodities that seeks to improve the risk/return relationship for the space. This is done by looking at several factors in the commodity futures market, any of which could help to differentiate this fund from others in the space (also see Inside the New iShares Commodity ETF).
FTGC in Focus
The advisor looks to maximize the return of a highly diversified commodity portfolio targeted to a specific volatility range. This is done by selecting between 10 and 35 distinct commodities, based on liquidity as measured by open interest.
These commodities’ returns are then modeled, and the expected volatility is forecasted using daily historical data. Then, a set of portfolios that seeks to maximize returns given certain volatility levels are generated along the efficient frontier.
Commodities are then chosen to match this according to a desired risk range, though there is definitely a focus on stability, especially when compared to traditional portfolio construction approaches.
It is also worth noting that the fund managers will take into account several key aspects of the commodity futures contract process. The managers will consider the spot return, roll yield, and cash yield in order to select the best contracts and to roll to the correct ones that have the lowest roll cost, while earning solid income levels on assets held as collateral.
Additionally, the structure of the ETF is such that a K-1 will not be necessary at tax time. This can often be a pain for some investors, so it is worth noting that this fund will have 1099 tax form reporting.