Under the Hood: Wisdom Tree’s Managed Futures ETF

You got to hand it to the marketing folks over at Wisdom Tree…. No sooner had the ink dried on Managed Futures good 3rd quarter and the Dow hit new 8 month lows this week than we started to see Wisdom Tree advertising their Managed Futures ETF ($WDTI) on CNBC. Marketing 101 = strike while the iron’s hot.

But how much “managed futures” exposure are you really getting with this product. We’ve looked under the hood of WDTI before, back when it launched in 2011, and thought it was high time to meet their managed futures marketing blitzkrieg during this stock market correction with some data and information on how well this product does what it purports to do (track managed futures).

 

  1. WDTI is a replication strategy

WDTI doesn’t track a managed futures index made up for actual managed futures managers providing alpha for their clients and managing real money. WDTI tracks something called the Diversified Trend Indicator (DTI), created by Victor Sperandeo, aka “Trader Vic”. The DTI tracks 24 markets (50% financials, 50% commodities) on a monthly basis and is designed to reflect rising and falling price trends in those markets. That is somewhat similar to the models used by systematic multi-market managed futures programs, but not completely similar. It is an attempt to capture the bulk of what they do at a lower price point, without the sophistication around the edges.

 

  1.  WDTI hasn’t replicated Managed Futures very well

So how has the WDTI done in replicating managed futures exposure… not great. Since its launch, it’s trailed the managed futures index (which we would think should be its benchmark) by 1,117 basis points (11.17%).  And what about a real program, not just the index. It’s trailed Covenant Capital’s Aggressive program, the same model used by our Trend Following Fund by 2,588 basis points (25.88%) since it was launched. And that’s after Covenant’s 2 & 20 fees. Past Performance is not necessarily indicative of future results.

1 3 Total Chart

Table of Comparisons
(Disclaimer: past performance is not necessarily indicative of future results)
Data points: 1/11 – 9/14

  1. DTI underperforms Managed Futures in market crisis periods

While the ETF itself only goes back to 2007, the DTI goes back quite a bit further, allowing us to be able to see just how the indicator has done in past crisis periods. You can see it has underperformed the managed futures index in past crisis periods.

DTI vs Managed Futures Crisis Period(Disclaimer: past performance is not necessarily indicative of future results)

  1.  DTI is becoming less and less correlated with Managed Futures

Notice the interesting pattern below, where the DTI has become less and less correlated with the managed futures index over the years. Why?  Because one of them (managed futures) is the results of actual managers continuously doing research and improving their models. And one is a single indicator designed years ago.

34 month correlation(Disclaimer: past performance is not necessarily indicative of future results)

  1. 25% of the portfolio is in just 2 markets 

With 13% of the portfolio tracking Euro currency futures and 12% tracking Japanese Yen futures, a full quarter of the portfolio is in just two markets. Watch out if those two are in an extended sideways period without trends.

 

  1.  WDTI doesn’t go short energy…

We just don’t get this one. Why the arbitrary rule just for one sector of the portfolio. They say it is to protect against the risk of ruin, as energy markets can spike on geo political events. But at the same time they allow short trades in Natural Gas &*^%.  And have you seen the volatility in Cocoa, or Copper, or Coffee – talk about price spikes.

 

  1.  There are no intra-month position adjustments

We don’t quite get this one either. What if a trend starts, or ends, during the middle of a month? Guess you get in or out late. This surely cuts down on Transactional costs and keeps things simple, but we’re sure it cuts down on performance also.

 

  1.  WDTI is Average, by design

At the end of the day, Wisdom Tree looks to have decided to try and replicate the beta of managed futures via an imperfect proxy, the DTI. What will that look like moving forward? The “average” performance of the managed futures index? Something less? Something more?  ‘Average’ looks less and less likely as the indicator continues to diverge from the live managers doing trend following strategies, with ‘less’ possible if there are no trends in the euro and yen while a short trend in energy, and a ‘more’ scenario dependent on trends in that concentrated currency exposure and hopes of an uptrend in energy.

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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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