ETF or exchange-traded fund investors are always looking for unique strategies that offer anti-volatility positioning or promises of inflation protection. The funds are, most of the time, drawn up using unique back-testing analysis and are touted as strong “alternatives” that complement existing bond and stock portfolios.
However, there are instances when the strategy will either fall flat right from the start or simply will not work considering the current circumstances that surround global markets. The difference between practice and theory is quite big when being applied to investment instruments which follow sophisticated indexes or other niche approaches.
Let us examine few ETF instances that just don’t seem to sync with the markets.
Wisdom Tree Managed Future Strategy Fund or WDTI
At the onset, managed futures strategy funds sound like complex vehicles and WDTI isn’t an exception. Exchange-traded funds seek to provide bonds by investing in quantitative rules-based indexes and non-correlated returns to more traditional stocks that seek to identify falling or rising trends in currency, treasury, or commodity futures.
My effort to simplify the last sentence is this: WDTI invests in the short and long positions of different alternative asset classes to outperform the market. It is considered an alternative strategy as it does not correlate with a conventional portfolio’s ups and downs.
Of course, this also means that it is hard for investors to fully understand how this fund is constructed, why its expense ratio – which stands at 0.95% – has to be so high, and how the funds underlying investments change with time.
According to information posted on the company’s site, WDTI has been experiencing negative returns of -3.44% every year from January 2011 to January 2016. This comes to a -16.25% overall during this time frame. At the same time, the fund hasn’t paid any dividends to its shareholders in the last 4 years.
The exchange-traded fund currently has $198,000,000 in total assets and was, in the offing, conceived as an institutional tool and not a tool for typical retail investors. It could as well by lying in wait for the perfect moment for it to turn on afterburners. On the other hand, I would be extremely careful about fully comprehending the methodology behind intricate funds of such a nature before committing any capital to its cause.
PERM/Global X Permanent ETF
You might thing that funds with the word permanent in their name are something that you should absolutely hang on to. However, Global X Permanent ETF uses a rather unconventional methodology to constructs its portfolio, making it difficult to work, or even fall in love with.
This exchange-traded fund is based on Solactive Permanent Index that allocates capital equally to four different asset classes: short-term Treasuries, long-term Treasuries, gold/silver, and stocks. The result is a uniquely diversified portfolio which experiences an internal tug of war between deflationary and inflationary assets.
When PERM stocks go up, the bonds go down, and this manages to offset most of the overall moves. At the same time, stalwart’s 25 percent allocation to short-range Treasuries is similar to having significant portions of your portfolio’s range in cash-like solutions that do not fluctuate in value that much. The result, a relatively low volatility portfolio that generally trades in sideway ranges.
Debuting in 2012, PERM has succeeded to create average returns of +0.13% every year since its commencement to February 29, 2016. PERM pays measly dividends that are distributed annually as well, which does not make it that exciting for income investors.
The good thing about PERM, however, is that it has not lost a lot of cash during the time it has been in existence. However, it has not made much money either. The fund would need a unique, precious metals, bonds, and stocks environment in a simultaneous uptrend for it make significant forward headways. We will be looking out for that.
CPI/ IQ Real Return ETF
Another ETF that focuses on a strategy that involves side-stepping inflation is Consumer Price Index (CPI). This fund takes up a fund of funds line of attack by investing in other low-cost ETFs with a goal of offering “real returns” that are above the standard rate of inflation as calculated by CPI.
In all fairness, we’ve been in a low inflationary and low-interest rate environment for almost the entire time CPI has been in existence. Since it was first introduced in 2009 (December), the fund has experienced an average of 0.89% in annual returns every year up until February 2016.
The good thing, however, is that the fund’s price history has exhibited comparatively low volatility, much like PERM’s. However, the fund’s current overweight Treasury bills allocation, alongside real estate and silver stocks make for a very tough portfolio that is envisioned to thrive shortly. At the same time, I am quite surprised that this strategy doesn’t include core allocations to inflation-protected Treasury securities within its mix.
Consumer Price Indexes turn out to be highly successful in a time when goods and services prices are rising like what the US experienced in the 70’s. Nonetheless, the fund may fall short of the expectations of most investors given it expense ratio of 0.48% and comparatively skimpy returns over the 6 years it has been in existence.