ETF Edge on using managed futures to navigate volatility during the Iran war

Summary

• Managed futures ETFs are gaining traction as a diversification tool with low correlation to stocks and bonds, driven by increased market volatility and geopolitical tensions like the Iran war.
• In 2022, the Dynamic Beta Managed Futures ETF (DBMF) gained ~22% while the S&P 500 fell ~18% and aggregate bonds fell ~13%, highlighting its role as a hedge during market stress.
• The managed futures ETF category is relatively small at ~$6.5 billion but is growing, with recent entrants like iShares, Fidelity, and Invesco indicating rising investor demand.
• Investors and advisors are generally under-exposed to managed futures strategies and require education on their complexity, tax implications, and behavioral aspects like sticking through periods of underperformance.
• Current market risks include elevated US equity valuations, top-heavy indices, concerns about the AI trade, inflation, rising interest rates, and geopolitical uncertainties.
• Managed futures strategies thrive on regime shifts (e.g., inflation changes) over 3-12 month horizons, not intraday moves, making them suitable for medium to long-term allocation as portfolio insurance.
• Specific assets like gold, crude oil, Bitcoin, and international equities are traded within these strategies, but trends are identified slowly, and recent volatility (e.g., gold unwinding post-Iran tensions) complicates short-term predictions.
• Tax efficiency in managed futures ETFs depends on underlying structures (e.g., futures vs. swaps), impacting after-tax returns, with the ETF wrapper offering advantages.
• Andrew Beer emphasizes extreme market uncertainty, citing potential for regime shifts and stresses in areas like private credit, oil, and interest rates, advising investors to prepare for worst-case scenarios like 2008 or 2022.
• Nate Geraci views managed futures ETFs as a "one-stop shop" for diversification, but stresses they are not for tactical trading and require a long-term commitment.