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WisdomTree Launches Managed Futures ETF

The new actively managed ETF targets positive returns in rising and falling markets.

Robert Goldsborough, 01/06/2011

On Wednesday, Jan. 5, WisdomTree launched a new, managed futures ETF that is aimed at providing positive returns both in rising and falling markets.

Dubbed WisdomTree Managed Futures Strategy WDTI, the actively managed ETF follows a quantitative, rules-based strategy that is designed to generate returns that correspond with the performance of a benchmark known as the Diversified Trends Indicator. To mimic the returns of this benchmark, which targets capturing the economic benefit derived from rising or falling price trends in commodity, currency, and Treasury futures markets, WDTI takes long and short positions in a combination of U.S. Treasury futures, currency futures, currency forwards, commodity futures, commodity swaps, government securities, and money market securities.

As the first-ever managed futures ETF, WDTI is aimed at giving investors "a way to get access to an asset class that was pretty hard for most people to reach," Luciano Siracusano, WisdomTree's chief investment strategist, told Morningstar. Indeed, large investors long have employed futures-oriented strategies; they just haven't yet been available to retail investors.

The Diversified Trends Indicator, which also is known as the DTI Index, is a long/short rules-based, managed futures strategy that Dallas-based Alpha Financial Technologies began live calculation of in 2004. The DTI Index incorporates a diversified group of up to 24 liquid components of exchange-traded commodity and financial futures contracts.

DTI weightings are reset each month based on seven-month moving averages of each of the composite pieces, so if a futures contract trades above its seven-month moving average, the entire sector is long for the entire next month.

WDTI is 50% commodity futures-based and 50% financial futures-based. The DTI's commodity futures contracts are diversified, with an 18.75% exposure to energy (light crude, gasoline, natural gas, and heating oil), an 11.5% exposure to grains (soybeans, corn, and wheat), a 5.25% exposure to precious metals (gold and silver), a 5% exposure to industrial metals (copper), a 5% exposure to livestock (live cattle and lean hogs) and then 1%-2% exposure to coffee, cocoa, cotton, and sugar each. On the financial futures side, positions are in the Canadian dollar, the Australian dollar, the Swiss franc, the British pound, the euro, and the yen, along with a 7.5% exposure each to the 10-year U.S. Treasury note and the 30-year Treasury bond.

WisdomTree officials noted that the managed futures asset class historically has had a low correlation to stocks and bond performance. In addition, the DTI rose 8% in 2008 and has outperformed both the S&P 500 and the BarCap Aggregate Bond Index since live calculating began in 2004. At the same time, investors should remain cautious of the fact that billions of dollars have flowed into managed futures investments in a very short amount of time, bringing the total dollars invested in from $50 billion to about $250 billion since 2002.

WDTI charges an expense ratio of 0.95%. As an ETF offering exposure to alternative investments, WDTI has few alternatives in the exchange-traded world. These include iShares Diversified Alternatives Trust ALT, which is taxed as a partnership and pursues a similar strategy, and ELEMENTS S&P Commodity Trends Indicator ETN LSC, which we view as an active, trend-following strategy overlaid on a commodity-futures basket.

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