DBMF Deserves A Place In Your Portfolio Next To KMLM (NYSEARCA:DBMF)

We’ve written before about managed futures in general and the KFA Mount Lucas Index Strategy ETF (KMLM) in particular. We get quite some questions about the most popular ETF in this category, the iMGP DBi Managed Futures Strategy ETF (NYSEARCA:DBMF). While we take a look at this fund we re-check the backdrop for managed futures after its stellar performance in 2023.

Our preferred managed futures ETF remains KMLM, but the difference with DBMF is small.

Managed future keep deserving a place in your portfolio. We expect the macro backdrop with high volatility to continue next year and this paves the way for another year with a nice performance. And both DBMF and KMLM can give you the needed exposure.

2022 in review

2022 is a bad year for the traditional 60/40 portfolio. Both equities (including real estate) and bonds are down. Only commodities are up.

Besides commodities also the dollar had a positive year. But even better is the performance of managed futures in general and KMLM in particular!

This performance is similar to those during the bursting of the dot-com bubble and the Global Financial Crisis and provided managed futures the label “crisis alpha”.

The case for managed futures

But what should we do after such a year? Take our money and run? Is the crisis over? Do we no longer need this time tested diversifier for bonds and equities?

The answer is no!

Let’s first check the long term trend for the major asset classes.

None of the major asset classes (including commodities) is in a clear uptrend. This calls for adding uncorrelated assets like managed futures to your portfolio. This points also to continued volatility in markets. Managed futures perform best when there are clear trends in the markets, like this year. This often coincides with such macro volatility.

According to AQR there is a reasonable chance that the high macro volatility trend will continue. Periods of significant macro volatility tend to be followed by continued elevated macro volatility. Good news for managed futures!

Research by AQR shows also that there is indeed no tendency for managed futures to underperform following periods of strong performance.

The bleak outlook for bonds and equities (based on their long term trend), the expected continued high macro volatility and the past performance of managed futures after a strong performance are three good reasons to remain invested in managed futures.

DBMF

The iMGP DBi Managed Futures Strategy ETF is the most popular managed futures ETF with almost $1 billion in assets under management. The fund is managed by Dynamic Beta investments (DBi). The fund managers use their so-called “Dynamic Beta Engine” is designed to identify the main drivers of performance of the SG CTA index. That’s an index published by Société Générale that is designed to reflect the performance of a pool of Commodity Trading Advisor (CTAs) hedge funds. The Dynamic Beta Engine analyses the recent (i.e., trailing 60-day) performance of those hedge funds in order to identify a portfolio of liquid financial instruments that closely reflects the estimated current asset allocation of the selected pool of CTA hedge funds, with the goal of simulating the performance, but not the underlying positions, of those funds. Then, DBMF takes positions in futures contracts (equities, fixed income, currencies, and commodities) designed to mimic this allocation.

DBMF vs KMLM

Both DBMF and KMLM are managed futures ETFs, but their approach is a bit different.

KMLM follows a (hedge fund like) trend following strategy, while DBMF wants to mimic the strategies followed by the biggest trend following hedge funds.

Managed futures are in essence a passive trend-following strategy that cancels out the emotional side of investing and is purely based on data instead of e.g. investor sentiment. KMLM falls perfectly into this category. DBMF falls somewhere between passive and active as it seeks to simulate the performance of the 20 largest managed futures hedge funds. The Dynamic Beta Engine is a bit of a black box and uses a 60-day lookback window to adapt its strategy. The rebalancing frequency of DBMF (weekly) is also more active than that of KMLM (monthly).

This different approach is also visible when look at the correlation between the two ETFs. Currently that correlation is quite high, but on average the two are rather uncorrelated. This fact alone is already a valid argument to have a position in both ETFs.

Because managed futures are supposed to be uncorrelated to bonds and equities it’s worthwhile to check the correlations. And indeed, both DBMF and KMLM have a negative correlation with both bonds and equities. The correlation between KMLM and bonds and equities is a bit lower compared to DBMF.

Concerning portfolio composition, we can say that DBMF is more concentrated with currently only 14 different futures in portfolio, compared to 22 for KMLM. One could say that KMLM is more diversifying and more diversified.

Let’s also take a look at the performance in this managed futures year. KMLM and DBMF are the best performing managed futures ETFs, but KMLM is the clear winner here.

We get the same picture when we look at the long term trend.

Finally, the expense ratios are quite comparable: 0.85% for DBMF and 0.90% for KMLM.

Conclusion

Managed future deserve a place in your portfolio and there is no reason to expect that its stellar performance this year should mean-revert next year. We expect the current environment with high macro volatility also next year.

The best performing managed futures ETFs are KMLM and DBMF and both deserve a place in your portfolio. If we had to choose between them, we would pick KMLM. The past performance is better, the long term trend is better, the correlation with bonds and equities is better and the portfolio is more diversified. But on all levels the difference is small.

Bottom line: our answer to the question what we think about DBMF is clear. It’s a buy!