ProShares Introduces First Risk Parity Managed Futures ETF

ProShares, the largest issuer of inverse and leveraged ETFs, has also become a leader in the rapidly expanding market of alternative exchange-traded funds. Already this year, ProShares has launched an infrastructure ETF (TOLZ), a North American high-yield credit ETF (TYTE), and a short North American high-yield credit ETF (WYDE), along with a more traditional dividend-growing exchange-traded fund (EFAD). On October 2, the Bethesda-based firm launched its fifth ETF of the year, the ProShares Managed Futures Strategy ETF (ticker: FUTS), which is designed to capitalize on both upward and downward price trends in the futures market.

Risk-Weighted Allocations

The ProShares Managed Futures Strategy ETF trades on the NYSEArca and is based on the S&P Strategic Futures Index, a risk parity based index. The index is rules-based and currently composed of 24 equally risk-weighted futures contracts across 16 commodity and eight financial markets. The index’s positions are either long or short based on the given commodity’s price trends over the past seven months, and as of August 31, the index – and therefore FUTS – held long positions in cocoa, coffee, the Australian dollar, and the British pound; and short positions in corn, cotton, lean hogs, soybeans, sugar, heating oil, the euro, the yen, and the Canadian dollar.

A description of the weighting approach of the index is as follows:

The weight assigned to each futures contract is determined on a monthly basis, and implemented as of each monthly repositioning. Weights are determined using a proprietary risk-weighting methodology that measures the risk exposure of the futures contracts and then weights each futures contract so that it contributes the same level of risk to the SFI. In addition, the index implements an enhanced rolling methodology on certain commodity contracts to limit the negative impact of contango. The SFI’s exposure to the futures contracts will be either long or short based on a comparison of the current price of each futures contract with a seven-month exponential average.

Managed futures strategies take long or short positions across asset classes such as commodities, currencies and fixed income markets. FUTS isn’t the first managed-futures ETF on the market – it will compete with Wisdom Tree’s Managed Futures Strategy Fund (WDTI) and the First Trust Morningstar Managed Futures Strategy Fund (FMF), which had respective assets under management of $178.8 million and $12.4 million as of FUTS’s launch.

Managed futures strategies are designed to have low correlation to the stock and bond markets, and to perform well irrespective of the market’s direction or the economy’s strength. Managed futures portfolios have historically provided risk-adjusted returns comparable to the risk-adjusted returns of the S&P 500, with a slight negative correlation (-0.09) to the S&P 500 and low correlation (0.23) to the Barclays U.S. Aggregate Bond Index, according to data sourced from Bloomberg and cited in the press release announcing FUTS’s launch.

“With their low correlation to both stocks and bonds, managed futures strategies can be a smart choice for investors looking to enhance the risk-adjusted returns of a traditional portfolio,” said ProShares CEO Michel Sapir. Mr. Sapir also cited the “liquidity, transparency, and cost effectiveness” of FUTS in “helping investors build better portfolios.”

For more information, download the FUTS fact sheet.

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