A commodity ETF for volatile markets

This fund adjusts its exposure to twists and turns.

By TheStreet Staff Oct 12, 2011 12:00PM

By Don Dion, TheStreetTheStreet


Once considered a darling among investors, the commodities market has become noticeably volatile in recent weeks as looming macroeconomic headwinds have weighed heavily on investor confidence.


Growth-correlated resources have not been the only commodities to take hits, however. On the contrary, even gold recently came under pressure. The iShares Gold Trust (IAU) is off nearly 10% over the past month.


As resource prices continue to struggle to find stability, it will be tempting to make alterations with every fluctuation. Long-term investors, however, will need to exercise patience and flexibility in order to come out unscathed. For some, the time and effort needed to construct and maintain a strong portfolio may prove to be too daunting.


Luckily for those who prefer a hands-off approach, there are several options.


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WisdomTree Managed Futures Strategy Fund (WDTI) is designed to target a diversified basket of commodity and international currency futures using a pseudo-active quantitative investment strategy. By opting to either go long or short any particular holding, the fund's managers can adjust its exposure to reflect any type of investing environment.


For example, as of Oct. 10, WDTI was flat energy; short grains, industrial metals, precious metals, and soft commodities futures; and long livestock contracts. On the currency front, the fund appears to be betting on the strength of the U.S. dollar; it is currently short the euro, Australian dollar, Swiss franc, Canadian dollar, and British pound. The Japanese yen is the fund's only other long currency bet.


These holdings are not set in stone. Rather, according to the fund's prospectus, the individual sectors comprising WDTI's portfolio are rebalanced back to their base weights and reevaluated at the end of each month and year.


Throughout the past few months of volatile action, investors opting to use WDTI to manage their commodities exposure have benefited. Although the fund has dipped slightly more than 6% over the past three months, its downturn has been contained relative to passive, long-only commodity ETFs like the PowerShares DB Commodity Fund (DBC). It has seen inklings of a rebound in recent days, but DBC still has plenty of ground to make up to recover from the 10% decline it has witnessed over this period.


Despite its impressive action in the face of market turmoil, WDTI must still be monitored. Because it is set up to rebalance on a monthly timetable, the fund faces the risk of missing out in the event of a mid-month market turnaround. Evidence of this challenge can be found by looking at the fund's performance compared to DBC over the past week.


While DBC has managed to power higher in light of the market's recent spurt of strength, WDTI's performance has been muddled.

Given its current index weighting, WDTI appears to have taken the correct bets given the current market environment marked by pressing macro concerns and growth doubts. Investors confident that the past few days of strength will translate into a long-term upward trend may want to hold off on jumping into WDTI until we can see what the next rebalance brings.

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