It’s likely to be a big week for markets and investors with both the U.S. election on Tuesday and October’s Consumer Price Index report on Thursday that could cement expectations for December’s Fed rate hike. Regardless of the election and CPI outcomes, markets will likely remain volatile as economic uncertainty persists this year, an optimal environment for managed futures strategies.
Markets closed higher on Monday afternoon in advance of the highly-anticipated U.S. midterm elections on Tuesday, November 8, rallying for the second day in a row. The major indexes were still down overall for the week last week due to strong October employment data, the 0.75% interest rate increase from the Fed, and continuing underwhelming earnings reports.
“Focusing on midterms, historically, the broader U.S. equity market has, on average, reacted positively to the reigning political party’s ability to retain its position in both chambers of Congress,” wrote Abhishek Gupta and Román Mendoza from MSCI Research in a recent note, reported Yahoo Finance. “A flip in control has led to uncertainty around the ability of the president’s party to pass bills and influence regulations, leading to enhanced volatility on a relative basis.”
It’s potentially more volatility for markets that have bounced on and off every new economic report, government data, and regulatory meeting this year as investors constantly try to absorb and anticipate the impacts of persistent inflation and unprecedented quantitative tightening alongside aggressive interest rate hikes from the Fed.
Managed Futures Offer Non-Correlated Performance
Managed futures have provided some outsize performance, a huge bonus on top of the non-correlated hedging opportunities the strategy can provide during times of increased volatility for portfolios. The KFA Mount Lucas Index Strategy ETF (KMLM) from KFAFunds, a KraneShares company, invests in futures contracts in commodities, currencies, and global bond markets and has had an outstanding performance this year.
KMLM’s benchmark is the KFA MLM Index, and the fund invests in commodity currency and global fixed income futures contracts. The underlying index uses a trend-following methodology and is a modified version of the MLM Index, which measures a portfolio containing currency, commodity, and global fixed income futures.
The index and KMLM offer possible hedges for equity, bond, and commodity risk and have demonstrated a negative correlation to both equities and bonds in bull and bear markets. Investing in managed futures offers diversification for portfolios, and carrying them within a portfolio can potentially help mitigate losses during market volatility and sinking prices.
The index weights the three different futures contract types by their relative historical volatility, and within each type of futures contract, the underlying markets are equal dollar-weighted. Futures contracts will be rolled forward on a market-by-market basis as they near expiration.
Futures contracts in the index include 11 commodities, six currencies, and five global bond markets.
The index evaluates the trading signals of markets every day, rebalances on the first day of each month, invests in securities with maturities of up to 12 months, and expects to invest in ETFs to gain exposure to debt instruments.
KMLM carries an expense ratio of 0.92%.
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