🎯Beyond Stocks and Bonds: The DBMF ETF Revolution

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Hello, ETF UNO Community! Welcome to our newsletter, where we explore strategies for building a resilient portfolio. As we’ve discussed, the traditional 60/40 portfolio—60% stocks and 40% bonds—is facing challenges. With persistent inflation, geopolitical tensions, and shifting interest rates, asset class correlations are unpredictable. When stocks drop, bonds may not always provide the expected support.

We're examining a strategy once exclusive to elite hedge funds, now available in an ETF format: the iMGP DBi Managed Futures Strategy ETF $DBMF ( ▼ 0.07% ) . DBMF opens doors for ETF investors to opportunities previously reserved for the ultra-wealthy, functioning differently from standard equity or fixed-income funds. We'll discuss what this ETF does, why it exists, and if it should be part of your investment portfolio.

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What is DBMF?

At its core, the DBMF seeks long-term capital appreciation. However, the path it takes to get there is where the story gets interesting. Unlike a standard S&P 500 ETF that buys stocks and hopes they rise, DBMF employs both long and short positions in derivatives. Primarily, it utilises futures contracts and forward contracts across broad asset classes, including equities, fixed income, currencies, and commodities.

To understand DBMF, you must understand "Managed Futures". Historically, this has been the domain of hedge funds and Commodity Trading Advisors (CTAs). A managed futures strategy is typically trend-following. Imagine a sophisticated algorithm that monitors the momentum of various markets. If gold prices are trending upward, the strategy takes a "long" position to profit from the rise. If the price of crude oil is crashing, the strategy takes a "short" position to profit from the decline.

Why do hedge funds widely use this, but not by ordinary investors? Traditionally, accessing these strategies required high minimum investments, lock-up periods where you couldn't withdraw your money, and opaque fee structures. DBMF democratises this access. It packages a hedge fund-style strategy into a liquid, transparent ETF wrapper that trades on an exchange like any other stock.

The most compelling feature of DBMF is its goal to perform regardless of the direction of equity markets. Most investors are "long-only," meaning they only make money if the market goes up. DBMF is "absolute return" oriented. Because it can short assets, it can generate positive returns during bear markets. Its exposure is built through some of the most liquid US-based futures contracts, enabling the fund to enter and exit positions efficiently without significant slippage. In essence, it acts as a diversifier that doesn't necessarily move in lockstep with the S&P 500 or the Aggregate Bond Index.

DBMF seeks to replicate the performance of large institutional managed futures hedge funds by using liquid US futures contracts across four core asset classes: S&P 500, Treasury, currency, and commodity futures (including energy, metals, and agriculture). Instead of directly purchasing oil, gold, or stocks, the fund leverages futures contracts, which require less capital, allow for easy shorting, and provide efficient market exposure.

This structure makes the ETF capital-efficient and highly liquid. The fund actively adjusts its exposures in response to changing market trends, enabling it to pursue returns in both rising and falling markets without the complications of trading physical assets.

Investment Strategy🛠️

As an ETF investor, you likely wouldn't want DBMF to be the cornerstone of your portfolio. Instead, think of it as a specialised tool in your investment toolbox.

• 🛰️Satellite Approach: A common implementation strategy is the "Core and Satellite" approach. Your "Core" might remain your broad market equity and bond exposure. DBMF would serve as a "Satellite" holding. A typical allocation might range from 5% to 15% of the total portfolio, depending on your risk tolerance and view on market volatility.

• 🛡️Crisis Alpha Role: Investors often include DBMF to obtain "crisis alpha," which refers to assets that prosper when others fail. For instance, during high inflation, stocks and bonds may decline, while commodities such as energy and agricultural futures can rise, offsetting losses elsewhere.

• 🔄Rebalancing Discipline: DBMF's volatility requires discipline. If it excels during a market downturn, your allocation may exceed intentions. A strict rebalancing schedule ensures you sell high and buy low, maintaining your target risk profile. Integrating DBMF adds insurance that pays out during market slowdowns.

DBMF at a glance

ETF Issuer: iM Global Partner

Inception: 2019-05-07

Asset Class: Multi-Assets (Derivatives)

Underlying Index: DBMF is an active ETF

Geographical Focus: Global

Expense Ratio: 0.85% (as of last data point)

Dividend Yield: 5.36% (as of last data point)

Distribution Frequency: Quarterly

Historical Performance

When assessing DBMF, it's important to critically evaluate its track record since its launch in early 2019, during turbulent market conditions.

2022 was a standout year for DBMF. As inflation rose and central banks increased interest rates, both stocks and bonds declined, posing challenges for the traditional 60/40 portfolio. In contrast, managed futures strategies like DBMF thrived, delivering strong positive returns during this market downturn. This performance underscored the effectiveness of trend-following strategies in capturing momentum amid macroeconomic changes.

Investors should be mindful of periods of underperformance. In 2020, during the pandemic crash and rapid recovery, trend-following strategies struggled amid market volatility, leading to false signals. This emphasises that DBMF is not a guaranteed solution; it performs best in sustained trending markets and may lag in choppy, range-bound conditions. Although past performance doesn't guarantee future results, the 2022 data highlights the fund's value in a diversified portfolio.

ETF Radar View

The radar chart below shows the general characteristics of the ETF:

Top 3 Reasons to Invest

1. True Diversification: The primary benefit is low correlation. Most ETFs in your portfolio likely rise and fall with the general economic cycle. DBMF operates on a different logic (price momentum). When your equity funds are red, DBMF has the mathematical potential to be green, smoothing out the overall ride of your portfolio.

2. Downside Protection: The ability to short markets is a superpower in a bear market. While you are holding onto your equity positions for the long term, DBMF can actively profit from declining prices in equities or bonds, offsetting some of the paper losses in the rest of your account.

3. Institutional Strategy, Retail Access: Previously, accessing a managed futures program meant wiring money to an offshore hedge fund with a two-year lock-up. DBMF offers daily liquidity, transparency of holdings, and the ease of trading within your existing brokerage account, bringing institutional-grade strategy to the individual investor.

Top 3 Reasons Not to Invest

1. Higher Expense Ratio: Active management and futures trading come at a cost. DBMF's expense ratio is significantly higher than passive index ETFs. Over long periods, these fees can drag on net returns, especially if the strategy goes through a prolonged period of sideways market movement.

2. Tax Complexity: While DBMF issues a standard 1099 (avoiding the dreaded K-1), its use of futures contracts triggers the "60/40 rule"—meaning 60% of gains are taxed as long-term and 40% as short-term, regardless of holding period. This blended treatment differs from standard equity ETFs and can complicate tax planning, so consulting a professional is recommended.

3. Volatility and Drawdowns: Do not mistake DBMF for a bond substitute. It is not a stable source of income. Managed futures strategies can experience volatility and drawdowns. If you are looking for stability and capital preservation in the traditional sense, the DBMF's fluctuating net asset value might cause unnecessary anxiety.

🌊Ride the Trend: DBMF Managed Futures Strategy

The iMGP DBi Managed Futures Strategy ETF (DBMF) offers an innovative option for investors worried about the traditional stock-bond correlation. By utilising long and short positions in equities, fixed income, currencies, and commodities, DBMF aims to generate returns independent of market direction.

We have examined how the trend-following mechanism has historically offered protection during inflationary periods, such as in 2022. While it offers benefits such as diversification and downside protection, it also presents challenges, including higher fees, tax implications, increased volatility, and potential drawdowns.

DBMF is not a substitute for core holdings, but a strategic complement. For disciplined investors willing to allocate a small portion of their portfolio to non-correlated assets, it can help navigate uncertainty with greater confidence.

Thank you for reading this in-depth analysis. If you found this information valuable, we encourage you to subscribe to our newsletter and stay informed about the latest insights in ETF investing. Together, let's create portfolios that are designed not only for today's market but also resilient enough for tomorrow's challenges.

DISCLAIMER: This article is for informational purposes only and should not be considered as investment advice. Always conduct your own research and consult with a financial advisor before making investment decisions.