Exchange Traded Fund (ETF) Trading Strategies

Saturday, November 7, 2009

First actively managed iShares ETF

ETF behemoth Barclays Global Investors released Monday its first actively managed ETF in its iShares family and the first managed-futures ETF on the market: iShares Diversified Alternatives Trust (ALT).

Institutional Strategy

Instead of tracking an index, ALT aims to offer exposure to "trading strategies often used by institutional investors for alternatives exposures." ALT buys long and short a mix of exchange-traded futures contracts of commodities, currencies, interest rates, stock and bond indexes and foreign currency forward contracts picked by Barclays Global Fund Advisors.

Futures contracts allow a trader to buy or sell a standardized amount of a given commodity on a future date at a set price. The main difference between a futures and an option contract is that in futures, the seller is obligated to deliver the goods and the buyer must receive them. Options contracts, on the other hand, give the buyer the right — not the obligation — to take hold of the goods.

The fund's managers can apply three strategies, according to the prospectus.

1. Yield and futures curve strategies, which seeks to take advantage of the spread between interest rate and futures contract prices.

2. Technical strategies, which buy investments showing momentum based on quantitative models.

3. Fundamental relative value strategies, which basically aim to buy underpriced assets and sell overpriced ones.

The prospectus warns potential investors to buy at their own risks. Futures prices are very volatile. The fund uses leverage, which can amplify losses if you bet in the wrong direction.

The managers pick holdings at their own discretion and there's no guarantee that they'll make good choices.

"Neither the advisor, nor any of the advisor's principals, has any experience as advisor to or manager of an active commodity fund," states the prospectus.

ALT carries an annual expense ratio of 0.95%.

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