First Trust, begun trading a new Long-Short Commodity Futures ETF, the First Trust Alternative Absolute Return Strategy ETF (Nasdaq: FAAR) on Wednesday, May 18, 2016. Here is a synopsis of the new ETF:
|Symbol: FAAR||Exchange: NASDAQ|
|Name: First Trust Alternative Absolute Return Strategy ETF||Net Expense Ratio: 0.95%|
The First Trust Alternative Absolute Return Strategy ETF is an actively managed exchange-traded fund that seeks to achieve long-term total return through long and short investments in exchange-traded commodity futures contracts (Commodity Futures) through a wholly-owned subsidiary of the Fund organized under the laws of the Cayman Islands (Subsidiary). The Fund will not invest directly in Commodity Futures. The Fund expects to gain exposure to these investments exclusively by investing in the Subsidiary. The Subsidiary is advised by First Trust Advisors L.P., the Fund’s investment advisor.
The Fund’s investment in the Subsidiary is intended to provide the Fund with exposure to commodity markets within the limits of current federal income tax laws applicable to investment companies such as the Fund, which limit the ability of investment companies to invest directly in Commodity Futures. The Subsidiary has the same investment objective as the Fund, but unlike the Fund, it may invest without limitation in Commodity Futures. Except as otherwise noted, for purposes of this prospectus, references to the Fund’s investments include the Fund’s indirect investments through the Subsidiary. The Fund will invest up to 25% of its total assets in the Subsidiary.
The Subsidiary’s holdings will primarily consist of Commodity Futures, which are contractual agreements to buy or sell a particular commodity or financial instrument at a pre-determined price at a settlement date in the future. As the settlement date for a futures contract approaches, the Fund, through the Subsidiary, intends to sell the expiring contract and replace it with a similar contract with a more distant settlement date. This process is known as “rolling” and may be done frequently by the Fund throughout the year so as to maintain a fully invested position. This frequent buying and selling of Commodity Futures, in addition to attempts by the Fund to rebalance its exposure to various market sectors, may cause the Fund to experience higher levels of portfolio turnover. The Fund, through the Subsidiary, engages in trading on commodity markets both inside and outside of the United States on behalf of the Fund. The Fund, through the Subsidiary, may invest in a range of Commodity Futures and markets as determined by the Fund’s investment advisor from time to time.
Through the investment process, the advisor will:
* Select commodity futures based on open interest and daily trading volume.
* Forecast the expected volatility and cross-correlation of each commodity.
* Generate a set of long/short portfolios that seek to maximize returns at various levels of volatility.
* Evaluate the futures curve for each commodity to seek the highest potential return contract.
* Analyze performance of the commodities and determine what affected performance, as well as how to position the portfolio going forward.
The remainder of the Fund’s assets will primarily be invested in:
(1) U.S. government and agency securities with maturities of 5 years or less;
(2) short-term repurchase agreements;
(3) money market instruments; and
The Fund uses such instruments as investments and to collateralize the Subsidiary’s Commodity Futures exposure on a day-to-day basis.
Fund Top Holdings (05/18/16):
|Cattle Feeder, Aug16||4.98%|
|Brent Crude Oil, Jul16||3.26%|
|Cotton No. 2, Jul16||3.10%|
|Soybean Oil, Jul16||1.95%|
|LME Nickel, Aug16||1.73%|
|Natural Gas, Jul16||-6.39%|
|KC HRW Wheat, Jul16||-6.09%|
|WTI Crude Oil, Jul16||-3.25%|
|Wheat (CBT), Jul16||-3.20%|
|Sugar #11 (World), Jul16||-3.14%|
|LME Lead, Aug16||-2.84%|
|Gasoline RBOB, Jul16||-2.31%|
|LME Zinc, Aug16||-1.57%|
|Low Sulphur Gasoil, Jul16||-1.48%|
|LME Primary Aluminium, Aug16||-1.29%|
FAAR Home Page
Here is a comment from John Gambla, CFA, FRM, PRM and Senior Portfolio Manager for the Alternatives Investment Team at First Trust:
“Absolute return offers the potential to provide long-term total return in a variety of market environments. Additionally, the strategy may offer low or no correlation to equities, bonds, real estate and long-only commodities. Global capital markets are increasingly integrated, correlations are rising among the major asset classes, and volatility is reverting back to long-term norms. In such an environment, absolute return strategies with lower correlation profiles can provide the robust diversification that is a cornerstone of modern portfolio theory.”