Trend following is considered one of the most significant strategies in the investment landscape regarding exchange-traded funds (ETFs). These ETFs allow investors to capitalize on market movements by trading assets in trending markets, whether bull or bear. In 2024, several trend-following ETFs stand out due to their performance, strategies, and adaptability to changing market conditions.
Understanding Trend Following
Trend following is an investment strategy that aims to profit by analyzing the trend direction in asset prices. It involves identifying and following the market's upward or downward direction.
The application of trend-following strategies lies in their ability to adapt to different market environments. For instance, they can perform well during volatile periods by taking short positions when markets decline and long positions when they rise. This flexibility has made trend-following ETFs increasingly popular among both institutional and retail investors.
Key factors to consider when choosing a trend-following ETF
When selecting a trend-following ETF, investors should consider several key factors to ensure they choose a fund that aligns with their investment goals and risk tolerance. Here are some key factors:
Liquidity and Trading Volume
Expense Ratio
Performance History
Underlying Assets and Diversification
Leverage
Investment Strategy and Methodology
Market Conditions and Economic Indicators
Regulatory Compliance and Fund Management
Trend following strategies used by ETFs
Trend-following strategies for trading ETFs involve mechanical strategies or systematic methods to capitalize on market trends by buying when prices rise and selling when they fall. Here are some key strategies:
Moving Averages
Breakout Models
Momentum Indicators
Systematic Approach
Best Trend Following ETFs for 2024
Alpha Architect Value Momentum Trend ETF (VMOT)
The Alpha Architect Value Momentum Trend ETF (VMOT) employs a complex investment strategy that combines value investing, momentum investing, and trend-following techniques to optimize performance while managing risk.
Performance Overview
Year-to-Date (YTD) Return: VMOT has brought a return of 8.6%.
Expense Ratio: The fund maintains a competitive expense ratio of 0.69%, positioning it in the lowest fee quintile among its peers, which is advantageous for long-term investors.
Strategy Components
Value Investing: VMOT targets high-value stocks that are undervalued relative to their intrinsic worth.
Momentum Investing: The ETF invests in stocks with strong price momentum, focusing on the highest relative returns over a specified period.
Trend-Following: The fund employs a trend-following system designed to minimize significant drawdowns by adjusting its equity exposure based on market trends. This includes hedging strategies that can fully or partially hedge against market downturns depending on specific market conditions.
Portfolio Composition
VMOT primarily invests in other Alpha Architect ETFs that focus on domestic or international equity securities using value or momentum strategies. As of the latest reports, approximately 99.7% of its assets are concentrated in its top 10 holdings, which include:
Alpha Architect US Quantitative Value ETF: 35.26%
Alpha Architect US Quantitative Momentum ETF: 30.85%
Alpha Architect International Quantitative Value ETF: 19.16%
Alpha Architect International Quantitative Momentum ETF: 14.39%.
Market Position
Despite a solid cost structure and strategic approach, VMOT's overall rating from Morningstar is currently negative due to weaknesses in its process and people pillars. This rating suggests that while the fund's strategy may be sound, there are concerns regarding execution and management.
In summary, VMOT has shown promising performance with a focus on value and momentum strategies while actively managing risk through trend-following techniques. However, before investing, potential investors should consider the mixed ratings regarding its management and operational processes. Alpha Architect Value Momentum Trend ETF (VMOT) is among the top choices for trend-following ETFs.
iMGP DBi Managed Futures Strategy ETF (DBMF)
The iMGP DBi Managed Futures Strategy ETF (DBMF) is designed to expose investors to managed futures, a strategy traditionally associated with hedge funds. Launched in 2019, DBMF aims to democratize access to this investment approach by offering it in an ETF format, which typically comes with lower fees and greater transparency.
Performance Overview
Long-Term Capital Appreciation: DBMF seeks long-term capital appreciation through investments in various asset classes, including global equities, interest rates, commodities, and foreign exchange markets.
Returns: DBMF has returned approximately 51% since its inception, demonstrating resilience during market downturns. Notably, it gained over 20% in 2022, a year marked by significant market volatility.
Correlation: The fund has maintained a correlation of around 0.9 with the Morningstar US Trend Systematic Category, indicating that it performs similarly to other managed futures strategies while mitigating single manager risk through its replication approach.
Investment Strategy
Managed Futures Approach: DBMF employs a quantitative strategy replicating leading hedge funds' trading strategies. This involves using computer models to identify market trends and price movements across various asset classes.
Diversification: The fund is diversified across major asset classes, which helps reduce risk. It has historically shown a low correlation with traditional stock and bond markets, making it a potential hedge during market downturns.
Low Expense Ratio: With an expense ratio of 0.85%, DBMF is positioned competitively within the ETF space, aiming to provide cost-effective access to managed futures strategies that typically carry higher fees in traditional hedge fund formats.
Portfolio Composition
The portfolio includes a mix of futures contracts and cash equivalents. Key holdings include United States Treasury Bills and various futures on indices such as the E-mini S&P 500.
Overall, DBMF represents an innovative approach to managing future investing, providing potential diversification benefits and capital appreciation while focusing on cost efficiency and transparency.
Simplify Managed Futures Strategy ETF (CTA)
The Simplify Managed Futures Strategy ETF (CTA) is an exchange-traded fund that exposes investors to managed futures, aiming for long-term capital appreciation while maintaining a low correlation with traditional equity markets. Launched in March 2022, CTA employs a systematic investment strategy that captures price trends across various asset classes.
Investment Strategy
Systematic Models: CTA utilizes a suite of systematic models developed by Altis Partners, a commodity trading advisor with over 20 years of experience. These models analyze market data to identify trends and determine whether to take long or short positions in futures contracts.
Diverse Futures Exposure: The fund invests in various futures contracts, including those related to equities, U.S. Treasuries, commodities, and foreign exchange. This diversification helps mitigate risks associated with any single asset class.
Dynamic Positioning: Each month, CTA adjusts its positions based on price trends—taking long positions in contracts that show positive momentum and short positions in those that exhibit negative trends. This approach aims to capitalize on market movements while managing downside risk.
Cayman Islands Subsidiary: CTA gains exposure through a subsidiary organized under Cayman Islands law to navigate the complexities of commodity markets. This structure allows it to invest in commodity futures without directly holding them.
Performance Metrics
Net Asset Value (NAV): As of September 12, 2024, the NAV was approximately $26.29, reflecting a slight increase of 0.64% from the previous day.
Price Change: The price per share was around $26.31, also showing an increase of 0.68%.
Risk Management: The fund is designed to provide support during risk-off events, making it a potential hedge for investors looking for stability in volatile markets.
Return Stacked U.S. Stocks & Managed Futures ETF (RSST)
The Return Stacked U.S. Stocks & Managed Futures ETF (RSST) is an innovative exchange-traded fund that combines exposure to U.S. equities with a managed futures strategy. This ETF aims to provide investors with a balanced approach to capital appreciation while mitigating risks associated with market volatility.
Investment Strategy
Stacked Approach: RSST employs a unique "stacked" investment methodology, which means it allocates capital between U.S. stocks and managed futures in a way that seeks to enhance returns while reducing overall portfolio risk.
Managed Futures Component: The ETF includes a managed futures strategy that typically involves trend-following techniques. Depending on market conditions, this allows the fund to take long and short positions across various asset classes, including commodities, currencies, and fixed income.
Diversification: By combining U.S. stocks with managed futures, RSST aims to achieve diversification benefits. The managed futures strategy can provide returns less correlated with traditional equity markets, potentially smoothing out volatility during market downturns.
Dynamic Allocation: The fund adjusts its allocation between U.S. stocks and managed futures based on market signals and trends. This dynamic approach helps the ETF respond to changing market conditions effectively.
Performance Metrics
Expense Ratio: RSST maintains a competitive expense ratio, making it an attractive option for cost-conscious investors.
Risk Management: The managed futures component incorporates strict risk management rules, which help minimize losses while allowing profits to run during favorable market trends.
ProShares Managed Futures Strategy ETF (FUT)
The ProShares Managed Futures Strategy ETF (FUT) is designed to provide exposure to managed futures strategies, which aim to generate positive returns in both rising and falling markets. FUT employs a trend-following approach across a diversified portfolio of futures contracts on equity indices, fixed income, currencies, and commodities.
Investment Strategy
Trend-Following: FUT utilizes a systematic trend-following strategy to ride price trends in various asset classes. The fund takes long positions in futures contracts that exhibit positive momentum and short positions in those with negative momentum.
Diversification: By investing across a broad range of asset classes, FUT seeks to provide diversification benefits to investors' portfolios. The fund's exposure spans equities, fixed income, currencies, and commodities.
Risk Management: The strategy incorporates risk management techniques, such as position sizing and stop-loss orders, to help limit potential losses while allowing profits to run during favorable market trends.
Performance and Fees
Expense Ratio: FUT has a competitive expense ratio of 0.85%, making it an attractive option for cost-conscious investors seeking exposure to managed futures strategies.
Returns: Since its inception in 2014, FUT has delivered annualized returns of approximately 6.5% as of mid-2024. The fund has demonstrated the ability to generate positive returns in various market environments.
Potential Benefits
Diversification: Managed futures strategies, such as the one employed by FUT, have historically exhibited low correlation to traditional asset classes like stocks and bonds, potentially enhancing portfolio diversification.
Adaptability: FUT's trend-following approach allows it to adapt to changing market conditions and profit from rising and falling markets by taking long and short positions.
Risk Management: The fund's risk management protocols, including position sizing and stop-loss orders, aim to limit potential losses while allowing profits to accumulate during favorable market trends.
While FUT offers a convenient way to gain exposure to managed futures strategies, investors should carefully consider their investment objectives, risk tolerance, and the inherent risks associated with futures trading before investing in the fund.
AQR Managed Futures Strategy Fund (AQMIX)
The AQR Managed Futures Strategy Fund (AQMIX) is a mutual fund that aims to provide positive absolute returns through a systematic and quantitatively driven investment approach. Launched on January 5, 2010, the fund invests in a diverse portfolio of futures, forwards, and swap contracts across four major global asset classes: commodities, currencies, fixed income, and equities.
Investment Strategy
Diversified Asset Allocation: AQMIX allocates its assets among various asset classes to capture market opportunities. This includes investing in liquid futures contracts and related instruments, allowing the fund to benefit from rising and falling markets.
Trend-Following Approach: The fund employs a trend-following strategy that establishes long positions in assets with favorable price trends and short positions in those with bearish trends. This methodology aims to capitalize on price movements regardless of market direction.
Quantitative Analysis: The investment decisions are based on quantitative models that analyze market data to identify trends. This systematic approach is designed to reduce emotional bias and enhance decision-making efficiency.
Risk Management: AQMIX emphasizes risk management by adjusting position sizes based on the volatility of the underlying assets, which helps mitigate potential losses during adverse market conditions.
Performance Metrics
Total Assets: As of mid-2024, AQMIX has approximately $1.47 billion in total assets under management.
Expense Ratio: The fund has a net expense ratio of 1.29%, which is relatively high compared to many other mutual funds but reflects the active management and research involved in its strategy.
Returns: The fund's performance has varied, with a year-to-date return of approximately 10.27% as of June 30, 2024. Since its inception, it has delivered an annualized return of around 3.16%.
Risk Profile: AQMIX has negatively correlated with traditional equity markets, making it a potential diversifier for investors looking to reduce overall portfolio risk.
Top Holdings
As of the latest reports, the top holdings within AQMIX include:
UBS Relationship Funds: 18.41%
Limited Purpose Cash Investment: 14.25%
Various U.S. Treasury Bills (0%): Approximately 8-9% each for several holdings.
Benefits of Trading Trend-Following ETFs
Trend-following strategies using ETFs can offer several key benefits:
Trend-following is a straightforward strategy that doesn't require complex analysis or forecasting. ETFs provide a convenient way to apply trend-following to a diversified portfolio of stocks, bonds, commodities, or other assets.
Trend-following strategies have historically had a low or even negative correlation to traditional investments like stocks, bonds, and other alternative strategies. This makes them a valuable diversifier within an investment portfolio.
Trend-following strategies have the potential to perform well during periods of sustained stress in global equity markets, such as the burst of the technology bubble and the Global Financial Crisis.
When market volatility spikes, trend-followers are uniquely prepared to re-enter positions if the prior trend resumes or a new one emerges. Trend-following strategies can adapt to changing market conditions.
Final Thoughts
Trend-following ETFs represent an innovative approach for investors and traders looking to navigate the complexities of financial markets in 2024. With the abovementioned options, investors can access diverse strategies designed for various market environments.
However, investors should do their due diligence and consider their investment objectives before diving into these dynamic financial instruments. With the right strategy and timing, trend-following ETFs can play a pivotal role in achieving long-term investment success amidst an ever-changing economic landscape.
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