As the ETF world has continued to flourish, issuers have been trying to find new ways to segment their favorite asset classes. Commodity ETFs in particular have come a long way from the first-generation funds that offered exposure to front-month futures. There are now dozens of commodity products that help retail investors slice and dice this space in a variety of ways. Now, First Trust has detailed a filing that may further the commodity ETF space [for more commodity ETF news and analysis subscribe to our free newsletter].
The proposed First Trust Global Tactical Commodity Strategy Fund will be an actively-managed futures fund that will invest in multiple commodities at once. This product, if green-lighted by the SEC, would “achieve its exposure indirectly by investing in a Cayman Islands-based unit in a strategy that may have positive tax implications for investors in the fund,” writes Olly Ludwig. According to the prospectus, the fund will have no more than 25% of its assets in the Caymans unit, but that quarter of the fund will include derivatives exposure; this could be a potential roadblock for SEC approval as derivatives have come under great scrutiny in recent years.
One of the more alluring features is the tax treatment of this potential fund. Most futures investors have to deal with taxes whether or not they have sold any positions, and Ludwig notes that the Caymans unit may allow for the fund to be taxed like an equity; a taxable event is only triggered by actually selling the fund [see also 3 Commodity ETFs Flying Under Your Radar: CORN, GASZ, UBG].
While there is no timeline on this ETF, the actively-managed structure will certainly turn some heads. The battle between passive and active products has been a theme in the ETF space for quite some time, as some claim that their active strategies can outdo their passive peers. Though it has been proven that most active managers fail to beat their respective indexes, the strategy may make more sense in the commodity space given the volatility these assets exhibit. Now, investors will just have to wait to see if the fund will ever see the light of day, and whether or not its methodology makes sense for their portfolio.
Disclosure: No positions at time of writing.