By John Spence –
BOSTON (CBS.MW) — Exchange-traded funds are mutating — again.
Although actively-managed ETFs have been on the drawing board for several years, they face complex regulatory hurdles. But now investors may have a somewhat comparable, if unwieldy, substitute.
On Monday, the Chicago Mercantile Exchange launched several cash-settled baskets of up to four futures contracts, in an index format, that settle every two weeks.
The futures contracts in each basket, dubbed “X-Funds,” will be selected by trading advisers called “fund designers.”
“CME X-Fund Index designers will choose components that they believe have the highest potential for strong returns in each two-week cycle,” said Rick Redding, CME managing director of products and services.
Unlike existing index-linked ETFs, the X-Funds will be actively-managed with the designers picking the futures contracts. Therefore, in some ways they will resemble short-term managed commodity funds.
“What you’re essentially buying and selling is the fund designers’ ability to pick winning portfolios,” said Felix Carabello, associate director of industrial commodities at the CME.
“These products have a two-week lifecycle — that’s the main difference from ETFs,” he added.
The fund designers have plenty of leeway — the futures can be both long and short, and they can be concentrated in one sector or spread out among many.
The value of each X-Fund will be measured like an index, with a starting value of 100 at the beginning of the two-week cycle. At the end of the period, the designers will liquidate the X-Fund and select a brand new set of futures.
But the value carries over to the next two-week cycle instead of “resetting” to 100. This will allow investors to track the long-term performance of the fund designers.
However, investments in the X-Funds do not automatically “roll over” because they are cash-settled every two weeks on Friday. Instead, investors wishing to remain in the funds must reinvest the cash every other Monday — a chore that isn’t necessary with regular ETFs.
The fund designers will release the new components for each X-Fund at the end of the two-week period on Friday.
If at first you don’t succeed …
The X-Fund concept is not a new one.
In 2002, the Chicago Board of Trade introduced virtually identical products that went by the same name. They lasted less than a year before being pulled by the CBOT due to lack of investor interest.
“These new funds are the same thing as the X-Funds previously launched on the CBOT,” Carabello said.
Interestingly, the CBOT will assist the CME in choosing the fund designers for the second incarnation of the X-Funds.
It appears both exchanges are hoping the rising popularity of ETFs will help X-Funds succeed this time around. The CME’s electronic platform and futures trading volume could be another plus.
A CME spokesman said fees are being temporarily waived during the initial launch period.
Source: CBS Market Watch