Return Stacking ETF Goes Live

A couple of new funds, one new and one new to me, popped up on my radar and I thought it would be fun to dig in a little bit.

The first one is the ABR 75/25 Volatility Fund (VOLSX). The name implies they're blending something together which in this instance a long volatility strategy and a short volatility strategy. Long short vol? It is two different strategies, the company's website has a fact sheet on each one although oddly I couldn't find information about VOLSX, the actual mutual fund, on the company's site. I got a fact sheet emailed unsolicited but don't know if the URL will work for you. This page from Fidelity will probably work if that last one doesn't.

The long vol part is mostly equity futures with a little long vol and cash. The short vol part is a little over half in short vol, over 1/3 in treasuries and the rest in cash. VOLSX allocates 75% to the long strategy and 25% to the short strategy. 

This excerpt from the fact sheet paints a good picture of what it's trying to do.

...target significant gains in extended periods of high volatility (Crisis Alpha) while using short volatility exposure to seek to harvest the volatility risk premium in normal markets. With both long and short exposures to volatility, the ABR 75/25 Volatility Strategy has the potential to produce positive returns in various market conditions.

Crisis alpha means what you think it means, adding positive returns during a crisis. We talk about the idea frequently here even if I've only used that term once or twice. So, how'd it do? Did it deliver crisis alpha?

 

Not exactly. Obviously it was down almost 30% last year versus down almost 20% for the S&P 500. In 2021 it was up roughly the same 27% as the S&P 500. Here are some other numbers compared to the S&P 500 and VBAIX which is a proxy for a 60/40 portfolio.

 

Although I am not certain, I don't think VOLSX is intended to look like the stock market but Portfoliovisualizer says VOLSX has a 0.93% correlation to the S&P 500. If I had to guess why it went down so much last year, I would say that the equity exposure, the bonds and the short volatility hit very hard. Stocks and bond both went down a lot and generically speaking, shorting volatility into a crisis probably won't add favorably to returns very often.  

The other fund really is new, it started trading on Wednesday; the Return Stacked Bonds & Managed Futures ETF (RSBT). Very simply, each dollar invested gives you $1 of exposure to bonds plus $1 of exposure to managed futures, so there is leverage. 

We've talked about return stacking and the related concept of capital efficiency many times. The WisdomTree US Efficient Core Fund (NTSX) is an easy example for understanding the concept. It invests 90% in stocks and leverages up to get 60% in fixed income. The way the math works, a 67% allocation to NTSX replicates 100% into a 60/40 portfolio which leaves 33% left over to do something. That something might be very conservative like buying T-bills, aggressive like buying more equities or going in between conservative and aggressive in some manner. 

RSBT is managed as a joint effort by Newfound Research, ReSolve Asset Management and Toroso Investments. Knowing a little about how they view things, I am quite certain that the fund is not intended to be a standalone. It is a tool to use in conjunction with other products that pursue capital efficiency or help to better balance out risk in pursuit of an all-weatherish portfolio. 

 

So here's a sort of comparison with one example of potential use. A 60% allocation to equities, and a 40% allocation to a backtest proxy of RSBT with 40% in the aggregate bond ETF and 40% in managed futures. The negative 40% in BIL allows for adding leverage to the model. You can see the backtest proxy of RSBT has a slightly higher CAGR very similar standard deviation but a much better worst year which was back in 2008. In 2022, VBAIX was down 16.87% while Portfolio 2 was only down 10.77%. In the 13 years between 2008 and 2022, VBAIX outperformed Portfolio 2 in six of those years with one year being a tie. So it backtests as a reasonable substitute for VBAIX most of the time with two instances of much smaller drawdowns during two different negative market events. 

The fund space for return stacking/capital efficiency is still early in the game, the space will evolve. I have no idea if RSBT will be an important fund in this context but if you're interested in learning more about portfolio construction and developing your investment process, this would be a good fund to study to figure out what goes right or wrong for it.   

I have no interest or intention of using any of the funds mentioned personally for for clients.