A New Return Stacked ETF

A few months ago we looked at the then new Return Stacked Bonds & Managed Futures ETF (RSBT). The simplest take on return stacking is to use leverage in a fund to blend exposures that tend to have a low or negative correlation to each other. Done in that manner, it comes close to leveraging down to create a better risk adjusted result and possibly a better nominal result too. 

RSBT offers 100% exposure to bonds that generally replicate the Aggregate Index and 100% to managed futures. RSBT had some bad luck out of the starting gate when a brutal whipsaw in two year treasuries punished the entire managed futures space. 

 

You can see it has been flat since that first dropoff, maybe drifting lower over the last couple of months.

The reason to bring this up is that now the Return Stacked US Stocks & Managed Futures (RSST) just started this week. Similarly it offers 100% to equities that generally replicate the S&P 500 and 100% to managed futures. 

That was the best way I could figure to back test the idea, ASFYX is a client and personal holding. VBAIX is a proxy for a 60/40 portfolio. The results.

Big outperformance obviously but significantly greater volatility. In 2018, Portfolio 1 was down 18.62% while VBAIX was down 2.82% and VOO dropped 4.50%. That is a big hit to take in a down mid-single digit world.

This creates context I think but I'm pretty sure these funds are not being positioned as a core holding like VBAIX where some folks probably have everything in that type of fund. There are other funds that offer capitally efficient (return stacked) exposure other things. The WisdomTree Efficient Gold Plus Equity Strategy Fund (GDE) offers 90% gold/90% equities. 

In a Twitter exchange with Jeremy Schwartz CIO of WisdomTree, he said the way to think about GDE is to start with how much gold do you want, if any, what percentage?  For a $100,000 portfolio, a 5% weighting to GDE gives you 4.5% to gold and provides 4.5% toward whatever equity exposure you want.

How much exposure do you want, if any, to managed futures? For the same $100,000 portfolio, a 6% weighting to RSST gives you 6% in managed futures and another 6% toward whatever equity exposure you want. With 11% invested you have 1/6 of your equity exposure (making an assumption of 60%) and possibly all the alternative exposure you might want. For the record I have less than 6% in managed futures but maybe a little over 10% overall in alternatives. From here then, maybe $49,000 (49% into an broad based equity fund and 40% into some sort of fixed income proxy. The leverage in GDE and RSST would allow you to get a hedge for free to the extent anyone wants that. 

Does anyone want that, will it produce a desirable result? Let's try to backtest it.

And the result. 

A slightly better result with slightly less volatility. A fine result, and anyone actually interested in this could play around with weightings and other alternatives but as more of these strategies get put into retail-accessible funds, it is hopefully useful to understand how to use these. There's a right way and a wrong way and while I won't proclaim the above is the right way, I am quite certain the result would not be catastrophic.  

Is the effort worth it? Maybe, that is up to the individual but I bet someone playing around with the numbers and some other things perhaps could navigate to a result that might not have higher returns but could reduce volatility more and all the better if you stumble into something that does outperform by a wider margin. 

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