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  • Guided Allocation

    A Defensive Stand Against Volatility

    David Schassler ,Portfolio Manager
    November 15, 2018
     

    The VanEck Vectors®Real Asset Allocation ETF (RAAX) uses a data-driven, rules-based process that leverages over 50 indicators (technical, macroeconomic and fundamental, commodity price, and sentiment) to allocate across 12 individual real asset segments in five broad real asset sectors. These objective indicators identify the segments with positive expected returns. Then, using correlation and volatility, an optimization process determines the weight to these segments with the goal of creating a portfolio with maximum diversification while reducing risk. The expanded PDF version of this commentary can be downloaded here.

    Summary

    The VanEck Real Asset Allocation ETF (RAAX) seeks shelter by allocating 100% to U.S. Treasury bills.

    • Volatility re-emerged in October as strong U.S. economic data stoked fears that the Fed would escalate monetary tightening. Existing turmoil related to China trade tensions, slowing growth in China, and Brexit compounded the situation. This triggered a sell-off in bond prices, which rolled over into equities and real assets.
    • Oil prices peaked in early October, at $76.41 per barrel, due to fears of supply shortages from U.S. sanctions on Iran. However, by month-end, the risk-off environment pushed prices down to $65.31, causing losses of 18% in oil service and unconventional oil and gas equities.
    • The 10-year U.S. Treasury yield abruptly increased from 3.06% to 3.24% which placed downward pressure on interest-sensitive real assets. REITs, global infrastructure, and MLPs were down -2.93%, -3.70%, and -12.05%, respectively.

     

    Average Annual Total Returns (%) as of October 31, 2018
      1 Mo YTD 1 Year Life
    (04/09/18)
    RAAX (NAV) -3.19 - - -2.38
    RAAX (Share Price) -3.03 - - -2.10
    Blended Real Asset Index* -4.51 - - -2.29

    Average Annual Total Returns (%) as of September 30, 2018
      1 Mo YTD 1 Year Life
    (04/09/18)
    RAAX (NAV) -0.31 - - 0.83
    RAAX (Share Price) -0.31 - - 0.95
    Blended Real Asset Index* 0.91 - - 2.33

    The table presents past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect temporary contractual fee waivers and/or expense reimbursements. Had the ETF incurred all expenses and fees, investment returns would have been reduced. Investment returns and ETF share values will fluctuate so that investors’ shares, when redeemed, may be worth more or less than their original cost. ETF returns assume that distributions have been reinvested in the Fund at “Net Asset Value” (NAV). NAV is determined at the close of each business day, and represents the dollar value of one share of the fund; it is calculated by taking the total assets of the fund, subtracting total liabilities, and dividing by the total number of shares outstanding. The NAV is not necessarily the same as the ETF’s intraday trading value. VanEck Vectors ETF investors should not expect to buy or sell shares at NAV.

    Returns less than a year are not annualized.

    Expenses: Gross 0.81%; Net 0.74%. Expenses are capped contractually at 0.55% through February 1, 2020. Expenses are based on estimated amounts for the current fiscal year. Cap exclude certain expenses, such as interest, acquired fund fees and expenses, and trading expenses.

    Performance and Positioning

    RAAX provided significant downside protection last month due to its 66% allocation to U.S. Treasury bills. While RAAX declined, it is important to look at the returns of the various real asset sectors for context. Most real asset classes were down significantly in October.

    This is an environment of extreme risk in real assets. RAAX responded by increasing its allocation to Treasuries from 66% to 100% this month. This is the first time that the ETF has been this defensive. RAAX is measuring elevated risk across nearly all real asset sectors. The indicators that are flashing red include weak momentum and commodity prices, wide credit spreads, and in certain cases, declining fundamentals and extreme volatility.

    Gold was the standout real asset in October. Gold did what it typically does in systemic risk-off events: it went up, this time by about 2%. However, RAAX remains bearish on gold due to weak technical readings and investor sentiment.

    A Closer Look at the What, When, and How

    RAAX offers a risk-managed approach to real asset investing. It seeks to address key volatility considerations in each step of its process by evaluating: first, what asset classes to invest in; second, when to get defensive by transitioning to cash; and lastly, how much to allocate among asset classes. Decisions are made on a monthly basis using our rules-based, quantitative allocation process with the responsiveness to quickly adapt to changing market conditions.

    RAAX only invests in asset classes that the model is bullish on, and the weightings themselves are not an indication of conviction but are instead determined by RAAX’s optimization process that seeks to maximize diversification and minimize volatility.

    Real Asset Segment View Rationale
    Agribusiness Equities Bearish Bearish equity price trend; bearish commodity price trend; ordinary volatility; bullish economic factors.
    Coal Equities Bearish Bearish equity and economic factors; bullish commodity price trends; ordinary volatility.
    Global Infrastructure Bearish Bearish price trend; ordinary volatility.
    Gold Bullion Bearish Bearish commodity price trend; ordinary volatility; extreme sentiment.
    Gold Equities Bearish Bearish equity and commodity price trends; ordinary volatility; mixed sentiment.
    Diversified Commodities Bullish Bullish price trend; ordinary volatility.
    MLPs Bearish Bullish price trend; ordinary volatility; bullish economic factors; bullish credit spread reading.
    Oil Services Equities Bullish Bearish equity price trend; bullish commodity price trends; bullish sentiment; bearish economic factor; ordinary volatility.
    Unconventional Oil & Gas Equities Bullish Bearish equity price trends; bullish commodity price trends, bullish sentiment signals; bearish economic factor remain bullish; ordinary volatility.
    Global Metals & Mining Equities Bearish Bearish equity and commodity price trends; bullish economic factors; ordinary volatility.
    Steel Equities Bearish Bearish equity price trend; bearish commodity price trend; ordinary volatility.
    REITs Bearish Bullish equity price trends; bearish economic factors; extreme volatility; bearish credit spread reading.

    Source: VanEck. As of November 2018.

    November Positioning

    This month, RAAX increased its U.S. Treasury bill allocation from 66% to 100%.

    Real Asset Sector and Asset Class Weights

    Real Asset Sector and Asset Class Weights

    Source: VanEck. As of November 2018.


    Monthly Asset Class Changes

     
    Real Asset Segment Nov-18 Oct-18 Change from Previous Month
    Cash 100% 66% 34% Increase
    Gold Equities 0% 0% 0% No Change
    Coal Equities 0% 0% 0% No Change
    Global Metals & Mining Equities 0% 0% 0% No Change
    Gold Bullion 0% 0% 0% No Change
    Steel Equities 0% 0% 0% No Change
    Global Infrastructure 0% 0% 0% No Change
    Diversified Commodities 0% 5% -5% Exit
    Agribusiness Equities 0% 5% -5% Exit
    Oil Service Equities 0% 5% -5% Exit
    Unconventional Oil & Gas Equities 0% 5% -5% Exit
    Master Limited Partnerships 0% 5% -5% Exit
    REITs 0% 9% -9% Exit

    Source: VanEck. As of November 2018. Past performance is not indicative of future results.

    Additional Resources