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  • Guided Allocation

    Gimme Shelter

    blog-allocation-author-details (David Schassler),
    January 24, 2019
     

    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”) continues to measure rampant risks in real assets.

    • Market risk was elevated in December due to hawkish comments from U.S Fed Chairman Jerome Powell, fears of slowing global growth, political uncertainty, and global trade wars. This led to significant sell-offs across all areas of the market including real assets, falling bond yields, points on the yield curve inverting, and widening credit spreads.
    • While our indicators have become less bearish, they still point to lower prices for almost all real assets. These include negative price trends, falling commodity prices, widening credit spreads, and, in some cases, such as oil and real estate, weakening supply and demand data.
    • We are bullish on gold bullion due to bullish technical readings. Gold rebounded in the fourth quarter, as investors sought shelter.

     

    Average Annual Total Returns (%) as of December 31, 2018
      1 Mo YTD 1 Year Life
    (04/09/18)
    RAAX (NAV) 1.13 - - -1.00
    RAAX (Share Price) 1.21 - - -0.88
    Blended Real Asset Index* -5.84 - - -7.84

    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

    Despite general market volatility, RAAX returned +1.13% in December.

    Real asset investments, with the exception of gold, were down significantly last month. Some notable losers were Oil Services stocks (MVIS U.S. Listed Oil Services 25 Index), down 20.79%, MLPs (Solactive MLP & Infrastructure Index), down 9.64%, and REITs (Dow Jones Equity REIT Total Return Index), down 7.87%.

    In January, RAAX remains allocated 20% to gold bullion and 80% to U.S. Treasury bills (“T-bills”). The strategy was effective at identifying the heightened risk regime early, before risk peaked in December. It allocated 33% to T-bills in September, 66% to T-bills in October, and has been in its maximum defensive posture, which is either 100% T-bills or 20% gold bullion and 80% T-bills, since November.

    Digging Deeper into Real Assets

    2018 ended not with a bang, but with a whimper. Global growth peaked, most likely in late 2017, and the slowdown became apparent in early 2018. From that point on, the market has been hyper-focused on every potential threat to growth and every data point that provides insight into the severity of the slowdown. By the end of the year, fear overwhelmed the markets and sent prices plummeting.

    The following chart is neat. It shows that, by using a diversified mix of objective, data-driven indicators, RAAX was able to successfully sidestep the worst of the drawdown in commodities and natural resources equities. It did this by seeking shelter in T-bills and gold bullion.

    RAAX’s Defensive Positioning Helped Avoid Commodities and Natural Resource Equities Drawdown
    Performance and Portfolio Allocation (4/10/2018 to 12/31/2018)

    RAAX’s Defensive Positioning Helped Avoid Commodities and Natural Resource Equities Drawdown: Performance and Portfolio Allocation

    Source: VanEck; FactSet. Data as of December 31, 2018.

    Gold was the hero of the latest sell-off. It did what gold historically does when the world panics, it shined. Gold was up 4.9% and finished the year at $1,282 per ounce. RAAX’s 20% gold allocation in December led to almost all of its positive 1.13% return last month. Even more impressive than gold’s return was the equity return of companies in the gold mining industry. The NYSE Arca Gold Miners Index returned 11.04%!

    Joe Foster, Portfolio Manager of the VanEck International Investors Gold Fund, writes a fantastic monthly commentary. In it, he covers all things gold. If you have an interest in the gold market, then you should consider adding it to your stack of monthly reads. Here are his latest comments on the impact of the Federal Reserve on gold:

    “The stock market, crude oil, bonds, and Donald Trump all signaled that Fed Chairman Powell made a grave mistake by indicating more rate increases to come in 2019. We also believe the Fed made a serious mistake, but the blame should be placed on Mr. Powell’s predecessors who waited far too long to normalize monetary policy. Now the Fed is tasked with normalizing rates late in the cycle and it is rapidly running out of time.

    It is widely believed that there is a 12-month lag for central bank policies to take effect. That means that the economy will feel the full impact of the Fed’s 2018 rate hikes and $30 billion of monthly quantitative tightening (QT) in 2019. In addition, the Fed is set to raise rates further and has increased QT to $50 billion per month.

    We expect to see one of two scenarios in 2019:

    1) The Fed stays on course, possibly driving the economy into recession. This may bring increased financial risks from highly-indebted governments and corporates. 2) The Fed pauses or reverses its tightening cycle. This would likely bring U.S. dollar weakness. Both scenarios would be favorable for gold.”

    At the time of this writing, risky assets are well into their recoveries off late-December lows. It is always frustrating not to participate in the first leg of a recovery. These moves are often the most violent. During periods like this it is important to remind ourselves of the simple math of loss recovery. The steeper the drawdown, the harder it is to recover. But, if you don’t lose a lot, you don’t need to perfectly catch the recovery to finish well ahead of the market. That is the goal of RAAX.

    The Greater the Loss, the Greater the Gains Needed to Recover
    Illustration of Gains Required to Breakeven from Losses

    The Greater the Loss, the Greater the Gains Needed to Recover: Illustration of Gains Required to Breakeven from Losses

    Source: VanEck. The figures shown above were achieved by means of a basic arithmetic formula for loss recovery and do not reflect results of any one investment. They help illustrate how, for example, a 100% gain can be eliminated by a 50% loss, and a 50% loss requires a 100% gain to recover that loss. For illustrative purposes only.

    At this point, our indicators are becoming less bearish. However, it is too early to proclaim that the coast is clear. Indicators continue to measure extremely elevated risk. Investors should not be surprised, in the near-term, if the market loses steam and re-tests its previous lows or if we continue to rally from here. RAAX will continue to read the risks and adjust its exposures appropriately.

    January Positioning

    RAAX’s exposures are unchanged from December to January and remain 80% to U.S. Treasury bills allocation and a 20% allocation to gold.

    Real Asset Sector and Asset Class Weights

    Real Asset Sector and Asset Class Weights

    Source: VanEck. As of January 2019.

    Monthly Asset Class Changes

    Real Asset Segment Jan-19 Dec-18 Change from Previous Month
    Cash 80% 80% 0% No Change
    Gold Bullion 20% 20% 0% No Change
    Gold Equities 0% 0% 0% No Change
    Coal Equities 0% 0% 0% No Change
    Diversified Commodities 0% 0% 0% No Change
    Agribusiness Equities 0% 0% 0% No Change
    Oil Service Equities 0% 0% 0% No Change
    Unconventional Oil & Gas Equities 0% 0% 0% No Change
    Master Limited Partnerships 0% 0% 0% No Change
    REITs 0% 0% 0% No Change
    Global Metals & Mining Equities 0% 0% 0% No Change
    Steel Equities 0% 0% 0% No Change
    Global Infrastructure 0% 0% 0% No Change

    Source: VanEck. As of January 2019. Past performance is not indicative of future results.

    Additional Resources