Skip directly to Accessibility Notice
  • Guided Allocation

    Responding to Rising Risks

    David Schassler ,Portfolio Manager
    August 21, 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

    Escalating trade tensions and the rising U.S. dollar both weigh on certain real assets.

    • The model remains bullish on most real asset investments and well diversified across natural resource equities, gold bullion, Real Estate Investments Trusts (REITs), global infrastructure, Master Limited Partnerships (MLPs), and commodities.
    • Despite rising inflation and strong economic growth, escalating trade tariffs and a strong U.S. dollar are putting downward price pressure on many commodities and commodity-related equities.
    • The model is responding by favoring real asset investments with less sensitivity to commodities.
    • We remain bullish on gold, despite recent price weakness. It is maintaining its attributes as a safe haven asset.1

     

    Average Annual Total Returns (%) as of July 31, 2018
      1 Mo YTD 1 Year Life
    (04/09/18)
    RAAX (NAV) 0.04 - - 2.07
    RAAX (Share Price) -0.16 - - 2.30
    Blended Real Asset Index* 0.10 - - 2.55

    Average Annual Total Returns (%) as of June 30, 2018
      1 Mo YTD 1 Year Life
    (04/09/18)
    RAAX (NAV) -1.80 - - 2.03
    RAAX (Share Price) -1.15 - - 2.46
    Blended Real Asset Index* -1.08 - - 2.45

    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 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

    The largest contributors in July were natural resource equity positions—primarily steel, agribusiness, and coal equities. Interest rate sensitive holdings, REITs and MLPs, performed well despite interest rates continuing to rise. However, the positive performance was mostly offset by negative price pressures on commodities. Diversified commodities and gold bullion, which accounted for approximately 44% of the fund’s assets, were both down for the month.

    Risks have increased in many real asset investments, and the model is adjusting. This month, RAAX added exposure to global infrastructure, decreased its diversified commodity exposure, and reduced the exposure to natural resource equities, while the REIT, gold bullion, and MLP exposures remained unchanged.

    A Closer Look at the What, When, and How

    RAAX helps investors with the what, when, and how of real asset investing. This includes: (1) what to own; (2) when to be invested; and (3) how to allocate. Decisions are made on a monthly basis using our rules-based, quantitative allocation process.

    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 Bullish Bullish equity price trend; bearish commodity price trend; normal volatility; and bullish economic factors.
    Coal Equities Bearish Bearish equity and commodity price trends; normal volatility; and bearish economic factors.
    Global Infrastructure Bullish Bullish price trend; and normal volatility.
    Gold Bullion Bullish Bearish commodity price trend; ordinary volatility; and sentiment is not extreme.
    Gold Equities Bearish Bearish equity and commodity price trends; normal volatility; and sentiment is not extreme.
    Diversified Commodities Bullish Bullish price trends; and normal volatility.
    MLPs Bullish Bullish price trend; normal volatility; bullish economic factors; and typical credit spreads.
    Oil Services Equities Bearish Bearish equity and natural gas commodity price trends; sentiment is extreme; bullish economic factors; bullish oil price trend; and normal volatility.
    Unconventional Oil & Gas Equities Bullish Bullish price trends in the equities and oil prices; negative natural gas price trend; sentiment is extreme; bullish economic factors; and normal volatility.
    Global Metal & Mining Equities Bearish Bearish equity and commodity price trends; bearish economic factors; and normal volatility.
    Steel Equities Bullish Bearish equity price trend; bullish commodity price trend; and normal volatility.
    REITs Bullish Bullish equity price trend; bullish economic factors; normal volatility, and typical credit spreads.

    Source: VanEck. Data as of August 2, 2018.

    August Positioning

    The model remains bullish on most real asset investments and is currently well diversified across natural resource equities, gold bullion, REITs, global infrastructure, MLPs, and commodities. Despite rising inflation and strong economic growth, escalating trade tariffs and a strong U.S. dollar are both putting downward price pressure on many commodities and commodity-related equities.

    RAAX is responding to risks in the commodities markets by favoring real asset investments with less sensitivity to commodities. For August, RAAX added a 20% exposure to global infrastructure, diversified commodity exposure declined from 22% to 5%, and natural resource equity exposure was reduced from 33% to 30%. Within natural resource equities, it’s important to highlight how our positioning changed. We increased our agribusiness exposure from 8% to 20%, and removed allocations to coal equities, global metals and mining equities, and oil service equities. Agribusiness equities are unique relative to other natural resource equities. Historically, they have had a stronger correlation2 to the S&P 500® Index and a lower correlation to commodities than other natural resource equity investments.

    Our cash allocation remains at zero. However, that may change next month if August proves to be another challenging month for real assets.

    Real Asset Sector and Asset Class Weights

    Real Asset Sector and Asset Class Weights

    Source: VanEck. As of August 2, 2018.


    Monthly Asset Class Changes

    Real Asset Segment Aug-18 July-18 Change from Previous Month
    Global Infrastructure 20% 0% 20% New Position
    Agribusiness Equities 20% 8% 12% Increase
    Cash 0% 0% 0% No Change
    Gold Equities 0% 0% 0% No Change
    Unconventional Oil & Gas Equities 5% 5% 0% No Change
    Master Limited Partnerships 5% 5% 0% No Change
    Steel Equities 5% 5% 0% No Change
    Gold Bullion 20% 20% 0% No Change
    REITs 20% 20% 0% No Change
    Coal Equities 0% 5% -5% Decrease
    Global Metals & Mining Equities 0% 5% -5% Decrease
    Oil Service Equities 0% 5% -5% Decrease
    Diversified Commodities 5% 22% -17% Decrease

    Source: VanEck. As of August 2, 2018. Past performance is not indicative of future results.

    Additional Resources