• Guided Allocation

    Rising Risks, Raising Cash

    David Schassler, Portfolio Manager
    September 19, 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

    With escalating near-term risks in many real assets, RAAX allocated defensively by raising cash for the first time since its launch.

    • Risks continue to outweigh rewards in many real assets and RAAX allocated defensively with a 33% position in U.S. Treasury bills.
    • 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, particularly impacting gold and diversified metals.
    • Consequently, RAAX favored real asset investments with less sensitivity to commodities.

     

    Average Annual Total Returns (%) as of August 31, 2018
      1 Mo YTD 1 Year Life
    (04/09/18)
    RAAX (NAV) -0.89 - - 1.15
    RAAX (Share Price) -1.01 - - 1.27
    Blended Real Asset Index* -1.11 - - 1.41

    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

    RAAX benefited from avoiding many of the poorer performing assets that plagued real assets investors, and also from its portfolio weighting methodology, which seeks to minimize volatility. In August, RAAX had no exposure to gold equities, global metals and mining, coal equities, and oil services equities. The average return of these asset classes was a dismal -7.5% last month.

    RAAX’s model rapidly adjusts to the rising risks of the changing environment. In September, RAAX added a 33% exposure to U.S. Treasury bills, removed its positions in gold bullion and diversified commodities, decreased agribusiness exposure from 20% to 7%, and added a 5% weighting to oil services equities.

    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 Bullish Bullish equity price trends; bearish commodity price trend; ordinary volatility; bullish economic factors.
    Coal Equities Bearish Bearish equity & commodity price trends; ordinary volatility; bearish economic factors.
    Global Infrastructure Bullish Bullish price trends; ordinary volatility.
    Gold Bullion Bearish Bearish commodity price trends, ordinary volatility, and extreme sentiment.
    Gold Equities Bearish Bearish equity and commodity price trends, ordinary volatility, and sentiment is not extreme.
    Diversified Commodities Bearish Bearish price trends; ordinary volatility.
    MLPs Bullish Bullish price trends; ordinary volatility; bullish economic factors; bullish credit spread reading.
    Oil Services Equities Bullish Bearish equity & mixed commodity price trends, and mixed sentiment signals; Economic factors remain bullish. Ordinary volatility.
    Unconventional Oil & Gas Equities Bullish Bearish equity & mixed commodity price trends, and mixed sentiment signals; Economic factors remain bullish. Ordinary volatility.
    Global Metal & Mining Equities Bearish Bearish equity and commodity price trends, and bearish economic factors; ordinary volatility.
    Steel Equities Bullish Bearish equity price trends; bullish commodity price trend; ordinary volatility.
    REITs Bullish Bullish equity price trends and economic factors; bearish economic factors; ordinary volatility, bullish credit spread reading.

    Source: VanEck. As of September 2018.

    September Positioning

    RAAX is responding to increasing risks, including heightened pressure from potential trade tariffs, by favoring assets with less sensitivity to commodity prices. In September, RAAX added a 33% allocation to U.S. Treasury bills. Should the number of bearish segments continue to increase, RAAX has the ability to expand its cash position and allocate up to 100% in cash to avoid a pervasive market drawdown. Positions in gold bullion and diversified commodities were removed, agribusiness equities were reduced from 20% to 7%, and a 5% allocation was added to oil services equities.

    Real Asset Sector and Asset Class Weights

    Real Asset Sector and Asset Class Weights

    Source: VanEck. As of September 4, 2018.


    Monthly Asset Class Changes

    Real Asset Segment Sep-18 Aug-18 Change from Previous Month
    Cash 33% 0% 33% New Position
    Oil Service Equities 5% 0% 5% New Position
    Global Infrastructure 20% 20% 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
    Coal Equities 0% 0% 0% No Change
    Global Metals & Mining Equities 0% 0% 0% No Change
    REITs 20% 20% 0% No Change
    Diversified Commodities 0% 5% -5% Exit
    Agribusiness Equities 7% 20% -13% Decrease
    Gold Bullion 0% 20% -20% Exit

    Source: VanEck. As of September 4, 2018. Past performance is not indicative of future results.

    Additional Resources