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  • Guided Allocation

    Technicals Signal Near-Term Pain

    David Schassler ,Portfolio Manager
    October 18, 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

    Negative price trends signal more risks than rewards in most real assets. The VanEck Vectors Real Asset Allocation ETF (RAAX) responds by allocating 66% to U.S. Treasury bills.

    • Escalating trade frictions with China are threatening global growth and supporting the U.S. dollar. This continues to put downward price pressure on gold and many other commodities and commodity-related equities.
    • Oil has been the standout commodity. Oil prices have rallied on supply concerns due to Iranian sanctions and falling production in Venezuela.
    • The 10-year Treasury yield abruptly rising to over 3.2% is putting downward pressure on interest rate sensitive assets, such as REITs, infrastructure, and MLPs.

     

    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

    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 returned -0.31% in September. Its exposure to natural resource equities helped performance, but that was more than offset by exposure to interest rate sensitive real assets. The natural resource equity investments that helped performance were in the oil, steel, and agribusiness industries. The interest rate sensitive assets that detracted from performance were MLPs, REITs, and infrastructure.

    This is an environment of heightened risk for real assets. Commodity risks remain elevated. Now, interest rate sensitive assets are under pressure from rising interest rates. RAAX identified the increased risk regime and responded by significantly reducing exposure to many real assets. It has a 66% allocation to U.S. Treasury bills. The 33% that is invested is well diversified across REITS, MLPs, oil-related equities, diversified commodities, and agribusiness 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 trend; bearish commodity price trend; ordinary volatility; bullish economic factors.
    Coal Equities Bearish Bearish equity and commodity price trends; ordinary volatility; bearish economic factors.
    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 Bullish Bullish price trend; ordinary volatility; bullish economic factors; bullish credit spread reading.
    Oil Services Equities Bullish Bearish equity price trend; bullish commodity price trends; mixed sentiment and economic factors; ordinary volatility.
    Unconventional Oil & Gas Equities Bullish Bearish equity price trends; bullish commodity price trends, mixed sentiment signals; economic factors 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 Bullish Bullish equity price trends; bearish economic factors; ordinary volatility; bullish credit spread reading.

    Source: VanEck. As of October 2018.

    October Positioning

    This month, RAAX increased its U.S. Treasury bill allocation from 33% to 66%, removed exposure to global infrastructure and steel equities, reduced exposure to REITs and agribusiness equities, and added a new allocation to diversified commodities.

    Real Asset Sector and Asset Class Weights

    Real Asset Sector and Asset Class Weights

    Source: VanEck. As of October 2, 2018.


    Monthly Asset Class Changes

    Real Asset Segment Oct-18 Sep-18 Change from Previous Month
    Cash 66% 33% 33% Increase
    Diversified Commodities 5% 0% 5% New Position
    Oil Service Equities 5% 5% 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
    Coal Equities 0% 0% 0% No Change
    Global Metals & Mining Equities 0% 0% 0% No Change
    Gold Bullion 0% 0% 0% No Change
    Agribusiness Equities 5% 7% -2% Decrease
    Steel Equities 0% 5% -5% Exit
    REITs 9% 20% -11% Decrease
    Global Infrastructure 0% 20% -20% Exit

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

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