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  • Guided Allocation

    The Defense Stays on the Field

    David Schassler ,Portfolio Manager
    December 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

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

    • Market risks remained elevated in November. The primary culprits that were unnerving the markets are trade tensions with China, perceived hawkish Fed policy, slowing global growth, and political uncertainty.
    • It was a challenging month for commodity indices, which were led sharply lower by the energy sector. Crude oil fell 24%, adding to the sharp losses sustained in October. The crude oil market decline was caused by an unexpected jump in Saudi oil production. Additionally, when the expected Iranian sanctions were announced, almost all of the Iranian export countries were given exemptions. Both of these events caused excess short-term supply and downward price pressure.
    • The fixed income markets are flashing warning signals. Credit spreads have widened, indicating that default risks are rising, and parts of the yield curve have inverted. Two-and three-year Treasury notes are now yielding more than five-year notes. This is an indication that the bond market expects a recession.

     

    Average Annual Total Returns (%) as of November 30, 2018
      1 Mo YTD 1 Year Life
    (04/09/18)
    RAAX (NAV) 0.28 - - -2.10
    RAAX (Share Price) 0.04 - - -2.07
    Blended Real Asset Index* 0.17 - - -2.74

    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 was 100% invested in U.S. Treasury bills in November. This resulted in a modest return of +0.28%. During the period, many real assets investments, specifically within the commodity and natural resource equity sectors, were down significantly. Certain high-yielding real asset investments, such as MLPs, REITS, and global infrastructure rebounded strongly last month.

    We believe it continues to be an environment of extreme risk in real assets. RAAX is now allocated to 80% in U.S. Treasury bills and 20% in gold bullion. The model is measuring high risks due to weak momentum and commodity prices, wide credit spreads, and in certain cases, declining fundamentals and extreme volatility.

    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 Bullish Bearish commodity price trend; ordinary volatility; neutral sentiment
    Gold Equities Bearish Bearish equity and commodity price trends; ordinary volatility; neutral sentiment.
    Diversified Commodities Bearish Bearish price trend; ordinary volatility.
    MLPs Bearish Bullish price trend; ordinary volatility; mixed economic factors.
    Oil Services Equities Bullish Bearish equity price trend; mixed commodity price trends; neutral sentiment; bearish economic factor; ordinary volatility.
    Unconventional Oil & Gas Equities Bullish Bearish equity price trends; mixed commodity price trends, neutral sentiment; bearish economic factors; ordinary volatility.
    Global Metals & Mining Equities Bearish Bearish equity and commodity price trends; bullish economic factors; ordinary volatility.
    Steel Equities Bearish Bearish equity and commodity price trends; bullish economic factors; ordinary volatility.
    REITs Bearish Bullish equity price trends; bearish economic factors; ordinary volatility; bearish credit spreads.

    Source: VanEck. As of December 2018.

    December Positioning

    RAAX decreased its U.S. Treasury bill allocation from 100% to 80%, and added a 20% allocation to gold.

    Real Asset Sector and Asset Class Weights

    Real Asset Sector and Asset Class Weights

    Source: VanEck. Data as of December 2018.


    Monthly Asset Class Changes

    Real Asset Segment Dec-18 Nov-18 Change from Previous Month
    Gold Bullion 20% 0% 20% Increase
    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
    Gold Bullion 0% 0% 0% No Change
    Steel Equities 0% 0% 0% No Change
    Global Infrastructure 0% 0% 0% No Change
    Cash 80% 100% -20% Decrease

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

    Additional Resources