Real Assets Resurgent on RecoveryDavid Schassler, Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEckDecember 17, 2020
TheVanEck 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.
The VanEck Vectors® Real Asset Allocation ETF (“RAAX”) returned +11.34% versus +3.51% for the Bloomberg Commodity Index and +13.98% for the Blended Real Asset Index.
November was a great month for RAAX and for most real assets due to the news of several vaccines with efficacy rates up to 95%. This sent asset prices for industries that are a direct beneficiary of improved global growth soaring, which includes most of the real assets that RAAX invests in. RAAX held over a 15% weighting to companies that are directly associated with the oil industry and these companies generated eye-popping performance last month with oil service companies up 44%, unconventional oil and gas companies up 34%, exploration and production companies up, broadly diversified oil companies up 28% and MLPs up nearly 20%. However, these impressive gains were not limited to companies in the oil industry. RAAX’s investments in companies in the renewable energy industry were up 27%, the steel industry were up 24%, the coal industry were up 22% and the diversified metals and mining industry were up 21%. In fact, besides gold, which we will get to in a minute, the worst performing real asset investment in RAAX in November was its allocation to diversified commodities, which was up nearly 10%!
Average Annual Total Returns (%) as of November 30, 2020 1 Mo† YTD† 1 Year Life (04/09/18) RAAX (NAV) 11.34 -14.11 -9.59 -3.77 RAAX (Share Price) 11.76 -13.88 -9.37 -3.68 Bloomberg Commodity Index* 3.51 -7.71 -3.06 -4.71 Blended Real Asset Index* 13.98 -2.80 1.81 1.54
Average Annual Total Returns (%) as of September 30, 2020 1 Mo† YTD† 1 Year Life (04/09/18) RAAX (NAV) -5.08 -21.67 -18.32 -7.53 RAAX (Share Price) -5.00 -21.62 -18.36 -7.51 Bloomberg Commodity Index* -3.35 -12.08 -8.20 -6.85 Blended Real Asset Index* -3.57 -14.00 -9.28 -3.26
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.
†Returns less than a year are not annualized.
Expenses: Gross 1.13%; Net 0.75%. Expenses are capped contractually at 0.55% through February 1, 2021. 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.
Now let’s get to gold. Gold prices declined by over $100 per ounce, or 5.4%, to finish the month at a price of $1,777 per ounce. Why did gold fall when everything else rallied? Very simply, many view the investment case for gold to be weakened by a return to normalcy. While it is absolutely true that a vaccine will help to get this virus under control and thereby reduce the systemic risk within the market, the vaccine will not cure the excessive debt levels, liquidity and low interest rates that have benefited gold up to this point. It is for this reason that, over the long-term, we are big proponents of gold as a core allocation to serve as both a store of value and as a safe haven asset.
The asset allocation mix at the beginning of the month was a 30% allocation to diversified commodities, a 26% allocation to natural resource equities, a 19% allocation to gold bullion, and 5% allocations to gold equities, renewable energy, REITs, global infrastructure and MLPs. There were some notable allocation changes within RAAX this month that were designed to maintain a moderate level of volatility within the fund. The largest change was an increase in allocation to diversified commodities from 15% to nearly 30%, which was funded with reductions from both global infrastructure and agribusiness equities.
A Deeper Dive
The chart below shows the overall real asset composite. A score of 0 represents the lowest risk level and a score of 100 represents the highest risk level. A score of 60 or higher will result in our most defensive posture. The current score is 14, which indicates a stable risk regime for real assets.
Overall Risk Score
The risk score can be decomposed into key factors that drive real asset prices. These include price trends, economic activity, realized volatility and investor sentiment.
Price trends, in aggregate, are positive. However, price trends remain negative in the energy sector despite the recent rally due to the extreme weakness experienced leading up to last month.
Price Trend Risk Score
Economic risk has ticked up lately, but remains below the key threshold level to cause alarm.
Economic Risk Score
Price volatility is within normal ranges.
Price Volatility Risk Score
Investor sentiment is not at an extreme.
Investor Sentiment Risk Score
RAAX will remain diversified and fully invested across a set of unique real asset investments, while continuing to monitor the current environment. It will adjust its allocations, if needed, to balance the risk and rewards of the asset class.
Real Asset Sector Allocations Since Inception
Real Asset Class Allocations
Dec-20 Nov-20 Change from Previous Month Diversified Commodities 29.1% 15.2% 13.8% Increase MLPs 5.0% 4.5% 0.5% Increase REITs 5.0% 4.8% 0.3% Increase Energy Equities 5.0% 4.8% 0.2% Increase Oil Services Equities 3.0% 2.8% 0.2% Increase Global Metals & Mining Equities 3.8% 3.6% 0.1% Increase Coal Equities 3.8% 3.7% 0.1% Increase Unconventional Oil & Gas Equities 2.9% 2.9% 0.0% No Change Cash 0.0% 0.0% 0.0% No Change Gold Equities 5.0% 5.1% -0.1% Decrease Low Carbon Energy Equities 5.0% 5.2% -0.2% Decrease Steel Equities 3.7% 4.0% -0.2% Decrease Gold Bullion 20.1% 22.5% -2.4% Decrease Agribusiness Equities 3.8% 7.3% -3.5% Decrease Global Infrastructure 5.0% 13.7% -8.7% Decrease
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The Blended Real Assets Index consists of an equally weighted blend of the returns of Bloomberg Commodity Index, S&P Real Assets Equity Index, and VanEck® Natural Resources Index. Equal weightings are reset monthly. The S&P Real Assets Equity Index measures the performance of equity real return strategies that invest in listed global property, infrastructure, natural resources, and timber and forestry companies. The VanEck Natural Resources Index is a rules-based index intended to give investors a means of tracking the overall performance of a global universe of listed companies engaged in the production and distribution of commodities and commodity-related products and services. Sector weights are set annually based on estimates of global natural resources consumption, and stock weights within sectors are based on market capitalization, float-adjusted and modified to conform to various asset diversification requirements. The Bloomberg Commodity Index is a broadly diversified index that tracks the commodity markets through commodity futures contracts and is made up of exchange-traded futures on physical commodities, which are weighted to account for economic significance and market liquidity. The S&P 500® Index (S&P 500) consists of 500 widely held common stocks, covering four broad sectors (industrials, utilities, financial and transportation).
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The Solactive MLP & Energy Infrastructure Index tracks the performance of MLPs and energy infrastructure corporations. The MVIS US Listed Oil Services 25 Index is intended to track the overall performance of U.S.-listed companies involved in oil services to the upstream oil sector, which include oil equipment, oil services, or oil drilling. The Dow Jones Equity All REIT Index, designed to measure all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. The NYSE Arca Gold Miners Index is a modified market capitalization-weighted index composed of publicly traded companies involved primarily in the mining for gold. The Index is calculated and maintained by the New York Stock Exchange. The S&P® North American Natural Resources Sector Index: a modified capitalization-weighted index which includes companies involved in the following categories: extractive industries, energy companies, owners and operators of timber tracts, forestry services, producers of pulp and paper, and owners of plantations. The S&P® GSCI Total Return Index is a world production-weighted commodity index comprised of liquid, exchange-traded futures contracts and is often used as a benchmark for world commodity prices.
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