All of the best things in life are worth waiting for.
With the tantalizing smell of pancake batter wafting through the air, the one hour I stood outside of Vidyarthi Bhavan waiting to get in was well worth it.
The dosas being served in Bangalore, India were nothing short of legendary!
For those who’ve never tried dosa before, they’re Indian pancakes made out of fermented batter of ground black lentils and rice.
The restaurant was a buzzing hive of activity with servers stacking plates of dosas to the heavens and above and somehow wielding them from one table to the next.
I counted one man carrying 16 at a time!
I’d never seen any kind of stack like that before in my life!
And with that in mind, today we’ll be reviewing a fund that I’ve been excited about ever since I first heard of the term “return stacking“.
It’s none other than Return Stacked Bonds & Managed Futures ETF.
It just launched today.
Normally, I’d allow a fund to drop into the frying pan and sizzle for a while (at least have a few months of returns under its belt) before considering a review.
But I’m making an exception this time around because it’s an ETF that immediately edges its way into my crowded DIY Quant portfolio.
It’s extremely rare for that to happen but the strategy of this fund is so intriguing that it just instantly bulldozes its way into the mix.
What Is Return Stacking?
Return Stacking was coined by Rodrigo Gordillo and Corey Hoffstein.
It’s the capital efficient process of combining two or more uncorrelated asset classes together into one fund without any compromises.
What exactly do I mean by that?
Normally, a fund is limited by a canvas size of 100%.
If you want to combine stocks and bonds you play within the boundaries of having to decide how much of this versus shaving down a bit of that.
For example, if you wanted 80% stocks you’d only have 20% room leftover for bonds.
Want to add more bonds to the mix?
You’ve gotta shave down your stocks.
However, return stacking flips that paradigm like a pancake in the air and stacks one on top of the other.
In other words, you get a gut busting portion of both stocks and bonds.
With a 200% canvas, it’s like having the dessert tray rolled over to your table and instead of choosing between carrot cake and cheesecake you say unabashedly, “I’ll take both!”
You expand the canvas of your portfolio to create space for both to exist whilst saying sayonara to the constraints of a 100% sandbox.
Why Would You Want To Return Stack?
Why would you want to return stack in the first place?
Isn’t diversifying your portfolio by adding alternatives a viable enough solution?
But it comes with the compromise of having to decide whether or not to create space by trimming your stocks and/or bonds.
When you return stack you’re layering alternatives on top (managed futures, gold, etc) of the backbone of an already sensible portfolio.
In most cases that’s the 60/40 portfolio.
You take the main ingredients of the sundae which is ice cream and banana (stocks and bonds) and add diversifying alternatives on top such as whipping cream, hot fudge, cherries and nuts (managed futures, global systematic macro, gold, market neutral, arbitrage, etc).
It clearly enhances the dessert.
Better yet you still get the same amount of ice cream and bananas!
In the case of return stacking you’re enhancing the returns of the portfolio plus managing risk better by adding diversifying alternatives.
It’s truly the best of both worlds.
Return Stacking Results In The Real World?
So you’ve waxed nostalgic about the wafting scent of stacked dosas and super duper sundaes.
Prove that return stacking works in the real world and not just inside of your overindulgent head?
Let’s do just that.
Let’s compare the results of a straight shooter 60/40 portfolio versus that of a return stacked portfolio.
In this instance we’ll be highlighting the results of the 60% equities and 40% bonds portfolio versus a return stacked portfolio featuring equal parts equities (50%), bonds (50%) and managed futures (50%).
The mandate is crystal clear.
Enhanced returns AND risk management.
Not one over the other.
And nothing less than both.
Return Stacked Portfolio versus 60/40 Portfolio
CAGR: 10.94% vs 7.24%
RISK: 9.87% vs 10.05%
BEST YEAR: 27.75% vs 21.79%
WORST YEAR: -15.78% vs -16.94%
MAX DRAWDOWN: -15.78% vs -16.90%
SHARPE RATIO: 1.01 vs 0.66
SORTINO RATIO: 1.84 vs 0.99
MARKET CORRELATION: 0.71 vs 0.99
The Return Stacked portfolio was able to achieve its capital efficient 50/50/50 configuration due to PSLDX offering 100% stocks and 100% fixed income with a 50% slice in the portfolio pie.
On the other hand, PQTIX was just a regular managed futures puzzle piece offering 50% Managed Futures exposure with a 50% allocation.
Notice something about the results of the Return Stacked 50/50/50 Portfolio versus the industry standard 60/40?
Something, ya say?
EVERYTHING is better!
Literally everything is better about the Return Stacked Portfolio where its enhanced returns and superior risk management collide.
It’s just game over for the 60/40 portfolio when you’re able to expanded the canvas of your portfolio and thoughtfully diversify.
The key point here being that managed futures have historically been uncorrelated with both stocks and bonds while typically providing crisis alpha along with consistent long-term positive returns.
Lethal Bonds Plus Managed Futures Return Stacked Combination
You really have to give it up to the folks over at Newfound Research and ReSolve Asset Management for having the vision to bring forth the first ever capital efficient managed futures ETF.
What do I mean by this exactly?
Well, up until now the only capital efficient managed futures plus long something else (usually stocks) were limited to just mutual funds.
This is the first ETF that provides you with 100% Bonds and 100% Managed Futures as a delectable stack-tastic combo!
This is exciting for a couple of unique reasons.
Firstly, it opens the door to investors who are able to purchase US-listed ETFs but not mutual funds to gain capital efficient access to managed futures for the very first time.
So I’m personally thrilled.
Secondly, it is the first capital efficient managed futures ETF (that I’m aware of) that combines managed futures and bonds.
Normally, it’s managed futures plus stocks as the expanded canvas equation.
This means as investors we’ve now got a unique puzzle piece to play around with as part of our overall return stacked portfolio.
Factor investors are likely over the moon excited.
As an example, for hardcore value enthusiasts, the capital efficient market cap weighted stocks plus bonds/managed futures/gold combinations were likely not enough to lure them in.
But with a 40% bonds/managed futures stack you can now plug 40% into your portfolio and then factor optimize your equities to your heart’s content with the remaining 60% space leftover.
The end result would be as follows:
60% Factor Equity Strategy + 40% Bonds + 40% Managed Futures = 140% Expanded Canvas Portfolio
Review of RSBT ETF : Reviewing Return Stacked Bonds & Managed Futures ETF
Hey guys! Here is the part where I mention I’m a travel blogger, vlogger and content creator! This investing opinion blog post ETF Review is entirely for entertainment purposes only. There could be considerable errors in the data I gathered. This is not financial advice. Do your own due diligence and research. Consult with a financial advisor.
source: ReSolve Asset Management on YouTube
Newfound Research and ReSolve Asset Management
When the folks over at Newfound Research and ReSolve Asset Management collaborate on a project (fund, paper, research, etc) you know it’s going to be stellar.
This is no exception.
I’ve been following Corey Hoffstein of Newfound Research and the ReSolve crew (Adam Butler, Rodrigo Gordillo and Mike Philbrick) for over a year now, as they have generously shared research content via tweets, videos and podcasts.
Return stacking has been front and centre.
For a while, I was wondering whether or not “return stacking” was merely a concept they were coining for advisors and client centred model portfolios
Now the mystery is over.
It’s for everyone to enjoy.
With the launch of RSBT ETF and RSSB ETF (soon to be released) it’s a game changer for retail investors who are seeking capital efficient ETF puzzle pieces to build the return stacked portfolio of their dreams.
RSBT ETF Overview, Holdings and Info
The investment case for “Return Stacked Bonds and Managed Futures” has been laid out succinctly by the folks over at Return Stacked ETFs: (source: fund landing page)
Capital Efficiency: Aims to provide simultaneous exposure to U.S. bonds and a managed futures strategy. For every $1 invested, the RSBT aims to provide $1 of exposure to U.S. bonds and $1 of exposure to a managed futures strategy.
Diversification: RSBT seeks to provide exposure to a managed futures strategy that has historically exhibited low correlation to both stocks and bonds.
Inflation Hedging: With the ability to go both long and short global futures markets (including equities, bonds, commodities, and currencies), managed futures has historically exhibited inflation-hedging characteristics.”
The Fund seeks long-term capital appreciation by investing in two complimentary investment strategies: a bond strategy and a managed futures strategy. For every $1 invested, the Fund attempts to provide $1 of exposure to its bond strategy and $1 of exposure to its managed futures strategy.
The bond strategy seeks to capture the total return of the broad U.S. fixed income market by investing in U.S. Treasury securities, broad-based bond ETFs, or U.S. Treasury futures contracts.
The managed futures strategy will invest using a trend-following strategy in futures contracts among four major asset classes: commodities, currencies, equities, and fixed income.”
RSBT ETF: Fund Selection Process
To better understand the process of how the fund operates, let’s turn our attention towards the prospectus where I’ve summarized the key points at the very bottom. (source: summary prospectus)
Principal Investment Strategies:
The Fund is an actively-managed exchange-traded fund (“ETF”) that seeks to achieve its investment objective by investing in two complimentary investment strategies, a bond strategy and a Managed Futures strategy.
The Fund uses leverage to “stack” the total return of holdings in the Fund’s bond strategy together with the potential returns of the Fund’s Managed Futures strategy.
Essentially, one dollar invested in the Fund provides about one dollar of exposure to the Fund’s bond investments and close to another dollar of exposure to investments in the Fund’s Managed Futures strategy (the amount is slightly less than a dollar due to the cost of financing).
So, the return of the Fund’s Managed Futures strategy is stacked on top of the returns of the Fund’s bond strategy.
Under normal circumstances, the Fund will invest at least 80% of its net assets, plus borrowings for investment purposes, in (a) the bond strategy (as described below) and (b) the managed futures strategy (as described below).
The Fund’s “80%” policy is non-fundamental and can be changed without shareholder approval.
However, Fund shareholders would be given at least 60 days’ notice prior to any such change.
For the Fund’s bond strategy, the Fund will invest in U.S. Treasury securities, bond ETFs, and/or futures contracts on U.S. Treasury securities.
For the Fund’s Managed Futures strategy, the Fund will invest among four major asset classes (commodities, currencies, equities, and fixed income) and generally, the Fund will gain exposure to these four asset classes by investing in futures contracts including, but not limited to, commodity futures; currency futures; equity index futures; bond futures; and interest rate futures (collectively, the “Instruments”).
The Fund may either invest directly in the Instruments or indirectly by investing in the Subsidiary (as described below) that invests in the Instruments.
The Fund will target a 100% notional exposure (i.e., the total underlying amount of exposure created by a derivatives trade) to the investments under each of its bond strategy and its Managed Futures strategy (i.e., the Fund will have an aggregate target notional exposure of 200% of the Fund’s net assets).
Further, the Fund (and the Subsidiary) will hold U.S. Treasury bills and cash equivalents as collateral for the futures contracts as well as to generate income.
The Fund seeks to capture the total return of the broad U.S. fixed income market with the objective of long-term capital appreciation.
To do so, the Fund will invest in U.S. Treasury securities, broad-based bond ETFs, or U.S. Treasury futures contracts.
For the Fund’s direct investments in U.S. Treasury securities, the Fund will invest Treasury bills, notes, and bonds across the yield curve and the holdings will have a target duration of two to eight years.
The Fund may also invest in broad-based aggregate bond ETFs, which are ETFs that are designed to provide broad exposure to U.S. corporate and government bonds.
The Fund’s sub-adviser, Newfound Research LLC (the “Sub-Adviser”), will favor low-cost bond ETFs that provide exposure to the overall U.S. bond market, and which are highly liquid. Further, the Fund may implement its bond strategy by investing in U.S. Treasury futures, which are contracts for the purchase and sale of U.S. government notes or bonds for future delivery.
The Fund will invest in futures contracts on U.S. Treasuries with maturities ranging from 2 to 30 years, with a target duration of 2 to 8 years.
Under normal circumstances, the Fund’s aggregate notional exposure to the bond strategy (whether held via U.S. Treasury securities, bond ETFs, or futures contracts) will represent approximately 100% of the Fund’s net assets.
Note: Notional value is the total underlying amount of a derivatives trade.
Leverage allows an investor (like the Fund) to use a small amount of money to gain exposure to a larger (and potentially, a much larger) amount.
So, notional value reflects the total value of a trade, not the cost (or market value) of taking the trade.
Managed Futures Strategy:
The Fund will invest, using a Managed Futures- strategy, among four major asset classes (commodities, currencies, equities, and fixed income).
As noted above, the Fund will invest in various types of futures contracts, such as commodity futures; currency futures; equity index futures; bond futures; and interest rate futures (collectively, the “Instruments”).
The Fund may either invest directly in the Instruments or indirectly by investing in the Subsidiary (as described below) that invests in the Instruments.
There are no geographic limits on the market exposure of the Fund’s assets.
This flexibility allows ReSolve Asset Management SEZC (Cayman) (the “Futures Trading Advisor”) to look for investments or gain exposure to asset classes and markets around the world, including emerging markets, that it believes will enhance the Fund’s ability to meet its objective.
The Futures Trading Advisor uses a proprietary, systematic and quantitative process which seeks to benefit from price trends in commodity, currency, equity, volatility, credit and fixed income Instruments.
As part of this process, the Fund will take either a long or short position in a given Instrument.
The size and type (long or short) of the position taken will relate to various factors, including the Futures Trading Advisor’s systematic assessment of a trend and its likelihood of continuing as well as the Futures Trading Advisor’s estimate of the Instrument’s risk.
The owner of a long position in a derivative instrument will benefit from an increase in the price of the underlying instrument.
The owner of a short position in a derivative instrument will benefit from a decrease in the price of the underlying instrument.
The Futures Trading Advisor generally expects that the Fund will have exposure in long and short positions across all four major asset classes (commodities, currencies, fixed income and equities), but at any one time the Fund may emphasize one or two of the asset classes or a limited number of exposures within an asset class.
Futures contracts have a limited lifespan before they expire (e.g., quarterly).
The Fund will frequently “roll-over” futures contracts – replace an expiring contract with a contract that expires further in the future.
As a result, the Fund’s portfolio will be subject to a high portfolio turnover rate.
Under normal circumstances, the Fund’s aggregate notional exposure to the Managed Futures strategy will be approximately 100% of the Fund’s net assets.
Return Stacked Bonds and Managed Futures Key Points
- Actively Managed ETF: Pursues the dual mandate of 100% Bonds + 100% Managed Futures strategies
- Leverage: Stacks the returns of 100% Bonds with 100% Managed Futures via leverage
- $1 USD Invested Exposure: $1 USD of Bonds + $1 USD of Managed Futures
- Bond Strategy: U.S. Treasury securities, bond ETFs, and/or futures contracts on U.S. Treasury securities
- Managed Futures Strategy: 4 major asset classes (commodities, currencies, equities, fixed income) via futures contracts
- 200% Expanded Canvas: Return Stacking 100% Bonds + 100% Managed Futures
- Cash Collateral: U.S. Treasury bills and cash = collateral for the futures contracts + generate income
- Bond Strategy Mandate: Equal total return of the broad U.S. fixed income market
- Bond Maturities: U.S. Treasuries ranging from 2 to 30 years with a target duration of 2 to 8 years
- Managed Futures Mandate: Systematic and quantitative trend process of taking long/short positions across 4 major asset classes (27 highly liquid global assets)
RSBT ETF Info
Canvas Size: 200% Total = (100% Bonds + 100% Managed Futures)
Net Expense Ratio: 0.97
AUM: ? (*Review written on first day of fund launch* Will update soon)
RSBT ETF Pros and Cons
Let’s move on to examine the potential pros and cons of RSBT ETF.
- Return Stacking 100% Bonds + 100% Managed Futures provides a unique capital efficient puzzle piece for investors
- First capital efficient managed futures ETF where you get 100% Managed Futures + 100% Long Something Else (in this case bonds)
- The ability to combine this with the factor equity optimization style of your choosing (value, momentum, defensive, etc) for a 60/40/40 portfolio of equities/fixed income/managed futures
- The ability to combine with other capital efficient ETFs and Mutual Funds to create your own return stacking masterpiece
- The unique opportunity to add alternatives (managed futures) without compromising your bond allocation in your portfolio
- The ability to use this ETF to create space for other alternatives (global systematic macro, gold, market neutral, arbitrage, bitcoin etc)
- Low correlation between stocks, bonds and managed futures means that the industry standards 60/40 portfolio’s days are numbered
- Not having to shave down equities and/or bonds to create space for alternatives (managed futures)
- A reasonable management fee for a 200% canvas fund with adaptive long/short positions
- Managed futures providing crisis alpha historically when markets are being thrown curveballs
- Managed futures strategy takes a top down and bottoms up approach via machine learning to replicate basket of trend-following hedge-funds
- Chance to support boutique fund providers offering up unique products for retail investors and advisors
- A year like 2018 when most strategies are negative for the year would mean leverage contributes to worse short-term returns
- When managed futures are having a challenging month/year it’ll be a drag on the portfolio (investors need to mentally prepare for this)
RSBT ETF Potential Model Portfolio Solution
There are so many potential options for fitting RSBT ETF into a portfolio at large!
Let’s explore a few.
First, we’ll go full throttle with a maximally diversified capital efficient portfolio.
Here we’ve got a nice ego free 5-20 model portfolio:
5-20 Return Stacking Portfolio
20% RSBT (100 Bonds / 100 Managed Futures)
20% GDE (90 US Equities / 90 Gold)
20% BLDNX (50 Equities / 100 Managed Futures)
20% DSEEX (100 US Equities / 100 Bonds)
20% DSEUX (100 Int-Dev Equities / 100 Bonds)
Every single piece of the return stacking puzzle is an expanded canvas product.
Thus, we’ve got the following overall exposures:
40% Managed Futures
We’ve got ourselves a sweet little 186% expanded canvas portfolio that is nicely balanced between equities, bonds and alternatives (managed futures and gold)
Return Stacking Value Portfolio
Let’s see how we can tickle the fancy of the factor focused value investor with a globally and strategically diversified 2 fund portfolio.
60% AVGE (100% Global Core Equities with Value/Quality factor tilts)
40% RSBT (100 Bonds / 100 Managed Futures)
You’re done just like that.
60% Global Equities
40% Managed Futures
You’ve got yourself a rad little 140% expanded canvas return stacking portfolio.
Chill out and enjoy life.
Defensive Return Stacking Portfolio
Want to build a more defensive portfolio?
Here we’ll just need 3 funds to pull if off.
40% ACWV (100% Global Min Vol Equities)
40% RSBT (100 Bonds / 100 Managed Futures)
20% QDSIX (6-1 Alternative Strategies AQR fund)
We’ve got a less aggressive equity position and we’ve chosen a defensive factor strategy.
We’re looking at a defensive return stacking strategy of the following exposures:
40% Managed Futures
20% Alternative Other Strategies (plus a bit more long equity, bonds, commodities)
That’s roughly a 140% canvas portfolio.
source: The Meb Faber Show on YouTube
Nomadic Samuel Final Thoughts
It feels a bit like Christmas day seeing Return Stacked ETFs arrive in the marketplace today!
I’ve been a good boy waiting patiently for it to arrive under the tree.
But in all seriousness that pales in comparison to the work that Newfound and ReSolve must have done to put all of this together.
It’s not easy to launch funds as boutique providers and they’ve certainly put in the legwork over the past year that I’ve been following them.
As I mentioned earlier in the article, it’s extremely rare for an ETF to make it into my portfolio upon its release day.
But that’s what happened today with RSBT ETF.
I loaded up at the buffet table adding it to all of my accounts.
What’s exciting is that this is just the first of hopefully many in what could someday be a mighty impressive Return Stacked product range.
Here’s to waiting for more presents to arrive under the tree.
But at this point in the review I’m interested in what you’ve got to say!
What do you think of this new return stacked RSBT ETF?
Is it on your radar?
Please let me know in the comments below.
That’s all I’ve got for today.
Ciao for now.
For your research and any discussions with the provider – do you think the 100% MF exposure in RSBT is equivalent from a risk/reward potneital perspective compared to 100% exposure to “vanilla” MF ETFs like KMLM, DBMF, CTA? E.g. you’ve said in the past KMLM has 200-300% “gross exposure”. I think this is another way of asking what volatility is RSBT targeting?
Hey Michael, thanks for the question. I reached out to make sure I’m giving correct information: “We are not targeting a specific volatility. We’re trying to track the SG Trend Index, so we’d expect volatility in the 10-12% range. As for the gross exposure, you can see the holdings on our website: https://www.returnstackedetfs.com/wp-content/fund_files/files/TidalETF_Services.40ZZ.STK_Holdings_RSBT.csv Currently, our gross exposure is around 350%.”
Any idea what equivalent bond duration exposure it would be ? Thinking it’s like 90% VGIT Or 50% TLT exposure ??
Hey J, thanks for the question. I reached out to make sure I’m giving correct information: “We are seeking to track the broad US fixed income market. AGG currently has an effective duration around 6.4 years.”
Dividend? Would this be a good piece for a fixed income portfolio?