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Fully Invested, Cautiously PositionedDavid Schassler, Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEckSeptember 21, 2020
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.
The VanEck Vectors® Real Asset Allocation ETF (RAAX®) returned +2.30% versus +6.76% for the Bloomberg Commodity Index and +4.72% for its custom blended benchmark.
RAAX performed well on an absolute basis, but lagged both of its benchmarks primarily due to its exposure to gold. The Fund held a 25% allocation to gold bullion and an 11% allocation to gold miners. RAAX’s investment in bullion returned -0.45% and its investment in gold equities returned -1.56%. Gold started the month strongly, quickly rising over 4.5% in the first few trading days and reaching an all-time high of $2,070 on August 6. This was due to weakness in the U.S. dollar and lower interest rates. Gold then corrected, falling $207 per ounce to an intraday low for the month of $1,863 on August 12, due to a stronger U.S. dollar, an uptick in interest rates and the announcement of a COVID-19 vaccine in Russia.
RAAX’s top performing position was in the clean energy industry. The VanEck Vectors® Low Carbon Energy ETF (SMOG™) was up 18%. It was a wild month for many stocks in this industry. The most remarkable was Tesla. It is the largest weighting in SMOG and is up nearly 500% year-to-date and up 74% last month alone!
Average Annual Total Returns (%) as of August 31, 2020 1 Mo† YTD† 1 Year Life (04/09/18) RAAX (NAV) 2.30 -17.48 -13.91 -5.75 RAAX (Share Price) 2.51 -17.50 -14.00 -5.76 Bloomberg Commodity Index* 6.76 -9.04 -3.90 -5.76 Blended Real Asset Index* 4.72 -10.82 -4.20 -1.89 Average Annual Total Returns (%) as of June 30, 2020 1 Mo† YTD† 1 Year Life (04/09/18) RAAX (NAV) 0.66 -24.32 -21.90 -9.75 RAAX (Share Price) 1.03 -24.07 -21.75 -9.62 Bloomberg Commodity Index* 2.28 -19.40 -17.38 -11.17 Blended Real Asset Index* 1.63 -18.57 -15.31 -5.93
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.
There were minimal changes to RAAX’s asset allocation in September. It reduced its gold equity allocation, from 10% to 5.34%, and added an allocation to steel equities. The reduction in the gold equity allocation was due to the recent increased volatility of gold equities and the addition of steel equities was based on improved price trends.
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 23. This 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 continue to remain positive after recovering from the drawdown in March. This is an indication of continued near-term stability in real asset prices.
Price Trend Risk Score
The real asset economic composite remains bearish as the supply and demand dynamics continue to be negatively impacted by the COVID-19 pandemic.
Economic Risk Score
Price volatility remains low across real assets. This is another indication that real asset prices are likely to remain stable in the near-term.
Price Volatility Risk Score
Investor sentiment is no longer at an extreme. This, too, indicates that prices are not overly vulnerable to a near-term correction.
Investor Sentiment Risk Score
Given the bullishness of these indicators, RAAX remains fully invested. However, it also remains cautiously positioned. The nearly 25% allocation to gold bullion and the 28% allocation to diversified commodities are designed to provide protection if the recovery stalls. Alternatively, the natural resource equity holdings offer the potential to deliver meaningful upside if the market rally continues. RAAX continues to hold its 5% minimal allocation to REITs, which has historically been one of the fund’s largest allocations, due to risk that these securities have been exhibiting.
As always, RAAX will continue to monitor the current environment and adjust its allocations to balance the risk and rewards of real asset investing.
Real Asset Sector Allocations Since Inception
Real Asset Class Allocations
Sep-20 Aug-20 Change from
Steel Equities 3.6% 0.0% 3.6% Increase Diversified Commodities 27.9% 27.4% 0.5% Increase Low Carbon Energy Equities 4.0% 3.6% 0.4% Increase MLPs 4.8% 4.4% 0.4% Increase REITs 4.7% 4.3% 0.4% Increase Coal Equities 3.5% 3.1% 0.4% Increase Global Infrastructure 4.7% 4.4% 0.3% Increase Energy Equities 3.4% 3.1% 0.3% Increase Global Metals & Mining Equities 3.6% 3.5% 0.1% Increase Agribusiness Equities 3.6% 3.5% 0.1% Increase Unconventional Oil & Gas Equities 3.3% 3.3% 0.0% No Change Oil Services Equities 3.3% 3.4% -0.1% Decrease Cash -0.1% 0.2% -0.3% Decrease Gold Bullion 24.2% 24.9% -0.7% Decrease Gold Equities 5.3% 11.0% -5.7% Decrease
Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and these opinions may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
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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 S&P 500® Index (S&P 500) consists of 500 widely held common stocks, covering four broad sectors (industrials, utilities, financial and transportation).
The S&P Real Assets Equity Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2020 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
The Solactive MLP & Energy Infrastructure Index tracks the performance of MLPs and energy infrastructure corporations. The MVIS U.S. 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.
Any indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made.
An investment in the Fund may be subject to risks which include, among others, in fund of funds risk which may subject the Fund to investing in commodities, gold, natural resources companies, MLPs, real estate sector, infrastructure, equities securities, small- and medium-capitalization companies, foreign securities, emerging market issuers, foreign currency, credit, high yield securities, interest rate, call and concentration risks, all of which may adversely affect the Fund. The Fund may also be subject to affiliated fund, U.S. Treasury Bills, subsidiary investment, commodity regulatory (with respect to investments in the Subsidiary), tax (with respect to investments in the Subsidiary), liquidity, gap, cash transactions, high portfolio turnover, model and data, management, operational, authorized participant concentration, no guarantee of active trading market, trading issues, market, fund shares trading, premium/discount and liquidity of fund shares, non-diversified and ETPs risks. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund’s returns. Small- and medium-capitalization companies may be subject to elevated risks.
Diversification does not assure a profit or protect against a loss.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.