Return Stacked U.S. Stocks & Managed Futures ETF: A Deep Dive into RSST’s Performance and Strategy
In the world of managed futures funds, one ETF that has caught the attention of investors is the Return Stacked U.S. Stocks & Managed Futures ETF (BATS:RSST). Managed by Return Stacked Portfolio Solutions, a fund manager associated with Corey Hoffstein, this ETF offers investors a unique opportunity to gain exposure to both a U.S. large-cap equity portfolio and a managed futures portfolio in a single investment vehicle.
However, upon closer examination, there are some concerns regarding RSST’s implementation of its managed futures strategy. It appears to resemble machine learning-based CTA funds, which have faced criticism in the past. Additionally, the RSST ETF recently experienced a significant drawdown coinciding with the unwinding of the short-Yen carry trade, raising doubts about its ability to provide effective diversification benefits.
Despite these challenges, investors are intrigued by the concept of “returns stacking,” which involves leveraging alternative strategies like managed futures to enhance overall portfolio returns. Historically, institutional investors have used this technique to diversify their core stock and bond allocations, aiming to generate alpha.
RSST aims to make this strategy accessible to a wider range of investors by combining large-cap equity exposure with a managed futures strategy in a single fund. For every dollar invested, RSST provides a dollar of large-cap U.S. equity exposure and a dollar of a managed futures strategy, offering a capital-efficient way to access these asset classes.
With $207 million in assets under management, RSST charges a 0.98% expense ratio for its innovative strategy. To achieve 100% U.S. equity exposure while enabling returns stacking, the fund utilizes equity index futures to free up capital for its managed futures strategy. This approach allows RSST to invest in 27 liquid futures contracts, capturing a broad cross-section of global assets.
Since its inception in September 2023, the RSST ETF has delivered solid performance, with year-to-date returns of 18.5% as of August 31, 2024, and since inception returns of 20.6%. However, evaluating RSST’s historical performance presents some challenges, as it combines U.S. large-cap equity returns with a managed futures strategy.
Comparing RSST to traditional equity ETFs like the SPDR S&P 500 ETF Trust (SPY), it is evident that RSST has exhibited lower returns and higher volatility since its inception. This discrepancy may be attributed to the recent struggles faced by managed futures strategies, as evidenced by the SG CTA Index’s performance over the past year.
One of the key concerns surrounding RSST’s managed futures strategy is its similarity to machine learning-based approaches used by other CTA funds. By replicating the Société Générale Trend Index through a combination of top-down and bottom-up approaches, RSST exposes itself to the risk of missing sudden changes in underlying manager positions.
The recent drawdown experienced by RSST in conjunction with the blow-up of other machine learning-based CTA funds raises questions about the effectiveness of its risk management strategies. While RSST claims to mitigate these risks through a bottom-up approach that uses more data to create stable estimates, the fund’s performance during market inflection points suggests otherwise.
The magnitude of the drawdown in late July and early August highlights the challenges faced by RSST in maintaining its performance amidst market volatility. The correlation between RSST’s returns and equity market performance raises doubts about its ability to provide true diversification benefits through returns stacking.
In conclusion, while the concept of combining U.S. large-cap equities with a managed futures strategy in a single ETF is intriguing, the performance of the RSST ETF thus far leaves much to be desired. Investors are advised to monitor RSST closely and assess whether its managed futures overlay can truly add alpha before considering it as a part of their investment portfolio. As the market continues to evolve, the success of RSST’s innovative strategy will ultimately determine its long-term viability in the competitive ETF landscape.
