Investors interested in diversifying a traditional portfolio mix with an alternative asset can look to a new ETF approach that provides exposure to real asset segments with positive expected returns while managing overall portfolio risk.
On the recent webcast, Real Asset Investing for the Real World, Roland Morris, Portfolio Manager and Strategist of Commodities for VanEck, explained that real assets include categories like commodities, natural resource equities, MLPs, REITs and infrastructure.
“An allocation to real assets can play three key roles in a portfolio: As a hedge to inflationary pressure. As a leverage to global growth. As a portfolio diversifier,” Morris said.
These real assets can help provide many portfolio benefits, such as low correlation to financial assets, outperformance in a rising rate environment, leveraged exposure to commodities, sensitivity to global growth and inflation, store value, provide safe-haven exposure, inflation protection and total return potential.
Related: VanEck Launches Real Asset Allocation ETF
A diversified approach that includes these alternative assets can help minimize overall portfolio drawdowns with less volatility, compared to the S&P 500. For example, in the period 1975 through 2017, commodity futures experienced an average decline of 10% to 20% a total of 6 times with an average length of 49 days. In comparison, U.S. equities experienced a decline of 10% to 20% a total of 9 times with an average of 163 days.
Looking ahead, a number of factors may continue to support the commodity outlook. Morris argued that the market is still emerging from a historic commodity bear market but sentiment strengthening. There is steady synchronized global growth and U.S. dollar weakness lending support to commodities. Additionally, fundamental factors like resilient global demand, supply reductions and companies exhibiting stronger balance sheets and cash flow should help support commodity prices.
To best capitalize on the real asset opportunity, VanEck has come out with the new VanEck Vectors Real Asset Allocation ETF (NYSE Arca: RAAX). The fund starts off exposure to commodities and companies involved in natural resources, real estate, MLPs and infrastructure. The managers then screens for indicators based on technical, commodity prices, investor sentiment and macroeconomic or fundamentals.
“RAAX uses a data-driven, rules-based process leveraging approximately 60 technical, macroeconomic/fundamental, commodity price, and sentiment indicators to allocate among 12 real assets segments. RAAX repositions its portfolio monthly using this repeatable process,” David Schassler, Portfolio Manager of Managed Allocation Strategy for VanEck, said.
The portfolio is currently bearish on sub-sectors like coal equity, global metals & mining, global infrastructure and REITs. On the other hand, the ETF is currently overweight diversified commodities at 30%, gold bullion 20%, agribusiness equity 20%, gold equity 10%, steel equity 5%, MLPs 5%, oil services equity 5% and unconventional oil & gas equity 5%.
Financial advisors who are interested in learning more about real asset investing strategies can watch the webcast here on demand.