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Real Assets Fueled by Energy
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.
April Performance Summary
The VanEck Vectors Real Asset Allocation ETF (RAAX) launched, on April 9, into a period of strong performance for real assets. RAAX performed well on both an absolute and relative basis. Through April, in the first 16 days of its life, RAAX returned +2.98% based on net asset value versus +2.41% for its benchmark, the Blended Real Asset Index, which is comprised 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.
| Total Returns (%) as of April 30, 2018 | ||||
|---|---|---|---|---|
| 1 Mo† | YTD† | 1 Year | Life (04/09/18) | |
| RAAX (NAV) | – | – | – | 2.98 |
| RAAX (Share Price) | – | – | – | 3.26 |
| Blended Real Asset Index* | – | – | – | 2.41 |
| Total Returns (%) as of March 31, 2018 | ||||
|---|---|---|---|---|
| 1 Mo† | YTD† | 1 Year | Life (04/09/18) | |
| RAAX (NAV) | – | – | – | – |
| RAAX (Share Price) | – | – | – | – |
| Blended Real Asset Index* | – | – | – | – |
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. ETF returns assume that distributions have been reinvested in the Fund at NAV.
†Returns less than a year are not annualized.
Expenses: Gross 0.81%; Net 0.74%. Expenses are capped contractually at 0.55% through February 1, 2020. 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.
RAAX’s positioning was moderately defensive in April, and it was fully invested across commodities, natural resource equities, and Master Limited Partnerships (”MLPs”). The largest real asset investments were in diversified commodities (30%), gold bullion (20%), and agribusiness equities (20%).
May Positioning: Fully Invested and Mostly Bullish
RAAX remains fully invested across commodities, natural resource equities, and MLPs. As they were at launch, the largest weightings remain in diversified commodities (30%), gold bullion (20%), and agribusiness equities (20%). However, its allocation to gold equities now stands at 10%, increasing overall gold exposure to 30%.
We are bullish on most real assets. Based on the model’s analysis, diversified commodities, gold, agribusiness equities, MLPs, steel equities, oil services equities, and unconventional oil and gas equities are all well positioned to perform. We are bearish on Real Estate Investment Trusts (REITs), infrastructure, base metal equities, and coal equities.
Asset Class Weights
Source: VanEck. Data as of May 2, 2018.
This month we increased our exposure to gold equities and removed our exposure to coal equities. Another notable point is that we are bearish on two interest rate sensitive sectors, REITs and infrastructure, as interest rates continue to rise.
Remember, RAAX only invests in asset classes that the model is bullish on, and the weightings themselves are not an indication of conviction but a byproduct of a quantitative process that seeks to maximize diversification and minimize volatility. Let’s take a look at some of the reasons why RAAX maintains a bullish or bearish position on certain asset classes.
Gold
The model remains bullish, and overall exposure increased based on the portfolio diversification benefits that gold provides. Gold prices have been flat this year, but the precious metal has provided stability during periods of broad market stress.
Cumulative Growth of $10,000 of Gold and S&P 500 Index in 2018
Oil Services Equities
Research conducted here at VanEck has identified that oil price and the S&P 500 Index can be used to explain most of the performance of oil services stocks historically. Using these variables to generate an expected return for oil services stocks, we can look at the difference between this and the actual return of oil services stocks. Right now, based on these variables, oil services stocks are trading at a substantial discount, and the chart below shows that oil services stocks haven’t been this cheap since 2001.
Performance Variance of Oil Servicers and Key Independent Variables
The model remains bullish on oil services stocks. Key bullish indicators include strong oil prices, reasonable volatility in oil services equities, and strong demand for natural gas. The chart below shows that oil prices are up 14.83% this year through April.
Cumulative Growth of $10,000 of Crude Oil in 2018
Coal Equities
At launch, RAAX had a small weighting to coal, but in May, this exposure was completely eliminated based on falling coal equity prices and weakening supply and demand data. Below is our economic composite for coal. It turned bearish at the end of April due to declining demand for coal in the U.S. and China, and declining production in the U.S.
Coal Economic Indicator Composite
A Closer Look at the What, When, and How
Step One: What to Own
The aphorism ”a rising tide lifts all boats” is appropriate here. April was a great month to invest in real assets. Each real asset in our investment universe and the approximated holding period return of the underlying index is listed below. The assets that we were bearish on are shaded.
Holding Period Return
April 10 – April 30, 2018
| Gold Equities | 1.42% | Oil Services Equities | 13.97% |
| Agribusiness Equities | 1.22% | Unconventional Oil & Gas Equities | 12.36% |
| Coal Equities | -1.78% | Global Metals & Mining Equities | 4.65% |
| Gold Bullion | -1.56% | Diversified Commodities | 3.60% |
| MLPs | 6.08% | REITs | 1.53% |
| Global Infrastructure | 1.53% | Steel Equities | 7.42% |
Source: Bloomberg; FactSet. Data as of April 30, 2018. Past performance is no guarantee of future results. Investors cannot invest directly in an index.
Step Two: When to be Invested
We were fully invested in April. This was the right call as real asset investments rallied. RAAX begins to raise a cash position when five or more assets become bearish. This is typically indicative of a systemic market event. RAAX has not raised cash since it launched.
Step Three: How to Allocate
Capital is allocated amongst assets on which the model is bullish on using an optimization process designed to maximize our diversification and minimize our volatility. In April, this resulted in a 50% exposure to commodities, a 45% exposure to natural resource equities, and a 5% exposure to MLPs. RAAX’s allocation in May has not changed drastically.
Monthly Asset Class Changes
| Asset Class | May-18 | Apr-18 | Change |
| Gold Equities | 10% | 5% | 5% |
| Diversified Commodities | 30% | 30% | 0% |
| Agribusiness Equities | 20% | 20% | 0% |
| Gold Bullion | 20% | 20% | 0% |
| Limited Partnerships | 5% | 5% | 0% |
| Service Equities | 5% | 5% | 0% |
| Cash | 0% | 0% | 0% |
| Unconventional Oil & Gas Equities | 5% | 5% | 0% |
| Steel Equities | 5% | 5% | 0% |
| Estate Investment | 0% | 0% | 0% |
| Global Infrastructure | 0% | 0% | 0% |
| Metals and Mining Equities | 0% | 0% | 0% |
| Coal Equities | 0% | 5% | -5% |
Source: VanEck. Data as of May 2, 2018.