Return Stacking ETFs for Lower Risk Higher Returns

Return stacking ETFs can be a great way to lower your risk and increase your returns. By combining multiple ETFs, you can create a more diversified portfolio that's less vulnerable to market volatility.

A key benefit of return stacking is that it allows you to take advantage of the strengths of different ETFs, such as their unique investment strategies and asset classes. This can help you earn higher returns over time.

For example, a study found that a portfolio of three ETFs, each with a different investment strategy, outperformed a single ETF by 3.2% over a one-year period.

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Return stacking ETFs allow investors to incorporate alternatives into their portfolios without diluting their core stock and bond allocation, providing a capital efficient solution to diversify their investments.

The Return Stacked Bonds & Managed Futures ETF (RSBT) seeks to provide long-term capital appreciation by investing in two complementary strategies: a bond strategy and a managed futures strategy.

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For every $1 invested, RSBT aims to provide $1 of exposure to its bond strategy and $1 of exposure to its managed futures strategy, allowing investors to maintain their core exposures while introducing diversification.

The ETF is designed to be a component of a larger portfolio, not a total portfolio solution, and its returns should not be evaluated on a stand-alone basis.

By replacing core U.S. fixed income with RSBT, investors can maintain their bond exposure while introducing managed futures on top, creating a more diversified portfolio.

For example, if an investor holds 60% stocks and 40% bonds, they could sell 20% of their bonds and buy RSBT, resulting in a portfolio that seeks to provide 60% stocks / 40% bonds / 20% managed futures.

RSBT's embedded capital efficiency makes it a unique offering in the market, allowing investors to thoughtfully incorporate alternatives into their portfolios without sacrificing their core exposures.

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The Return Stacked Bonds & Managed Futures ETF (RSBT) offers a unique combination of two investment strategies: a bond strategy and a managed futures strategy.

This fund 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, and U.S. Treasury futures.

The bond strategy is designed to provide a stable source of returns, while the managed futures strategy aims to capture market trends using a systematic and quantitative process.

The managed futures strategy invests across commodities, currencies, bonds, and equities via futures contracts, and uses sophisticated machine learning techniques to blend two distinct and diversifying approaches.

The expense ratio of the RSBT ETF is 0.97%, which is relatively low compared to other managed futures strategies in the market.

Investors who are looking for a cost-effective way to gain exposure to bonds and managed futures may find the RSBT ETF to be a suitable option.

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The fund's pricing is designed to be cost-competitive with other managed futures strategies, making it an attractive choice for investors who want to add an alternative beta component to their portfolio.

The RSBT ETF is a rules-based strategy, meaning that it uses a systematic and quantitative process to manage the portfolio, rather than relying on discretionary inputs.

This approach can help to minimize the risk of human error and ensure that the portfolio is aligned with the investment objectives.

Investors should consider their goals and objectives when evaluating return stacking ETFs. Are you looking to diversify your portfolio or enhance returns?

To determine which approach is right for you, ask yourself two questions: Is your goal with a prospective investment portfolio diversification? Are you able to take a holistic approach to portfolio management and evaluate your portfolio by the sum of its parts? If so, return stacking may be a good fit.

If your goal is more aligned with returns enhancement, you may want to consider a dedicated diversifying strategy, such as a negatively or non-correlated trend-following CTA. For example, as of June 2022, the Auspice Diversified (Series X) was +17.6% YTD, whereas the return-stacking Auspice One Fund (Series A) was +1.0% YTD, with the "traditional" component of the Auspice One Fund weighing on returns.

When designing the RSBT ETF, the creators considered implementing a managed futures strategy using an ensemble approach, blending the weights of different implementations together. This would have reduced single-manager risk.

However, they decided against it and instead opted for a strategy that could track the benchmark closely, which would provide more consistent returns.

The RSBT ETF is designed to be a component of a larger portfolio, not a standalone solution. Its best use is as a replacement for core U.S. fixed income, allowing investors to maintain their bond exposure while introducing managed futures on top.

For example, an investor holding 60% stocks and 40% bonds could sell 20% of their bonds and buy RSBT, resulting in a portfolio with 60% stocks, 40% bonds, and 20% managed futures.

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Investors often struggle to stick with alternative investments, especially when they underperform traditional assets for years. Historically, this has led to selling core stock and bond exposure to make room for alternatives.

This approach can create meaningful underperformance during strong bull markets. To avoid this, return stacking allows you to maintain your core stock and bond exposure, reducing tracking error to your benchmark.

Return stacking can help mitigate the human biases that investors often face, such as evaluating investments on a line-by-line basis and divesting during periods of underperformance.

By using return stacking solutions, investors can potentially lead to higher standalone and risk-adjusted returns. However, this approach may not be suitable for all investors, particularly those seeking diversification or risk mitigation with significant equity risk.

In such cases, a dedicated diversifying strategy like a negatively or non-correlated trend-following CTA may be more appropriate.

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Historically, trend following strategies have done poorly during periods with no meaningful, sustained trends. The 2010s are a standout example of this type of period.

To evaluate the performance of a return stacking ETF, it's essential to consider its integration into a larger portfolio. The Return Stacked Bonds & Managed Futures ETF (RSBT) is designed to be a component of a larger portfolio, not a total portfolio solution.

A capital efficient solution like RSBT can be used to replace core U.S. fixed income, allowing investors to maintain their bond exposure while introducing managed futures on top. This can be achieved by selling 20% of bonds and buying RSBT, resulting in a portfolio that seeks to provide 60% stocks / 40% bonds / 20% managed futures.

Return stacking, particularly when done with uncorrelated and even negatively correlated strategies, can produce more attractive risk-adjusted returns. This approach addresses human biases that investors often face, such as evaluating investments on a line-by-line basis rather than taking a holistic approach to portfolio management.

The Auspice Diversified (Series X) fund, a negatively or non-correlated trend-following CTA, has performed well in certain market conditions, returning +17.6% YTD as of June 2022. In contrast, the Auspice One Fund (Series A), a return-stacking portfolio, was +1.0% YTD during the same period.

The RSBT ETF's performance can be quite dependent on market conditions. It tends to do well when bonds and managed futures both perform well, but poorly when both do poorly.

A key period to note is the 2010s, when trend following strategies struggled due to the lack of meaningful, sustained trends.

Favorable periods for the RSBT ETF have been those with sustained trends, such as the emergence of sustained trends in the U.S. dollar and interest rates in 2022.

Historically, trend following strategies have not done well in periods without sustained trends.

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Portfolio Optimization is all about making the most of your investments. By replacing some of your core holdings with a fund that provides 2x exposure to a 50% stock / 50% bond portfolio, you can create a capital efficient implementation that frees up space in your portfolio for other opportunities.

For example, if you hold a 60% stock / 40% bond portfolio, you could sell 10% of your stocks and 10% of your bonds and allocate 10% to a 100/100 fund. This would allow you to maintain your core stock and bond exposure while introducing a new diversifying strategy.

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By using a Return Stacked ETF, you can provide long-term capital appreciation by investing in two complementary investment strategies: a bond strategy and a managed futures strategy. For every $1 invested, the ETF seeks to provide $1 of exposure to its bond strategy and $1 of exposure to its managed futures strategy.

A Return Stacked ETF like RSBT can be a valuable addition to a portfolio, particularly for those seeking to maintain their bond exposure while introducing managed futures on top. By replacing 20% of your bonds with RSBT, you can create a portfolio that seeks to provide 60% stocks / 40% bonds / 20% managed futures.

The key to successful portfolio optimization is to consider your investment goals and risk tolerance. Are you seeking diversification or returns enhancement? By understanding your objectives, you can choose the right investment strategy for your needs.

Here are some possible portfolio configurations:

Ultimately, the best portfolio configuration will depend on your individual circumstances and investment goals. By considering your options and choosing the right strategy for your needs, you can optimize your portfolio and achieve your financial objectives.

Benchmarking a TAA portfolio is crucial to accurately measure its performance. A classic choice for a benchmark is often overlooked, but it's essential to consider it when evaluating a TAA strategy or portfolio.

The classic choice for a benchmark is just like in the example, where a specific benchmark is not mentioned, but it's implied to be a subtle aspect of measuring performance. This aspect is often overlooked, but it's crucial to consider it when evaluating a TAA strategy or portfolio.

A benchmark is necessary to compare the performance of a TAA portfolio, and the choice of benchmark can greatly impact the results. The benchmark should be relevant to the specific TAA strategy or portfolio being evaluated.

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Return stacking is a strategy that's been practiced by institutional investors for decades. It's a combination of strategies, often an "alpha" and a "beta" strategy, into a single portfolio or fund.

The goal of return stacking is to provide more than $1.00 of exposure for each $1.00 invested, by layering one investment return on top of another. This is achieved through the thoughtful application of leverage, allowing investors to include diversifying alternatives without diluting their core stock and bond allocation.

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Return stacking generally involves the use of cash-efficient derivatives, such as futures, which require only a small percentage of capital versus the gross notional exposure. This enables investors to create multiple exposures with the same amount of capital.

The result of return stacking is a portfolio that can provide slightly more returns than the sum of the parts, due to the non-correlation of the strategies and rebalancing. Notably, the risk metrics of a return-stacked portfolio are not the sum of the parts, and are often lower than the standalone volatility of the S&P 500.

For example, a 100% allocation to a CTA benchmark, the BTOP50, on top of a 100% allocation to a Traditional 60/40 portfolio, has shown returns that are slightly more than the sum of the parts over a period of almost 35 years.

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Return stacking is a powerful investment strategy that allows you to achieve more than $1.00 of exposure for each $1.00 invested.

At its core, return stacking involves layering one investment return on top of another, creating a snowball effect that can boost your portfolio's growth.

By doing so, you can unlock the benefits of diversification in your own portfolio.

Professional management is key to making return stacking work, and that's where return stacking ETFs come in – they provide a convenient and accessible way to implement this strategy.

These funds are designed to help investors build a diversified portfolio by layering returns on top of each other, making it easier to achieve more exposure for each dollar invested.

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Return stacking ETFs can be a game-changer for your portfolio management strategy. By integrating them into your existing portfolio, you can maintain your core stock and bond exposure while introducing managed futures on top, all while reducing tracking error to your benchmark.

In fact, the Return Stacked Bonds & Managed Futures ETF (RSBT) is designed to be a component of a larger portfolio, not a stand-alone investment. This means you can use it to replace core U.S. fixed income, allowing you to maintain your bond exposure while introducing managed futures.

Consider this example: if you hold 60% stocks and 40% bonds, you could sell 20% of your bonds and buy RSBT, resulting in a portfolio that seeks to provide 60% stocks / 40% bonds / 20% managed futures.

By using a return stacking ETF, you can also create a capital efficient implementation that frees up 10% of your portfolio for other uses, such as alternative assets and strategies that can introduce beneficial diversification.

Here's a brief overview of the potential benefits of return stacking ETFs:

Overall, return stacking ETFs offer a unique opportunity to enhance your portfolio management strategy and achieve more attractive risk-adjusted returns.

ETFs can be a great addition to a portfolio, but it's essential to understand how to integrate them effectively. Evaluating an ETF's returns on a stand-alone basis can defeat the purpose of the strategy, so it's better to consider it as a component of a larger portfolio.

A capital efficient solution like the Return Stacked Bonds & Managed Futures ETF (RSBT) is best used as a replacement for core U.S. fixed income, allowing investors to maintain their bond exposure while introducing managed futures on top.

To incorporate an ETF like RSBT into a portfolio, consider replacing some of the core holdings with a fund that provides 2x exposure to a 50% stock / 50% bond portfolio. This can be done by selling 10% of stocks and 10% of bonds and allocating 10% to the ETF.

Return stacking, particularly when done with uncorrelated and even negatively correlated strategies, can produce more attractive risk-adjusted returns. However, it's essential to consider the objective or role of an investment, as it may be better served with a dedicated diversifying strategy, such as a negatively or non-correlated trend-following CTA.

The largest beta or risk factor likely determines where a strategy belongs in a portfolio. For example, the Auspice One Fund, which overlays core CTA alpha strategies on top of a traditional-like portfolio, would sit in an equity portfolio.

By using an ETF like RSBT, investors can maintain their core stock and bond exposure while introducing managed futures on top. This can be done by allocating a portion of the portfolio to the ETF, rather than selling core holdings.

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Here are some best case usage scenarios for an ETF like RSBT, ranging from high to low conviction allocations:

By considering these scenarios and understanding how to integrate ETFs into a portfolio, investors can unlock the benefits of diversification and potentially improve their risk-adjusted returns.

The Auspice One Fund is a unique approach to portfolio management that offers retail investors in Canada a solution similar to those available to institutional and US investors. This fund was launched in 2020.

It's essentially a way to "stack" protective CTA strategies on top of a traditional portfolio, providing an extra layer of diversification and risk management. By combining the Auspice Diversified fund with a traditional 60/40 portfolio, investors can achieve compelling risk and return metrics.

The Auspice One Fund adds a small allocation to gold in the traditional portfolio and a long/flat trend-following overlay on 50% of the traditional portfolio to better manage risk. This approach has led to significant improvements in risk metrics, including lowered volatility and worst drawdown.

With an annualized return of over 12% since inception, the Auspice One Fund has outperformed benchmarks MSCI ACWI (equity) and XBAL (Balance Fund ETF) with a low equity correlation and lower drawdown.

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