RAAX: Multi-asset class inflation hedge ETF, below average asset allocation strategy
I have hedged several inflation hedge ETFs in the past. Some focus on individual asset classes, including Treasury inflation-protected securities, commodities and global miners, etc. Others are diversified, multi-asset ETFs. The VanEck Inflation Allocation ETF (NYSEARCA:RAAX) is an example of the latter and provides investors with diversified exposure to the most relevant inflation hedging asset classes, with a strong focus on commodities. Asset allocations depend in part on fundamental and technical indicators, a strategy intended to maximize gains while minimizing losses. This strategy has been ineffective in the past, leading to moderate underperformance relative to its peers.
In my opinion, although RAAX is an effective inflation hedge and a reasonable investment opportunity, there are similar, stronger and better performing alternatives. SPDR SSGA Multi-Asset Real Return ETF (RLY) comes to mind. RLY is extremely similar to RAAX, but with a stronger asset allocation strategy and track record. I last covered RLY here. As such, I would not invest in RAAX at this time.
RAAX – Presentation
RAAX is a diversified, multi-asset class inflation hedge fund of funds. It invests in the most relevant inflation hedging asset class, through investments in cheap, simple, broad-based index ETFs. RAAX’s investments include commodity futures, as well as energy, real estate, infrastructure, mining and commodities stocks, all effective hedges against inflation. The fund also includes small investments in bitcoin, clean energy stocks and mortgage REITs. Together they represent approximately 5% of the fund’s value. These investments are not direct inflation hedges, and they have not performed particularly well during previous periods of high inflation. Their inclusion is negative, but since the allocations are small, it is not a important negative or deal breaker.
The RAAX asset class weightings and top holdings are as follows.
As can be seen above, RAAX invests in all relevant inflation hedging asset classes, but with a clear focus on gold, commodities and energy. I would have preferred a smaller allocation to gold, if only for diversification purposes, but these are all common, sensible and largely effective choices.
Generally speaking, RAAX’s underlying asset classes and funds are expected to outperform when inflation is high. Inflation has jumped since the start of the year, during which RAAX’s underlying holdings generally outperformed significantly, as expected. There are a few exceptions, notably real estate, which has slightly underperformed YTD. However, the results are generally positive.
RAAX itself has significantly outperformed year-to-date against most relevant asset classes, including US equities, global equities, Treasuries, bonds and high yield bonds. Almost all relevant asset classes are down, except those who profit from rising prices, all of which are included in RAAX.
In my view, and given RAAX’s holdings, strategy and track record, the fund is a largely effective multi-asset class inflation hedge ETF. The fund is expected to outperform when inflation is high and prices are rising, making it a suitable investment opportunity for investors looking to hedge their portfolios against inflation. However, there is a problem with the fund’s strategy and performance that makes it a weaker investment compared to its peers. Let’s look.
RAAX – Asset Allocation Strategy Analysis
RAAX asset allocations are partially function of fundamental and technical indicators. The fund may decide to overweight gold if the asset class looks relatively cheap, or may decide to underweight energy if oil prices look bubbly. The specific process is proprietary, so details are scarce.
This strategy aims to maximize gains, by investing in asset classes with strong fundamentals and (potential) above-market returns. Comparing the RAAX asset class weightings with those of its peers, it appears that the fund is currently overweight gold, with an allocation of +20%. Gold has underperformed year-to-date against most commodities year-to-date, so it seems unlikely that overweighting said asset class was the right move.
RAAX itself underperformed RLY, a close peer as well. The overweight to gold almost certainly contributed to the fund’s underperformance.
From what I’ve seen, RAAX’s asset allocation strategy has been ineffective in picking out the best performing asset classes or maximizing gains. There is however limit the proof, as we lack exact information on the fund’s asset allocations over time. Perhaps RAAX bought gold at a very opportune time, although it doesn’t seem very likely: gold has been underperforming for some time now.
RAAX’s asset allocation strategy also aims to minimize losses during downturns, favoring cash during such times. Synchronizing the market in this way is quite difficult, and RAAX has do not could do it successfully. Looking at the fund’s returns since the first half of 2020, the onset of the coronavirus pandemic, we can easily guess when the fund entered cash and when the fund exited said position. The timing was off in both cases. RAAX entered cash at the end of March 2020, a week or two after the market bottom, and therefore did not avoid any losses. RAAX exited cash at the end of June 2020, during which commodities and other relevant asset classes rebounded more than 10%, missing much of the recovery. At the end of 2020, the fund was nearly 10% behind close competitor RLY, almost exclusively due to inefficient and unprofitable market timing/asset allocation decisions.
RAAX has also underperformed since inception, almost exclusively due to the above.
This example of market timing failure explains more of RAAX’s underperformance since inception, but the fund has continued to underperform ever since.
RAAX’s asset allocation/market timing strategy has been ineffective in the past, resulting in reduced gains, below average performance and underperformance relative to its peers. I have no reason to believe the strategy will outperform going forward, so I think further underperformance is likely.
As this is the only material difference between RAAX and RLY, and given the difficulties inherent in most market timing strategies, I would not invest in RAAX at this time. RLY is quite similar to RAAX and does not engage in unsuccessful market timing strategies, making it the vastly superior investment.
Conclusion – No reason to buy
RAAX is a largely effective inflation-hedging ETF, but with an unsuccessful asset allocation strategy. As there are similar but vastly superior alternatives to RAAX, I would not invest in the fund at this time.