Diversification Draws Investors to RSST

The Return Stacked U.S. Stocks and Managed Futures ETF (RSST) is far from a commonplace strategy, but its steady inflows since it debuted last September suggest an investor appetite for diversification.

Managed through a joint venture with Boston-based Newfound Research and ReSolve Asset Management in the Cayman Islands, RSST has grown to nearly $210 million with just one day of net outflows since its inception.

To appreciate its appeal—increased portfolio diversification without relinquishing exposure to core holdings—understanding how the fund collateralizes the underlying equity index to purchase managed futures exposure that enhances diversification is important.  

For every dollar invested, 75 cents is used to purchase exposure to the S&P 500 Index, with a portion of the remaining 25 cents buying collateralized exposure to the S&P to bring the overall exposure up to 100%.

What’s left over from the 25 cents is used for daily long and short trading of managed futures contracts.

If it sounds complex, that’s because it is. But for most ETF investors and financial advisors placing RSST in client portfolios, the main thing you need to focus on is how the “stacked” diversification will perform across market cycles.

Spoiler alert, the leverage being used in the ETF can cut both ways.

Managed Futures Stacked on SPY

Rodrigo Gordillo, ReSolve president and portfolio manager, admits the addition of managed futures increases overall volatility, but he said the tradeoff is a managed futures parachute if the broader markets go into freefall.

Using the extreme example of 2008, when the SPDR S&P 500 ETF (SPY) fell by 35% and the iShares Core U.S. Aggregate Bond ETF (AGG) gained 7.6%, the SocGen Trend Index, representing managed futures, was up 20%.

More recently, when the pullback of 2022 sent SPY down 17.7% and left AGG off 12.6%, the managed futures index was up 26.4%.

Then, of course, there’s the short pullback of a few weeks ago when SPY dropped 8% between July 16 and Aug. 5. Over that same period, RSST lost 17%. But since the start of the year SPY and RSST are both up just over 17%.

Gordillo calculates RSST’s standard deviation at 22, which compares to a less volatile 20 for SPY. He said that over shorter periods the difference can be unsettling for some investors.

“It will be more volatile on average,” he said. “For almost every year, when comparing RSST and SPY, you are likely to see a worse peak to trough with RSST.”