Tidal Mixes Leveraged and Managed Futures in New ETF

Tidal ETFs launched the U.S. Stocks and Managed Futures ETF (RSST) last Wednesday, offering investors a novel way to diversify their portfolios.  

The ETF uses leverage to give investors a managed futures strategy and exposure to the S&P 500. Managed futures strategies trade different types of futures based on their momentum. According to fund sub-advisor Newfound Research, these strategies are historically uncorrelated with stocks or bonds. 

The fund uses leverage to allow investors to diversify their portfolio by including managed futures strategies, while not sacrificing their allocation to stocks. Newfound said that the benefits of diversification outweigh the risks and costs of leverage. 

“My non-controversial take is that diversification is good. We think this fund offers investors more diversification in a way we have a lot of confidence in,” Corey Hoffstein, chief investment officer of Newfound, told etf.com. 

Leveraged ETF Stigma 

Hoffstein understands that many investors are wary of having a leveraged ETF as part of their core holdings. 

“People hate leverage because when you look at every major financial catastrophe, leverage is at the center of it," Hoffstein said, adding that "concentrated leverage" is the main problem. "We’re not just adding stocks to more stocks, we’re putting in an asset that zigs when stocks zag." 

The strategy of getting market exposure through one asset class and then trying to get outperformance from another is called “portable alpha,” a strategy common with institutional investors, but rarely accessible to retail investors, he said. 

Advisors Remain Skeptical 

Paul Schatz, president of financial advisory firm Heritage Capital, said in an interview that while the theory behind the fund is sound, he’s skeptical that Newfound can put it into practice. He points out that the large institutional investors that use complex strategies like this have more expertise and infrastructure than most ETFs do, and so Newfound may struggle to replicate them. 

Charles Failla, CEO of Sovereign Financial Group, another financial advisor, said that he is staying on the sidelines for now. He does think the fund is interesting, however, and is putting it on his watch list to see if the fund can make its ideas work in an ETF. 

The fund’s expense ratio of 1.04% is higher than average for ETFs and may also make investors wary. 

RSST is the second fund by Newfound to focus on diversification-based leverage. The Return Stacked Bonds & Managed Futures ETF (RSBT) launched in February and holds $23.6 million in assets. Tidal has also filed to launch another fund with Newfound that combines stock and bond exposure.