I’m not exactly back, but this morning’s Twitter review rocked my mental space all day, to the point that I’m compelled to write. And the news…the launch of RSST, Return Stacked ETFs U.S. Stocks & Managed Futures Fund. Read up on it, and have some wonderings to share!
The news in a nutshell: In March, Return Stacked ETFs, a new fund company merging the talents of ReSolve Asset Management and Newfound Research, launched RSBT, a combined US Bonds and Managed Futures Fund. That one gives investors $1 dollar in US bonds (think AGG) and $I dollar (think DBMF, not exactly, but close enough) for every $1 dollar invested. How to get $2 in exposure for $1 actual? By using one portion of the money as collateral to fund options purchases to mimic the behavior of the actual market. Yes, it’s leverage, but different from some of the forms of leverage you’ve heard of before: no interest rate drag on the portfolio, you aren’t on the hook for anything below zero, no daily resets, and no broken kneecaps.
The big development this morning was that a companion fund has been announced: RSST, which will do the same thing as RSBT except with US large-cap equities (think VOO) in place of bonds. So, you get $1 in the S&P along with $1 in Managed Futures for every dollar invested. Read more in the fund summary here, but the key is that this is an accessible way to expand one’s investing canvas by using the relatively cheap leverage inherent to the use of futures. The fund’s fee is high (1.04%), but I like to think of this extra 1% (since your typical S&P fund is going to be close to .04%) as the cost for basically doubling your exposure. That’s a good deal, in my book.
To learn more for yourself, head to the website, and you may also like some of my earlier Risk Parity Chronicles posts on Return Stacking and capital efficiency. Make sure you also check out this great interview with Corey Hoffstein of Return Stacked on Picture Perfect Portfolios, Nomadic Samuel’s indispensable website covering all the cool happenings in capital efficient asset allocations.
And now I have some open questions, wonderings, musing, speculations…
1) Did y’all mean to give me a heart attack?
I was a little caught off guard by the announcement of RSST. Back in the Spring, when RSBT (Bonds + MF) was launched, the website for Return Stacked ETFs said that RSSB (a return stacked Global Stocks & Bonds) was coming soon. I was excited by that, but that would be another competitor to NTSI, not a new ETF idea on the scene.
Had heard some rumblings on Twitter over the past year or so that a stocks & MF was *perhaps* possible. Then in a reply to a post I made about RSBT back on August 29th, I got a reply back from Rodrigo Gordillo that a new fund was set to launch “very, very soon,” but I was thinking he was talking about RSSB, the stocks & bonds mix.
Wasn’t at all prepared for the stocks + MF option! That was really the fund I was waiting for, and I was pleasantly surprised that RSST jumped the queue.
RSSB is still listed as "coming soon" on the website, and once that is in place, the three-legged stool for capital efficient retail investors will be complete, allowing anyone to mix and match these three asset classes: long equities, long-bonds, and multi-asset trend, in whatever combination they wish.
2) Wait...is this too good to be true?
I do my best to be measured in my investment choices. I run quite a few backtests, wait and see, look at competitors, do my homework, that kind of thing. But I found myself today just wanting to throw caution to the wind and jump in.
The nagging voice, though, wonders if I've just fallen down a rabbit hole of optimism. No legit backtests yet (obviously), and given how I really only feel comfortable with backtests that include the 1970s, it will be a loooong time before we get that. I do look forward to doing some rough approximations using proxy funds, but that task will have to wait until later.
I don’t have any expert takes to draw on just yet, either. I’d love Ben Felix to tackle this topic on the Rational Reminder, or to have Antti Ilmananen write a paper about it, but we’re quite a ways from that: Return Stacking, or the more general topic of capital efficiency, remain pretty niche. They really shouldn’t be, but alas, that is the case.
I will still invest anyway, with new money as it comes in, but won't make major decisions (cashing out of VOO, for example, to put it all in RSST) just yet.
Still, all that aside, the arrival of RSST feels a bit like winning first class tickets on your favorite airline to go to your favorite city to watch a concert by your favorite band (that’s Singapore Airlines to Copenhagen to watch a reunited Daft Punk, by the way). Yeah, that's never happened to me before either and I don’t have any happiness data to look back on, but I don't need a lot of analysis to figure out that would be pretty freakin’ awesome. That’s sort of my early take on RSST, too.
3) If it does go wrong, how would it happen?
Corey covers this a bit in the interview I mentioned (go to the “When Will RSST ETF Perform At Its Best/Worst?” about 60% down, and then also the “Cons of RSST” a bit below that), on top of which I'll sketch out my three big concerns:
- If the Managed Futures strategy doesn't beat the fees, this won’t work, full stop. Think of it as a 1% hurdle rate. Still… the oldest trend following Managed Futures fund I know of (MFTFX) has returned 2.9% since 2009, while DBMF and KMLM, two popular funds nowadays, have returned 8.7% and 14.2 & since 2019 and 2021, respectively. The MF portion should be in good shape, but you never know.
- Trend stops working. Maybe economic cycles become so short and so stochastic that whatever sophisticated models exist just can no longer keep up. I have learned about trend-following MF strategies over the past year that they work well with tides and with waves, but not really the wakes of speedboats - they can do well to capture things that develop slowly but not necessarily things that dart quickly. From my reading and listening, the long-term academic case for managed futures seems pretty strong, though the actual implementation strategies used in the past have struggled (probably because of high fees more than anything, though).
- There is such a severe downturn in the equity markets that funds fail, whether they are deserving or not. The options strategy is clever, but it’s not bullet-proof. If we get a repeat of 2008/9, nothing might survive, no matter how clever. In this case, RSST might still “work” but you could get cashed out at a big loss anyway.
Any other distinct risk scenarios I should be thinking of?
4) I know the 60/40 will never die, but if you can get 100% equities plus 100% trend for cheap, then what’s the rationale for a 60/40?
I saw Nomadic Samuel on Twitter propose a 60% RSST/ 40% RSBT split - your typical 60/40 but gaining an extra 100% of MF along the way.
But, I'm wondering if, when we go back to first principles, that the 60/40 framework might not be valid when you can blend funds as RSST does. Recall that the origin of the 60/40 was to capture the upside of stocks, but since their volatility was too high, you threw in relatively inert and sometimes negatively correlated bonds into the mix to smooth the ride. I usually visualize this as adding ice cubes to a bad scotch to make it go down easier.
Yet, what if trend-following Managed Futures are a better diversifier than long bonds? The MF portion of RSST can go long and short and runs across multiple asset classes. It can be long bonds when that makes sense, but not when it doesn't.
If that's the case, why dilute the long-only portion of stocks to be long-only in bonds when that would have lower returns? Not to be hyperbolic - but part of me is thinking that RSST might have just completely blown up the last remnants of a rationale behind a straight vanilla 60/40 (though of course I know nothing will actually kill the 60/40!).
5) What else is on the way for Return Stacked ETFs?
I'm not a pro, of course, but the basic idea of these capital efficient funds is that you have one part, the base, which has to be large, liquid, and easy to use as collateral. Then, most of the customer's money goes into that, and then a remaining cash portion is used to purchase options to track the second part of the strategy.
This got me thinking, where might the strategy go from here? Will we get an international stocks version of RSST, as well as an emerging markets version, just as WisdomTree has a US, international and EM version of their 90/60 funds? Could we get long-gold plus managed futures? Could we get the NASDAQ 100 plus MF, or USMV plus MF? Dreaming out loud: can Return Stacked just partner with Avantis and do capital efficient versions of all of Avantis's funds?
I'm super excited by RSST (and RSBT, too) but even more excited by the future possibilities. Strap in, folks, the capital efficient wave is coming soon.
6) Did I just find my new "deserted island" fund?
It's a silly construct but one that provokes some good discussion nevertheless: imagine you're going off to a deserted island for twenty years. You have to put all your assets in one fund, no checking it, no rebalancing it, nothing. What do you choose?
I have had different iterations in the past, everything from VT to VIOV (and then AVUV) and most recently, NTSX.
I’m just jonesing to say RSST would be the choice now.
7) Is RSST a possible "giant killer" in the ETF space?
Are we watching the infancy of David before he grows up to defeat Goliath?
At the first level, RSST seems to fulfill the mission of NTSX just a bit better (argument: trend-following MF is a better diversifier than long-only bonds, and you get +50% more exposure). I’m really curious to start playing with Portfolio Visualizer and start putting up an RSST framework against an NTSX framework and see how they test out.
But then I got thinking even bigger - what's the rationale for investing in VTSAX/VOO anymore, now that RSST is here? To be clear, Managed Futures must beat the fees, but if this is true, then why not take advantage of the extra exposure to Managed Futures, another strategy with positive expected return? True, if both elements are done, you'd be down more than with just VTSAX/VOO but again, the low, non-, or negative correlation of MF suggests that you'd likely have more cases where MF saves your bacon instead of burns it.
Just envisioning the downfall of VOO and VTSAX, each with more than $300 Billion in AUM, plus every other similar fund. No biggee!
8) All things considered, just how big of a deal is RSST?
I'm reminded again of one of the funniest dynamics on Fintwit. On the one hand, and as the account TikTok Investors tracks so well, literally any random moron can make a TikTok containing the most thoroughly bullshit advice imaginable. I'm not just talking silly, sub-optimal, or highly risky, but also stuff that is so transparently absurd (like this guy who won't pay cash for a new car, but instead pays...cash) or that actually promotes the commission of felonies (such as insurance fraud, tax evasion, or commercial loan fraud).
On the other hand, you have actual experts with advanced degrees in quantitative financial modeling from the best schools presenting their well-reasoned, mathematically-supported strategies based on 10-20 years of experience and a hundred years of financial data, and they basically can't say anything lest they run afoul of SEC regulations. Hoffstein and Gordillo, the two big principals behind RSBT and RSST (keeping in mind the teams at ReSolve and Newfound Research in support!), thus probably can't let on too much. They have to be wary of over-promising, and basically only make public statements about their fund that they could defend in a court of law.
Given this landscape in how the public finds out about new funds, RSST is going to need all the hype it can get, as its publicity is hamstrung by the sad fact that its creators are too legit to do what the bozos could do in 20 seconds. Lies can get halfway around the world before the truth can get its boots on, says Mark Twain (maybe Twain? you never know).
To even the score a bit, I’ll say it bluntly: RSST is a big fucking deal.
This could well be the fund that completes the puzzle of capital efficiency, at least as far as retail investors are concerned. Paired with RSBT, everyday Joes and Janes now have an easy and cheap way to get $1 act like $2.
Time will tell how it actually does, but I am really excited by this fund and think it could have a major impact. The launch of new funds is pretty tricky, though, as just like really great neighborhood restaurants, sometimes even the most fabulous ones can still struggle to capture the requisite attention at the right time. Let’s hope these guys get the fund inflows they deserve!
Sorry, that got out of hand. Will shut up now. But check out RSST!