My First Look: Return Stacked U.S. Stocks & Futures Yield ETF (BATS:RSSY)

Introduction

Seeking Alpha provides us Contributors a daily list of tickers readers have shown interest in and when an article was last published for each of those tickers. Within this list are tickers readers have visited enough to be on the list but have never been covered on the Seeking Alpha site. The Return Stacked U.S. Stocks & Futures Yield ETF (BATS:RSSY) recently appeared, and its name attracted my attention. A quick read showed it was using a different investment strategy than many of the other equity+income ETFs like the JPMorgan Equity Premium Income ETF (JEPI), a widely covered and followed ETF here on Seeking Alpha.

As with any unique strategy employed by an ETF, time will tell. In the meantime, give the RSSY ETF a Hold rating.

Return Stacked U.S. Stocks & Futures Yield ETF review

Seeking Alpha describes this new ETF as (edited):

Return Stacked U.S. Stocks & Futures Yield ETF is co-managed by Newfound Research LLC and Resolve Asset Management Sezc. The fund invests in public equity, fixed income, commodity and currency markets of the United States. For its equity portion, it invests through derivatives and through other funds in stocks of companies operating across diversified sectors. The fund uses derivatives such as futures to create its portfolio. It invests in growth and value stocks of large-cap companies. For its fixed income portion, it uses derivatives such as futures to invest in fixed income markets. For its commodity portion, it uses derivatives such as futures to invest in commodity markets. For its currency portion, the fund uses derivatives such as futures to invest in currencies. The fund gains exposure to futures contracts either directly or indirectly by investing through a wholly owned Cayman Islands subsidiary. The fund employs quantitative analysis to create its portfolio. The fund employs proprietary research to create its portfolio. RSSY started in late May of this year.

Source: seekingalpha.com RSSY

The managers provide the following as their investment case for this ETF:

Capital Efficiency and Diversification. Aims to provide simultaneous exposure to U.S. stocks and a futures yield strategy. For every $1 invested, RSSY aims to provide $1 of exposure to large-cap U.S. equities and $1 of exposure to a futures yield strategy.

Diversification: RSSY seeks to provide exposure to a futures yield strategy that has historically exhibited low average correlations to both stocks and bonds.

Directional Alternative: With the ability to go both long and short global futures markets (including equities, bonds, commodities, and currencies), futures yield (carry) has the potential to dynamically respond to changing market regimes and complement other directional alternative strategies like trend following.

Source: returnstackedetfs.com RSSY

By executing a U.S. equity strategy and a futures yield strategy, the ETF seeks long-term capital appreciation and enhanced income. The equity strategy is designed to capture large-cap U.S. returns via direct investing in those equities, by large-cap ETFs, or index futures. The futures yield strategy will go long and/or short commodities, currencies, bonds, or equities via futures contracts using a systematic and quantitative process that seeks to capture roll yield (carry) in futures contracts. The ETF rebalances daily. That can lead to undesirable tax events for investors, especially due to the use of futures contracts.

I found the following in an article about RSSY published while writing mine, and default to their knowledge on this important part of the ETF’s strategy.

Roll yield = (total change in futures prices) – (total change in spot price)

Now, this is different from a dividend yield or a fixed income yield (such as a bond’s YTM or yield to maturity), but it essentially has the same effect of complementing the core return from the changing price of the underlying asset – whether that’s a bond, a commodity, an equity, or a currency pair.

RSSY, therefore, can be said to use a strategy that not only directly benefits from an equity’s price gain or loss, but adds a couple of layers on top of that – the price change in the underlying assets and the roll yield.

The mechanics are more complex than that, of course, but the essence of it is that when long-dated contracts are priced higher than short-dated contracts (contango), the roll return is negative, while the inverse is true when the futures curve is in backwardation, which is the exact opposite and longer-dated contracts are priced lower than short-dated contracts. This second situation can happen when the commodity, such as soy, sugar, gold, corn, etc., faces short-term shortages that aren’t expected to be repeated the following year. Therefore, the total return for the fund comprises the price appreciation/depreciation component of the equities and futures contracts and the yield or roll return component of the contracts.

Source: DeVas Research RSSY

They provided this diagram to help explain how the Futures Yield Strategy and $1-for$1 strategy are funded.

The cash generated funds the use of futures for exposure to all four asset classes used, plus executing “roll capture” within the futures used otherwise.

Holdings review

This is the complete list of holdings, sorted by strategy and portfolio weight.

Observations:

• The ETF is bullish on US stocks and Bearish on International stocks. Overall, Equities has the highest positive weighting.
• Bonds, both US and International, all have negative weights, with the strategy having the largest overall negative weighting. The managers are betting on more rate cuts, as was recently seen by the European Central Bank. There is growing belief, despite the pending election, that the FOMC will cut rates in September.
• Currencies show split, with the GBP and AUD being long, and the ETF short four others, led by a huge negative bet on the Canadian Dollar.
• Commodities are also split, with the net weight almost being 0%. RSSY is long most fossil fuels and short the metals, with Gold having the biggest bet against it amongst the metals.

My two cents say the managers believe the USD will be strong, with declining interest rates worldwide. While that also helps explain the positive outlook for fuels, demand/supply differences must come into play for other commodities; otherwise I would think the metals would be positive bets. One thought explaining that, especially the large negative Gold position, is that concerns about inflation are dying down, which is when metals usually shine.

Distributions review

Distributions, if any, are expected to be made annually at the end of each calendar year. Related ETFs from these managers all yield less than 1%, so investors might be disappointed if buying RSSY looking for an enhanced yield ETF due to its name.

Risk analysis

As with any fund, the Prospectus contains a long list of risks investors should be aware of. Ignoring the usual laundry lists, here are a few RSSY has others might not:

• Futures are managed and traded via their Cayman Island subsidiary. This means their laws apply if issue arises, not the US.
• There is Counterparty risk that many investors first became aware of during the GFC when Lehman Brothers went under because of that ripple effect.
• New funds have their own risks, even if back testing or academic research says the strategy provides Alpha. Studies assume no trading costs and perfect execution.
• Manager risk based on skill and industry experience. The Return Stacked^® brand, currently four ETFs dating back to early 2023, is co-owned by Newfound Research LLC and ReSolve Asset Management SEZC (Cayman).
• Related to the prior risk, a big risk is the ability of the “black box” behind the strategy to make the proper allocations amongst the four basic asset classes.

Portfolio strategy

It is hard for me to imagine the benefits that my portfolio would gain by including any of the four ETFs using the Stacked Return investment approach. Yield doesn’t seem to be generated, and their ages are not long enough to measure correlation to my standard equity and bond ETFs. As with any unique strategy employed by an ETF, time will tell. In the meantime, I give the RSSY ETF a Hold rating.