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Friday, January 27, 2023

VanEck Inflation Allocation: Not Fans Of This ETF Of ETFs (RAAX)

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Klaus Vedfelt

By Rob Isbitts

Summary

At first glance, VanEck Inflation Allocation ETF (NYSEARCA:RAAX) looks like an interesting ETF, at least in concept. Then we looked deeper. This is a “fund of funds,” which is not inherently bad. But we’re not fans of this one. There’s a Cayman Islands subsidiary involved. In an ETF, that gives us the willies, so to speak. With all the bells and whistles attached to this ETF, it rarely outperforms its biggest holding. So why bother, we ask? We rate RAAX a Sell. We like commodity allocation ETFs, but don’t like the structure here.

Strategy

VanEck Inflation Allocation ETF’s prospectus states as follows:

“The fund invests, under normal circumstances, primarily in (i) exchange-traded products that provide exposure to real assets through investment in domestic and foreign equity and debt securities, master limited partnerships (“MLPs”), and commodities, including ETFs and non-1940 Act (defined herein) commodity pools or commodity trusts and exchange traded notes (“ETNs”) (collectively, “ETPs”); and (ii) cash or cash equivalents.”

My take on that typical prospectus “word salad” is further down in this report.

Proprietary ETF Grades

  • Offense/Defense: Offense

  • Segment: Commodities

  • Sub-Segment: Diversified

  • Correlation (vs. S&P 500): High

  • Expected Volatility (vs. S&P 500): Moderate

Holding Analysis

This ETF holds 19 other ETFs. That’s it. To us, that’s a lot of ETFs to own, even if you can buy it in one trade via RAAX. The 8 largest holdings make up about 80% of this fund. Translation: the other 20% won’t impact it much. As explained further below, some of those smaller holdings do add to the fund company’s assets, since Van Eck Funds make up 6 of the 10 smallest holdings.

Strengths

RAAX gives investors one-click/one-trade access to a diversified basket of inflation-fighting asset types. That’s great. I’ve researched ETFs since there were ETFs (1993), and researched mutual funds well before that. Furthermore, I really like Van Eck as an ETF firm. They are innovative and offer funds that target some very useful and unique niches. But that’s where the accolades for RAAX end for us.

Weaknesses

We don’t usually put a heavy emphasis on past performance. After all, it’s in the past, so you can’t have it unless you already owned the security. However, we do put emphasis on return and risk patterns, via what we call “rolling return” analysis. Here, you see a chart of all 6-month returns of RAAX, plotted each month since the start of 2019, the ETFs’ first full year of existence. Note how the orange line nearly always outperforms the purple line. And when the market for this type of investment falls, RAAX, in purple does not preserve capital much differently from Invesco DB Commodity Index Tracking ETF (DBC), a broad-based commodity ETF that is RAAX’s biggest holding, at a significant 20% of assets. It prompts the concern that RAAX is a lot like a common commodities ETFs (there are many, and this is not an opinion on DBC specifically).

Chart
Data by YCharts

Opportunities

The case for RAAX is narrow, but there is one. If an investor prefers to buy an “all-in-one” inflation fighter, complete with commodities and equity exposure, it is all in here. But at what cost and what complexity does one seek that? There are other options, some of which we have already profiled in Seeking Alpha, and many more forthcoming.

Threats

The weaknesses noted above prompt a critical question and concern for investors considering RAAX. Are those additional holdings, positions in other Van Eck ETFs that add up to more than 40% of assets currently, more like “window-dressing” than something that helps this fund perform better? We think that’s most likely the case.

But there’s more to that point. Those other Van Eck ETFs within RAAX generate another layer of fees. There is some legal double-dipping potential here.

Proprietary Technical Ratings

  • Short-Term Rating (next 3 months): Sell

  • Long-Term Rating (next 12 months): Sell

Conclusions

ETF Quality Opinion

We think many investors would be better off segmenting this type of exposure on their own. That will avoid the layers of fees and the Cayman Islands subsidiary involved in the structure of RAAX. But RAAX is not one of their signature achievements.

ETF Investment Opinion

Even if our suspicions about this fund’s structure were not valid, there’s a bigger issue for us with RAAX. We think today’s investors seek simplicity, and that ETFs should offer as much of that as possible. RAAX adds unnecessary complexity and likely cost as well. Any time a “fund of funds” structure like this ETF puts itself out there, the first thing we look for as analysts is a sign that it is a vehicle to gather assets for its other ETFs. Nothing wrong with that if investors want to buy it. But we’re not buying it. We rate RAAX a Sell.



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