Inside Van Eck's New Real Asset ETF

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Sanghamitra Saha
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Given rounds of concerns over trade tensions, geopolitical crisis, changing monetary policies in central banks and equity overvaluation concerns after a superb 2017, investors’ need for a safe product is understandable (read: 5 ETF Ways to Hedge Your Portfolio Against Volatility).

Probably this is why, VanEck Vectors launched a new product called VanEck Vectors Real Asset Allocation ETF RAAX. Let’s delve a little deeper.

Inside RAAX

The fund looks to generate long-term total returns. In order to do so, the fund intends to maximize real returns while seeking to lower downside risk during prolonged market declines by “allocating primarily to exchange-traded products that provides exposure to real assets, which include commodities, real estate, natural resources, and infrastructure.”

The fund looks to lower downside risk by using a rules-based approach to determine when to allocate a portion or all of the fund's assets to cash and cash equivalents. The fund holds about 10 securities. PowerShares Opt Yield Diverse Commodity ETF takes about 30% of its portfolio followed by VanEck Vectors Agribusiness ETF taking about 19.8% of assets and iShares Gold Trust accounting for 9.61% of assets.

The new fund deploys a rules-based model to assign its total assets among about 12 exchange-traded products (ETPs) to generate “real returns” and may allot a full portfolio to cash or cash equivalents if its mangers see immense risk in the market, as per etf.com.

How Does It Fit in a Portfolio?

The fund is a good pick for diversification. Investors can have an access to equities, fixed-income securities, physical assets and exchange-traded products that provide exposure to real assets, including commodities, real estate, natural resources and infrastructure.

According to the press release, real assets act like inflation-protected assets add to portfolio diversification and cash in on uptick in global growth. The ETP’s range is far reaching and diverse. It covers agribusiness, coal, infrastructure, real estate, steel, oil services, unconventional oil & gas, and gold mining companies as well as diversified commodity futures exposure and physical gold (read: Inflation Ticks Up: What's in Store for Europe ETFs?).

By investing in diverse asset classes, the fund will likely reduce volatility and offer stability to the portfolio. This is because some of its holdings have low correlations with conventional asset classes (read: Trade Tensions or Not, Stay Safe with These ETFs).

Can it Succeed?

There are real return ETFs in the market, namely SPDR SSgA Multi-Asset Real Return ETF RLY, IQ Real Return ETF CPI and QuantX Risk Managed Real Return ETF QXRR. So, as long as the newbie’s investment objective is to yield real returns, the above-mentioned funds may pose threats.

And if risks flare up in the broader market or there are both equity and bond-market selloffs, investors may choose to in invest in cash components. In such a scenario, money market ETFs like PowerShares BulletShares 2018 Corporate Bond Portfolio BSCI, iShares iBonds Dec 2018 Term Corporate ETF IBDH and JPMorgan Ultra-Short Income ETF JPST may act as competitors to RAAX. This is because money market instruments often act like cash components.

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