RSSB aims to soon provide a “return stacked” solution for global stocks and bonds in a single ETF. Let’s review it.
First, it’s important to note that as of March 29, 2023, RSSB is not trading yet. The SEC filing happened on February 6, 2023.
“Return stacking” – a term that was actually coined by the creators of RSSB – simply refers to layering different sources of expected return on top of one another using leverage to simultaneously achieve asset class diversification and boost expected returns, in this case in a single fund with expected returns greater than or equal to that of a standalone unlevered equities fund.
Basically, this means that we’re, in the words of the fund provider themselves, “achieving more than $1.00 of exposure for each $1.00 invested.” In that sense, we’re improving capital efficiency. And doing so with uncorrelated assets can actually reduce risk. Return stacking may be particularly useful in the face of low expected returns for multiple core assets like stock and bonds.
NTSX from WisdomTree exemplifies this idea uses 90% U.S. large cap stocks and 60% exposure to intermediate U.S. treasury bonds via futures contracts. It took a while for this fund to hit its stride in terms of popularity, but it now boasts nearly $1B in AUM 4 years later. Not too long after its debut, WisdomTree launched sister funds NTSI and NTSE for ex-US Developed Markets and Emerging Markets respectively. Compared to NTSX, those two have pretty low AUM.
To read more about the specifics of this idea of return stacking and its merits, go read my post on NTSX here first and then come back here. In a nutshell, we can show both theoretically and empirically that a portfolio of stocks and bonds using a modest amount of leverage would be expected to have a higher risk-adjusted return than that of a 100% stocks portfolio. To illustrate that concept, here’s a rough approximation of NTSX (90% U.S. large cap stocks and 60% intermediate U.S. treasury bonds) versus the S&P 500 from 1990 through 2022:
In the case of RSSB, we’re effectively “stacking” 90% global stocks and 60% U.S. treasury bonds. This is the same allocation used by WisdomTree’s NTSX, NTSI, and NTSE. With some hand waving, we can think of RSSB as the combination of those three funds.
If you’ve stuck around here long enough, you know I’m a big fan of global diversification in stocks, so I’m pretty excited about RSSB. I’ve been in numerous Reddit threads over the past few years where people explicitly wished for “a global version of NTSX.” Now it’s here.
Fun fact: RSSB is brought to you by some of the same names who initially discussed return stacking ideas that ultimately catalyzed the creation of NTSX and RPAR.
- Corey Hoffstein and the gang at Newfound Research LLC serve as the sub-adviser.
- Toroso Investments, LLC serves as the investment adviser.
- Rodrigo Gordillo, Adam Butler, and the folks at ReSolve Asset Management SEZC serve as the futures trading advisor.
- Foreside Fund Services, LLC is the distributor.
Another fun fact is that ReSolve and Newfound Research have actually trademarked the terms Return Stacking™ and Return Stacked™.
Conveniently, RSSB will aim to match market cap weights of global equities markets. According to the fund’s prospectus, it will invest at least 40% of the fund’s assets in international (ex-US) stocks. Mechanically, the fund has the freedom to achieve that exposure via global equities funds like VT from Vanguard or a combination of U.S. funds and international funds, so it’s not clear yet what exactly those holdings will look like. The latter would be more likely to provide pass-through foreign tax credits to investors for any given year.
It sounds like RSSB’s bonds exposure should be nearly identical to that of WisdomTree’s lineup, aiming to deliver notional exposure of 60% intermediate U.S. treasury bonds, specifically with a target duration between 2 and 8 years. RSSB will do so by investing in futures contracts on U.S. Treasuries across most of the yield curve, with maturities ranging from 2 to 30 years. RSSB’s 10% collateral for those futures contracts will be held in ultra-short-term U.S. debt instruments, considered cash equivalents.
These sources of return and their allocations are thoughtfully assembled, not haphazardly thrown together. For example, leverage on the fixed income side via futures contracts is cheaper, more liquid, and more efficient than doing so on the stocks side, making RSSB potentially suitable for a taxable environment. Also, a 90/60 allocation means investors can hold RSSB at 67% of the portfolio for the classic 60/40 portfolio and still have 33% for other diversifiers such as gold, TIPS, managed futures, factor tilts, etc. Lastly, an intermediate effective bond duration is a one-size-fits-most solution for accumulators and retirees alike.
At this point you’re probably wondering what the fee looks like. It’s not as high as you probably think.
Let’s first consider what comparable exposure would cost using WisdomTree’s lineup at current global market cap weights of roughly 60% U.S., 30% ex-US Developed Markets, and 10% Emerging Markets. So that’s 60% NTSX, 30% NTSI, and 10% NTSE. These funds have fees of 0.20%, 0.26%, and 0.32% respectively, so we arrive at a weighted average expense ratio of 0.23%.
RSSB has a stated fee of 0.56%, but Toroso Investments have decided on a fee waiver of 0.15% through at least May 30, 2024, resulting in an effective net expense ratio of 0.41%.
So RSSB will be nearly double the cost of comparable exposure using WisdomTree’s lineup, but in my opinion that doesn’t mean we should discount it. Remember that simplicity in portfolios is extremely valuable, both in terms of peace of mind and mitigating biases for retail investors and time savings in the case of advisors. Also recall that RSSB will inherently provide market cap weighted global equities exposure, while the investor using the WisdomTree lineup would manually need to dial in and rebalance those weights regularly to stay agnostic.
And at the end of the day, I’m always a fan of products that bring strategies to the hands of retail investors that were previously only accessible by institutions and sophisticated traders.
Lastly, as with any portfolio, remember that leverage is not a free lunch and can result in larger losses than an unlevered portfolio when multiple asset classes move down the same time (as we saw in 2022), and high financing costs can add insult to that injury. Derivatives are also not guaranteed to perfectly track their target exposure. Investors should fully understand these risks and read RSSB’s prospectus before jumping in.
As I said years ago in regards to NTSX, I think RSSB is incredibly clever, elegant, and thoughtfully constructed, and it has a strong theoretical basis. In my opinion, it is definitely not just another exotic shiny object driven by marketing buzz.
RSSB will obviously be a direct competitor to the WisdomTree lineup, but it may also sway some globally diversified, capital-efficient Bogleheads from “VT and chill” to “RSSB and chill.”
What do you think of RSSB? Let me know in the comments.
Disclosure: I am long NTSX, NTSI, and NTSE.
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