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Pivot to Cautiously Optimistic

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By David Schassler, Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEck Global

The VanEck Vectors® Real Asset Allocation ETF (RAAX®) uses a data-driven, rules-based process that leverages over 50 indicators (technical, macroeconomic and fundamental, commodity price, and sentiment) to allocate across 12 individual real asset segments in five broad real asset sectors. These objective indicators identify the segments with positive expected returns. Then, using correlation and volatility, an optimization process determines the weight to these segments with the goal of creating a portfolio with maximum diversification while reducing risk. The expanded PDF version of this commentary can be downloaded here.

Overview

The VanEck Vectors Real Asset Allocation ETF (RAAX) returned +0.66% versus +2.28% for the Bloomberg Commodity Index and +1.63% for its custom blended benchmark.

In July, RAAX pivoted from being highly defensive, with a position of U.S. Treasury bills and gold bullion, to a diversified portfolio of real asset investments. While now fully invested, cautiously optimistic best describes the current allocations. RAAX has a 28% allocation to diversified commodities, a 33% allocation to gold, 25% of that in bullion and 8% allocation in gold equities, a 24% allocation to natural resource equities and small allocations to REITs, MLPs and global infrastructure.

The reason that RAAX transitioned away from its most defensive posture is because market price actions are no longer consistent with supply and demand dynamics of most real assets. More specifically, the price trend composite, which tracks price trends on a basket of real asset investments, is no longer bearish due to the rapid price recovery over the past few months. This price action, including lower volatility, is at odds with our bearish macroeconomic composite, which measures supply and demand activity in real assets. Without market prices confirming our non-price based indicators, RAAX will no longer maintain its most defensive posture.

1 Mo YTD 1 Year Life
(04/09/18)
RAAX (NAV) 0.66 -24.32 -21.90 -9.75
RAAX (Share Price) 1.03 -24.07 -21.75 -9.62
Bloomberg Commodity Index* 2.28 -19.40 -17.38 -11.17
Blended Real Asset Index* 1.63 -18.57 -15.31 -5.93
1 Mo YTD 1 Year Life
(04/09/18)
RAAX (NAV) -17.83 -25.77 -22.48 -11.78
RAAX (Share Price) -17.54 -25.58 -22.37 -11.67
Bloomberg Commodity Index* -12.81 -23.29 -22.31 -14.66
Blended Real Asset Index* -17.20 -27.74 -24.01 -12.10

The table presents past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect temporary contractual fee waivers and/or expense reim­bursements. Had the ETF incurred all expenses and fees, investment re­turns would have been reduced. Investment returns and ETF share values will fluctuate so that investors’ shares, when redeemed, may be worth more or less than their original cost.

Returns less than a year are not annualized.

Expenses: Gross 1.13%; Net 0.75%. Expenses are capped contractually at 0.55% through February 1, 2021. Expenses are based on estimated amounts for the current fiscal year. Cap exclude certain expenses, such as interest, acquired fund fees and expenses, and trading expenses.

A Deeper Dive

Below is the overall real asset composite. A score of 0 represents the lowest risk level and a score of 100 represents the highest risk level. A score of 60 or higher will result in our most defensive posture. The current score of 28, below 40, indicates an unstable risk regime for real assets.

Overall Risk Score

Overall Risk Score

Overall Risk Score

The risk score can be decomposed into key factors that drive real asset prices. These include price trends, economic activity, realized volatility and investor sentiment.

In aggregate, the price trends for real assets are bullish. This is an indication of near-term stability in real asset prices.

Price Trend Risk Score

Price Trend Risk Score

Price Trend Risk Score

The economic composite remains bearish as the supply and demand dynamics continue to be negatively impacted by the COVID-19 pandemic.

Economic Risk Score

Economic Risk Score

Economic Risk Score

Volatility continues to stay low, which is yet another signal that prices are likely to remain stable in the near-term.

Price Volatility Risk Score

Price Volatility Risk Score

Price Volatility Risk Score

Investor sentiment is no longer at an extreme. This too indicates that prices are not overly vulnerable to a near-term correction.

Investor Sentiment Risk Score

Investor Sentiment Risk Score

Investor Sentiment Risk Score

While now fully invested, RAAX is clearly cautious about the current environment given its mix of assets. RAAX continues to hold lots of gold and diversified commodities which, right now, are amongst the lowest risk assets in the portfolio. Gold has been a fantastic performer this year, up around 18%, and handily outperforming other real assets and major asset classes.

Historically, REITs were at the top of the list of attractive real asset investments due to their defensive characteristics and strong returns. Not this time. COVID-19 is reducing the need for commercial space and the ability of tenants, including residential tenants, to pay rent. RAAX is seeking to minimize these risks by holding small allocations to REITs.

As always, RAAX will continue to monitor the current environment and adjust its allocations to balance the risk and rewards of real asset investing.

Real Asset Sector Allocations Since Inception

Real Asset Sector Allocations Since Inception

Real Asset Sector Allocations Since Inception

Real Asset Class Allocations

Jul-20 Jun-20 Change from
Previous Month
Diversified Commodities 27.9% 0.0% 27.9% Increase
Gold Equities 8.4% 0.0% 8.4% Increase
Global Infrastructure 4.6% 0.0% 4.6% Increase
MLPs 4.5% 0.0% 4.5% Increase
REITs 4.5% 0.0% 4.5% Increase
Global Metals & Mining Equities 3.5% 0.0% 3.5% Increase
Unconventional Oil & Gas Equities 3.5% 0.0% 3.5% Increase
Agribusiness Equities 3.5% 0.0% 3.5% Increase
Oil Services Equities 3.4% 0.0% 3.4% Increase
Coal Equities 3.4% 0.0% 3.4% Increase
Low Carbon Energy Equities 3.4% 0.0% 3.4% Increase
Energy Equities 3.3% 0.0% 3.3% Increase
Gold Bullion 25.8% 25.3% 0.5% Increase
Cash 0.5% 74.7% -74.2% Decrease

DISCLOSURES

Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and these opinions may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

*The Blended Real Assets Index consists of an equally weighted blend of the returns of Bloomberg Commodity Index, S&P Real Assets Equity Index, and VanEck® Natural Resources Index. Equal weightings are reset monthly. The S&P Real Assets Equity Index measures the performance of equity real return strategies that invest in listed global property, infrastructure, natural resources, and timber and forestry companies. The VanEck Natural Resources Index is a rules-based index intended to give investors a means of tracking the overall performance of a global universe of listed companies engaged in the production and distribution of commodities and commodity-related products and services. Sector weights are set annually based on estimates of global natural resources consumption, and stock weights within sectors are based on market capitalization, float-adjusted and modified to conform to various asset diversification requirements. The S&P 500® Index (S&P 500) consists of 500 widely held common stocks, covering four broad sectors (industrials, utilities, financial and transportation).

The S&P Real Assets Equity Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2020 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

The Solactive MLP & Energy Infrastructure Index tracks the performance of MLPs and energy infrastructure corporations. The MVIS U.S. Listed Oil Services 25 Index is intended to track the overall performance of U.S.-listed companies involved in oil services to the upstream oil sector, which include oil equipment, oil services, or oil drilling. The Dow Jones Equity All REIT Index, designed to measure all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. The NYSE Arca Gold Miners Index is a modified market capitalization-weighted index composed of publicly traded companies involved primarily in the mining for gold. The Index is calculated and maintained by the New York Stock Exchange. The S&P® North American Natural Resources Sector Index: a modified capitalization-weighted index which includes companies involved in the following categories: extractive industries, energy companies, owners and operators of timber tracts, forestry services, producers of pulp and paper, and owners of plantations. The S&P® GSCI Total Return Index is a world production-weighted commodity index comprised of liquid, exchange-traded futures contracts and is often used as a benchmark for world commodity prices.

Any indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made.

An investment in the Fund may be subject to risks which include, among others, in fund of funds risk which may subject the Fund to investing in commodities, gold, natural resources companies, MLPs, real estate sector, infrastructure, equities securities, small- and medium-capitalization companies, foreign securities, emerging market issuers, foreign currency, credit, high yield securities, interest rate, call and concentration risks, all of which may adversely affect the Fund. The Fund may also be subject to affiliated fund, U.S. Treasury Bills, subsidiary investment, commodity regulatory (with respect to investments in the Subsidiary), tax (with respect to investments in the Subsidiary), liquidity, gap, cash transactions, high portfolio turnover, model and data, management, operational, authorized participant concentration, no guarantee of active trading market, trading issues, market, fund shares trading, premium/discount and liquidity of fund shares, non-diversified and ETPs risks. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund’s returns. Small- and medium-capitalization companies may be subject to elevated risks.

Diversification does not assure a profit or protect against a loss.

Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

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