RSBT ETF Review – Return Stacked® Bonds & Managed Futures ETF

The RSBT ETF aims to provide a “return stacked” solution for bonds and managed futures in a single fund. It's called the Return Stacked® Bonds & Managed Futures ETF. I review it here.

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If you've landed here, chances are you're already at least somewhat familiar with “return stacking” and maybe you've even already checked out the other funds in this family like RSSB and RSST, but here we'll do a very brief refresher on what “return stacking” is for those who haven't heard of it. Essentially, it refers to borrowing (i.e. leverage) to provide additional capital to then layer different sources of expected return on top of one another. I delved into this idea in detail in a separate post here. I'd highly encourage reading that post first and then coming back here. The creators of the RSBT ETF actually trademarked the term Return Stacked®.

RSBT is part of a broader family of ETFs from Return Stacked® that also includes RSSB, RSST, and RSSY. And while I wrote about a couple of those first, RSBT was actually the first product in this family to launch. All these funds utilize leverage to “stack” different combinations of assets like stocks, bonds, and managed futures.

Using a phrase from the fund provider themselves, this borrowing allows us to “achieve more than $1.00 of exposure for each $1.00 invested.” Co-creator Rodrigo Gordillo refers to this as a “yes, and” approach, meaning we don't have to sacrifice core exposure to add additional return streams. In that sense, we're able to deploy additional capital that we wouldn't otherwise have. And doing so with uncorrelated assets can actually reduce risk in some cases. This idea may be particularly useful in the face of low expected returns for multiple core assets like stock and bonds.

I also touched on this idea tangentially when discussing the NTSX ETF from WisdomTree years ago, which “stacks” US stocks and US Treasury bonds, albeit at a lower leverage than the Return Stacked® family of ETFs.

Here with RSBT, as the name suggests, we're effectively stacking U.S. bonds and managed futures at 100% each. In other words, for every $1 invested, this ETF seeks to provide $1 of exposure to U.S. bonds and $1 of exposure to its managed futures strategy.

Looking at it another way, this means we can use a smaller allocation for any given desired exposure. For example, a traditional 50/50 allocation to U.S. bonds and managed futures can now be replicated with just 50% allocated to RSBT (which is 100/100). This frees up capital for the investor to buy additional assets or strategies, thereby providing valuable flexibility without having to sacrifice precious space in the portfolio.

First let's talk about the bonds piece, which is the “B” in RSBT. The fund name has neither “US” nor “Treasury” in the name, but note that the fund is mostly narrowing in on US Treasury bonds (government bonds), which I think is a good thing. It does have some corporate bonds in there as well, but it's getting most of this fixed income exposure via a pretty straightforward total US bond market fund, which is roughly 75% treasuries.

Specifically, for its fixed income exposure, RSBT can hold U.S. Treasuries, bond ETFs, and U.S. Treasury futures, or any combination thereof. As an illustrative example, RSBT may hold 50% in a broad US bond ETF and the remaining 50% in a ladder of Treasury futures contracts:

• 50% iShares Core U.S. Aggregate Bond ETF (“AGG”)
• 12.5% US 2-year Treasury Note Future Contract
• 12.5% US 5-year Treasury Note Futures Contract
• 12.5% US 10-year Treasury Note Futures Contract
• 12.5% US Treasury Long Bond Futures Contract

For this half of the fund, I wouldn't exactly call it “plain vanilla,” but there's nothing super complicated going on, and it's relatively “passive.” At the end of the day, it's effectively 100% broad US bonds with an intermediate average duration. So basically think of something like BND or AGG but with more government bonds. In fact, nearly half of RSBT is literally AGG from iShares.

The second half of the fund is 100% managed futures, which may prove to be a useful diversifier with positive expected returns and structural uncorrelation to both stocks and bonds:

As such, RSBT's primary use case in my opinion would be acting as a potent, packaged diversifier to hold alongside core equities. Previously, the stocks/bonds investor who wanted to allocate to managed futures would have to sell fixed income to create space for the new diversifier, potentially causing tracking error regret, dissonance, and disappointment. That's no longer the case. Here's a hypothetical example to illustrate:

Suppose you've got 50/50 stocks/bonds but you want to add in managed futures. You can now keep that 50/50 core exposure as is and layer managed futures on top, effectively naively equally weight global stocks, US bonds, and managed futures at 50% each (for 150% total notional exposure). We can easily build that with 50% VT and 50% RSBT, for example, which you can view here.

While such an allocation sounds relatively simple, appreciate that this could potentially be a very powerful portfolio and is inherently well-diversified while only requiring two funds. I'm always harping on the value of sheer simplicity in the form of fewer line items in the portfolio.

Here's this idea of “stacking” building blocks with respect to RSBT visualized using 60/40:

Such is the beauty of these Return Stacked® solutions – simple, packaged products that offer robust exposure that was previously much harder, if not impossible, for the retail investor to achieve. Institutions have been using these ideas for decades, but most in the retail space wouldn't have the knowledge to even begin to borrow capital and use it to implement a managed futures strategy, for example, much less the desire for that ongoing management.

Fun fact: RSBT is brought to you by some of the same names who initially discussed the ideas surrounding capital-efficient “return stacking” that ultimately led to the creation of funds like NTSX and RPAR.

• Tidal Investments LLC serves as the investment adviser.
• Corey Hoffstein and the gang at Newfound Research LLC serve as the sub-adviser.
• Rodrigo Gordillo, Adam Butler, Michael Philbrick, and the folks at ReSolve Asset Management SEZC serve as the futures trading advisor.
• Foreside Fund Services, LLC is the distributor.

On the managed futures side, RSBT has the ability to go both long and short across 27 global futures markets (including equities, fixed income, commodities, and currencies). As a strategy per se, managed futures has historically exhibited inflation-hedging characteristics, which has driven more coverage, discussion, and adoption in recent years.

RSBT implements a systematic and quantitative long/short futures trading strategy that seeks to benefit from price trends, which is the “T” for Trend in the ticker. You can think of this as a Momentum hedge fund strategy. We can call it “indexed” – with some air quotes around that word for sure – but it's simultaneously somewhat “black-box.”

Because of the trading on that side and daily rebalancing, though, note that RSBT has much higher turnover and would be considered much less tax-efficient than something like your typical plain vanilla equities index fund, so it may be most suitable for tax-advantaged space like an IRA.

Without getting too in the weeds on managed futures and Trend specifically, for its managed futures strategy design, RSBT seeks to replicate the Société Générale Trend Index – aka the “SocGen Trend Index” – by combining two diversifying approaches:

• 30% top-down – identifying the portfolio weights that closely replicate the recent returns of the manager basket.
• 70% bottom-up – identifying the strategies that closely replicate the returns of the manager basket.

It's worth noting that these two approaches can diverge considerably over the short term, introducing the potential for significant tracking error over short periods versus the target index. We would expect that tracking error to diminish over the long term, but of course even if the strategy doesn't perfectly adhere to the index, we're still getting a diversified trend-following strategy at the end of the day with that 70% bottom-up approach.

While retail investors don't often include Trend in their portfolios (admittedly it has only recently become more accessible and approachable), some allocation may make sense to address environments that would be expected to hurt both stocks and bonds, such as high inflation. People often turn to gold for that purpose, which may still be sensible, but while a trend-following strategy will usually include exposure to gold and other commodities, the class as a whole tends to be uncorrelated to the metal, so simply utilizing both may not be the worst idea, even if it's only a product of mental accounting.

While some might reflexively shy away from RSBT's fee of 1.06%, it's worth noting that that's not too expensive for even a standalone managed futures strategy (consider funds like KMLM, CTA, and DBMF all in a similar expense ratio arena), and here you're getting that plus 100% bonds, so it's not really as pricey as it appears, and remember fees are relative to the exposure you're paying for.

I explicitly noted with its sister funds RSSB and RSST that those could serve as one's total portfolio on their own, using stocks as the core driver of returns and then layering diversifiers like bonds and Trend respectively for those two. Here with RSBT, though, its case is different, at least in my opinion. Stocks are usually the asset of choice for the greatest expected returns, while bonds and Trend are again usually viewed as diversifiers to hold alongside equities, so RSBT per se is a packaged diversifier and should probably not be used alone as the entire portfolio.

Extending that logic, it thus makes little sense – again, at least in my humble opinion – to look at the performance of RSBT in isolation. Rather, we'd probably want to include it in a portfolio with stocks to see its additive diversifying effect(s). This should hopefully be pretty obvious, but even the fund creators themselves have explicitly stated as much.

Specifically, with some hand waving, as I hinted at earlier, we could think of RSBT as roughly 100% in broad U.S. bonds (e.g. BND or AGG) and 100% in KMLM, for example. Recalling the hypothetical example from earlier of equal allocations to global stocks, US bonds, and managed futures at 50% each, we would expect such a portfolio to deliver a greater risk-adjusted return than 50/50 stocks/bonds (and 100% stocks) over the long term, and while this is admittedly a crude approximation and uses simulation data, it has indeed done so swimmingly since the inception of KMLM's index in 1992:

2022 is especially notable here with the portfolio weathering that stormy year comparatively much better being down only 6% while stocks finished the year down 18% and 60/40 was down 15%, which is exactly the type of behavior we're hoping for in such a strategy.

To be clear, the performance you see above is not meant to be a simulation of RSBT's historical performance, nor is it an indication of future results. It is purely a hypothetical visualization to illustrate the potential diversifying effects of additional uncorrelated assets.

Just to hammer this point home one last time so that no one is confused, I want to explicitly note that I personally would never entirely give up stocks in the portfolio. Just as bonds reduce the risks of owning stocks, so too do stocks reduce the risks of owning bonds. Taking that further, I think a portfolio of 100% bonds almost never makes sense, even for retirees, unless the investor has zero need for risk and just wants to quit playing the game and buy 100% T-Bills. What that means is that if I were to utilize RSBT in my own portfolio, it would be as a diversifier alongside some kind of equities exposure. And while it's another conversation entirely, of course you could do that with their other funds like RSSB and RSBT – effectively “stacking” the “stacks” – if you didn't want to use a plain vanilla equities ETF.

Further, while the word “leverage” may make you automatically think of a young kid with a long horizon and high risk tolerance, recognize that these Return Stacked® products are certainly not solely for that accumulator audience and could just as easily be utilized by the retiree on the other extreme who simply wants to enhance portfolio diversification without additional capital outlay.

If you want to hear from the creators themselves about a lot of these ideas going on with RSBT, here's a video:

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, remember that while I think it's being used pretty thoughtfully and modestly here, leverage is not a free lunch and can result in larger losses than an unlevered portfolio when multiple asset classes converge and move down at the same time, and high financing costs can add insult to that injury. Derivatives are also not guaranteed to perfectly track their target exposure. These are some of the asterisks that would accompany what appears at first glance to be a free lunch when looking at the performance backtest above.

Similarly, it's also worth noting that at any given time, the fund can represent leveraged exposure to a particular risk factor. For a hypothetical example, with the bonds sleeve already being long U.S. bonds, if the futures sleeve also goes long fixed income, you could end up having levered bonds exposure greater than 100%, which is going to fall further per se than “just” 100% bonds if the US bond market suddenly tanks. Similarly, if you've already got equities exposure and you add in RSBT – which again I'd submit is its primary use case – and its futures go long equities, you'll end up with greater than 100% equities exposure. This should all go without saying, but some may forget about the intrinsic leverage and overlook this mathematical fact.

On the flip side, of course, those scenarios can work out in the fund's favor if bonds and/or equities go up, but obviously we experience the emotional impact of volatility on the downside and we don't usually care about the degree of volatility on the upside; shout-out Sortino.

As I hinted at earlier, we'd expect such volatility to smooth out over longer periods. But short-term volatility can potentially introduce significant tracking error over short periods, and novices (for whom, to be frank without trying to gatekeep, this fund is probably not very suitable in the first place) tend to check their portfolios more often and experience that volatility more viscerally over the short term. I can reliably expect someone will buy this fund after reading this and then later will ask me why it's behaving a certain way.

As with any product, investors should obviously fully understand these risks and read RSBT's prospectus before buying it.

Hopefully it also goes without saying that this is very much a buy-and-hold product and not a day trading product, but hopefully you're not day trading anything to begin with.

At the time of writing in 2024, after a little over a year since launching in early 2023, RSBT has amassed a little over $75M in assets. The fund rebalances daily and makes distributions annually.

RSBT should be available at any major broker, including M1 Finance, which is the one I'm usually suggesting around here.

What do you think of RSBT? Let me know in the comments.

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Disclosure: I am long NTSX.

Disclaimer:  While I love diving into investing-related data and playing around with backtests, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a research report. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. I mention M1 Finance a lot around here. M1 does not provide investment advice, and this is not an offer or solicitation of an offer, or advice to buy or sell any security, and you are encouraged to consult your personal investment, legal, and tax advisors. Hypothetical examples used, such as historical backtests, do not reflect any specific investments, are for illustrative purposes only, and should not be considered an offer to buy or sell any products. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here.