RSBY ETF Review – Return Stacked® U.S. Bonds & Futures Yield ETF

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

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If you've landed here, it's highly likely that you're already at least somewhat familiar with “return stacking” and you've probably even already checked out the other funds in this family like RSSB, RSBT, and RSST, but in the interest of full disclosure in case you've never heard of any of that, I'll take a second to do a very brief refresher on what “return stacking” is.

Essentially, it refers to layering different return streams on top of one another via leverage (borrowing). I explained this idea in detail in a separate post here. I'd highly recommend reading that post first and then coming back here. The creators of the RSBY ETF actually trademarked the term Return Stacked®.

So as I just mentioned, RSBY is part of a broader family of ETFs from Return Stacked® that also includes RSSB, RSST, RSSY, and RSBT. I've got separate posts on all those. RSBY is one of the newest, having launched in August 2024. 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 (i.e. leverage) allows investors to “achieve more than $1.00 of exposure for each $1.00 invested.” The primary goal in doing so is not to just lever up beta but rather to maintain core exposure while freeing up space to add in additional sources of expected return. In that sense, we're effectively able to deploy additional capital that we wouldn't otherwise have.

“Return stacking” specifically refers to this extra step of utilizing additional diversifiers. If these diversifiers are uncorrelated to whatever we're already using for the core portfolio, doing so 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.

Here with RSBY, as the name suggests, we're effectively stacking U.S. bonds and futures yield 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 futures yield strategy, effectively allowing you to “diversify your diversifiers.”

So the first half of the fund is the bonds piece, which is the “B” in RSBY. This half of the fund is effectively replicating the total U.S. bond market. This ends up 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 the total bond market comes out to roughly 75% treasuries.

Specifically, for its fixed income exposure, RSBY can hold U.S. Treasuries, bond ETFs, and U.S. Treasury futures, or any combination thereof. As an illustrative example, RSBY 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.

What you're almost certainly much more curious about is the second half of the fund which is the futures yield strategy (the “Y” in the ticker), which aims to harvest “roll yield,” also referred to colloquially as “carry.” This is a diversifier that is structurally uncorrelated to both stocks and bonds.

As the name suggests, this strategy aims to capture the economic benefit of simply holding or “carrying” an asset. The minimum cost of carrying an asset is the return on cash, which we're foregoing by buying the asset instead. RSBY aims to capture this roll yield by utilizing a systematic and quantitative long/short trading strategy across commodities, currencies, bonds, and equities via futures contracts.

So what's the reason for such carry premia to exist in the first place? You can think of them as essentially compensation for taking on the risks of holding such assets, providing risk-based explanations across all four asset types that the fund holds, including but not limited to:

• illiquidity risk
• inflation risk
• monetary policy risk
• etc.

For a couple tangible examples you're likely familiar with, this shows up as dividends from stocks and coupon payments from bonds.

Portfolio weights and directions of this futures yield sleeve are determined by calculating and optimizing for aggregate risk-adjusted carry premium across all assets in its selection universe, with an overall target annualized volatility of 10%. That investable universe spans 26 different futures markets across the globe:

The details of the construction of such a strategy and the purported optimality thereof are beyond the scope of this blog post, but ReSolve have a nice whitepaper on the topic that you can find here if you're an investment professional.

Notice how such a long/short trading strategy results in dynamic weights that can shift over time:

Carry may prove to be a useful diversifier with positive expected returns and structural uncorrelation to both stocks and bonds:

Carry has also historically been uncorrelated to Trend as well, which we covered in the posts on RSST and RSBT, suggesting it may be useful to combine some of these funds for additional return streams. Modern Portfolio Theory reminds us that all else equal, assuming positive expected returns, we usually want to try to maximize the number of uncorrelated assets in the portfolio to reduce volatility and risk and increase return per unit of risk, which we call risk-adjusted return.

Some investors may prefer the more intuitive risk-based explanations for Carry over the more behavior-based explanation for Trend, which may largely just be the result of biases like status quo bias, loss aversion, and herding. It's also perhaps worth noting that historically, Carry has been positively correlated with a core stocks/bonds portfolio during “normal” economic times and negatively correlated during periods of market turmoil, which is sort of the holy grail of diversifiers.

As I noted with RSBT, RSBY'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 Carry 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 a futures yield strategy. You can now keep that 50/50 core exposure as is and layer Carry on top, effectively naively equally weight global stocks, US bonds, and futures yield at 50% each (for 150% total notional exposure). We can now easily build that with 50% VT and 50% RSBY, for example.

In that sense, RSBY allows us to “diversify our diversifiers.” 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.

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 roll yield strategy, for example, much less the desire for that ongoing management.

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

Fun fact: RSBY 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.

Because of the trading and daily rebalancing, note that RSBY 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.

RSBY's fee of 1.04% is pretty par for the course in this arena of futures trading and leverage. Remember you're getting 100% bonds plus 100% Carry strategy, and fees are relative to the exposure you're paying for.

Stocks are usually the asset of choice for the greatest expected returns, while bonds and Carry are again usually viewed as diversifiers to hold alongside equities, so RSBY 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 RSBY 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.

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 RSBY 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 RSST – 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.

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 in the instances I've referenced, 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.

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

RSBY rebalances daily and makes distributions annually.

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

Disclosure: I am long NTSX.

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