RSST ETF Review – Return Stacked® US Stocks & Managed Futures ETF

The RSST ETF launched in late 2023 and aims to provide a “return stacked” solution for US stocks and managed futures in a single fund. Appropriately, it's called the Return Stacked® US Stocks & Managed Futures ETF. Let's review it.

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First, let's briefly cover what “return stacking” is. Essentially, it refers to borrowing (i.e. leverage) to free up space in the portfolio to then layer different sources of expected return on top of one another. I delved into the concept of return stacking in detail in a separate post here. Consider reading that post first and then coming back here. The creators of the RSST ETF actually trademarked the term Return Stacked®.

RSST is part of a broader family of ETFs from Return Stacked® that also includes RSSB, RSBT, and RSSY. These are other funds that “stack” different combinations of assets like stocks, bonds, and managed futures.

In the words of the fund provider themselves, this borrowing allows us to “achieve more than $1.00 of exposure for each $1.00 invested.” In that sense, we're improving capital efficiency of the portfolio. And doing so with uncorrelated assets can actually reduce risk in some cases. Return stacking 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 a bit when discussing the NTSX ETF from WisdomTree years ago, which “stacks” US stocks and US Treasury bonds.

Here with RSST, as the name suggests, we're effectively stacking 100% US large cap stocks and 100% managed futures. In other words, for every $1 invested, this ETF seeks to provide $1 of exposure to US stocks and $1 of exposure to its managed futures strategy.

This means we can get away with a smaller allocation for any given desired exposure. For example, a traditional 50/50 allocation to US stocks and managed futures can now be replicated with just 50% allocated to RSST (which is 100/100). This frees up capital for the investor to use with additional assets or strategies, thereby providing valuable flexibility without having to sacrifice valuable space in the portfolio.

Managed futures may prove to be a valuable diversifier with positive expected returns and structural uncorrelation to both stocks and bonds:

As such, RSST could be utilized as one's entire portfolio for the investor who is wholly averse to bonds, or to again simply free up space for other assets like bonds, gold, cash, etc. I say this not too cavalierly, because aversion to bonds is all too common, especially among younger investors.

Here's a hypothetical example to illustrate the latter idea:

Suppose you wanted to naively equally weight US large cap stocks, managed futures, and gold at 50% each (for 150% total notional exposure). You can now easily build that with 50% RSST and 50% IAUM, for example, which you can view here.

Fun fact: RSST is brought to you by some of the same names who initially discussed the ideas surrounding capital-efficient “return stacking” that ultimately catalyzed the creation of 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.

RSST mirrors the S&P 500 for its US large cap stocks exposure, and then on the managed futures side, the fund has the ability to go both long and short across 27 global futures markets (including equities, bonds, commodities, and currencies). As a strategy per se, managed futures has historically exhibited inflation-hedging characteristics, which has driven more discussion about it in recent years.

RSST implements a systematic and quantitative long/short futures trading strategy that seeks to benefit from price trends, hence 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 RSST 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, RSST seeks to replicate the Société Générale Trend Index – aka the “SocGen Trend Index” – by blending 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.

I would have liked to see RSST use global stocks like they did with RSSB, but the US-only equities exposure potentially makes the product more marketable to a U.S. audience.

While some might reflexively shy away from RSST's fee of 0.98%, it's worth noting that that's actually pretty affordable 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% stocks, so it's not really as expensive as it appears, and of course remember fees are relative to the exposure you're paying for. Of course, remember these examples like KMLM, CTA, and DBMF are diversifiers, while RSST is basically the total portfolio, so two very different things.

Specifically, with some hand waving, we could think of RSST as roughly 100% in the S&P 500 (e.g. VOO or IVV) and 100% in KMLM, for example. We would expect such an allocation to deliver a greater risk-adjusted return than 100% equities over the long term, and while this is admittedly an extremely crude approximation that uses simulation data, it has indeed done so since the inception of KMLM's index in 1992:

2022 is especially notable here with the portfolio staying afloat with a positive 2% return 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 – managed futures usually sort of chugging along not doing much but then coming to the rescue in arguably rare circumstances when called upon.

This is also paying off swimmingly for RSST so far in 2024.

To be clear, the performance you see above is not meant to be a simulation of RSST's historical performance, nor is it an indication of future results. It is purely a visualization to illustrate the potential diversifying effects of “stacking” levered stocks and bonds.

At the time of writing in 2024, after nearly a year, RSST has amassed a little over $150M in assets. The fund distributes annually.

It's perhaps also worth explicitly noting that I personally would never entirely give up treasury bonds, so I'd still be incorporating those somehow if I were to utilize RSST in my portfolio, and 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 fixed income ETF.

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.

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 equities sleeve already being long the S&P 500, if the futures sleeve also goes long equities, you could end up having levered equities exposure greater than 100%, which is going to fall further per se than “just” 100% equities if the stock market suddenly tanks. On the flip side, this can work out in the fund's favor if equities go up, but obviously we experience the emotional impact of volatility on the downside and we don't usually care about upside volatility; shout-out Sortino.

Of course, as I hinted at earlier, we'd expect such volatility to smooth out over longer periods. But these are again just things to keep in mind that can potentially introduce major tracking error over short periods, and novices (for whom, to be frank, 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.

Investors should obviously fully understand these risks and read RSST's prospectus before jumping in.

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.

RSST 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 RSST? 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.