E21. STACKED UNPACKED: When Diversification Works Unevenly – Lessons from 2025

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[00:01:40] Rodrigo Gordillo: Hi everyone. Thank you for joining another episode of the Stacked Unpacked podcast, where we're going to do a brief review of our quarterly commentary. My name is Rodrigo Gordillo, President of ReSolve Asset Management and co-founder of the Return Stacked® suite of ETFs. And as per usual, I'm being joined by Corey Hoffstein, CEO of Newfound Research and co-founder of Return Stacked® ETFs.

But before we begin and pass it on to the research, just a quick note that if you don't have a copy of the commentary with you, then you can go to the website, click on the Insights tab at Returnstacked ETFs.com, and it should be at the top of the menu there for easy access.

So, with that said, Corey, how are you doing? How's the year treating you so far?

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[00:02:38] Rodrigo Gordillo: I was, I was…

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[00:02:40] Rodrigo Gordillo: I actually wrote it out today and I was debating…

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[00:02:53] Rodrigo Gordillo: Yeah, why don't we pop it up and start kind of running through some of the key items here. So, the big headline is that we breached the $1 billion mark by the end of the year. And if, I'm looking at the numbers today in the, in 20 calendar days, we're now just over $1.1 billion as of January 20th.

So first off, I think we'd like to thank, many of the listeners here are probably our biggest supporters, and large part our success is due to your support, and we wanted to thank you for that continued partnership, and it has been honestly a great partnership throughout the years.

We've been doing this for many, many years. We've had different types of clients. I would say the Return Stacked® clientele is amazing, and great to work with. And for those who haven't engaged with the team yet, we're there to help. We're there to provide ideas, portfolio construction ideas, give you more insight into the individual ETFs.

We do want to work with you and partner with you, if you haven't reached out and you are an allocator, and if you're not an allocator, I hope this presentation provides a little bit more insight as to why we think that this is the future of portfolio construction, and we want to take you along for the ride.

So, as you can see here from the page, we've been growing quite a bit across our securities. Obviously the biggest AUM gatherers have been on the trend and equity side, which is not surprising. On the RSST, our second biggest position, there is the hundred percent bonds, a hundred percent equity, global equity ETF, which allows a choose your own adventure type of return stacking process.

And then once again, on the trend side with RSBT, though we are seeing very fast growth on the RSST, which is a hundred percent U.S. stocks and a gold/Bitcoin overlay. So, and it's been very interesting to see the growth and the in and the kind of directions of where people are taking it. We are going to continue to evolve this list of ETFs and we'll keep you posted as that moves along.

But for now, what I want to do is just pass it over to Corey to review how well we tracked RSSB versus our benchmark and see if there's anything, any insights there.

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So we are going to try to provide a cursory overview. We'll dive deeper into some, less deep into others. If you have particular questions, please ask. We'll be keeping our eye on the questions that we receive. We'll either address them real time or at the end, or if we don't get to them, hopefully can reach out to you afterwards.

So I'm going to start off with RSSB. RSSB is our Return Stacked® Global Stocks and Bonds ETF, just passed its two year anniversary in December. And the idea behind this ETF is that for every dollar you invest, you're going to get a dollar of passive global equities. I say passive here, meaning trying to track sort of a non-active benchmark, as well as a ladder of 2, 5, 10 and long bond U.S. Treasuries, equally weighted. And the goal here is not to say that we want to use this necessarily to stack duration on top of your portfolio, though we do know some people that have used it to make that tactical bet at times. What we really see RSSB being effective at is being a “choose your own adventure” stack tool.

What it effectively allows you to do is sell a dollar of stocks, sell a dollar of bonds, buy a dollar of RSSB, get those stocks and bonds back, and then have a dollar left over to do whatever you want with. You can keep it in cash and use it opportunistically to deploy. You could allocate it to some alternative or trade with it tactically, effectively creating an overlay on your portfolio.

So it's a really, I think, arguably the reason it is our largest ETF is because it's really versatile in what it offers, and I think Figure 1. really just sort of highlights exactly what we're trying to do. What we have in the two, the green line and the green dots is both the price and NAV of RSSB. And then the black line is a 100/100 benchmark, where that is 100% in the passive global equities and 100% in a diversified U.S. Treasury benchmark. And what we can see is that we have tracked it quite closely over time.

We don't expect to track it perfectly, for a variety of reasons, but the closer we can track it, again, the better we can make the argument that this is a tool that effectively gives you a significant amount of capital efficiency and a huge amount of versatility.

Another use case I want to mention, and this is one that we're seeing a lot of people sort of dip their toes into return stacking with, is for advisors who have to carry around a few percentage points of cash for compliance or operational reasons, they can use something like RSSB actually, to make it so that they can hold that cash without any cash drag. Sell a little stocks, sell a little bonds. Buy RSSB, effectively make it so that that cash is just being offset by the extra exposure you get in RSSB. That cash can sit there for operational reasons without any of the cash drag that you'd normally get along with it. And so again, little use cases, that make RSSB a very effective tool.

It was a great year for stocks and bonds. It's been a great couple years since we launched this. This is not an actively managed product. There's really no active stack here. It's really meant to be passive type exposure, but again, one that we think has a huge amount of versatility, and one that is very fun to talk about because of that versatility. It's not so much about this stack, it's about all the other things you can do with it. So with that, any questions come up Rod on RSSB?

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[00:09:13] Corey Hoffstein: Yeah, we'll keep it short and sweet on that one because uh, some of the other ones are a little more fun to talk…

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[00:09:17] Corey Hoffstein: So I'll flip it to you Rod for RSBT, RSST.

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And so for those of you who haven't dug deep, the way we're trying to provide exposure to trend following is through replication. And the reason replication is important is because we want to keep these building blocks as simple as possible, as often as we can. Trend following is notorious, the whole space is notoriously difficult to kind of find a manager that you can consistently have low dispersion to the index, and there is a large dispersion across the different offerings. And last year was no exception.

So the goal here is to really try to provide that trend factor to investors as a stack, and the way we do that replication is through two basic processes. There's a top-down replication approach and a bottom-up replication approach. The top-down approach is, um, we have two models. One that's held a small universe of nine contracts, and the other, which is a full 27 contract universe. And what we're trying to do there is really try to replicate the returns from looking at previous data, and trying to extract the likely positions that those, that that, index or group of managed futures managers are likely to be invested in.

And so it really tries to replicate kind of price, rather than process. The bottom-up approach is trying to replicate the process. So this is us looking back across history and identifying the likely systems that are in place with these large managers, that actually trigger positive trends and negative trends.

And another way to think about bottom-up is that it is a trend system, but it's a trend system that provides the average trend triggers that the industry tends to exhibit. And so when we look at Figure 1. of the quarterly report, you can kind of see the differences in performance with those gray lines. You can see top-down was the one that had the worst tracking error. Note that I didn't say the best performance, because I'm not necessarily, we're not necessarily happy as trend replicators to see a large dispersion, even if it is to the upside. But it is, out of all three models of one that had the largest dispersion. Then you have the top-down and bottom-up having done a much better job of tracking the index.

But ultimately you can see that they'll have different times where they'll perform well in terms of tracking, and that's why creating an ensemble was useful for us. And that ensemble is that green line. Again, we manage, I think the SocGen Trend Index here had around 0% return last year.

We managed to, got a positive return, but again, that was more than likely due to just luck, rather than us being good at managed futures. So when we look at Figure 3., what we want to, the way to see this chart, and I know a lot of people have been confused about that big jump in the gray line where we talk about top-down. This is, this chart just shows relative performance to the index. And what we want to accomplish here over time is for that green line to be as close as possible to that number one line there, and as you can see again, there was a massive upside dispersion from the top-down small universe in mid-March, and there was some negative performance for the bottom-up universe in late July. But on average, I think we're tracking that index fairly closely, and we're pretty happy with the outcomes here.

Let's talk about positioning. You know, over the last quarter, not a lot has changed. If we go through the fixed income positioning, most of it has remained roughly even. There's a big change in Gilt, from the previous quarter. We went from short to long.

When we take a look at the equity component, the biggest jump here is giving more exposure to S&P 500, and the rest have roughly remained the same as the previous quarter. We remain long equities broadly, and long bonds broadly, with the exception of the Euro bond.

On the commodity side we also kind of have gone from being slightly long energies to being slightly flat-ish. And of course, not surprisingly, given that we're a trend following mandate, we continue to have strong positions in gold and silver, a little lower on copper. These are mostly due to probably volatility sizing ,rather than trend having changed too much from the previous quarter.

And then on the currency side, more of the same. You know, not much has changed, with the exception of getting a lower exposure to the Eurodollar, so not the Eurodollar, the European currency.

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If you go look at our actual holdings on the website, it's going to look materially different than this, but we do, on the website, also daily update our target risk-weighted position, so you can compare what's actually driving risk in the portfolio.

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So who were the biggest winners for the year? Obviously, on the equity side, S&P 500 provided a big, it was a big positive contributor to return. The biggest detractor was the Euro. But broadly speaking, equities obviously helped, again, not surprising during, because of the trend, bonds were flat to slightly, it was actually in combination, pretty strong negative performance for the mandate, Energies again detracted from performance.

But the big winners that should be not surprising to most is gold and silver. Copper flat-ish. But as a combo, the metals provided around 10% of return for the year and 5% for the quarter. So metals continue to be a strong driver of returns for the recovery that we've seen in trend since Liberation Day.

Finally, when you, the tracking of the bonds and equities, Corey alluded and showed you that already, in the first slide. We see more of the same on the base tracking. And we did, as I mentioned earlier, slightly outperform the basic benchmark, but that could reverse at any time.

There's going to be dispersion, from quarter to quarter. On the RSST side, here are the returns. You can review them again on the website, or the report. But pretty good year for RSST mainly driven by the S&P 500. But, we were lucky enough to be able to stack a couple of percentage points by year end. So it is, it did end up being a Return Stacked® year for the RSST and RSBT mandates. Any other additions here? Corey? Anything you want to…

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So what we see is for each sector there are notional limits. Max short, max long. So for example, energies as a collective unit can go max 75% short, max 75% notional. Long metals, negative 75% short, 75% long. Equities, negative 100% short, 100% long. It's not done so much at the position level because again, what we care about is the max exposure of that group.

And then bonds, because again, something like the two year, we need to lever up a lot more, or the five year we need to lever up a lot more to get the same risk as something like oil. You know, you might, the limits are closer to like negative 300, positive 300. Or rates, which is actually where the two year falls under, negative 400 to plus 400.

So we get, if you're interested, you can send us an email, we can send you the exact limits. As far as are we hitting those limits, I believe we're getting close in the aggregate equities to being at the max position limits. I don't believe we are there with metals yet.

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[00:19:35] Corey Hoffstein: Yeah. One of the things that I, that was really interesting to me when putting this commentary together, and doing a lot of the initial analysis, Rod, if I can be so bold, it's a jump in your section, was a lot of what happened with trend this year was like inter-aligned with people's perception of the narrative of what happened through the year, was you had big economic surprises. You had the tariff tantrum, you had all sorts of narrative shifts, and people trying to figure out how things were going to play out, that resulted in whipsaw.

So you saw big whipsaw in currencies, you saw it in bonds. It was really a question all year of both the pace and rate, and when central banks were going to start cutting. You saw surprise announcements with Germany and the Eurozone after the tariff tantrum, as to fiscal policy impulses. With energy you saw lots of issues, with Russian sanctions that hit crude, both WTI and Brent in October. And so it was a year where it was difficult for persistent trends to emerge.

Copper is another one where we got sudden tariffs where you had these sudden policy shifts that were adverse to what was happening with market expectations throughout the year. I think the tariff tantrum period really encapsulated that. But we saw it in different markets throughout the rest of the year. It was the markets that were sort of left unscathed, ironically, equity markets for the second half of the year, and then gold and silver through Q4 that you saw these massive trends emerge and persist.

And so, you know, I think the big question at the beginning of the year, especially the first half of the year was, well can trend following work when you get an administration that in the U.S. that's behaving like the current administration, where there's, for lack of a better phrase, a bit of economic chaos. You know, trying to say that without any sort of negative … connotation.

Like, it's just what's happening. What's priced into the market is not what's persisting in the market. And I think what we saw by the end of the year is, yes, we can still see very powerful trends emerge, and trend following can capture and still end up with a positive year, but the process along the year can be a little bit painful.

I think a lot of people saw, especially in something like RSST where you got equities down and trend down during the tariff tantrum saying diversification didn't work. Well again, diversification doesn't mean negative correlation. Diversification means zero correlation, which means they can be down at the same time.

And you will often find that right? You're going to be long those equity trends right into the bend, and it's going to be a little bit of double pain at the beginning of that transition. But then trend can find new footing in different places. And you know, again, how many people knew silver was going to take off the way it did? And that's, I think, one of the advantages of a diversified trend program.

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These are things that we didn't have to turn it around, lose a little, then come back in. Like, trend was already there, and it became stronger, and there were more and more policy shocks that you saw. So just like, it cuts both ways. And the chances are basically in any given policy announcement is 50/50, whether we're going to be positioned appropriately or not, and you could get a couple of tails, and then a few heads here and there. But ultimately the whole point of trend following is that once you're able to then capture a sustained trend, you're going to get those non-correlated returns. Secondly, on the correlation, it's key to understand that there's initial shocks, and then if the trend persists, that's when we talk about first responders and second responders.

fier, which is what we saw in: 2022

[00:24:05] Corey Hoffstein: I don't want to belabor this too long Rod, but there was a follow up question on position sizing. Is it possible for us to quickly share our screen? Maybe we can use the RSST website as an example, and just show people where they can find the notional holdings as well as the risk profile of the trend stack.

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[00:24:28] Corey Hoffstein: Unfair of me to ask you to do…

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[00:24:31] Corey Hoffstein: Yep. We can see it.

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[00:24:35] Corey Hoffstein: So, yeah, so if we scroll down here, so this is the RSST page, ReturnstackedETFs.com, and if you keep scrolling down, you get all the fun details, you see performance, and then maybe you can stop a little higher, a little higher. Right here you can see a list of the top 10 holdings. This is required by regulators for us to show.

So one of the questions was, for example, how much gold do we have in the portfolio? You can see right there, the GCG6 commodities contract. That's the 100 ounce gold futures. And you can see it is, the market value, the price, the shares, but probably most importantly is the 12.6% weight that is a notional weight in the portfolio.

So, you know, as an example, you can see the two year note has a 27.3% weight, a little bit higher. It's probably the fourth line down there. The two year U.S. Treasury note, 27.33% weight, double the weight, more than double the weight, but was, we'll see, not even close from a risk perspective. Now, under that table, keep going up Rod.

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[00:25:38] Corey Hoffstein: Under that table you can see a button for download all holdings, and that'll show you all 27, 28, 30 holdings within the ETF. And this is updated daily. Also updated daily, if we scroll down a little bit under that table, is the risk allocation by asset class for the trend program in RSST. And so what we can see is in our estimation, the vast majority of risk in this portfolio is coming from equities and metals. Bonds, currencies, energies, really not contributing much on a day-to-day basis.

So if you're asking what's in the driver's seat, what's really driving performance today, tomorrow, the next day, this'll tell you most of the performance is going to be coming from equities and metals right now. This can change dramatically and this picture does change dramatically quarter to quarter. If you want to see on an actual market level, we can scroll down and we can see both what direction the trade is, and our what, where we think our estimation of how much risk that position is contributing to the portfolio.

And so to go back to the example of where notional weights can be a little misleading. The two year U.S. Treasury, which was a 27% position, is only contributing about 1% risk in the portfolio, versus if we scroll down, gold, which was less than half the weight, is 10.6% of notional risk in the portfolio. And so this is where those notional weights can be a little misleading, because gold is so much more volatile than two year U.S. Treasuries that we need to look at this on a risk-weighted basis, and so that's why we provide this table. These tables, the graph above, as well as the notional table and data, are all updated every single day for you to take a look at, if you are ever wondering what is driving risk and return in the portfolio.

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[00:27:31] Corey Hoffstein: Alright, we'll dive into RSBY and RSSY.

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[00:27:35] Corey Hoffstein: Wonderful. So, this is our Return Stacked® Bonds and Futures Yield and Return Stacked® US Stocks and Futures Yield ETFs commentary. For those of you who are unfamiliar with futures yield, this is another way of saying multi-asset carry. Effectively, what we're going to be trading in these portfolios is 26 futures contracts across equities, bonds, currencies, and commodities.

We're going to go long and short these markets based on our measure of carry. Carry, you can sort of think of it as what is the expected return of an asset if price doesn't move? So in bonds, this might be the coupon yield, in equities it might be the dividend, but that gets a little more complicated when you start to talk about currencies and commodities.

But they're all measurable, and there is an inherent internal yield that manifests in the shape and slope of the futures curve. And so we can use the futures curve as a signal as to whether we want to go long or short these different markets. Now we typically think of carry as being a risk premium, right?

Why does trend work? Well, some people think maybe there's a little bit of a risk premium element, liquidity provider element, but a lot of people say trend works because it's taking advantage of behavioral or misbehavior among investors. It might be position limits, it might be constraints, it might be people anchoring to old information or hurting behavior.

But systematic trend following, the generally accepted answer is, there's a misbehavior among investors that you can exploit, if you're a flexible trend investor. With carry, we're generally saying we're getting paid to warehouse some sort of risk, and that shows up in the futures curve. The futures curve is effectively inviting investors to invest in certain places and in certain directions, and show up in warehouse risk, and you expect to earn a risk premium over time for doing so, but at, you know, you are taking on risk.

So we launched RSSY a year and a half ago, RSBY shortly thereafter, and I won't sugarcoat it. I will say the futures yield program has been frustrating, and arguably disappointing. Since launch it looked actually a lot like trend did for the first year, and then they both flatlined. But while trend really had a great Q3, and in particular Q4 last year, and ended up positive for the year, the multi-asset carry program did not, and in fact really struggled in Q4.

And so, what I wanted to do with this commentary was not talk at sort of a theoretical level, but go through a very practical example, go through a single market that actually drove a lot of the performance in Q4 for carry, and explain really what was happening, why we were positioned in a certain way, and sort of talk about what was happening in markets to cause that positioning.

And so if you have the commentary open, I'm going to really be walking through Figure 6.. I'll walk through each of these components of Figure 6. first, and then we'll sort of talk about what happened. So in Figure 6., what I'm showing is, there's three different graphs to Figure 6.. The first graph is the return of the front month crude oil futures, normalized to a dollar. The reason I normalize it to a dollar is to make it much easier to see. In entering October, it was priced at a dollar. We quickly lose 8% to mid-October, and then it rallies up back to a dollar. So you can see the magnitude of the price swings a little bit easier.

Obviously, the futures weren't trading at a dollar, but it's all been normalized to a dollar to make it a little easier visually. The second part of Figure 6., the graph below that shows the steepness of the futures curve. And here all we're looking at is the six month contract, relative to the front month contract.

Now, for those of you who aren't used to thinking about futures, what's important here is that futures allow you to basically buy delivery at a future date and time. And with something like oil, there's a contract for this month, and next month, and the month after, all the way out to say, 12 months. And those contracts are all going to trade at different prices, based on perceived immediate supply tightness, or economic conditions in the future, or seasonality.

All those things are going to play a role, and you're going to see that appear in the futures curve. And so when you have the front month trading above the deferred months, your backwardation. When the front month is below, you're trading in contango, and they tell you different things about the market's perception, particularly about prompt supply risk.

And then the third part of this, unfortunately, goes on the other, next page. But these are our target weights. And what you'll generally see, I'm not going to focus so much on this part, but feel free to compare it yourself, is what you'll generally see is our target weights largely line up with the direction and magnitude of the curve steepness.

That when the curve is very, very steep, when it's in backwardation, we tend to be long. When it gets flat, or towards contango, we tend to go short, and then, that obviously dictates our positioning. Now, not to go too much into theory, I do want to sort of walk through what happened in the month of October. But the general idea here is that backwardation is a scarcity signal, that there is a concern about how much prompt supply there is in that the market, is ultimately inviting speculators to come in and help hedgers hedge their supply risk, and you will get paid to do so. The risk you are taking on is that that supply crunch unwinds faster than the market expects it, and you will earn a carry through the role of your futures when you buy them, if that scarcity persists.

And so that's, ultimately what we're trading with this signal is that when there's steep backwardation, it's ultimately a sign that there is a supply crunch, and we are stepping in to warehouse the risk that we don't think that that supply crunch is going to end anytime soon, and be on the other side of the trade from people who are trying to hedge that. And then once there's the other side of the trade, when you go into contango, or a flat curve, when there's not enough supply, we take the other side of that trade.

So going into October, what we can see here is that there was with a steep curve, a general perception of tightness in near-dated supply. You had the front month trading at a premium to the back month, which was creating positive carry. And so we entered the month, excuse me, with a positive position in crude oil. What happened after that is that economic news started to come out that there was weakening demand expectations. There was larger than expected global inventory, especially in non-OPEC supply growth. Now, there really wasn't as much threat to near-term barrels as people thought there was, and oil, sort of two things happened. One, front month oil sold off 8% in, call it a week, week and a half, as the market rapidly repriced. But what we also saw was that the curve flattened dramatically, right, because the market was saying, oh, there isn't as much supply crunch as we thought here. And so this is exactly where we realize a loss, because the carry is no longer there.

We want to unwind our position, but because we were long oil, all of a sudden we take that loss in the front month as oil sells off. You generally see, as that, that's the risk, right? We were warehousing the risk that actually there wasn't a supply crunch. The news came out that maybe there isn't a supply crunch. Oil sells off quickly. That's sort of the risk we're bearing. So, all of a sudden, we move into a short position, taking the other side of the trade, as the curve is very flat. Well, and then what happens? Well, on October 22nd, President Trump announced expanded sanctions against Russian oil exporters, in particular Rosneft and Lukoil, and all of a sudden that changes materially the landscape of near-term supply disruption.

Oil shoots up 8.59% within two days, and the curve immediately goes back into steep backwardation, steeper than it was at the beginning of October. Of course, we had just gotten into a short position, and all of a sudden we have to realize those losses as oil rallies, and shift out of that short position again.

And so this is sort of a perfect example. And this is one of, and the exact same story, more or less happened in crude oil, Brent, highly correlated markets. These were two of the biggest drivers of losses in Q4. And it just happened in these sort of three weeks where you had this very quick, and it wasn't so much oil volatility. It was a whipsaw in market expectations, right? In something like oil, carry strategies are going to perform best when scarcity is persistent and sort of expressed gradually throughout the curve. And what we saw here is that like in October, the environment was very hostile to front month carry in oil, right?

You had very rapid adjustments to market expectations. You had supply tightness, economic news suggesting otherwise. And then you had a rapid policy shift with sanctions that was an immediate impact on supply tightness causing the curve to shift dramatically with price. And this caused dramatic whipsaw in our position and created realized losses.

And this has been, I hate to say, sort of the story since these funds were launched a year and a half ago. Underperformance, if we look at actual attribution, has been, it really, in markets that are most exposed to rapid macroeconomic repricing. It's been oil, it's been gold, it's been copper, where things like policy and trade and growth expectations have rapidly shifted, and have shifted fast enough to outpace the gradual sort of accrual and tailwinds that carry normally give us. And so it's really been a story of a challenge of sequence and speed, right?

Much like trend can get whipsawed by price, carry can get whipsawed by the curve moving very rapidly, and that's exactly what we've seen. And so, you know, again, people often ask us, is this type of trade broken? The way they asked was, was trend broken in the first half of last year because of what's happening with policy? Well, is carry broken? No, I don't think so, personally. I think this is, unfortunately, when you are running a strategy that tries to harvest a risk premium, when those risks are realized more frequently than the market prices them in, you end up suffering losses.

And so again, when we look at ultimately where our losses were last year, there was a large concentration in the energy sector. There was a large concentration in the metal sector here that drove losses, and heavily in these different periods of policy shift. Totally different and independent of the losses we saw in trend, right?

Frustrating for both trend and carry to post losses in energies. But when and why and how they posted losses were completely different. So I know that was a lot to digest and I hope it wasn't too confusing. Again, what's really important for us here, I think, to try to provide a very concrete example and try to provide some intuition about why carry is positioned in certain ways.

And I wanted to really drill down into a single market, a single month, a single example of where losses were being realized and why and how that sort of economic news and rapid expectations shift, policy shift, news shift, supply shift is offsetting the risk premium we're trying to earn. But why, again, we think that ultimately over the long run, this is a strategy that does harvest a risk premium well. I spoke specifically about oil, that same story can be told across all the 26 futures markets we trade.

I think you're muted, Rod.

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[00:40:45] Corey Hoffstein: Yeah, so a lot of people when they talk about carry, right, the other trade you could put on here, or I'm showing a very naive measure of carry with front month versus six month. But one could argue, well, okay, if the front month is trading well above the six month, couldn't you go short the front month, long the six month, and look for the curve to normalize and capture that spread, and do it in a beta neutral manner, so you're not taking a directional bet on oil.

I would make the argument that in doing so, you're effectively saying that you think the futures curve is mispriced, but you're not capturing carry. Whereas I would argue that by taking the directional trade that we are, it's a more, while there's more, obviously much more exposure to the price movement of the underlying, you are indeed trading in line with carry, and much more in line with a risk premium, rather than an expression that the market is mispricing the curve.

The market can still, I mean, for lack of a better way of phrasing it, the markets can still be efficient and you can earn a risk premium for stepping in and buying that front month tightness when no one else wants it, versus if you're trading the six month versus the front month. I would argue that that's much more of an argument that the market is mispricing the curve.

So there are different ways of expressing a trade. I think they often get conflated. No, we don't do the latter. We don't do a time expression. We do purely the directional expression. We think that is more in line, frankly, with what a carry trade is, in these markets, though it does, again, it is, in my opinion, more pure expression of a risk premium, and therefore, you know the risk you are subject to, or different…

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And, you know, it's near the edge of like, left tail events, but it's not something that is wildly outside of model. It can happen. It's not surprising that it's happening in this environment, that is such a novel and unique environment from a global macro landscape in the asset classes that we are in, as Corey alluded to in explaining these case studies. So, you know, when you take the, it being within the distribution, and it being such a novel type of global macro environment, it's no pay, no premium.

We continue to believe in this, and we've seen this with other risk premiums in the past. We've seen it with value before it recovers. We've seen it with many other more obscure risk premiums that are out there. The goal is diversification, and it is different than trend as we can see, and it is different than equities and bonds. So ultimately, it's our expectation is that it'll stack positively and it'll add to the diversity of the portfolio.

[: 00:44:07

When you are seeing a backwardated curve and you buy that front month futures contract, you are making an explicit trade that you are stepping into that prompt tightness that the market's expectation of a lack of supply. You are stepping into hedgers trying to hedge that. And if the market continues to get tighter, you will profit, or if that tightness unwinds gradually, you can profit from the carry, versus the gradual unwind, versus if you were doing the time spread, you know, “carry”, you're actually short that front month. You're short that risk premium, and you can get blown out even if you try to beta hedge from an increase in perceived tightness.

So I, you're actually short that risk premium in my opinion. So I actually think they're fundamentally different trades for what's trying to be expressed. They sometimes both get called carry. I know a lot of banks call that time spread a commodity carry. I think it's questionable whether it is a carry strategy or not, but we are so in the weeds at this point, I think that's better for maybe a more technical podcast and discussion.

[: 00:45:45

[00:45:46] Corey Hoffstein: For those of you for whom that was nothing but Greek, I apologize. For the four of you that enjoyed that, shoot me an email.

[: 00:45:53

And this is kind of the idea of herding and anchoring and adjusting and herding and auto correlation. And then you have carry, which is a bet that objects with higher yield tend to attract more capital and push that price up over time versus other markets, right? So those are the two major things that you can kind of help investors that are seeing that we're trading the same futures in different ways, why it matters.

All right. Let me see if any of the other questions on the carry stuff. Is directional carry versus timeframe. So I think, I think we've.

[: 00:46:49

Alright, I'm going to move on to the Return Stacked® Bonds and Merger Arbitrage ETF. RSBA ETF just actually hit its one year anniversary in December. This is an ETF that for every dollar you allocate, we seek to provide you a dollar of core U.S. Treasury exposure, plus a dollar of exposure to a merger arbitrage strategy.

For those of you who are not as familiar with merger arbitrage strategies, the idea here is that when one company announces that it will acquire another, the company that is getting acquired, their stock price tends to jump towards, but not all the way to the acquisition price. The spread between the acquisition price and the price the stock moves to, represents both the time value of money, the uncertainty of when the deal is getting completed, and the uncertainty of if the deal is getting completed.

And so what happens often is that you can step in and buy at those prices and wait for those deals to close, and earn what has been historically an attractive risk-adjusted return. And what we look at as being a risk premium, you are effectively bearing the risk that the deal falls apart. What we think is particularly attractive about merger arbitrage is not just its long-term positive excess return that is generated, but that every deal tends to be priced in an idiosyncratic manner. It doesn't seem to have the same systematic risk that something like credit does or equity beta. It tends to be fairly uncorrelated to rates. It tends to be fairly uncorrelated to credit or equity.

The example I like to give here is something like Elon Musk, agreeing to buy Twitter and then trying to back out. These deals almost always go through unless there's regulatory intervention. We have very strong deal law here in the U.S. and so you're effectively trying to capture the last couple of percent return as those deal spreads come to fruition. And so we think it's a very attractive risk premium.

tractive, particularly in the: 2010

In an environment where we can stack it on top of core bonds, I think this product in particular is a great alternative to traditional credit. So, since we launched, I'm going to jump right to some performance. Since inception last December, December 2024, the annualized excess return of that merger arb portfolio has been about 2.5%, with an annualized volatility of just about 1.6%.

So you're talking about a Sharpe ratio of about 1.5, which I think is particularly attractive. Now, this is below our target excess return of 400 basis points for that strategy. And that's because of what we see in Figure 9.. So Figure 9. shows us what the positions in the merger arbitrage strategy have looked like over time.

And what you'll see is that we are not always fully allocated. This is a strategy that on a deal-by-deal basis is going to determine whether the expected return of the deal is over our target return threshold. And if it's not, we're not going to invest. The idea is we don't want to underwrite deals that don't meet our expected return criteria for the risk that they have.

: 2025

Many of them closed into Q3 and a number of new deals have opened in Q4. And actually as of today, I think we're about 90% invested. And so what we see is this type of merger arb strategy that we've implemented here in partnership with AlphaBeta, who actually runs the index strategy that we seek to track, is very opportunistic in the way it trades.

There are going to be periods where it does, it's going to sit on a lot of cash or you know, effectively, a lot of core bonds. And then there's going to be periods where that overlay to merger arbitrage is going to be much bigger, because we see a lot more opportunity in the market to earn those returns.

But it's not going to actively put on deals just for the sake of putting on deals. It's only going to try to put on those deals that it determines have an appropriate level of return for the risk being taken. And for most of the cases, that's just, does it exceed the 400, ex-400 basis point hurdle rate in the portfolio?

If we look at the actual excess returns and Figure 10., I think what we see is a very attractive return and risk profile versus credit. So in the green line, what I have is the AlphaBeta Merger Arbitrage Index, the excess returns of that index. And in the black line, what I have is the return, isolated return of credit.

So you can think of this as sort of, if I take corporate bonds and subtract out the Treasury component, what does that return look like? And as expected, as we know from last year, credit continued to tighten, and so we saw credit was positive throughout the year. But what we also saw in merger arb was it was a good year to harvest merger arb returns. At the end of the day, it did so with much lower volatility, a little bit higher of a total return profile.

And so that's why when we say, well, we can take Treasuries and stack credit on top, or we can take Treasuries and stack merger arb on top. We think merger arb is a very compelling alternative, and when you look at it from a long-term return profile, it doesn't look all that different from say, corporate bonds.

So advisors who are looking to introduce this without a lot of disruption, that overlay really stands out, and I have to explain it to my clients. This is one that I think is really compelling from that perspective of it introduces a diversified risk premium that should be there, that you should be able to earn over the long run.

It's not a behavioral anomaly. This is something that you should get paid for the risk you're bearing. It can help potentially diversify out of your credit risk, particularly at a time where credit spreads are near all-time lows. And what we tend to see is that the returns of merger arbitrage and credit are not all that correlated.

So credit being at all-time lows is not inherently a risk to the number of deals we see, or deal completion. And so we think it right now, in particular, over the long run, it's a great diversifier. Right now, in particular, it's a great time to evaluate whether you should be thinking about switching some corporate bond exposure into something like RSBA.

[: 00:54:07

[00:54:27] Corey Hoffstein: Man, this is a great question, and this is in the weeds, and this mattered because we did hold Walgreens. So for those for whom, I just want to, I want to get a little bit of background. Walgreens was acquired. There was an illiquid component of the deal that basically you got this right. If you held the deal to completion, you were going to be given this illiquid right. That was worth up to a certain amount, based on the ability to, of the acquirer to carve out part of Walgreens and spin it off and sell it.

The problem for a, frankly, a liquid fund like us is one, how do you daily mark to market the value of that right? And two, how do you deal with money flowing in or out of the fund, given that you can't change the size of that right? We're going to be given a certain amount of that right, based on the assets we hold at the time of the deal completion. And then we have to make a determination about going forward, like as the fund grows, that's going to be, hopefully it's going to become a relatively smaller proportion, but if the fund shrinks, it can become a much larger proportion, and we can't get out of it.

So ultimately, the decision we made was to close the position before that right was assigned to us, simply because it represented too much of an accounting risk, and too much of a risk from a being an open-end fund. And so those are things we look at, those sort of illiquid rights.

We're obviously trying to close as close to maximum spread as possible, but those are things that we ultimately stepped out of holding, because we didn't think it made sense for the type of fund that we manage.

[: 00:56:14

And what we're trying to do with the ETF is really try to gain exposure to gold and Bitcoin via ETFs and futures contracts. So we don't, we're not buying direct gold or spot Bitcoin. We're buying it through ETFs and getting those exposures. And the goal of the overlay here is different than anything else we've kind of put together.

It's designed to have a constant shifting of weights between gold and Bitcoin based on their volatility contributions. So an example of that would be if we were to measure the volatility of Bitcoin and then measure the volatility of gold in the recent period, and Bitcoin was at 80 and gold was at 20, the allocation would be 80/20 gold/Bitcoin. And what we have seen, like if we actually look at how we, where we started the quarter, we started at around 75% gold, 25% Bitcoin. And surprisingly, we ended the quarter with more Bitcoin and less gold. And it's because we're, this is not about who performed best, but how volatility's changed.

And over the quarter, over Q4, what we saw is Bitcoin's volatility actually decreased while gold relative volatility increased from around 17% to almost 19%. And so that was the reason for the shift. And it is just, basically, for those who know about risk parity, that is the concept here. And from the way we see it from a fiduciary responsibility for most advisors is, it is very difficult to really think about adding small positions to odd asset classes like gold and Bitcoin, and they're not generally going to be large allocations. And so how does one trade them operationally? And then how does one keep an eye on whether we should be invested in one asset, versus the other?

And I think long-term, as if Bitcoin ends up becoming less favorable and not adopted as much, what's going to happen is, volatility is going to continue to go higher and higher, and the allocation's going to go lower and lower, and it allows a natural way for us to reduce exposure on behalf of allocators, where they don't have to think too much about what's going on. So it's a bit of an automatic hedge there. And again, the rebalancing is no, is a big deal too. If you're going to put 5% of your portfolio in RSSX, that means you're going to get roughly one or 2% in Bitcoin.

You know, a lot of allocators don't want to rebalance in one or 2% position. The ETF does that on your behalf. So the performance has been pretty outstanding this year. If we just look at the charts here, the three asset classes, you know, equities did well, gold did the best, and Bitcoin really fell off in the last quarter of the year. But what you'll notice is, I think this is another benefit from a behavioral perspective, from a line item perspective, is that you're getting exposures to these diversifiers. Two out of the three engines were good, one was bad. And the kind of the perception or the view of that line item, that green line at the top there in Figure 11. you can see is it's certainly not as bad as having just owned Bitcoin.

And I think that is a key benefit of being able to provide a three-in-one solution with a solid stack that is, that automatically rebalances as well. So, since inception, returns just under 30%. The last quarter we were up 1.89%, largely driven by gold, then equities, and detracted by Bitcoin.

Yeah, I mean that's really it for the RSSX. The only thing I would say is that this is another great piece, aside from just getting exposure to gold and Bitcoin. The reasons why we find a lot of allocators allocating to gold and Bitcoin is because of, they see a lot of debasement risk in the U.S. currency. They see the risk of persistent inflation, and it's a way to diversify away from the U.S. dollar while maintaining your full exposure to the driver of returns over the last decade plus, if not a hundred years, which is the S&P 500. So again, having your cake eating it too. If currency's going to be an issue, this may provide a way of hedging against that.

So yeah, we're, I think we're seeing a lot of growth in this ETF and if anybody has any questions on how other people are using it, please do reach out and let us know. We'll be happy to provide some case studies. All right. Any questions, Corey, that you see?

[: 01:01:34

[01:01:36] Rodrigo Gordillo: Okay. I think we're at the top of the hour.

Thank you for joining us today, Corey, and everybody here for spending time with us going through the document. Again, you can find this on ReturnstackedETFs.com. On the insights tab, download the document. If you have any questions for us, there is a Contact Us button there that you can find your territory, whoever's covering your territory, and we can book a meeting with you right away to help you out with any portfolio construction needs or any specific product questions. Until then, Corey, unless you have anything else to add, I'm going to sign off.

[: 01:02:16

[01:02:17] Rodrigo Gordillo: Thanks everybody.