With inflation expectations consolidating and near multi-year highs, I believe the SPDR SSGA Multi-Asset Real Return ETF (NYSEARCA:RLY) ETF is still a proprietary fund. The RLY ETF offers investors 1-stop exposure to commodities, natural resource stocks and infrastructure assets that should perform well in an inflationary environment. However, in environments where inflation is not a concern, investors should avoid the RLY ETF as it significantly underperforms.
The SPDR SSGA Multi-Asset Real Return ETF is intended to provide exposure to securities that can achieve real rates of return. The fund has exposure to publicly traded companies in natural resources, inflation-protected securities, real estate and commodities sectors. The RLY ETF has $470 million in assets.
The RLY ETF provides investors with exposure to asset classes, such as inflation-protected securities issued by the US government (“TIPS”) or foreign governments, domestic or international real estate securities, commodities, infrastructure companies and companies operating in the natural resource or commodity sectors. . The distribution of the fund between asset classes is variable and depends on the adviser’s views on the returns and risks of each asset class. The RLY ETF primarily employs a fund of funds model and owns other ETFs and funds, mostly issued and/or managed by SSGA.
As of October 28, 2022, the fund’s asset allocation is shown in Figure 1. The fund has 34% of assets invested in natural resource companies, 25% in global infrastructure, 22% in commodities and 19% in other asset classes and cash. Figure 2 shows the actual holdings of the respective ETFs and funds.
As of September 30, 2022, the fund generated decent short-term returns of 2.5%/7.7%/5.2% 1/3/5-year average annual return (Figure 3). Notably, the fund has returned -2.3% YTD to September 30, 2022, significantly outperforming other asset classes such as the S&P 500 Index which has returned -23.9 % till the date.
However, the long-term performance of the RLY ETF has been poor, with 10-year returns of just 1.6%.
Distribution and Yield
The RLY ETF pays a variable quarterly distribution, with an LTM distribution of $3.48/share or an LTM yield of 12.8%, primarily due to a strong fourth quarter 2021 distribution of $2.9271/share.
The standout contributor to RLY’s high spread in 2021 was the Invesco Optimum Yield Diversified Commodity Strategy No K-1 (PDBC) ETF which paid $7.14736 per share in 2021 or 42% trailing return as commodities had a stellar 2021. The RLY ETF owned 24.3% of the fund at PDBC in 2021 and currently owns 21.9%.
However, the most recent quarterly distribution was only $0.1001 per share paid on September 23, 2022. As commodity markets have been more volatile in 2022, it is unclear what the year-end distribution rate will be for PDBC and, by extension, for RLY.
The RLY ETF charges a relatively high gross expense ratio of 0.50%.
RLY ETF is the right fund for the times
There is no denying that the RLY ETF is the right fund for the current macro environment with high inflation globally. RLY’s ability and willingness to make allocations to commodity and natural resource companies has enabled the RLY ETF to outperform over the past 2 years, generating a strong return of 22.9% in 2021 and 4. 9% through October 31, 2022, despite the global bear market in most asset classes (Figure 4).
However, investors should be aware that the RLY’s exposure to commodities and natural resources can be a double-edged sword, as seen in Figure 4 above. RLY Peer Ranking Compared to Other Asset Allocation Funds (Based on Morning Star) is quartile 1 or quartile 4, depending on whether those asset classes are in fashion.
To get an idea of when the RLY ETF should perform well, investors can monitor the Expected rate of inflation 5 years, 5 years (“5-year break-even point”). When 5-year breakevens are rising, that means inflation expectations are rising, and commodity and natural resource stocks should do well. Conversely, investors should avoid the RLY ETF and commodity/natural resource stocks when the 5-year breakeven is headed lower, as it indicates inflation is not a concern (Figure 5).
With inflation expectations consolidating near multi-year highs, I believe the RLY ETF remains a self-funded fund. The RLY ETF gives investors 1-stop exposure to commodities, natural resource stocks, and infrastructure assets that should do well in an inflationary environment. However, in environments where inflation is not a concern, investors should avoid the RLY ETF as it significantly underperforms.