RLY: A Really Nice Allocation Fund (NYSEARCA:RLY)

Asset allocation is not dead. Although we have been in a cycle where any diversification around large US stocks has detracted from performance, it is still just a cycle that will end and bring with it a new set of possibilities. Results. If you agree, and are looking for a fund that provides a mix of exposure to an asset class designed to generate a real return, then… SPDR® SSgA Multi-Asset Real Return Fund (NYSEARCA: RLY) is worth a look.

RLY was launched in April 2012 as an actively managed exchange-traded fund, or ETF, that seeks real returns through capital appreciation and current income. The fund uses a quantitative model that follows a proprietary algorithm, complemented by fundamental analysis, to determine where to allocate. RLY focuses on inflation-protected securities, real estate securities, commodities, infrastructure companies, and companies operating in natural resource/commodity intensive sectors such as agriculture, energy, metals and mining. RLY charges an expense ratio 0.50 percent, and generates income for investors through a 30-day SEC yield of 3.62%.

Look at the holding

This is an eclectic mix of ETFs, with the SPDR S&P Global Natural Resources ETF (GNR) at the top, making up roughly 29% of the fund. This is an ETF of ETFs, so although these allocations are large, they are very diversified when you consider the rollover of securities in each position.

GNR invests extensively in energy, metals and agriculture-related products produced and sold by companies located around the world. GIL invests in global companies that build, operate and maintain infrastructure assets (such as transportation, utilities and energy infrastructure). PDBC, which tracks a basket of energy commodities, precious metals, industrial and agricultural products. TIPX consists of US Treasury inflation-protected securities that mature in one to 10 years. XLE is designed to directly highlight the energy segment of the market, including energy harvesting, processing or distribution.

Sector composition and weights

The allocations match the names of the ETFs. Natural resources make up the largest overall group, followed by global infrastructure and commodities.

I like the mix here. Obviously, the return pattern will look different than what you would get from the S&P 500 (SP500), and these areas are likely to perform well in inflationary environments like we have today from a real return perspective.

Peer comparison

Since this is a multi-asset fund, it may be helpful to compare it to a more traditional underlying basket such as the iShares Core Growth Allocation ETF (AOR). This fund of funds has a significant allocation to growth-oriented asset classes such as domestic and international stocks, bonds and real estate investment trusts (REITs). When we look at the price ratio between the two, we find that RLY outperformed until 2022, but then lagged steadily. This shouldn’t be surprising given that AOR has exposure to technology stocks, and this has been the only game in town for about the last two years.

Pros and Cons

On the plus side, this fund provides investors with a great mix of asset classes that should help maintain and grow real purchasing power after inflation. It’s a good solution for funds, and hopefully it will provide diversification benefits versus stocks, as the fund model helps direct weights to where power is highest.

On the downside? It’s a fund of funds that isn’t very active, which means you may want to consider doing it yourself without the additional management fees. I like the convenience factor here, though. It is also worth noting that there is of course no guarantee that the fund is doing what it is supposed to do as a beneficiary of inflation.

Conclusion

In an era where inflation risk is a critical consideration, the SPDR® SSgA Multi-Asset Real Return ETF offers investors a way to protect and potentially grow their purchasing power. I think the combination of exposure to multiple sources of inflation hedging assets and sectors with an active strategic approach has great appeal. It certainly looks and functions differently than a stock-only portfolio, and I think that will matter more and more as the cycle continues to change.

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