Return Stacking: How to Unlock >100% Portfolio Efficiency
Return Stacking: How to Unlock >100% Portfolio Efficiency
COACHING POINTS
- The Constraints: In a traditional portfolio, every dollar invested in Bonds is a dollar not invested in Stocks. You are forced to choose between Growth (Stocks) and Safety (Bonds), diluting your returns.
- The Strategy: Return Stacking uses “structural leverage” (via futures or swaps) to get $1.00 of Stock exposure AND $1.00 of Bond/Alternative exposure for every $1.00 of capital. This creates a “100/100” or “60/40/40” portfolio.
- The Goal: Unlike reckless 3x leverage used by day traders, Return Stacking uses modest leverage to add diversification, not to double down on risk. It allows you to stack uncorrelated return streams on top of each other.
“Diversification is the only free lunch, but leverage is how you get to the table.” Institutional investors (Endowments, Hedge Funds) have used this for decades. They don’t sell stocks to buy bonds; they hold stocks and use futures to layer bond exposure on top. Now, thanks to new ETFs (like RSST, RSSB), retail investors can stack returns to break the “Risk vs. Return” trade-off. Source: Return Stackedยฎ Indices / ReSolve Asset Management
Scenario: You have $100. You want Stocks for growth, but Managed Futures for crisis protection.
- Traditional (The Dilemma):
Invest $50 in Stocks / $50 in Managed Futures.
Result: You sacrificed half your stock upside. - Stacked (The Solution):
Invest $100 in a “Stacked ETF”.
1. The ETF uses $100 collateral to buy $100 of S&P 500.
2. The ETF uses the same collateral to enter $100 of Managed Futures contracts.
Total Exposure: $200 (200%).
Result: You get 100% of the Stock return PLUS 100% of the Futures return (minus borrowing costs).
Portfolio Efficiency Comparison
| Portfolio Type | Total Asset Exposure (%) |
|---|---|
| Traditional 60/40 | 100 |
| Stacked 60/40/60 | 160 |
*By stacking, you are essentially making your capital work overtime. The 160% exposure allows for robust diversification without reducing core equity holdings.
What-If Scenario: The 2022 Inflation Shock
Comparison: Stocks vs. Stacked Portfolio (Stocks + Trend).
| Quarter | S&P 500 Return | Stacked (S&P + Trend) Return |
|---|---|---|
| Q1 2022 | -5 | 2 |
| Q2 2022 | -16 | -5 |
| Q3 2022 | -20 | -8 |
Execution Protocol
Do not stack just to gamble. Stack to solve a problem. Usually, the problem is: “I need inflation protection (Gold/Commodities), but I can’t afford to sell my Stocks.” This is the perfect use case.
Look for funds that explicitly state their exposure target (e.g., “100% Equities + 100% Bonds” = RSSB, or “100% Equities + 100% Managed Futures” = RSST). Be aware of the expense ratio; these funds are more expensive (0.70% – 1.00%) but cheaper than building it yourself.
Leverage is not free. You are effectively borrowing cash to buy the extra exposure. If short-term interest rates (Cash Rate) rise to 5%, the “hurdle rate” for the stacked layer increases. The strategy works best when the stacked asset outperforms the cost of cash.
COACHING DIRECTIVE
- Do This: Use Return Stacking to introduce “defensive” assets (Managed Futures, Gold) without reducing your “offensive” assets (Stocks). It is an “AND” solution, not an “OR” solution.
- Avoid This: Stacking highly correlated assets (e.g., 2x S&P 500). That is just leverage risk. The magic comes from stacking uncorrelated streams (Stock + Trend) to smooth out the ride.
Frequently Asked Questions
Is this margin trading?
No. Margin involves borrowing from your broker and risking a margin call. Return Stacking ETFs use “embedded leverage” inside the fund via futures contracts. You cannot lose more than your investment, and you won’t get a margin call.
What is “Carry”?
Carry is often a component of stacked portfolios. It involves borrowing in a low-interest currency/asset and investing in a high-interest one. It creates a steady income stream that is distinct from stock market beta.
Can I do this in an IRA?
Yes. Because you are buying an ETF (like RSSB), it is fully eligible for IRAs and Roth IRAs, unlike trading futures directly which requires specific account permissions.