RPAR: Why This ETF Has Finally Found Support

Summary

• The RPAR Risk Parity ETF has shown signs of resilience lately, and the recent rebound could be the beginning of a march towards a peak later in 2022.
• The fund has benefitted from its exposure to commodity producers, gold and inflation-linked bonds, despite a soft S&P 500.
• RPAR looks good today due to its balance across asset classes amid a tumultuous period, combined with prices that seem attractive.
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Daniel Grizelj/DigitalVision via Getty Images

When I last suggested that the RPAR Risk Parity ETF (NYSEARCA:RPAR) looked like a good buy on the dip, back in December 2021, the fund's shares were trading a dollar above their current price. Clearly, 2022 has not been a great year for this ETF (down 5.5% YTD, cash distribution included, vs. the S&P 500's 9.5% dip) and most long-only strategies that are not heavily allocated to commodities.

At the risk of not being accurate on my timing once again, I believe that RPAR remains attractive today. I explain below why the recent rebound could be the beginning of a march towards a peak later in 2022.

What is RPAR?

Before anything, it is important to understand how RPAR invests its assets. As I have explained previously in more detail, risk parity is a strategy that seeks multi-asset class diversification to ensure good performance in virtually any macroeconomic environment. The ETF tries to achieve this goal by investing in government bonds, stocks (domestic and international), commodity-producing equities and gold. Below is the target allocation pie.

RPAR: Target Asset Allocation (RPAR ETF website)

Since its January 2020 inception, RPAR has failed to top the absolute returns of the S&P 500 (SPY): 10% vs. 16% annualized. However, because the ETF is better balanced, it has outperformed the stock-only benchmark on a risk-adjusted basis: Sortino ratio of 1.64 vs. 1.39. Using month-end prices, RPAR's maximum drawdown during the thick of the COVID-19 bear was only 6.5%.

Why RPAR has found support

Unlike the S&P 500, RPAR may have found a floor in the past few weeks. Notice below how, after declining through most of January, RPAR stabilized in the first three weeks of February; and then rebounded in the past many days.

Data by YCharts

Fears of a large-scale conflict in Europe led to crude oil prices skyrocketing, which benefited commodity producers — 15% allocation in RPAR. The same developments also led to higher consumer price expectations (the five-year breakeven inflation rate jumped from 2.8% in early February to about 3.3% now) and higher risk of economic deceleration, a scenario that benefited both inflation-linked treasuries and gold — 35% and 10% allocation, respectively.

The past couple of weeks have shown how RPAR can still deliver decent results, even when a traditional stock-and-bond portfolio fails to perform well.

Why RPAR could climb

Should the current market dynamics persist (i.e., fast rising commodity prices, higher inflation, etc.), RPAR can very well continue to thrive, even without the support of an S&P 500 that continues to dig deeper towards correction territory. But one does not need to have a certain set of convictions about what may happen next in the global economy and the markets to find RPAR an interesting investment. This is the case because the ETF is designed to do well in many environments.

Beyond betting on future price movements in the underlying assets, I believe that RPAR's current drawdown suggests an eventual climb from today's levels. At least this is what history suggests.

The chart below shows the relationship between drawdowns from a peak and six-month forward return. At an r-squared of nearly 0.5, notice that RPAR tends to perform better in the next half year when the ETF is in a drawdown. The sharper the pullback, the better. In other words: at least up to this point, dips have proven to be good opportunities to buy.

Scatter Plot: RPAR 6-Month Fwd Returns vs. Drawdowns (data from Yahoo Finance)

Also notice the red star above, which marks RPAR's current drawdown. Almost never in the fund's history has the ETF dropped this far from an all-time high and not produced returns of at least 10% in the following six months.

Due to the balance across asset classes amid a tumultuous period in the global economies and markets, combined with prices that seem attractive relative to prior peaks, I continue to think that RPAR is an ETF worth owning today.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of RPAR, SPY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.