Rydex Total Return Fund Works - In Some Ways

With all the market volatility these days, it's time to take another look at the Rydex Managed Futures(RYMFX Quote) absolute-return fund.

I took an asset-allocation approach toward this fund a year ago: If you believe in having a diversified portfolio, you will always have some commodity exposure.

RYMFX blends long and short positions of commodity and financial futures in an effort to deliver a steady return regardless of the market environment.

The fund mimics the S&P Diversified Trend Indicator, which is made up of 50% financial futures (allocated to eight products captured in the pie chart below) and 50% physical commodities (allocated to six products captured in the pie chart below). The methodology is to go long any of the 14 products that is above its seven-month moving average and short anything that is below its seven-month moving average.

The one exception is with energy, which the fund will not short due to the volatility of the political/risk premium.

Last year, I was skeptical about the decision to not short energy, and I now believe my skepticism was not merited.

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The index is currently short the British pound, live cattle and lean hogs; and thus, is long all of the other products. It rebalances (if need be) monthly.

This fund is intended to follow an absolute-return strategy that, like any strategy, has strengths and weaknesses.

An absolute strategy will likely deliver a competitive result versus equities in a flat or down market -- but in a bull market would likely lag by a meaningful amount. This has been the case in the five years ended Dec. 31 where DTI had an average annual return of 8.43% versus 12.83% for the S&P 500 (both backtest numbers from the fund fact sheet from Rydex).

The stock market has an up year 72% of the time -- so the drawback of RYMFX is that it would probably lag most of the time.

The advantage is that it will be much less volatile than the stock market, as was the case in a 22-year backtest, and in the fund's first year of trading.

In addition to relatively low volatility, the index has had a negative 0.075 correlation to the S&P 500 over the same 22-year backtest; the negative correlation seems to have held up over the last year as well.

This is good if you want to own some assets that do not correlate with U.S. stocks but the negative of course is that, again, stocks go up the vast majority of the time.

I view absolute strategies as one of many tools that might comprise a diversified portfolio. The role that absolute can fill is that of helping to reduce volatility of the overall portfolio to help investors better emotionally deal with market conditions like we are enduring now.

I would not expect the fund to do as well as it has done over the last few months, but its ability to go long or short -- and to rebalance so frequently -- do, in my opinion, give a great chance for steady returns the vast majority of the time. I own it in my Health Savings Account.

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