DFRA: A New Real Asset ETF Off To Good Start

(This article was co-produced with Hoya Capital Real Estate)

Introduction

What does "real assets" mean? Later, when I compare several funds that use that term in their name, you will see what I mean; the assets held are not totally consistent. I have found over my many years of investing, one has to look "under the hood" to see what the fund holds, not just take the fund's name as "gospel". Here I review a ETF that is new to me and it is fairy new too, having started in late 2019: the Donoghue Forlines Yield Enhanced Real Asset ETF (BATS:DFRA). Compared to the other two ETFs and even the S&P 500 Index ETFs, DFRA is off to a good start.

Donoghue Forlines Yield Enhanced Real Asset ETF review

Seeking Alpha describes this ETF as:

The investment seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the FCF Yield Enhanced Real Asset Index. The underlying index is designed to track the investment results of a rules-based strategy that aims to provide exposure to "real assets" equities based on the adviser's proprietary research.

Source: Seeking Alpha DFRA

DFRA has $51m in AUM, making them a "small-fry" in the ETF world. The managers are charging 69bps, about what seems standard for an actively managed ETF. Income investors will appreciate the 8+% yield, though that needs to be taken with the preverbal "grain of salt".

For those, like me, who are unfamiliar with this manger, this is how they define themselves:

Donoghue Forlines is a Boston-based tactical investment firm that has specialized in active risk-managed portfolios since 1986. In December 2017, W.E. Donoghue acquired JAForlines Global (JFG), an investment management company specializing in risk-managed global tactical strategies. The acquisition resulted in a unique firm in the investment management space.

Source: Donoghue Forlines

The fund managers list several reasons they believe investors should own their fund: note they list inflation hedge as the first reason.

Index review

The FCF Yield Enhanced Real Asset Index (the "FCFRA Index") is designed to track the investment result of a rules-based strategy that aims to provide exposure to global "real assets" equities. The Index intends to reflect the performance of companies related to "real assets" (REITS, Infrastructure, Oil & Gas MLP's, Commodities, Natural Resources) with the following characteristics: High-Quality Alternative Exposure; Inflation Hedge; Enhanced Quality Income; Alpha Generation FCFRA TR Index reflects backtested performance from the period beginning 11/30/1998 to 08/31/2021, with a base value of 1,000. The index's live calculation began on 09/01/2020. Performance illustration starts 5/31/2005 when benchmark return was first available.

Source: indxx.com

They provided this chart and data for the index, including the backtested period.

The underlying index is sponsored and maintained by FCF Indexes LLC (the "index provider"), an affiliate of FCF Advisors LLC, the fund's investment adviser. I could not find a document explaining the index selection rules. The S&P Real Assets Equity Index is defined as:

A static weighted return of investable and liquid equity indexed components that measures the performance of real return strategies that invest in listed global property, infrastructure, natural resources, and timber and forestry companies.

Source: spglobal.com index

I mention this to point out the two indices are very different in that one is 70+% in fixed income assets, and the S&P index, as the name implies, is 100% equity, though it does include MLPs.

Holdings review

The next diagram shows how the portfolio is selected.

As the sector allocation shows, Energy stocks play a leading role for this ETF.

The entire portfolio is linked to how well the economy does, something to keep in mind as the FOMC continues to risk pushing the US into a recession.

Top 20 holdings

DFRA own about 80 stocks, with the Top 20 comprising 38% of the portfolio's weight. Overall, the allocation is fairly weighted, with the bottom 20 stocks comprising 16% of the portfolio, a larger percentage than many equity ETFs. With no stock over 3%, concentration risk seems to be well controlled.

Distribution review

Payouts were on a steady climb until the most recent, which should give income investors a pause as to what DFRA really yields.

Seeking Alpha's analysis

Seeking Alpha grades and ranks each US ETF; here are the current values for DFRA.

Portfolio strategy

While DFRA is not consistently beating the US inflation rate, it has achieved its inflation-beating goal since inception. The next set of data compares DFRA against two other funds that include "Real Assets" in their name:

• Brookfield Real Assets Income Fund (RA), which I recently reviewed (article)
• Nuveen Real Asset Income & Growth Fund (JRI)

I also included the SPDR S&P 500 ETF (SPY) to see if investors did better just owning an standard index ETF: answer is no over this limited period.

So, while DFRA might be behind inflation since its start in December'21, it has done better than the other two real asset funds (both CEFs) and SPY. As for the CEFs, both are high-percentage fixed-income asset holders, so not a perfect apples-to-apples comparison to DFRA or SPY, but highlights the need to look beyond a fund's name and into what they actually invest in.

Final thought

While DFRA's start is good, that is only about sixteen months of results; longer existing real asset funds had good short returns too, but lag stocks in the long run. Fund's holdings appear highly correlated to the US economy so my best view at this point is a Hold rating.

I ‘m proud to have asked to be one of the original Seeking Alpha Contributors to the 11/21 launch of the Hoya Capital Income Builder Market Place.

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