ETF Slop

That phrase, ETF slop, was the focal point of an episode of the Rational Reminder podcast. It's a long one but the key point was to question whether newer ETFs actually benefit customers or not. Things like crazy high yielders and 2x single stock ETFs would be part of the ETF slop discussion. 

I'm willing to learn about any ETF or strategy, slop or not. If you read these posts regularly, you probably know what sorts of things I think of as being slop, like the two above, but I think it is time well spent trying to challenge my belief of what is slop or the other way around, study ETFs that maybe people would not consider slop but actually is.

There are some derivative income funds that offer utility without "yielding" 80% and I believe in the idea of capital efficiency even though I am very skeptical about bundling it into an ETF. There are quite a few levered equity/managed futures products either coming or recently listed. Simplify just listed one with symbol CTAP and I believe Man Financial and JP Morgan each have one coming if they're not out already. The capital efficient (levered) space is going to proliferate. 

I believe PIMCO is the first in the space with its Stocks PLUS Long Duration (PSLDX) which is 100% equities/100% long bonds. PIMCO just launched something similar in an ETF wrapper. SPLS looks like 100% equities/100% various PIMCO bond funds. 

Are any of these for the customer's benefit or are they just slop. It depends who you ask but I would encourage skepticism when assessing complex funds. 

Reading the description of SPLS, it almost reads like it is stocks plus carry. It certainly does not appear to be stocks plus duration. Carry can be several different things. It can refer to long backwardation/short contango, it can also refer to the income stream kicked off by a investment like a dividend from a stock or a coupon from a bond. RSSY from ReturnStacked does both.  

While no one suggests putting the entire equity allocation into RSSY, I have no idea why someone would want to own it. But that doesn't mean there isn't something to the idea of stocks plus some version of carry. Stretching beyond the typical definition of carry, the description of SPLS got me wondering about adding arbitrage on top of equities. SPLS seems to want to add fixed income yield on top of stocks without a lot of fixed income volatility and maybe that will work but arbitrage is usually a very low vol, absolute sort of return strategy.

Portfolio 3 might replicate what SPLS is trying to do but I believe SPLS will be active in owning different PIMCO fixed income fund but that model was down 35% in 2022. These are clearly no picnic where it comes to volatility and drawdowns. Portfolio 1 was surprisingly volatile and was down more than just the S&P 500 to varying degrees in 2002, 2008 and 2022. 

There's certainly no magic bullet with this idea but it's time I will continue to spend. 

Closing out, we knew these were coming at some point. GraniteShares filed for a single stock autocallable ETF on Robinhood. CAIE from Calamos has been wildly successful in terms of AUM and having a very high yield but without an eroding NAV. A very high level on how these work is they pay out very high yields unless there's some sort of very large, predetermined decline in the underlying security. CAIE yields 14%. I didn't see any mention of the yield in the GraniteShares filing but if you figure we are in a 4% world then one way or another, getting a 14% yield means you're taking a lot of risk. That's not a bad thing so long as you understand the risk being taken. A diversified portfolio includes holdings with various risk profiles, that really is not problematic when sized correctly. 

For now though, I do not have the risk to autocallables dialed in. I'll get there but for now, it's hard to figure that nothing bad happens with CAIE until the S&P 500 drops 40%.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. 

Hold On And Just Relax

We throw around the word ergodicity here quite a bit. The big idea is that the market will go up by some amount in the future either with you or without you so it might as well be with you along for the ride. The idea of never doing anything doesn't really fly as occasionally changes need to be made because of something different with the stock or fund or some sort of change in life circumstances where the asset allocation needs to change. 

The following is from a client who has been with me about 20 years. 

The column with the bigger numbers is the current value and the other column is the cost basis. A couple of the holdings are individual stocks and several are sector ETFs. The one in the middle that is flat is a fixed income ETF. This isn't a brag about picking what to own. One of them is a broad tech sector fund, there's no skill or even luck in choosing to own the tech sector. Anyone with a diversified portfolio has the tech sector in there one way or another. 

The client's account is a diversified portfolio so of course there are things in there that have not gone up anywhere near as much as the broad market.

The point is understanding the value of knowing when not to get in the way. Quite obviously none of them went up in a straight line. And while I did shave a couple down here in there to rebalance, this sort of thing is mostly a function of understanding ergodicity. 

A very specific memory for learning about this came from when I was working a Schwab in the 90's. I helped out with some issue on an account that had a little over $1 million which was less common back then, and about 80% of it was Dell Computer. He bought and never sold it and it made him wealthy. 

Whatever the best performing stock of the last 20 years is, there have been long stretches where it traded terribly. Microsoft in this century is up 1219% per testfol.io versus 657% for the S&P 500 yet it lagged badly from 2000-2014. Since its IPO, Microsoft is up 790,000% versus 6841% for the S&P 500.

While I doubt too many people would have held through 14 years of lagging, the point about ergodicity and doing less are still embedded in the result and certainly selling a stock based on a bad quarter is very short sighted. Your "favorite" stock or fund will at times lag badly. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. 

All Weather Portfolio Lab

Larry Swedroe had an interesting article at FA Mag about how to size alternatives. The interesting part was the talk of equal weighting various factors including kurtosis (a measure of tail risk) and standard deviation. Larry listed out more but I think those two cover a lot of ground. 

I started at Copilot and then also brought in Claude using Invesco Momentum (SPMO), SPDR Gold (GLD), Saba CEF ETF (CEFS), AQR Managed Futures (AQMIX), Convertible Arbitrage (ARBIX) Stoneridge Catastrophe Bonds (SHRIX). I ask both Copilot and Claude to "build a portfolio with the following funds by equal weighting standard deviation and kurtosis. Do the best you can if its not possible to do it exactly." Here are the weightings they each gave;

The next step was to ask each one to grade the concept for "all-weather robustness" because the results are interesting and the time is not so short as to be useless.

Copilot gave it an A- thinking it would benefit from more explicit inflation and deflation hedges than what I used. Claude was a little tougher, it gave a me a B- with a lot of color that led me to believe it thought Dalio's All-Weather was better. This made no sense to me so I pushed back, "the portfolio I asked you to build and then evaluate outperformed Dalio's all weather allocation by more that 400 bp compounded, had smaller drawdowns than Dalio's all weather allocation and a lower volatility. How do you figure that Dalio's all weather allocation is superior? That doesn't make sense to me, what am I missing?" 

The reply to that was very interesting. Claude said I was right to "call me out" and gave the following;

I think I see this sort of thing frequently where people overly rely on the "conventional wisdom" of bonds and get hung up on how things should work. Claude bumped the grade up to A. As a follow up, Claude asked how I backtested and I told it that I just used testfol.io, compared it a version from Copilot and Dalio and how similar its results were to Copilot. It replied to that saying that fund selection matters more than weightings which is interesting up to a point. 5% in everything and the rest all in ARBIX obviously would have been far inferior to the final result. 

One interesting item from the interaction with Copilot. I plugged in the symbols and then asked to figure the weightings. I made a typo on one of the funds. I typed AQRIX which is sort of risk parity instead of AQMIX which is managed futures. I told it I made a mistake and asked it to rerun with AQMIX which it did. It also told me that AQMIX made much more sense than AQRIX which I thought was funny. 

This was fun and productive. I don't really have the mathematical chops to have figured this myself and tweaking weightings over and over to get close would have taken a long time versus a couple of minutes of both AIs "thinking." 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Ok, But That's A Lot Of Bitcoin

From Twitter;

I am not familiar with this person but maybe their portfolio is interesting. I'm not sure how "broad based indexes" differs from just plain "indexes" in the third slot but I replicated his idea as follows

I used materials and staples for the sectors. If he allocates that much to the Mag 7 and that much to indexes then adding more tech would just compound the duplication. I pretty much equal weighted the Mag 7 names and I used managed futures for the "other" category. I used BTCFX instead of the Grayscale product because going back too far with Bitcoin would yield some results that I don't think are repeatable. 

The results are pretty good. The growth rate is better than the S&P 500 and while the volatility checks in a little lower per testfol.io, Portfoliovisualizer shows the profiled portfolio with a higher standard deviation. The drawdowns for the portfolio have usually been larger than for the S&P 500. With that much in Bitcoin, I am surprised the volatility isn't higher. 

Interesting that the large weighting to SCHD didn't spare the portfolio in 2022 but it and Bitcoin probably held it back in 2025.

The allocation to Bitcoin is way too large for me unless he started tiny and it grew into that amount and he's comfortable letting it blow up. That would be harnessing the asymmetry and I think that is ok but I don't know if that is the case. Whatever Mag 7 means to him and owning indexes, presumably the S&P 500 and maybe the NASDAQ 100, seems like a lot of overlap that I think can be captured with far fewer holdings. SCHD might be a good offset to all the tech, likewise the cash exposure and while I don't know what he uses for "other" the managed futures we used is probably helping too.

Fun exercise, short post.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Don't Give Up On Dividend ETFs

Just some very quick hits today. I lost most of my Saturday, after our monthly fire board meeting, we had to put snow chains on one of the trucks and we discovered a boulder, seriously a boulder, between the dually on the passenger side that turned into a lengthy project. We deflated the outer tire and then used a hammer chisel (may not be the precise name) to break up the rock. It was granite and just the chiseling took 40 minutes. I've got a bunch a tabs open so this is the best way to catch up. 

Barron's wrote about dividend ETFs including SCHD for anyone wanting to be more defensive in 2026. SCHD is an excellent fund. Since inception its total return has compounded at 12.5% and its price only has compounded at 9% versus 15% for the S&P 500. Those are outstanding numbers and of course the drawdown in 2022 was much smaller than the S&P 500. 

The last three full years though, would you be impatient and throw in the towel? Yesterday's post was titled whatever you believe in will not always be optimal. SCHD is no less valid than its ever been but anything you believe in will at times lag. This example is the epitome of the patience required to succeed in markets. 

A quick snippet from a different Barron's article. "So, a 3% fed-funds rate could coexist with a 6.75% 30-year bond. Such a backup in yields would result in a 30% price plunge." Thirty percent?!? The compensation for the risk taken for intermediate and longer bonds at these levels is inadequate. I have no idea if the 30 year can ever get to 6.75% but at that level it starts to get into the lower end of equity returns which starts to become interesting/attractive. 

Panoptica which is kind of like Grantland, wrote about the 4% rule. To be blunt, I don't actually understand what the main point of the article was. The 4% rule is out of date because of some undefined signal says it is? But in the part of the conversation about sequence of return risk something that I've seen more than a couple of times with newly retired clients is they have their first two or three years of retirement somehow covered so they don't have to start withdrawing right away. One client got a separation package after some sort of corporate transaction. Another actually consulted part time for a while. I say "actually" because I think that gets written about far more often than it works out. 

One way to mitigate sequence of return risk is to set aside cash but another one is to figure out how to get by without pulling from an account if your retirement date turns out to be unlucky timing. Figuring out how to get by in this context obviously takes a lot of planning and a little bit of good luck.

The last one is again from Barron's about the withering away of the FIRE movement. The take here on FIRE has always been about pursuing independence as opposed to giving up work. The extreme of doing nothing at 35 seems wholly unfulfilling. Also not talked about enough elsewhere is undercutting your own Social Security if you really stop work at 35. Sixty years is an awfully long time to rely on a portfolio and nothing else, remember no Social Security. Or at least a tiny amount of Social Security. 

An observation I mentioned about FIRE very early in its existence is younger people not understanding what it means to be 50. It's not unreasonable for someone who is 25 or 30 to believe that 50 is very old, too old to enjoy "what little time is left." 50 can be old of course but doesn't have to be. Being 50 (or 60), having a little money in the bank and still being able to get it done can be a great time in our lives. The combination of health and experience is fantastic but I appreciate can be difficult to understand in our twenties.  

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Whatever Strategy You Believe In Will Not Always Be Optimal

Eric Balchunas Tweeted out the following.

Meb Faber who runs Cambria replied "I doubt this will happen again in my career, but at least for today, cheers!" While it was probably just an off the cuff reaction there is a useful point of understanding embedded in the comment.

The exposure that GVAL provides is certainly a valid way to go, no question, but it is not always going to be optimal. Whatever strategy you believe in will not always be optimal which is just fine.

Yes GVAL has lagged ACWX but in 13 full and partial years in the backtest, per Testfol.io GVAL has been the better performer six times which is almost a coin flip. If you look for yourself year to year, although they are both proxies for foreign equities, GVAL does differentiate quite a bit, in four out of 13 years, the spread between GVAL and ACWX was more than 1500 basis points. Differentiation is a positive attribute in my opinion but it can be difficult to endure. 

Short one, a lot going on...even on a Friday night!

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

All Weather Fixed Income Portfolio?

Lately, I've been getting emails promoting the Prospera Income ETF (THRV) which started trading on Sept 30, 2025. The big idea is that it blends an income strategy with a small options overlay for protection to create an all weather income fund. The options strategy doesn't appear to be about enhancing the income. 

Using closed end funds (CEFs) is always interesting. It can be a tricky niche and anytime I see a fund using them, I appreciate the effort being put in. The results may be great or poor, I have no idea but someone is trying to do some work. 

The fund benchmarks to an equal weight mix of SPDR High Dividend ETF (SPYD). iShares Aggregate (AGG) and iShares High Yield (HYG). Backtesting THRV probably isn't productive, it's only three months old and being actively managed, there's no way to know what they would have done previously but we can play around with the pie chart in a backtest and see if there's anything to take from their process. 

I built out the following to replicate the pie chart.

THRV might be constrained to not use mutual funds but we are not. FLOT is a client holding. CEFS is an ETF that owns closed end funds. SHRIX yields 13% per Yahoo Finance, SRLN yields 7.5%, FLOT at 4.8%, CEFS is just under 7% and ETV which I am using for the "equity" sleeve yields 8%. The literature for THRV says it yields 7.5%.

Testfo.io's output didn't look right so I ran it through Portfoliovisualizer instead.

By using CEFS, we outsourced the CEF exposure for a big swath of complexity. Most of the holdings are complex strategies so that is a drawback but the result has a whopper of a yield and a relatively smooth ride. The replication might be a little heavy on credit risk, senior loans and CEFs probably have some overlap there in terms of risk taken. In real life I'd never consider anything close to 20% in single funds, I'd want to diversify more than that. 

GlobalX listed a suite of what appears to be Bulletshares-like products for zero coupon bonds. 

In each fund, all of the issues mature in the year of the name of the fund. for example, in ZCBF, the issues in that fund mature at different points in 2034. These aren't laddered products, they are products to build your own ladder. 

I like that the target maturity/ladder space is evolving. This seems like one of several spaces where fund companies are trying to move toward a more useful solution. I'll have to study these some before really saying anything about them beyond that pound for pound, zeros are very volatile but I am intrigued enough to want to try to learn more. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.