The Pacer Metaurus US Large Cap Dividend Multiplier 400 ETF (QDPL), via a Tweet thread from Corey Hoffstein, is an interesting fund with about $500 million in assets that fits right in with one of the discussions we have here regularly. Metaurus is an investment firm that appears to partner with Pacer on the strategy, there are other Pacer Metaurus funds too. Obviously the name Metaurus was the name of a battle in the second Punic War between Rome and Carthage. Just kidding, I Googled that.
The fund owns the S&P 500 and dividend futures, that's a thing, with the objective of tracking the S&P 500 on a price basis with 4x the index' distribution. We've talked about this some, but pretty superficially with the Overlay Large Cap Shares (OVL). That fund owns the S&P 500 and generates income selling put spreads. Unlike a covered call strategy, selling put spreads does not cap the upside. The negative trade off to what OVL does is that it can go down more than simple market cap weighted (MCW) exposure as was the case in 2022 when it was worse by about 400 basis points.
A little more specifically, QDPL has 89% in the S&P 500 and the rest dividend futures (cash to collateralize the futures).
I think part of why Corey Tweeted this is it looks like a variation on ReturnStacked ETFs and the graphic is also very similar (I think) to what is in ReturnStacked's marketing material. QDPL though is several years older, having started trading in August, 2021.
At a high level, being able to track the S&P 500 with a higher yield is interesting and not something that the older covered call funds can do. Some of the newer ones that sell 0dte options instead of monthly expirations seem to do a better job of staying closer. Not close maybe, but closer.
This captures total return of all three funds we're talking about. OVL outperformed in all three of the up years captured and lagged in 2022 like I said. QDPL lagged slightly in all three up years and went down 196 basis points less than VOO in 2022. The total return picture is not discouraging.
Price-only is a different picture. Part of the price-only lag is that QDPL only has 89% in the actual index. Forgetting everything else for a minute, the expectation should be that it will lag some just because of that fact. That's neither bad nor good, it's an expectation that I think is being set.
The combo of more yield with less upside is a valid exposure for how it can potentially blend with the other holdings and for the yield that can be added to the overall mix. If the 215 basis point lower standard deviation of QDPL is appealing enough to make the fund the core equity holding then I would suggest reinvesting a good portion of the dividend to not sacrifice too much of MCW's compounded growth. That supposes that the investor needs compounded growth.
I think there in an interesting way to think about QDPL as sort of a proxy for one aspect of carry. There is a capital efficiency aspect to the fund's payout. Looking at the history of the fund, there hasn't been a problem with the QDPL getting very close to 4x the dividend of the S&P 500. That part of it appears to work.
If a portfolio just held $10,000 in VOO, then in 2023 it would have taken in $162 in dividends. To get that same $162, an investor could have had just 24% of the dollars invested in QDPL to get the same carry. One form of carry is the return, yield or dividends or interest, irrespective of price movement. A stock pays $3/sh in dividends, regardless of whether it goes up 5% or down 5%, the $3 dividend is the carry.
Lets assume QDPL will continue to get 1/3 of VOO's price appreciation. A 24% weight then to QDPL might contribute 8% of of equity beta to the result. Playing this out hypothetically, the other 92% of equity beta could come from a 46% weighting to a 2x leveraged long fund, leaving room for a variation of return stacking, or creating portable alpha, that avoids multi-asset funds.
The 24/46 blend with the rest in cash was off a bit from exactly tracking VOO because the way it samples out with such a short test, the recovery off the 2022 low was a lot to overcome but it is still close, you can build this for yourself and decide what you think. And it is possible that the new Tradr leveraged long funds will work better in this capacity. I built out the rest of Portfolio 2 with alts we use for blogging purposes all the time. BTAL is a client and personal holding.
Portfolio 2, has plenty of equity beta, it outperformed VOO slightly and had lower standard deviation but again looked very much like the market. In 2022 out was down 500 basis points less than the S&P 500 though, so that is worth noting.
On Corey's thread, there was a conversation about how tax inefficient QDPL is because dividends are taxed at ordinary income rates. We don't talk a lot about taxes here but maybe we should talk a little bit more, at least on this one. I'm not a tax expert so I can only tell you how it is, not necessarily why it is. A lot of these options funds characterize the payouts differently than straight dividends.
The point of the exercise is to show that for anyone actually interested in portable alpha, I think there is a better way than using some of the more complex multi-asset funds. I think there might be a little more to them than appears, I don't mean that in a good way. Where we talk about investment products evolving, I think there is a path to pulling this off in a manner similar to what we did today, getting what amounts to the full equity effect from just a little less exposure to make room for an alt. While the fund providers in this space talk a lot about wanting to avoid tracking error, I'm not sold on that idea as a priority but if it is your priority, I don't think complex multi-asset funds are the way to get it done.
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.
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