A New Way To Look At Single Stock Covered Call Funds

One of the ReturnStacked guys Tweeted out a chart about combining bonds and merger arbitrage. They've had something with merger arbitrage in the hopper and maybe that's coming soon. There was a comment on the post from someone with the following slide but no mention of it yet on the ReturnStacked website.

Their other funds with bond exposure, offer AGG-like bond exposure and so for now, I would imagine this will have the same exposure. I built out the following to try to understand what this blend might do. 

Putting 40% in client holding MERIX instead of AGG or using leverage or mixing the two without leverage has offered a better result. Portfolio 3 has slightly better returns, slightly lower standard deviation and slightly higher Sharpe Ratio. Portfolio 3 also has the best Calmar Ratio but not the best Kurtosis number. 

I think the message here is the importance of knowing what to avoid, in this case AGG. I can't stress enough the importance of avoiding or being extremely underweight AGG-like fixed income exposure or any sort of bond duration. I'm a huge believer in arbitrage exposure, but obviously IRL I wouldn't put anywhere near 40% in it or in any single diversifier. 

YieldMax single stock covered call funds? Bob Elliott from Unlimited Funds has thoughts.

First to the "dividends." If characterized as dividends (ordinary income), then yes these are not tax efficient. I couldn't find on the website how the dividends are characterized. Derivative income funds tracking broad indexes like the S&P 500 tend to get more favorable tax treatment. FWIW, the internet thinks the YieldMax payouts are taxed as ordinary income. 

When Bob says they lag behind their respective underlying security he is correct but his comment might have triggered a different way to think about this. Using Bob's example, you are not buying Nvidia, you are buying a product that sells Nvidia volatility and that is different. 

Here's YieldMax Tesla (TSLY) versus the common stock price only.

And now total return.

The argument for TSLY looking anything like the common stock is non-existent. I've pretty much been saying this since they started trading, the more volatile ones, maybe all their funds, can't keep up with the ex-dividend reductions. TSLY is a product that sells Tesla volatility it is not a product that tracks Tesla common stock. Selling volatility is a valid strategy but as I always say it is tricky, with the YieldMax funds being a good example. Being intrigued by these, which I am, does not mean I've ever going to use one, I can't see that happening, but I wouldn't rule out someone finding utility with them and I will probably continue to keep tabs on them. 

Bloomberg hosted the ETFs in Depth Conference earlier this week. I don't know how much if any of it will be accessible online but some snippets have been Tweeted out including some detail about Nouriel Roubini's appearance to talk about the recently listed Atlas America ETF (USAF) that he manages. Part of the why for the fund is Roubini wanting to do more than write about his opinions, he wants to put his process to work, hence USAF. 

If you've heard Roubini anytime recently, he thinks bonds with duration should be avoided, like me, and USAF allocates away from duration. We took a closer look at USAF when it first listed. The backtest looked like a horizontal line tilting upward with a 5% CAGR.

Making his case at the Bloomberg event, Roubini cited geo-politics, climate issues, automation and a few other things that he says will contribute to a more inflationary environment which will be bad for the typical 60/40 portfolio. He's almost always bearish, that's his thing. If someone is always bearish, they're going to be correct occasionally. Is this one of those times where he will be correct? I have no idea but if you agree with him, I would say it makes sense to have some first responder defensives onboard whether that's tail risk, inverse or the type of long short that will go up when stocks drop. 

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