Endowment Style & Selling Volatility

Meb Faber hosted a webinar to support what his firm, Cambria, is doing with 351 exchanges and the upcoming Cambria Endowment ETF (ENDW). 

351's are kind of like 1031 exchanges in real estate. If you have a taxable portfolio of at least $1 million where selling or rebalancing would hit very hard tax-wise, you can exchange your portfolio for shares in a 351 ETF. You'd have the same cost basis but you'd have better diversification. Go to the Cambria website if you want to learn more. 

Moving to ENDW, we just mentioned this the other day, really just acknowledged that it is coming soon but the webinar added some color. ENDW is going to be leveraged, offering 130-150% of exposure. It's going to use futures to add the leverage but in listening to the webinar and the extent to which it is going to avoid domestic market cap weighted equities, I'm not clear how it will actually leverage up. For example, the fund is going to have exposure to shareholder yield ETFs from Cambria. That does differentiate from market cap weighting alright but I don't think there is a futures market for it unless a bank is going to create some sort of derivative for the effect. That's ok, we'll know more in April.

Here was an interesting slide that gives an idea of ENDW's likely allocation. The fund is expected to have the leveraged version. 

I built out the unleveraged and leveraged version with the following funds, splitting equities evenly between ACWX and SYLD and splitting fixed income evenly between TFLO and SRLN. Based on Cambria's other multi-asset funds, ENDW will probably have fixed income duration but that's a space I will continue to avoid.

The results.

I threw in 50/50 Cambria Global Asset Allocation ETF (GAA)/Cambria Trinity ETF (TRTY) because Meb talked about those two quite a bit as being core type funds, each one maybe even for use as a single fund portfolio. 

The returns of both the unleveraged and leveraged versions are good but there is a good bit of volatility. It's not clear that the volatility make the returns that attractive. We build portfolios here all the time with similar return profiles but with less volatility. Both the Calmar Ratio and kurtosis for both leave something to be desired. Obviously the actual holdings will be different, my attempts tried to be simpler than what ENDW will probably be but I also tried to be true to the equity exposures Meb talked about.

More important than all of that fun endowment stuff is a point made repeatedly during the webinar. The returns of market cap weighted domestic stocks over the last 15 years have been fantastic. They've been remarkably high in a way that could be very difficult to continue on. The returns are not unprecedented, the 1990's were similar as one example but then when it ends, the "backside of the mountain" as Meb put it can be pretty rough. Most of us of course lived through that from 2000 through to 2009. The S&P 500 hit 1500 in March 2000, then again in the fall of 2007 and then the third and final time in January, 2013. That's a long time for a broad based index to not make any progress. 

There were places to make money during that run, most notably foreign stocks and equal weight S&P 500, that ETF came out in 2003 and had very good years until 2008. It then had a huge snap back year in 2009. 

This part of conversation drifted into how things like Permanent Portfolio, Risk Parity and some other portfolios that differ from 60% SPY/40% AGG and which we explore here could rotate back into favor.

And a quick follow up that I meant to include yesterday about GraniteShares YieldBoost SPY ETF (YSPY) that we profiled on Wednesday. 

YSPY sells put spreads on SPXL which is the Direxion 3x Long S&P 500. The YSPY fund page still shows the short leg of the spread as having a strike price of $171.50 so this all makes for a great test right out of the blocks for trying to understand how YSPY will trade. Where selling puts is a bullish strategy, YSPY going down a similar amount as SPY isn't the worst possible outcome but the volume was thin and down 1.86% is far from the best possible outcome. From my perspective, there's no reason not to follow this and try to learn. Selling volatility is a valid strategy generally but you really have to be selective trying to do it in a fund wrapper. And since we mentioned it in the YSPY post, WDTE which also sells puts on the S&P 500 was down 1.41% on Thursday. 

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