Watch Out For Bull Market Geniuses

We've got a lot to cover today.

First up, have you ever heard the pejorative term bull market genius? Here's an example of a high yield fund that shuttered in 2023. It started many years ago with lights out, 5 star performance and then floundered from there before closing. I'm leaving the name out of it, here though is a comparison to the benchmark iShares fund with symbol HYG.

Bull market geniuses come along all the time which is worth remembering if you're ever tempted to chase some sort of heat like Cathie Wood a few years ago maybe. The opposite of bull market genius might be bear market genius but I would settle for bear market kind of smart guy, avoiding some of the full impact of a large drawdown. 

Jeff Ptak from Morningstar wrote an article dissing using 2x leveraged ETFs noting that so called volatility decay causes most of them to underperform the effect versus their respective reference securities meaning that a 2x Meta ETF won't return anywhere near twice the return of the underlying common stock and it might even lag the common stock on a nominal basis too. For ages, I've been saying that 2x S&P 500 ETFs are the only ones that are fairly close to tracking twice the S&P 500 more often than not.

Any time we have this conversation, I include a similar chart to the above and ask what you think, is that close enough? Putting 100% into the levered SSO is not something I think is smart. The potential application is something closer to portfolio three, where whatever percentage you'd put into an S&P 500 fund, put half that amount into SSO leaving cash left over for some sort of capital efficient strategy. In the times of zero percent interest rates, putting the leftover cash into T-bills would not have made up the 70 basis point difference versus SPY but now it would, but there is no guarantee that the previous 70 basis point lag would carry on in the future. It is interesting to me that portfolio 3 has a lower beta and lower volatility. 

I'm never going to do something like this with SSO but the recently listed Tradr 2x ETFs with longer reset periods of weekly, monthly and quarterly could prove out as a way to actually implement some version of this. They're only a few months old but so far, there's been nothing catastrophic that has happened. Here's maybe a more realistic way of what this could look like.

Portfolio 2 leverages down with 10% in cash while portfolio 3 leverages up with an alternative strategy ETF.

VolatilityShares launched two 100/100 ETFs that include Bitcoin. OOSB owns the S&P 500 and Bitcoin while OOQB owns the NASDAQ 100 and Bitcoin. I figured out a better way to articulate why I am not a big fan of these. If you listen to the ReturnStacked guys talk about their funds that do something very similar to OOSB and OOQB, they talk about needing to be able to dismiss line item risk. Ok but....my understanding of line item risk predates the ReturnStacked funds and pertains to a holding that appears to be doing poorly. Managed futures is an easy one to use as an example. 

Managed futures is a diversifier that fairly reliably has a negative correlation to stocks so if stocks are doing well, you might expect managed future to be doing poorly on a nominal basis although I would argue they are doing exactly what they should be doing, going the other way from stocks. 

The intended use is not putting an entire portfolio into RSSY or RSST. The idea is to put some portion of a portfolio into one or both funds and then the rest into a simpler stock fund as one example. By using RSSY and/or RSST you are getting some of your equity allocation from them. 

I'm sure they both track what they are supposed to track, that isn't my point, but the funds don't look like the stock sleeve of what they own. Fine, line item risk but tell me those two aren't tough to hold when you're looking to them to provide some of your equity exposure.

If you put 50% into SPY and 5% each into RSSY and RSST, to whatever extent they might be stock proxies, they've looked nothing like stocks which I believe makes them much harder to own versus stocks up 15% as a made up example while my stand alone managed futures fund is down 10%. I don't know why someone has to have the leverage but if you do, one of the Tradr ETFs paired with stand along alt funds might be better.

Ricky Cobb aka @Super70sSports on Twitter does a daily poll called Why Not where followers pick a favorite from four totally unrelated items. As an example Stairway To Heaven, Apple Jacks, Planet of The Apes, Moses Malone. It's a fun thing. In that spirit....Why Not...

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