"Bear Market Cumulative Returns"

Bill Hester from Hussman Funds had a lengthy write up on diversifiers that track what he called Bear Market Cumulative Returns (BMCR). This wasn't a discussion about alternative strategies but there were a couple of fantastic charts.

This is helpful for creating some understanding of tendencies of factors. One very interesting tidbit from the table is that small caps are all over the place. The factors that drift up toward the top of table seem fairly consistent which is useful information. A portfolio that goes narrower than an S&P 500 500 or total market fund probably has some exposure to low vol, dividends and the others. Yes the broad based funds do too but you don't feel the effect that way. Yahoo shows the S&P 500 down 6% YTD (not sure that is right but that's ok) while the Schwab US Dividend Equity Fund (SCHD) is up 1.7% for example. 

We talk about this at the sector level too. Some sectors tend to go up more on the way up and so they tend to go down more on the way down. Something like staples usually goes up less and down less. YTD, the Staples Sector SPDR (XLP) is up 1.6% per Yahoo while the Tech Sector SPDR (XLK) is down 10.6%.

How reliable do you think these various exposures are? I think they're reasonably reliable but every now and then, they won't "work," kind how managed futures has struggled through most of the current event. We have written about managed futures I don't know how many times, saying repeatedly not go heavy in case they somehow don't "work" during some random market event and that's what has happened so far on this go around. That might start to change as we mentioned the other day if the current downtrend in equities continues. 

Now for a little more fun. First this Tweet from Eric Balchunas;

The initial read from ETF Twitter was that ANIM would own five 2x single stock ETFs and that WILD would leverage up from there essentially being a 4x fund. Later on, the crowd drifted toward ANIM owning the five underlying stocks, not 2x funds of those stocks but that WILD would own the 2x ETFs making it a slightly more diversified 2x fund than just a single stock 2x fund.

These are a lot of fun to look at and play around with conceptually but getting caught on the wrong side of one of these would be painful.

And checking in on the GraniteShares YieldBoost SPY ETF (YSPY) that sells put spreads on a levered S&P 500 ETF;

Yes, that is a rough start, clearly, but interestingly the math checks out. YSPY sells put spreads on a 3x fund. Oddly, the fund page no longer mentioned targeting a 2x outcome, it appears to now say 3x. When I spoke to them they implied it was some sort of delta/gamma effect where what they were doing would yield a result that looked like 2x. Well, I'm not sure what to make of that but it is still interesting to see whether this will turn out to be a great fund or a catastrophe. A little bigger picture, selling volatility is a valid strategy but might be tricky to do in a fund. 

Lastly, from an old blog post by Bob Elliott of Unlimited Funds that runs the HFND ETF, he looked at an allocation of 75% "diversified alpha" and 25% managed futures as a diversifying strategy. I took what he was saying to be expressed as follows in a portfolio.

And compared to just VBAIX in Portfolio 2

The longer term result is interesting. Portfolio 1 lagged by quite a bit in 2019 and then even more in 2020. Then it made it back in 2022 when it was only down 1.1%. With a little more effort, this could probably be molded into something with a more robust outcome than the MBXIX/AQMIX/VBAIX we used for a first look.

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.