Drinking From A Flamethrower

First up is the new Rex Bitcoin Corporate Treasury Convertible Bond ETF (BMAX). It owns convertible bonds of companies who issue the converts to buy Bitcoin. When I read about this, my computer melted. For now, there are very few bond holdings from only three issuers, Microstrategy (maybe its just called Strategy now, not sure where that name change stands), Mara Holdings and Riot Platforms. 

Dave Nadig found a potential tax problem in the fine print. Apparently it is not diversified enough to meet RIC, regulated investment company, standards which as Dave tells it would nullify the tax benefits associated with ETFs. I'm not sure if there is a process that would resolve this issue if/when it becomes more diversified. 

That being said I am of course fascinated by this. Michael Saylor (CEO of Strategy) acolytes think he's a genius who has found a way to print money via Bitcoin yield which is a term he made up while skeptics think it is all complete bullshit. Most of the converts from Strategy are zero coupon and the way it works out, it is either paying more for Bitcoin than it is worth or it is a way to lever up your Bitcoin exposure. Here's another explainer from Benzinga via Fidelity. 

Convertible bonds have a lot of equity beta as the chart shows. I threw in convertible arbitrage to show how different they are. I don't have a Bloomberg to chart out the Strategy converts but a Google search says they are relatively volatile compared to most of the convertible space. That sets the stage for BMAX to be like drinking from a flamethrower but either way, fascinating. 

Bloomberg reported that the current 10% drop for the broad market was the 7th fastest correction on record, taking only 16 trading days. The nature of fast declines is that they tend to snap back quickly but there is obviously no way to know whether this one will or not. The huge lift on Friday isn't indicative of this being over just yet. The tape would be a little more constructive if the declines stopped with more of a whimper, just petering out versus such a dramatic move up. The best example of this that I can think of to make the point was in the fall of 2008 when one day, the Dow fell 1000 points and then the next day it made it most of it back. Of course the bottom was still months away. 

A reader question served as a good prompt for not a quadrant portfolio but for a couple of different three fund portfolio ideas that might be off the beaten path a little bit.

SPMO is the Invesco S&P 500 Momentum ETF. Both portfolios have higher returns and lower standard deviations than PRPFX and VBAIX. In 2022 Portfolio 1 fell 6.27% versus a decline of 5.29% for PRPFX and 16.87% for VBAIX. Portfolio 2, the one with managed futures, was up 2.77%. It's managed futures so of course it backtests very well but there is misery in actually holding it, especially 25%. It's useful for modeling but too much for me in real life. Same with catastrophe bonds. The right type of storm comes along in such a way that catches fund managers offsides and that could be painful.

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