The Happy Fun Ball Of Investing Strategies

For some reason, the YieldMax Microstrategy Option Income ETF (MSTY) was trending on Twitter. MSTY is one of the crazy high yielding single stock covered call funds (actually synthetic long with options and then a call written against that combo). Curious, I looked and found this work from @HYDivys.

I can't vouch for the process or the accuracy but in terms of how we look at these things, check out the different between reinvesting MSTY's dividends and taking them as cash.

That MSTY can pay out forty whatever percent and be even pricewise is no simple task. Of course the underlying common is up a lot more in that time. YTD, MSTY is down 18% on a price basis and if a stock as volatile as MicroStrategy hits a rough patch, the YieldMax equivalent should be expected to get hit very hard. We've mentioned before about the YieldMax Tesla ETF going down so much it had to reverse split. All of these various derivative income funds tracking Microstrategy and Tesla take on serious CEO risk in a way that is different than the other products in the respective suites. Maybe Tim Cook or Jensen Huang will do stupid things in the future that hurts their stocks but the risk that their behavior blows up those stocks isn't really on the table. In the right circumstance, a small exposure to these (ex-TSLA and MSTR as far as I am concerned) trying to barbell a lot of income out of a small slice of the portfolio can make sense.  

Speaking of crazy high yielders or almost crazy high, check out the Sonic Shares Shipping Companies ETF (BOAT) which Yahoo has yielding 14%. I've never owned one of the shipping stock companies but the space always intrigued me. The yields historically have been crazy high and there's a lot of erosion. The intrigue for me is thinking they could be kind of like toll road stocks which is a space I used to blog about starting before the Financial Crisis. Constant traffic kicking off constant cash flow for share holders has some appeal. There are a handful of toll road stocks traded on foreign markets around the world. 

The only one I ever owned personally was Jiangsu Expressway (JEXYY). Part of the idea way back then was that more Chinese people would be getting cars and hitting the road sort of copying Americans. Longer term, it has had a mid-single digit yield but almost no CAGR. For a ten year run ending Jan 1, 2019 though it compounded at over 6% annually plus that dividend yield on top and a very low beta. To me, that was a great mix of attributes. At some point along the way I lost faith in China from the top down and sold it. I also owned the name for a couple of more risk tolerant clients. 

That's sort of what I'd hope the shippers would do but that is not the case, not even a little bit. They seem like they can flush down very hard out of the blue in a way that is worse than most other niches. 

That's a slow 90% decline into early 2022 from when it first listed and over the last ten months it has cut in half. Very difficult to hold

Jack Hough, writing for Barron's had a peculiarly thin article picking on managed futures. Maybe, managed futures deserves a lot of criticism and maybe it should have a warning label like Happy Fun Ball.

Warning: Pregnant women, the elderly, and children under 10 should avoid prolonged exposure to Happy Fun Ball. Caution: Happy Fun Ball may suddenly accelerate to dangerous speeds. Happy Fun Ball contains a liquid core, which, if exposed due to rupture, should not be touched, inhaled, or looked at. Do not use Happy Fun Ball on concrete. Discontinue use of Happy Fun Ball if any of the following occurs: itching, vertigo, dizziness, tingling in extremities, loss of balance or coordination, slurred speech, temporary blindness, profuse sweating, or heart palpitations. If Happy Fun Ball begins to smoke, get away immediately. Seek shelter and cover head. Happy Fun Ball may stick to certain types of skin. When not in use, Happy Fun Ball should be returned to its special container and kept under refrigeration. Failure to do so relieves the makers of Happy Fun Ball, Wacky Products Incorporated, and its parent company, Global Chemical Unlimited, of any and all liability.

But it seemed like Hough was more focused on being snarky than actually providing value to help understand the pros and the cons. To be clear, even though I am a huge believer in limited exposure, there are cons. 

Maybe I am overreacting but "What are the fees? The industry would rather you didn’t ask for now, but we’ll come to it" seems to lack professionalism. If you believe the fees are too high then don't use funds in the space. I am not defending the fees, an investor either perceives value or they don't but where brokerage account-accessible funds are concerned the fees aren't hidden and if the strategy is accessed through some other vehicle like a hedge fund, the assertion the fees are a secret is not true.

"How much do managed futures return?...Morningstar just under a year ago found that it had returned 4.8% a year, versus 5.9% for global stocks and 3.9% for global bonds." This is some first level thinking and belies a lack of understanding of a critical point. The value, if you believe there is value, is that the strategy could go up 10, 20, 30% in a year like 2022 which many funds did. There's no guarantee that will ever happen again but if you're looking back to try to develop the right expectations, lagging stocks by 100 or 150 basis points based on a long term average is not the correct way to look at it. The passage implies chugging  along a little behind equities when the reality is managed futures is likely to be way behind or way ahead because if you believe in the strategy, you believe it is a differentiated stream. 

One thing I learned though is that the iShares Managed Futures Active ETF (ISMF) started trading earlier this month. The literature seems to say it is not a replication strategy, based on the number of markets it trades, it looks like a full implementation. 

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.