Lean Forward And Learn

This Tweet paints a great picture of craziness going on in markets being driven of course by external factors that are even crazier. 

Early this week, I referenced a comment by Meb Faber that essentially said, you did what you did to try to protect your portfolio, hopefully it's working but that this point you just need to sit back and relax. I expanded on it a little bit and noted it's not particularly relaxing but I would reiterate that this is a great time to lean forward and learn about some things in real time versus looking at a backtest from a benchmark event like the 2020 Pandemic Crash or 2022. I will say, I do think I'm pretty good at remembering cross asset dynamics from those previous events. 

The prompt is a thin article from Barron's about dividend stocks which reminded me of the people who say put it all in SCHD, the Schwab US Dividend ETF, and forget it.

The chart is from the highwater mark in mid-February. SYLD fared the worst, momentum was very close to market cap weighting and PKW which is buybacks and SCHD has been the best performer from that highwater mark. For one month, SCHD was just about the worst performer though and for five days, it was the worst by about 200 basis points. You can add 1% back in to SCHD for going ex-dividend on March 26 but that doesn't help the five day result. 

SCHD hasn't really provided crisis alpha on this go around but it did in 2020 and had a great 2022. All of the different factors have their moments in the sun. An idea from me, from a long time ago was if you want to use factor funds, you need to just stick with them. SCHD is clearly valid but it cannot be the best for all times, no factor can. 

Mid-morning on Thursday I sat in on a webinar for the Alpha Architect Tail Risk ETF (CAOS). We've look at this quite a few times. It seems to have solved the bleed issue but isn't necessarily that sensitive to broad market declines. 

Having a few things that go up on a huge down day in a portfolio that goes narrower than five or six holdings makes for good diversification. TAIL has some serious long term bleed issues. BTAL has compounded positively over the the last ten years but barely and SH too will of course erode when held long term. CAOS behaves differently. 

It has compounded at 7% per testfol.io and it has very little volatility. In watching it pretty closely for most of its existence as an ETF, I have described it before as a horizontal line that tilts upward that may or may not protect against a decline. It's track record is not perfect. 

The fund primarily invests in box spreads and then overlays long puts as well as selling put spreads. Success is contingent to some degree on what volatility does. As they acknowledged on the webinar, the mutual fund predecessor didn't really help in 2022 because of the path that the VIX took. So it could be a first responder defensive, or not. Either way, with the S&P 500 down 10% or so this year, CAOS is up 3%.

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