Dissecting Derivative Income

A colleague asked about the iShares 20+ Year Treasury Bond Buywrite Strategy ETF (TLTW) which we've looked at a couple of times although it has been a while. TLTW owns TLT and sells covered calls. Yahoo shows the yield to be 10% so it's high yielding alright but not a crazy high yielder like some of the YieldMax or GraniteShares. 

I spelled it out for him in terms of TLT pretty much having equity volatility without equity upside, the covered calls capping whatever upside there might be which you can see a great example of in the chart and that there are plenty of high yielders that either have a shot of going up or at least mostly keeping with the distributions. TLTW is not one that has come anywhere close to keeping up with the distributions.

The area inside the green circle shows TLT going up nicely but TLTW doesn't get the benefit of that lift. I threw in BRW which is a closed end fund of funds that is not in my ownership universe but one we've used for blogging purposes. It yields 12% per Yahoo and of course may not go up but it does offer the opportunity to go up that I don't believe is available with TLTW and BRW has track record for trading sideways meaning it has often kept up with the distributions. Keeping up with the distributions for something that yields 8-12% is a pretty good outcome. 

The next chart is interesting.

It's a 20 year chart of the SPDR S&P 500 ETF compared to a stock that is not in the tech sector and is not Amazon. Other than that it doesn't matter which company it is. The point to be made here is one of ergodicity. There have been painful declines along the way, clearly, but it's never been a stock in jeopardy of going under. The declines mostly correspond to declines in the broad market, not terrible news from the company. Terrible news doesn't mean an earnings miss, there probably have been quite a few over the years, I mean something serious to worry about like a drug becoming obsolete or like Kodak film no longer being needed. Other than shaving down if the position got too big, there would have been no reason to sell the name even in that awful looking decline in 2022. 

I saw a Tweet promoting the Return Stacked Bonds & Managed Futures ETF (RSBT). Similar to yesterday looking at equities plus managed futures, this is a corresponding study using RSBT compared to 100% AGG paired with the same four managed futures funds that we used to study RSST. 

We spend a lot of time trying to dissect complexity, trying to assess the value of various funds and/or strategies. Some work well and some really don't work at all. No one suggests putting 100% into RSBT but the study is apples to apples and as we've been saying, the short position in CASHX speaks to the point of the cost to finance the position even if not to the exact basis point. 

It's not like this backtest was skewed by an outlier year even. RSBT has been the worst of the five in each year available to study.

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