Closed End Complexity

On Tuesday I sat in on a presentation about the Absolute CEF Opportunities Fund (ACEFX). I've known about closed end funds (CEFs) since the late 80's reading about them regularly in Barron's. Barron's still gives them some attention. It's a quirky space. There are only 455 CEFs. The quirk is that unlike mutual funds or ETFs, the number of shares is fixed (for the most part) so the market price can drift above or below the net asset value (NAV) of the fund's holdings. 

Back then, Thomas Herzfeld was the axe in the space and these days I think Boaz Weinstein from Saba Capital would have that title but there are a few other activists too and other types of managers including ACEFX. The managers of ACEFX have only been on the fund for a year and they inherited a dreadful track record so I have no idea whether the fund is a good one or not but the presentation was interesting.

Individual investors, they said, tend to buy CEFs for the yield. CEFs use leverage which magnifies the yield as well as the size of the drawdowns. Institutional investors are trying to capture a bunch of other types of trade beyond just sitting on them for the yield.

ACEFX listed out the various trades it looks for under its hood as follows.

Event Driven

• Rights offering-often leads to tradeable price movement
• Liquidity at NAV-occasionally funds close or offer to buy shares back at NAV
• Fund mergers-this would typically occur within the same fund family
• Large dividend changes-this too can lead to tradeable price movement

Relative Value

• Deep value names with a catalyst
• Volatile premium/discount valuations
• Sector funds (e.g., healthcare, master limited partnerships (“MLPs”), real estate investment trusts (“REITs”)
• CEFs trading at premiums, both long and short
• Relative dividend yield discounts versus peers
• Tax loss selling and the “January Effect” 

I thought the first CEF was Adams Express (ADX) which started in 1929 and has since changed its name to Adams Diversified Equity Fund. It turns out CEFs have been around since the 1800's. I really get a kick out the fact that something presumably so basic has evolved into a series of very complex strategies. 

I don't have much to add here, it's just a fun part of the market to look at. 

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.

Rebooting From Burnout

William Bernstein and Charlies McQuarrie posted a strange article to Advisor Perspectives saying that people do not spend less when they retire. They fixate on 30% as the spending cut that doesn't happen. 

Maybe it's me but I think the focus is more about not needing to fully replace income in retirement. I don't think people talk about flipping a switch to spending 30% less. They attribute part of the myth to mortgages, FICA and kids' tuition going away. They rightly say this doesn't all happen at once when we're 64 years and 11 months. 

Yes, FICA goes away as soon as earned income stops, that part is not myth. Can you square up being mortgage free before you retire? I could see where some folks would peg their retirement date to paying off the mortgage like maybe the mortgage will be paid off at 65 years and 2 months and so someone retires at 65 years an 8 months to war chest their first few months of retirement. The way the world has evolved, even if a new retiree is long past paying tuition bills, adult offspring could still be on the payroll (crude way to put it, I know). 

We've talked plenty of times about taking a bottoms up approach to working through expected spending needs and then revisiting periodically. Even if you're 70, have been successfully retired for 7 or 8 years I would do this. Is there visibility for something in your spending picture to change? The context could be favorable or negative. How resilient is your plan to some sort of negative and expensive surprise? 

I say it constantly here but I think the key to resiliency in retirement is having income streams beyond an investment portfolio and fallbacks and the planning for this needs to start early. I don't think I will retire from what I do but at some old age my practice will be more of a small income stream similar to how my Del Webb Foundation gig is shaping up, both of which by then would probably be smaller than the rental income from our Airbnb. 

As with a lot of things in life, the more you put into it (retirement planning) the more you will get out of it. 

Michael Kitces and Carl Richards looked at advisor burnout. If you're an advisor reading this and you have truly hung your own shingle that includes operating the business and doing compliance then yeah I could see burning out on that. I outsource all that thankfully but even the little bit of compliance reporting that we have to do is no fun so I get that. As far as the advisor and portfolio functions, I have nothing for any advisor who doesn't enjoy that part of it. Look at this excerpt from Matt Levine;

My theory of exchange-traded funds is that they are an easy way to package trades. Anyone — any broker or financial adviser or individual investor — can think up a trade, and there are infinite possibilities. “Buy Tesla stock” is a trade, and “borrow money to buy more Tesla stock” is a different trade, and “buy Tesla stock and also buy Ford stock” is a third trade, and “buy Tesla stock and short an equal dollar amount of Ford stock” is yet another trade, and “buy Tesla stock and also buy some Dogecoin,” and “buy Tesla stock and sell call options on Tesla,” and “buy Tesla stock and also put options on Tesla,” and “buy Tesla stock and buy puts and sell calls,” and “buy Tesla stock and buy puts and sell calls but with different strike prices,” and “buy Tesla stock on Mondays and sell it on Wednesdays,” and so on, a tedious infinite list of potential trades just involving Tesla.

That is a doozy of a paragraph but it isolates why the work is so much fun, you have the opportunity to always learn new things and not captured in that passage is the opportunity to help people, I mean really help someone figure something important out. No matter how long you work in the field, those two opportunities will always exist.  

To help with burnout, or as the guys said it might just be boredom, more generally, I would say regular, vigorous exercise can help as well as some sort activity that requires completely different thought processes. For me that is volunteer firefighting but there are infinite possibilities on this front to turn off being whatever your day job profession and then turn on your volunteer role. Both exercise and volunteering offer regular rebooting which I think can help with burnout. 

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.

Retirement At 58?

Let's start with Ben Steverman from Bloomberg doing some personal calculus on whether to buy a house or rent. As I read the article, it seems like Steverman might be in his early 40's, has never purchased a house (or condo) and has mixed feelings about it. I don't sense regret, I think he is genuinely unsure, leaning toward being ok with not having bought up to this point. 

It was of course always a no brainer to buy a house if possible but along the way, the no brainer argument eroded some. In many places now, if you run the numbers on buying versus renting, renting appears to be cheaper. 

Part of the argument against homeownership is that the total costs far exceed the price of the house. With a 30 year mortgage, the total interest paid over the loan term will exceed the price of the house. Invariably, there will be things that need to be fixed and things that need to be upgraded or replaced. There is of course property tax and insurance. Renters don't need to directly incur any of those costs. 

Rent will go up at some rate that is probably close to the rate of price inflation whereas a mortgage payment stays the same (in terms of principal and interest). In 2005, the US median home price was $232,000 and the prevailing 30 year mortgage rate was 5.8%. Assuming 20% down back then, the homeowner's payment would be $1322/mo. The median home price today is $410,000. Google says that the median rent in 2005 was $694 and now it is $1700.

I'm not big on everyone should either way, but this is a blog and I share opinions. A non-religious sort of parable that I think fits; a middle-aged guy tells a friend he's interested in learning Italian but he thinks it'll take five years before he could actually be proficient. The friend tells him that the five years are going to go by no matter what. 

Someone who made a decision about buying versus renting in 2005, well the 20 years went by and using the 2005 example, the mortgage balance is down to $96,000 so the equity is $314,000 that they wouldn't have accrued from renting. There's an argument about renting allowing people to save/invest more (extra) money which I have trouble believing this is something that people do, somehow investing extra money. Please leave a comment if you are on the other side of that idea. 

That equity is optionality. Regardless of the dollar and cents of the buy/rent decision 20 years ago, the homeowner has $314,000 or optionality on top of what is hopefully a healthy 401k balance. 

Now to the affordability problem in big cities which Allison Schrager touched on with her own personal account from about 20 years ago coincidentally when she was faced with talking her way out of moving from New York City to Austin. Her article was more about whether large cities are too expensive for people irrespective of buying a house or condo. 

I have no idea whether the "era of the big city might be over" as she asserts in the title as she admits that she might have been better off moving to Austin 20 years ago. I've never been to Austin, but looking at a couple of cost metrics, it appears to be a second tier city in terms of cost of living (not making a value judgement, this is simply dollars and cents). It has a big population but the average home price is just a fraction of places like Boston or the Bay Area. 

As someone who has lived in very small city for most of my adult life, there are advantages and disadvantages. It used to be very cheap here to buy a house but that is no more. The way the internet has evolved it has become much easier to make a living remotely than when we got here in 2002. Our population growth has sort of overwhelmed the road system, there is now a lot of traffic in Prescott and Prescott Valley but it's nothing like a truly big city. The population of our county is only 250,000 but it's heavily concentrated in the Prescott area. 

Even if not true of Prescott anymore, there are plenty of medium and smaller cities where homeownership is far more accessible. If someone can enjoy a smaller and less expensive city and make a good living thanks to remote working, buying versus renting might be less of a dilemma. Places like Chattanooga and Tucson often show up favorably on lists of desirable places to live and average home prices in both places are in the $300's. Where are two, there must be others.

Now, connecting all that to a Tweet from Unusual Whales about a CNBC survey that concluded "retirement age should be 58." The comments were fantastic, ranging from very smart to very dumb, it should be easy to retire (financially) to people believing they will never have enough, retirement should be earlier to we should never retire for several different reasons, there were assumptions about whether Social Security would or would not start at that age and of course comments about loving what you do being akin to already being retired. 

Again, no everyone should from me but for people who do want to retire, the optionality created by building up home equity over the course of 20 or 30 years makes whatever they have in mind easier. Maybe the best plan for someone is to stay put. Ok, that mortgage will be paid off at some point dropping their cost of living. 

My comments about Chattanooga and Tucson create a path to downsizing working out pretty well, financially. To Schrager and working in NYC. Someone working there in 2005 might have bought in Hoboken, NJ and paid a median price of about $300,000 back then. Maybe that was a bit of a financial stretch and now in 2025 they don't have a ton saved in 401ks but they have some. If this person is now of retirement age, they could sell for a median price of $920,000, downsize to Chattanooga for $337,000 and have a good bit left over to fund retirement. 

If this person had been renting in Hoboken the whole time, they'd have started paying $822 in 2005, they'd now be paying $3800 and not have all that retirement optionality with that equity. 

Weigh in if you disagree but I think the discussion between renting versus buying is more of a shorter term issue, appearing to be cheaper...for now. A gap in my thinking would be people who expect to move frequently but I don't know the prevalence of that cohort, is that common? If someone expects to move in five years then buying a house/condo may not make sense but I'm hard pressed to see where someone is better off 20 years later by having decided to rent. 

All the numbers I pulled for this post were from Google Gemini and the mortgage calculations were from mortgagecalculator.org. That was a fun one!

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.

My Dude, No

The Barron's cover story was about the potential for private equity and private credit to be available in 401k plans. If you have read anything about this story, it probably included something to the effect of this being good for the asset managers and how they've been trying to get into this market for a while.

I think is a monumentally bad idea. The odds of this ending badly are very high. Contradiction alert, they probably should be available in plans, I am not a fan being denied access by someone else but it is up to us figure out they are looking for bagholders and to have the sense to avoid putting our 401k money into private equity. One of the comments on the Barron's article said, "if it's such a good deal, why are they offering it to you?" That was pretty much what I was taught about IPOs when I first started at Lehman Brothers in 1989. 

Does anyone think the asset managers have an altruistic ambition to level the playing field for the individual investor? My dude, no. If you gots to have it, skip one contribution and put that money into one of the asset managers benefitting from the fee income.

After looking at the results of a couple of the ReturnStacked ETFs, a reader asked about the Return Stacked Global Stocks & Bonds ETF (RSSB). 

I think the replication is pretty accurate and being short CASHX should address most of the cost of financing. The results are within a few basis points of being identical. For someone interest in portable alpha and wanting to take on a little duration in a treasury portfolio, it seems to work. 

Sorry, short post today.

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.

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.

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.

The Risk Of Too Much In Fixed Income

Vanguard maintains what it calls its time varying asset allocation portfolio, it's a model ETF portfolio. The news from last month is that the model is allocating 70% to bonds versus their 60/40 benchmark. 

Looking forward, Vanguard expects equities to underperform due to what they view as a "low equity risk premium." They could turn out to be correct about equities not doing as well as they usually do. If you click on the link, it will say they ten year expectations for bond returns are 5.5% versus 5.2% for equities. 

Portfolio 1 uses mostly Vanguard funds except for AGG to replicate their idea. Portfolio 2 is fixed income proxies that we talk about all the time and Portfolio 3 is the same as Portfolio 2 but replaces their equity suggestions with the S&P 500.

The numbers on what they are suggesting going forward have been pretty brutal but they could be right. There are really some enormous bets in their portfolio though. Value and small cap have lagged so badly for so long that picking them now as the time they will do well or at least better than large cap is really just a guess. There are theories about small cap lagging related to the prevalence of IPOs starting out as large cap stocks, bypassing the small and mid cap indexes which in the past were a source of a good amount of those indexes' growth. Small cap indexes no longer get the benefit of those stocks. 

Small caps used to lead early cycle and that hasn't happened the way it used to. There used to be fairly predictable points in the economic cycle, related in part to yield curve dynamics, where value tended to outperform growth and again, that's not working in the same manner. 

With that fixed income allocation, Vanguard is counting on rates going down some to hit that 5.5% growth assumption. Again, they might turn out to be correct but relying on getting that kind of call on interest rates correct is a tough way to make a living. 

We pretty much go over this a couple of times a week about there being plenty of ways to sub in other the attributes of what I think people want from fixed income without the volatility and the need to be right about interest rates that goes with the funds Vanguard has chosen. Of course the funds we talk about here have their own risks as indicated by the past results but the impact of something going seriously wrong with one of them can be mitigated by proper sizing of exposures that are vulnerable to different things. 

If someone really wanted to implement Vanguard's 30/70 portfolio, they could include some short dated individual issues (avoids interest rate risk) and add in a couple more funds to get the weightings to less than the 10% I simplistically put together. And while I am not sure I would rely on value and small cap equities, I would blend in some foreign exposure with the S&P 500.

Simplify filed for an ETF that will leverage up to own 100% US equities and 100% managed futures in a similar (identical?) manner as ReturnStacked US Stocks US Stocks & Managed Futures ETF (RSST). 

No one has suggested 100% into RSST but this comparison supports the point of why I have been so skeptical. The other four comparisons are short CASHX so there is something of an embedded financing cost as we looked at the other day even if it is not precise. 

Doing the same combo with KMLM did worse than RSST and I should note that client and personal holding BLNDX has had a very rough go for a while. 

If you read content from ReturnStacked, it's great stuff if you don't, they often talk about 20% allocations to managed futures. This paper dated June 25th looks at building a portfolio with 30% managed futures of course stacking the exposure on top of 60/40. Presumably the way to do this is with 30% in a plain vanilla equity index fund, 40% in a plan vanilla bond fund and 30% in RSST. 

Portfolio 1 is taken from the paper with 30% VOO, 40% AGG and 30% RSST so it is 60/40 with 30% managed futures added on top. The other four are 60% VOO, 40% AGG, 30% the managed futures fund named in the title of the portfolio and -30% in CASHX which again should account for most of the financing cost. 

BLNDX, rough as it has been for a while, is a low single digit weighting. When it is working which has been far more often than not, a little goes a long way. Great backtests notwithstanding, 20%, let alone 30%, in managed futures doesn't make a lick of sense to me.

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.

Come For The Inflation Protection, Stay For The Absolute Return

A couple of months ago we gave a quick mention to the new WisdomTree Inflation Plus Fund (WTIP). Two months isn't really enough time to draw a conclusion but I thought it would be fun to circle back for a closer look at the idea even if not the fund yet. WTIP uses leverage to blend together a lot of TIPS, long/short commodities and a little bit in crypto. The allocations I found in June are a little different than what is in there now, they obviously must have some leeway.

The positions show 67% in TIPS, 28% long commodities, 26% short commodities, 7% cash and 4% in crypto. It will always be long gold and silver and right now "precious metals" show long 8.85%. Using the current allocation, I built the following. 

STIP is short dated TIPS which is a pure application of the WTIP idea but STIP compounded almost identically to inflation in the period backtested due primarily to a 5% decline in 2022 when inflation was positive by a little over 2%. So STIP provided no real, positive return. If you think you might want to replicate WTIP, just use individual TIPS, not an ETF. I used managed futures because it is long and short commodities but it's not a perfect substitute because the strategy goes long and short other markets too. 

The back test only goes back to the beginning of 2018 because before that, Bitcoin had some fast, massive rallies that I don't think can be repeated. I don't know if the result from early 2018 on can be repeated but it's plausible. 

The results are interesting. Inflation for the same period compounded at 3.60% so all three had a pretty good positive real return. For a little context, earlier in the year quite a few pundits suggested TIPS as being attractive for offering a real return of 2% above inflation. I'm relaying that third hand, it was not a first hand observation. 

All three versions of the WTIP replication pull in some other attributes that we often talk about here. The first one is that the growth is barbelled into the Bitcoin allocation. Bitcoin compounded at 31% in the period tested. Roughly 40-45% of the gains in each of the three replications is attributable to the lift in Bitcoin. Continuing to go up a lot, on a relative basis, might happen but is 31% something that can repeat? Again it's plausible but not a certainty by any stretch.

I also think the overall result is absolute returnish. There's some dispersion year to year but the volatility is quite low. None them should be expected to look like equities, the S&P 500 compounded at 13.67% during the period tested. Although the results look pretty good compared to VBAIX, I don't think that would stand up over a longer timeframe due to having no equity exposure. 

If Bitcoin simply meandered along, not going up a lot, it would reduce the various growth rates of the backtests by about 300 basis points. By meander, I mean trade sideways not go down a ton. Even then, the real return versus inflation would still be decent, volatility would compress even further making it an easy ride for someone able to resign themselves to the fact that this will not keep up with equities. Another thought would be to try to find other opportunities for asymmetric returns to swap in for Bitcoin or to diversify the 4% crypto sleeve with Bitcoin. 

I think the replications are very interesting even if WisdomTree were to look at them and say bruh, not even close. 

I'll wrap up with a quick check in on the RISR/plain vanilla MBS fund pairing we've explored several times. As a reminder, the idea is that 50/50 RISR/one of the MBS funds would offset into an absolute return with very little volatility. Yesterday it worked.

And was working mid-day Tuesday.

I track these daily and I would say it probably works on a daily basis about 70% of the time. The idea is fascinating but it might be too big of a leap of faith. 

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.