Closing Complexity

Simplify announced it is closing four ETFs including the Simplify US Equity PLUS QIS ETF (SPQ) and the Simplify Macro Strategy ETF (FIG).

Despite the firm's name, they've bundled a lot of very complex strategies into ETFs. While I have been critical of quite a few of their funds and have found a some that appear to work well, I have to tip my hat at their willingness to try a lot of very different ideas. 

QIS is short for quantitative investment strategies and Simplify has ETF QIS that is devoted to quantitative investment strategies with $97 million in AUM so SPQ combined 100% S&P 500 with a 50% overlay of the QIS fund. If you look at the QIS holdings info, I think some of the things would be recognizable like calls and puts on equity indexes and currency positions but also plenty of things that would not be recognizable unless you know what MSSIQUA1A is. Generically, quantitative investment strategies do work as differentiated return streams but I don't know if it can be packaged into an ETF. Testfol.io has the QIS ETF compounding negatively at -2.95% since its inception in July, 2023.

SPQ, the fund that combines the S&P 500 and the QIS fund has lagged far behind the S&P 500 of late. It tracked sort of closely for a while but started falling further behind late in 2024.

I threw ReturnStacked US Stocks and Managed Futures (RSST) in there because they do something similar. They both leverage up to add exposure to an alternative strategy on top of 100% equity. Maybe in a different type of market event, SPQ could have had a better run but without anything else to go on, it simply becomes a datapoint for the difficulty of bundling equities with an alternative using leverage. 

We've looked at FIG a couple of times before. It's not necessarily that it has done poorly but maybe it just hasn't done anything? 

The chart is helpful. EBSIX is a fund we use occasionally for blogging purposes and is in the macro realm. The FIG literature talks about it seeking a differentiated return stream. Eye of the beholder whether FIG has been differentiated enough to be helpful but it is much easier to make out EBSIX as being differentiated a meaningful amount of the time. The idea is not to keep up with equities, equities are the thing that goes up the most, most of the time so a differentiator like macro shouldn't be expected to keep up with equities. FIG only shows $11 million in AUM so maybe that figure and the return profile was enough for them to close it. 

It is fun to look at these types of funds when they come out and to try to track them but as another reiteration, a lot of these funds will turn out to not be very useful. Part of the story here could be that they are too complex. As interesting as these are, they are best used in small doses. A lot of simplicity (plain vanilla stocks) hedged with a little complexity.

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 Solution To Unreliable Volatility?

 The following from the CEO of Bitwise with a slight modification from me. 

Trying to improve on 60/40 is literally my hobby but the data from Charlie is not a clarion call to add more Bitcoin and crypto. Own a little, sure, why not but the solution to unreliable volatility now embedded in bonds with duration is not an asset class with even more volatility that is even less reliable. 

That brings us to a paper from Alliance Bernstein that looked favorably at portable alpha. As a reminder, portable alpha typically uses leverage to blend together plain vanilla beta with some sort of alpha (alpha being a source of outperformance). The original expression of this was stock picking added on top of indexed exposure which got hurt badly in the Financial Crisis. Lately the conversation as pivoted to using the leverage to add an alternative that might not by itself be an alpha source but when combined with beta does yield outperformance (alpha).

The paper seemed to being saying several different things about how to build a portable alpha strategy. First was " they should seek alpha in less-efficient and less-exploited market segments—such as small-cap and EM equities—where the opportunity is richer," which is obviously equity beta like they did in the financial crisis. But then "our research suggests that long/short equity strategies can be a strong alpha source, with many hedge funds outperforming even the best long-only managers." There was also talk of market neutral so the conclusion while clearly in favor or portable alpha, I don't know what they think was the best way to build it.

I wanted to play around with the long short part of their idea to look at leveraging down, not using any leverage and leveraging up.

Before using ProShares 2x S&P 500 (SSO) I looked at the 20 years one by one versus SPY and in 20 full and partial years, there were only six years, where the dispersion was greater than 1%, only two of which came in the last ten years but one of the two was the widest at 370 basis points favoring SPY. Most specifically, I compared 25% SSO/75% CASHX to 50% SPY/50% CASHX. The two should be the same and you can decide whether that is close enough but it certainly is for blogging purposes. 

The leveraged version of course was the top performer with the trade off being much more volatility and some drawdowns that were much larger than VBAIX. Interestingly the drawdown this year was only slightly worse than VBAIX. 

There are two aspects of portable alpha that are potentially interesting to me which is probably why I spend so much time on it. I have zero interest in leveraging up but the idea of getting essentially the same result while having a bunch of cash set aside, like the leveraged down version, is very effective for managing sequence of return risk. And more of an intellectual curiosity, the idea of getting a disproportionate amount of the return from a narrow slice of the portfolio fascinates me. 

Part of the Alliance Bernstein paper that seemed nonsensical was idea of picking or isolating top quartile managers for the alpha seeking portion of this. It reminded me of the old joke about wanting to get rich, ok so first go get $1 million dollars....their comments implied the exact opposite past returns not ensuring future results. 

This is fun stuff and while I believe my process has been influenced slightly, this is a very difficult path to go all in on.

Since it is sort of related, I want to touch on managed futures very quickly. The space had a great Monday in a down tape. I'm not claiming victory with that statement because this may just be one of very few good days this year mixed in with a lot of stinkers but more of a reminder that when managed futures does well, even a small weighting (which is what I have) can have a big impact on the bottom line of the portfolio. It's worth taking the time to play around with the numbers. 

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.

Warren's Wisdom

By now you've heard that Warren Buffett plans to step down at the end of the year. 

We talk frequently about the stock market's ergodicity, the natural inertia to go from the lower left to the upper right despite some bumps along the way. The more someone trades, the more they are fighting that natural inertia other than proper asset allocation targets and mitigating sequence of return risk when relevant. Of course mistakes get made so those need to be corrected and company fundamentals change too for better or worse which may need to be addressed too. 

I try to hold on to companies and the narrower ETFs for very long periods, forever if it works out. I have quite a few names for clients that I've held for more than 15 years.

The names don't matter. The chart captures three ETFs and two common stocks with the Dow 30 in pink (leftover from another chart I was using for something else). The purple line went through a nasty drop in 2022. The best performer has had several nasty declines. I haven't sold through any of those drawdowns. 

Buffet said the last "45 days, 100 days" was nothing in the context of long term investing and holding on to strong companies and included in my chart, narrower ETFs. I don't agree it's been nothing necessarily. For anyone who made a serious behavioral mistake and did meaningful selling in early April, this was something. I can see the dip last August being one that most people forget about but I don't think that will be the case with the Q1 into April 2025 event. 

But, however long this lasts (maybe it's over, no idea), it will be one of those retracements just like the others on the chart that happened on the way to higher prices. When you look back at a chart of some stock that is up a bazillion percent in 20 or 30 years and think I wish I woulda, chances are that 20 or 30 years included at least a couple of eye-watering declines. 

There are countless, valid approaches to portfolio management but if you pick the right stock or niche, the fundamentals don't unravel and it continues to do what you'd expect it to do, why would you get out of the position? Maybe you trim a little for risk management but that is different than getting out completely. 

Pivot to Rick Rieder from Blackrock being interviewed by Barron's. Several of his comments echoed the conversation we've been having here for a long time. I don't know whether these have been long held by Rieder or recent opinion changes. 

People used to view bonds, particularly long-end interest rates, as the ballast for and protection engine in a portfolio. Then we lived through almost a full decade of things like negative interest rates in Europe and Japan and zero interest rates in the U.S. Now, though, people are rethinking their fixed-income allocation. They can get 6% or 7% yields in quality assets, without having to go out on the yield curve. That can serve as a great stabilizer in a portfolio.

I don't know why an individual investor would want the volatility associated with the long end of the bond market without some serious compensation above prevailing money market yields. Eighty basis points is nowhere near enough compensation.

I just don’t think being a hero in fixed income makes a lot of sense. My view is: diversify. I call it, “Make a little bit of money a lot of times.”

Diversify into different income market segments to avoid being done in by some random malfunction somewhere in markets. The Financial Crisis broke the commercial paper market and a product called auction rate securities. Commercial paper came back but auction rate securities did not. Getting caught with 5% in the next auction rate securities, if something like that ever happens again, would suck but would not be ruinous as opposed to maybe 20% in a segment like that. 

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.

Stagflation Is Coming. All-Weather?

You've probably heard or read predictions calling for a lost decade. Barron's just this weekend talked about lower returns coming. Torsten Slok from Apollo says that stagflation is coming. Will we have a lost decade? Is Slok correct about stagflation?

I have no idea whether stagflation is coming but as usual, I am more interested in if he is right, then what? Slok tells us that stocks should go down and rates should go up. Interest rates going up doesn't worry me from a portfolio perspective, I pretty much don't have any interest rate risk in the portfolio. If something somehow broke or malfunctioned though, there could be unexpected fallout in some random income market niche. That's not a prediction, more like a reiteration to diversify across many fixed income or bond proxy segments in case something crazy does happen in one pocket. If longer bonds went way up in yield, that would be something to consider, 7% for ten years is a lot more interesting than 4.4%.

What about equities going down? Over the last couple of days, I've seen a lot of opinions expressed implying the market event is over and that people worried and panicked for nothing. Panic selling is always a bad idea so that's not what I am talking about here but no one knows whether the event is over or not. Woe is me four weeks ago was just as unproductive as gloating that it's over now because no one knows. I've been talking for months about positioning to be less volatile that the market as opposed to wanting to do any meaningful selling. 

Nothing has changed for me on that front at this point but right here, right now, but anyone who felt they got caught wrongfooted a few weeks ago but managed to hold on, maybe now is a time to make changes?

The 7.2% is from the high watermark. Since April 2nd, the S&P 500 is actually up ever so slightly and YTD, the index is down 3.3%. Fortunately, I don't feel wrongfooted from the last month or couple of months or whatever but, looking forward, what if anything should we start to think about for a lost decade or stagflation? 

My first thought is to think about the all-weather attributes of Permanent Portfolio-inspired, quadrant investing. The Permanent Portfolio allocates 25% each to stocks, gold, long bonds and cash. So I don't necessarily mean copying that but maybe taking influence from the idea. If Slok is correct about rates going up, 25% in long bonds implies a lot of pain. 

2022 gives a good test for stagflation as Slok sees it because rates went up and stocks went down. Client and personal holding BLNDX bills itself as an all-weather strategy. Blending it with PRPFX could be interesting, it would only have 12.5% +/- in long bonds so it might be interesting to see if a smaller weighting would be problematic to the bottom line of the portfolio. In 2022, that blend was down 89 basis points so some drag (PRPFX did worse than BLNDX that year) but not problematic. 

Portfolio 3 is sort of close to what we blog about regularly. We had a lost decade from 2000-2009 but there were several years that stocks went up kind of lot. In 2003 the SPY ETF was up 28%, up 10% in 2004 and 15% in 2006 which is why there is a decent weighting to equities. I would expect broad commodities to get a tailwind in a stagflationary environment, they did better than gold in 2022 but maybe gold would be the better choice going forward. In the real world, a portfolio could have both. I threw in convertible arbitrage for being bond like but without interest rate risk. However that's not to say it couldn't be vulnerable to something malfunctioning. Also in the real world, I wouldn't go anywhere near 30% in one alt. 

The backtest is also useful for showing BLNDX finally struggling, it is down this year as equities and managed futures are both down. While there is something intellectually appealing about getting all done with one or two funds, it really is not a great idea. 

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.

Shots Fired In The Portable Alpha ETF Space

Anytime I've ever made a joke about an ETF going to eleven or melting my computer, well this new one really does go to eleven. The Defiance Leveraged Long + Income MSTR ETF (MST) checks a lot of buzz word boxes. It targets 150-200% exposure to Microstrategy and sells weekly call spreads for income. The literature talks about the fund also being a play on Bitcoin. 

Long time listener, first time caller, I own Microstrategy, REX Bitcoin Corporate Treasury Convertible Bond ETF, two different Bitcoin ETFs and I just bought MST for a little income. Am I diversified?

Shots fired in the portable alpha ETF space.....I might be overreacting. The ReturnStacked ETFs invoke a strategy called portable alpha which as we have discussed before, uses leverage to combine beta (plain vanilla exposure like an equity index) with alpha which these days typically means some sort of alternative strategy. 

Harbor Capital, fairly new to the ETF space I believe, filed for an Alpha Layering fund which will leverage up stocks and managed futures to offer 75% to each, 150% overall. The proper name will be Harbor Alpha Layering ETF with the proposed symbol being HOLD. I could swear there was a cash proxy ETF at one point with that same symbol but either way. 

Speaking of which, the ReturnStacked guys have another paper out in support of their funds. I would encourage giving it a read. I've been very skeptical of course but there is always plenty to learn or study. The title of the paper is "Finding The Right Match." I put together a portfolio using a variation on their idea to try to find a different match. 

The way Microsoft is added in, I am replicating 5% in MSFL which is a 2x long Microsoft ETF with a short track record. I picked Microsoft for being growthy but without crazy-CEO risk. Portfolio 2 leverages up Microsoft the same way and the S&P 500 with a small exposure to SSO. 

Where portable alpha funds might use S&P 500 futures, there can be friction embedded in the futures pricing based on interest rates. I've seen theories that a similar thing can also impact SSO. I'm not entirely sure but where the futures might be a little off from perfect tracking so too might SSO so if you're willing to own futures then you might be willing to own a little SSO too. Portfolio 3 is intended to be the same as Portfolio 2 but without leverage. 

The unleveraged version does lag the two leveraged versions but with less volatility. Also, the unleveraged version outperformed VBAIX by 169 basis points with less volatility while leveraged versions clearly did better but with more volatility. Not surprisingly, the unleveraged version consistently had small drawdowns. 

I will be curious to see how the Alpha Layering fund does. It should land in the middle of RSST and client/personal holding BLNDX but we'll see. For now though, I just can get there with the leverage. 

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.

Stocks Should Not Be Going Up!

But they are. For the last eight sessions anyway.

In a recent post, I asked if it was over making it crystal clear that I had no idea and I still have no idea. There is always a working list of pros and cons to weigh out in trying to assess risk. No matter how bad things may appear there are always at least a few positives. Sometimes though, markets go up for no reason at all. 

Microsoft did a lot of the heavy lifting on Thursday as I think this table captures. SPXT is the S&P 500 excluding technology. The Invesco S&P 500 Equal Weight ETF (RSP) was down 14 basis points today. 

I had a quick phone call with one of the higher ups at my firm today and he asked if I had any opinion about what was going to happen with all the current drama underway. He probably didn't love my answer but I told him that I don't know and that I happy being less volatile than the market and felt fortunate that the expectation I had set (being less volatile) was playing out as intended. 

My hunch is that this is nowhere close to being over but client outcomes are not relying on that hunch being correct. Mark Mobius made the rounds on Bloomberg earlier in the week for sharing that his fund is 95% in cash. Figuring out when to get back in from that sort of cash position will be very difficult to get right especially if there is no sort of woosh down. Down 30% from the high would bail out someone sitting on 95% cash, that would be buying low even if it goes lower. 

If from here, the market rocketed higher, then what does he do? What if it jumped 10%, he got back in and then it fell 30% and then traded sideways? There is no reason for any of us to try to thread that sort of needle.

The chart is the S&P 500 going back 40 years. Other than having the proper asset allocation and addressing sequence of return risk when relevant, I would not want to get too aggressive, like selling 95% of my stocks, trying to fight that inertia.

BTAL and SH make up just mid-single digits of the portfolio. Gold and CBOE which have chipped in with defensive attributes also combine to mid-single digits but CBOE clearly has equity beta and managed futures, also a small weighting, simply isn't helping during this event. Yes I sold one stock six months ago, Nike, but my typical approach is to try to avoid selling a lot of stock as opposed to trying to offset the declines with holdings that should go up. BTAL, SH and the others should go up but they may not always work (SH as an exception). Managed futures has done fantastically well in previous events but clearly not this one. 

To the extent you even believe in any of this, a little goes a long way. If you don't believe in any sort of volatility management, the 31000% gain in the above chart supports your belief. 

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.

A Long Runway To A Successful Retirement

Christine Benz wrote 4 Key Decisions for Early Retirement.

• Will you continue to work?
• What lifestyle changes do you plan to make?
• How flexible are you willing to be with your spending?
• How do you feel about lifetime spending versus leaving a bequest?

Really though, the word early could be removed from the title of her article because they are relevant questions for any retirement age. These are not the only decisions obviously but I agree they are important to sort out for yourself now at 50 or 60 or whatever but then also to be cognizant of any changes later in what you believe you want to do. 

Maybe you've always thought you'd take Social Security at 62 but then you hit 60 or so and view it differently. Or maybe you always thought that you'd "hard stop" any work at all but then take a different view of the finality of never working again. 

There's no single right path or template for retiring. I believe the questions/decisions can be common like putting in a little work to understand Social Security and then pick when you think is best for you to take it or assessing whether you want to live somewhere else or maybe downsize close to home. With Social Security I try to be consistent in not saying everyone should wait or everyone should take it early. I share my thought process for my wanting to wait, my wife is 6 years younger so she would get a larger survivor payout if I die young but I would encourage her to take it as soon as I do (64 years and two months for her). 

Will you continue to work is a question to ask or maybe a better one is what will you do with your time. Maybe you will work, maybe you'll volunteer, do hobbies, hopefully you'd want to do something but I realize not everyone does. 

I've been big on cultivating income streams like from monetizing hobbies, monetizing volunteer work or some sort of post-retirement career that is more aligned with your interests. This sort of path provides purpose and relieves some of the burden off of the portfolio which can help with Christine's third question about flexibility. The less reliant a retirement plan is on an investment portfolio, the less need there is for flexibility. 

All the articles about the 4% rule and whether it can be nudged higher or not, presume that the majority expenses will be covered by taking 4% from the portfolio. Four percent is of course very reliable but not infallible. I might be the only one who has ever said this and it has been a while, but I don't believe the 4% rule is just about taking 4% in perpetuity. Part of it is sustainability in the face of the occasional, expensive thing that comes along. I don't mean an annual vacation or tires for the car but more like a new roof or some other once (hopefully) in a lifetime expense. I'm saying the 4% rule is about paying for that big thing but still maintaining the same regular withdrawal rate. I say that because the math in most simulations and with several IRL clients, is they die with a lot of money leftover. 

A retirement plan that starts out with $600,000 right before a 30% decline in the broad market that then coincides with a $100,000 catastrophe might never recover. This is exactly why I've been preaching for so long about playing a long game to cultivate income streams to build up some resiliency for a retirement that starts out with some insanely bad luck. 

I've been cultivating incident management work (fire related) for a while and have worked on a couple of large incidents but I had to change this up. I have a little more going on with my day job (a positive development) so being away on a fire, despite access to the internet all day, doesn't make a lot of sense. The team for which I have been an alternate on said they will still call me when they get assigned to a fire local to the Prescott area which was the end goal and which I will still pursue. When something happens locally, I would like to be able to help, I don't want to be away from home for four months going from incident to incident which some of the guys do. One full two week assignment (close to home) would pay about $14,000 which relative to our annual spending needs would be a lot of money if I was somehow not otherwise working. Something that pays $14,000 like that would be the equivalent of having another $350,000 in the portfolio ($14,000 is 4% of $350,000).

The other one I've been cultivating for a much shorter time is having been a research volunteer for the Del E Webb Foundation. Early on with this, I said there was a chance to become a board member which is a paid position and I have been invited to do so and I said yes. It will pay a little more than what I spelled out above for incident management work. Relative to our spending needs, this would be a lot of money if I was somehow not otherwise working. The difference between volunteer and board member is about an hour a week and having a vote on who gets awarded funding. 

I should note that this opportunity came about from people who know me from volunteering with the fire department. I do believe I really have cultivated these opportunities which is why I write about this path so much, play the long game, it can work. 

Neither income stream is a lot of money by themselves but would be meaningful in the context of a $100,000 lifestyle (we don't spend anywhere near that much) that relies heavily on an investment portfolio. 

We don't spend a lot of time here on having money leftover to bequeath to kids or grandkids. This is a high priority for some people and zero priority to others. But along these lines I recently talked about small inheritances covering the tax on Roth IRA conversions. Are you likely to inherit any money? Counting on an inheritance might be risky but a little bit of planning in case you get one makes sense. There may be the intention, but sometimes life gets in the way. End of life care, assisted living and other types, can obviously be very expensive and you don't know whether you'll need it until you need it. I can't stress enough what a bad idea I think it is to count on an inheritance. 

The more time put in to planning retirement, the better the odds that retirement is successful in whatever manner you define success. 

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.