Interesting ETF Filing

The newly filed for Brinsmere Balanced Fund (proposed symbol TBFB) is going to do a variation of the portfolios we theorize with here. The very short version is 20% in equities, 20% in bonds and then sort of a go anywhere with the rest which "may include gold, commodities, and managed-futures" but it will seek to have similar returns to a traditional 60/40 portfolio. 

Brinsmere has a proprietary process for selecting what gets included in the fund and although I did not see anything in the prospectus about trying to reduce volatility (corroborated with Grok) it is plausible that lower volatility would be part of the outcome, and even if that is incorrect, we can play around with their idea in pursuit of that outcome.  

Using the following to get a decently long backtest;

The volatility looks great while the growth rate lags behind a little. The way it backtests looks like it achieved 75/50.

The period studied includes a stretch where both managed futures and gold floundered for several years and of course 20% in all world equities creates a drag versus 60% in domestic-only equities. Shortening the backtest up to six years was far more favorable, the growth rate of the mimicked portfolio was slightly ahead of VBAIX and the volatility was about the same 6% or so. 

If we consider a much shorter period, we'd have many more ways to fill the 60% bucket for a more robust mix including cat bonds that we use frequently here and that are in client accounts. I used XYLD which is an old covered call fund as sort of a proxy for a buffer fund. XYLD has no shot of keeping up with plain vanilla equities on a price basis. On a price basis, XYLD has compounded negatively ever so slightly in the period studied versus a CAGR of 13.92% for the S&P 500. QSPIX is not my favorite for any strategy but it is useful here for having a long track record. Like several other AQR funds, it seems prone to occasional long periods of lagging, 2018 through 2020 was dismal.

ETFs can't own mutual funds but something MKTN that we looked at the other day could slot in for QSPIX, ILS is an ETF that owns cat bonds and there are several merger arb ETFs.

Good luck to the Brinsmere guys, I hope the fund lists and is as interesting as our mimicking of their 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.

Woefully Flawed Backtesting

 Hopefully this will be obvious.

Any sort of long term study involving Bitcoin is built on a growth rate that can't be repeated. Over the last ten years, Yahoo Finance has Bitcoin is up 32,000%. That unrepeatable gain is built into the impact cited of 1% added to the portfolio.

It has been awhile since we included Bitcoin in one of our studies but I typically didn't go back further than 2021, where I have the yellow line because of the unrepeatable nature of the some of the earlier returns. 

Backtesting is useful but not infallible. I try to point out flaws that I see in some of the backtests we do but this one with Bitcoin is especially easy to observe. 

A quick follow up to yesterday when we looked at the MKTN ETF which hasn't been around that long. It turns out there is a mutual fund version with the Federated Hermes MDT Market Neutral Fund (QQMNX). Hat tip to reader Max for finding this fund. For some reason, Testfol.io only goes back about five years with that fund but it is quite a bit older. Portfoliovisualizer lets you go further back.

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.

Getting TIPSy?

Laurence Kotlikoff says TIPS are a screaming buy. He has long been a fan of TIPS, maybe always but either way, for a very long time. The real yield on TIPS has hit 3%, he notes 3.4% as of last week in his substack post. 

His post is in part an advertisement for his software which includes how to build a TIPS ladder. He draws some very dour conclusions about the risks of stocks that do not ring true for me on the way to thinking 20% in stocks and 80% in TIPS would be reasonable. You can read the post and decide for yourself. 

We recently looked at the Northern Trust 2055 Distributing TIPS Ladder ETF (TIPD). The example I used for utility was property tax. I speculated that with crazy high inflation rates for homeowner's insurance or health insurance including Medigap plans, it might not be ideal. Here's what the price of TIPD has done over the last year though. 

On a total return basis it is down a shade over 6%. The way it's structured, if someone put in $50,000 on day one and assuming no malfunction in the fund or panic sales, then the holder should get all of their money back plus interest along the way but the price can drop in between now and 2055. It holds plenty of very long dated TIPS and while the short dated ones won't really move too much the longer dated ones will if rates go up. Yes there will be at least a partial par value reset but that won't completely offset the decline if there is a huge move up in rates from here.

That's not a prediction, that is an attempt to build an expectation of what holding TIPD or individual TIPS might feel like. Great if you can avoid panic sales but what if something painfully expensive comes up and TIPD is down another 10% and there's no other place to pull from? Generically, a TIPS ladder can absolutely work but it is not a walk in the park by any stretch. 

Although I disagree with Kotlikoff's conclusions, he is asking good questions. What if the risk/reward for equities is out of whack for a while and we have some sort of lost decade or the like? We spend a lot of time trying to build in some robustness in case that happens. 

That brings us to a new (to me) fund, the Federated Hermes MDT Market Neutral ETF (MKTN). It's a long/short fund that's only been around for about a year. The long short strategy involves individual stocks. Its growth rate has been lower than QLEIX from AQR but its volatility has been lower too.

This comparison is interesting. It's very short but interesting, they take different paths to the same outcome. Blending them together should have a very low volatility. 

If Kotlikoff is directionally correct about stocks (the magnitude he talked about is way too extreme) then long short becomes more important. MKTN and HFND do different things, long/short versus global macro. Putting 50% each into two funds seems very unnecessary to me but lately we've looked at several different pairings that offer the opportunity for a decent real return with low volatility and no duration risk.

The Check For A Pulse portfolio has three different "pairings" plus cat bonds and APHPX that although not a pairing, fit the bill for very low volatility and no duration risk.

The pairings are color coded. We could also throw an arbitrage fund in there to lower the weightings of everything else or maybe do something with shorter dated TIPS. Other than MKTN, these are all funds/exposures we have been working with here for quite a while and they continue to behave as expected. 

The volatility numbers can probably stand up and while I do believe this could give a fine CPI plus x% result, the outperformance versus VBAIX is probably an anomaly unless stocks do poorly. RISR will probably drop if interest rates go down. The Check For A Pulse has very little equity beta and very little duration.

It's not riskless of course but as I already said, the concept gives the opportunity for a real return independent of typical benchmarks.

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.

This One's Even Worse

The other day we took a quick look at a blend of 30% equities, 60% managed futures and 10% in cash. The long term result was good albeit disconnected from standard benchmarks but holding it would have led to long periods of misery and anguish. 

Well this one might be worse. 

The framework is the same as the other day. The investor objective is a much steadier or smoother ride than something like a 60/40, 70/30 or maybe even 50/50. This would likely result in lagging behind in years when the stock market is up a lot and bonds don't implode.

Where we've talked about CPI plus 5 as being a common target for endowments and a good way to think about how a portfolio actually works to meet someone's needs. Maybe today's idea could be thought of as CPI plus 3.5 or CPI plus 4 but with no duration risk that would go with putting it all in TIPS. Side note, TIPS aren't quite at a 3.5% real return currently. 

Portfolio 1 is a synthetic backtest, I spent a little time trying to recreate the effect to get a longer look. The return is similar but the volatility is a touch higher. An objective of CPI plus 4 overlaps with the 75/50 concept that we've looked at periodically over the years where a portfolio captures 75% of the upside with only 50% of the downside. 

The synthetic backtest is long enough and been through enough different types of market events to make me think it has some merit. The idea we're playing with is 50% buffer funds/50% managed futures. The longest backtest we can build is using BJUL which I believe is the oldest buffer fund.

Those earlier years in the green box would have been rough for anyone expecting this idea to keep up with VBAIX. There were two years where the portfolio was up but fell short of CPI plus some decent number and obviously it was down a little in 2018 but it has been reasonably steady in line with the volatility and beta numbers. The standard deviation for BJUL/AQMIX was 3.94 versus 11.91 for VBAIX. 

Maybe the way to think of this is in the realm of aggressive absolute return. In the same period as we tested BJUL/AQMIX, Vanguard  Market Neutral (VMNIX) compounded at 6.85% with a volatility of 6.86%.

Since 2018 there has been a proliferation of buffer and defined outcome funds that have hit the market and there are now many more managed futures funds so anyone interested in something close to this would not need to limited themselves to 50% in two different funds, that seems crazy to me and very unnecessary. Additionally, buffer and defined outcomes do a lot of different things and building in different levels of protection would seem to make sense and we've looked countless times at different ways managed futures funds are run including replicators or not, different risk weightings and differing volatility targets. The result might be a pretty smooth ride but I don't think this would be set and forget by a long shot. 

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 Different Type Of Retirement Problem

Barron's had an article about retirees who haven't really spent down their nest eggs even well into retirement. There are a few variables here that contribute to this scenario and while the title of the article implied it was about people being afraid to do so, that wasn't really it.

The simplest variable is that the stock market has ripped for the 15 years so, just ripped which of course you can't count on in planning. There was a stat in there from Vanguard that 4 out of every ten retirees don't draw on their accounts until RMDs require it. Quick note, RMDs don't have to be spend, the money can be added to a taxable account and invested for any circumstance where that is appropriate. 

The article made a point that we have touched on which is that there can be a peace of mind from having a lot in the bank or brokerage account. That sentiment resonates with me. If something really goes sideways, knowing you can handle it has some value. The dollar amount needed for this sort of peace of mind will be a different number for each of us. 

This idea has evolved for me to being a number I don't want to go below in our accumulated accounts. That thought process made buying the Tucson house much more comfortable and it turned out to be a fantastic decision.

One point that was lightly hit on in the article with a couple that has $30 million, but moreso in the comments is that the lifestyle many people want to live isn't all that expensive in relation to what they have accumulated, again market results are a contributing factor here. This is how I've described my lifestyle. The life we enjoy living doesn't cost that much. When something expensive needs fixing, we do it. We've taken big trips here and there but we are not the Facebook friends who go to Europe every six months. Our ability to travel is more about scheduling with our volunteer endeavors so we're not spending a lot on that. I would add that the amount of amazing national parks, national monuments and the like that are within driving distance is endless so that is inexpensive too. We've been to a lot of them and will never get to all of them. 

This entire conversation is one of privilege and quite the contrast to all the the numbers and reports about how undersaved Americans are for retirement. We talk frequently about habits and lifestyle choices that improve the odds of being over-saved, not spending enough but I wouldn't discount luck either. It's ok to have been lucky.  

One final point is that a couple of comments focused on being healthy. I have been called a health nut by a few colleagues on the fire department but I can see where working hard to have a financially successful retirement only to be unable to reap the benefits for being unhealthy causing more regret than getting to a very old age with a bunch of money that's never going to be spent. 

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.

Avoidance, Not Predictions

ReturnStacked put up a new paper a couple of weeks ago about leveraging up to add alternatives. An important building block to their work and products is not removing equities or fixed income to make room for the alternatives. As I was making my way through, I had the following thought about what a huge allocation to managed futures would look like with very little in equities and no bonds.

On testfol.io, the KMLM managed futures ETF can be backtested to 1987 via however they simulate certain tickers. You can see where managed futures helped and where it was a drag but that's not the most interesting way to look at it. 

The worst year for the two portfolios that are 60% managed futures with no bonds was 2002 when Portfolio 1 was down 12.31% as you can see and Portfolio 2 was down 11.68%. Yes, plain vanilla 60/40 was down less that year but if you agree with me about bonds, then we cannot rely on bonds the way we used to to offset large equity declines. 

Looking at the year by year bar chart, out of 39 full and partial years, I count 12 years where Portfolios 1 and 2 were far, far behind 60/40. Lagging in some random year by 5 or 6% ok, but as one example of what I mean, in 2017 both 1 and 2 were down less than 1% while 60/40 was up 14%. Portfolios 1 and 2 lagged badly three years in a row recently; 2023, 2024 and 2025. 

The point is that anyone looking for a portfolio that resembles what 60/40 used to do when bonds were a one way trade have a decent chance of doing so without the unreliability of bond duration or the variable of adding leverage. Over the very long term, the portfolios with 60% in managed futures tracked closely to 60/40 without duration risk.

Adding a ton of managed futures is one way and while it can probably work, as we've looked at countless times, there will be long periods of anguish here and there. 

Another approach we've looked at many times has been barbelling the 40 with a lot in very boring, steady fixed income with a small slice into riskier income niches. The idea being that if something terrible happens in the risky slice it won't wreck the portfolio. 

Portfolios 1 and 2 are 90% FLOT which is very plain vanilla. Portfolio 1 puts the risky sleeve in TLT which would have been a poor choice and Portfolio 2 puts the risk sleeve in catastrophe bonds which would have turned out to be a good choice. The 10% in TLT would have lagged the 10% in cat bonds but TLT did not blow anything up. 

The returns for Portfolios 1 and 2 are not killing it by any means but that is not the object for what goes into the 40 or whatever percentage you use to offset equities, make that reliably offset equities. Also you can see FLOT yielding nothing for a long time and then turning up in 2022 as it finally started to pay out. 

This is simply an example of how to size risk into a portfolio. Having 10% in cat bonds probably isn't inviting doom but is a little heavier than I'd want to go. As we have looked at countless times, there are enough higher yielding segments that take different kinds of risk to get some yield, reduce volatility and diffuse risk without extending duration which many pundits are saying it is now finally time to do. Unfortunately a lot of them said the same thing at 4% and at 3%. 

I have no idea what interest rates will do. If you've been reading this blog for a while you know I'm not trying to predict something, this is about avoiding something. 

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.

Did An Autocallable ETF Just Malfunction?

We have called out the ProShares S&P 500 Autocallable Income ETF (ACSP) as being more volatile than many of the other funds in the space, I believe it is because ACSP targets a relatively high 18-19% distribution rate. This is a relatively new niche but we are working with the idea that the higher the yield, the more volatile the fund is likely to be. 

The fund went ex-dividend today for a whopper of a distribution. It should be like a catchup dividend reflecting September and most of August back to the fund's inception. 

From Yahoo;

From the ACSP website;

To keep the math simple, if ACSP pays 18% annualized then it would be 1.5% per month so I would have expected the first distribution somewhere close to 2.25%, not 11%. I couldn't find a news release on this so I asked Gemini if maybe one of the notes got called and they had to pay the redemption out and Gemini guessed that that is what probably happened but the math doesn't check out, it's too big for that unless a bunch of the notes got called early. Grok said that is not what happened that the structure the holdings could not possibly result in notes being called early. 

Grok gave a rationale for it being a catchup distribution but when I pointed out why the distribution is too big for that it backed off and said "we'll know soon" what happened. 

I don't think it malfunctioned. I don't know what happened and I'll eat some crow if this was a malfunction but I have to think that the explanation will fit into parameters laid out in the prospectus. But that doesn't let the fund off the hook and creating a very rough ride for anyone holding the fund.

JELM and IACL are much lower yielding than ACSP and much less volatile. 

The lower yielding ones are not going to end up being horizontal lines that tilt upward, they will be more volatile than that but I am quite certain they won't look like ACSP. That fund looks like a very difficult ride. 

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.