Income Engines

StateStreet has filed for the SPDR NASDAQ MyPaycheck ETF. It will be a fund of funds and while there is surprisingly little information on the underlying index for now, Copilot thinks it will target about a 6% yield. Great name, it overlaps one of the things we talk about here for bridge strategies and it reminds me of the StrategyShares NASDAQ 7Handle Index ETF (HNDL) which started trading in 2018 and targets a 7% distribution that can be comprised of yield, capital gains and return of capital.

It was a lot harder to cobble together 7% in 2018, I remember the fund having a lot more exposure to MLPs and funds like SDIV.

The chart is price only. Right now, the distributions are a shade under 7%. 

SDIV has been paying out closer to 9% with much more volatility and obviously compounding very negatively for anyone taking out the distributions. When I first wrote about HNDL, that URL doesn't exist anymore, I expressed concern that the fund would deplete which it clearly has not done. Thinking back to 2018, "the fund will yield 7% and the price will trade sideways" would have been thought to be very good result, I do think it is a good result. 

Lately, HNDL has been paying more ROC. One third of the fund is in various aggregate bond funds that yield more like in the fours, it might actually be more than 1/3 because another 28% appears to be in swaps that replicate the fund. 

I took a stab at making a paycheck strategy as follows;

BKLN and BSJS are in my ownership universe. 

If all the income is taken out then it would deplete after 27 years per Copilot. That seems a little too optimistic but as a bridge to some financial milestone it could last a decently long time. The withdrawals could be managed to avoid the negative compounding (take less out).

HNDL and our idea held up well this past March when the Iran war started but they both got hit hard during the Tariff Panic, dropping about 15%. 

Although not precise terminology, this idea plays off the concept of carry, creating an income "engine" from a portfolio balance that doesn't move around that much.

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 Social Security Problem Appears To Be Getting Worse

By now, you've probably seen they nudged up the timetable to 2032 for when Social Security would presumably need to start cutting payouts by what the Washington Post says would be 22%. Here's the Barron's report on this story. 

There are plenty of ideas floating out there including raising the full retirement age, lifting the income cap (for 2026, once income gets to $184,000 there is no more payroll tax due), reducing the annual COLA bump, means testing (cutting/reducing it for "rich" people) and even investing it in the stock market.

As a legal matter, they simply cannot pull the money from somewhere else to plug the hole. Apparently the last time they made changes in 1983 they did so just in the nick of time which argues that sitting here in 2026 is too soon to worry about it. To adopt that position is to give Congress the benefit of the doubt and while I am sure they will do something, I don't know about giving them the benefit of the doubt on anything. My point being that waiting until the last minute increases the odds that whatever they do is "unfair" to more people than it would otherwise need to be. 

There's a cliche about a negotiation being good when no one thinks they got a great deal, they got something they wanted but not everything. I would suggest being mentally prepared for feeling a little worse than that when this all shakes out. 

Related, this year's Social Security COLA is now estimated to be 4.7% after this morning's inflation data. Someone planning to take Social Security in 2031 and thinking they will get $4000 in today dollars would get $4866 in 2031. If they have to take a 22% haircut from $4866, they'd be down to $3795. Put yourself in that position with your numbers. As it stands right now, would that much of a drop be a problem? I'm not being critical at all. If that drop is a problem, you've got time to figure something out. Then, all the better if they somehow fix it. 

And a quick follow up, with the recent leg down in Bitcoin, I wanted to check in on the Vistashares Bitbonds 5 Years Enhanced Weekly Distribution ETF (BTYB). The basic idea is that fund seeks to pay out twice whatever the five treasury is paying by harnessing Bitcoin volatility via a synthetic covered call. 

UFIV tracks the five year treasury and YBTC is a Bitcoin covered call fund. In the period charted, BTYB has paid out a total of $0.187 so add 75 basis points back into the decline of 5.5% as of Tuesday's close.

BTYB is down less than I would have expected in the face of how much Bitcoin has fallen. What has probably gone on is that as the price of Bitcoin has fallen, the volatility has gone up which results in the option combo that creates the synthetic covered call going down slower than underlying Bitcoin. The fancy term is gamma. BTYB benefitted from positive gamma. If Bitcoin had gone down in such a way that volatility compressed then BTYB would have probably fared worse.

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. 

Permanent Adjacent?

Meb Faber Tweeted out an article he wrote in 2020 about a "stay rich portfolio" which he called the Global Asset Allocation. Presumably, the article was in support of the Cambria Global Asset Allocation ETF (GAA) which allocates 45% to equities, 45% to fixed income and 10% into alternatives. 

We've looked at GAA before. The allocation is interesting and results need to be looked at closely to understand them.

The overall numbers aren't so hot. The 67%/33% blend is in there because it was mentioned in the article as being good middle ground between all GAA or all T-bills. The DIY version I built as follows;

Gold is mentioned favorably in Meb's article and I know he thinks managed futures is an excellent diversifier. I chose QMHIX for this to start playing with higher volatility managed futures. MERFX and BKLN are client holdings. 

When we look at the Cambria funds, the volatility stats usually aren't that good, they seem high for GAA given it only has 45% in equities. I wouldn't expect 45% equities to keep up with 60% equities but it would be nice for the volatility to be lower than it is for GAA, inline with the DIY version maybe. 

Where the results get interesting beyond the obvious that the  GAA ETF has been doing very well for the last year and half is that it does appear to be differentiated from VBAIX. Differentiation can be good. 

Pivot to a new fund that might blow your mind. It is blowing my mind, not being sarcastic. It's the Porter & Company Porter Index Fund (PPCP) it is a quadrant style fund that is modeled after the Permanent Portfolio but the asset mix is different. It allocates 25% each to... are you ready... property and casual insurers, capital efficient equities, hard assets and short term fixed income. What?

This one is easy to backtest thanks to the iShares US Insurance ETF (IAK).

Which one is which? That's a 20 year run and the lack of dispersion is remarkable. 

Copilot has thoughts. First it says that PRPFX hasn't been true to the Permanent Portfolio in terms of long term bonds. The equity allocation in PRPFX has generally tilted toward quality, not simpler market cap weighting. Gold is gold of course and cash is cash. Copilot thinks "insurers are unusually resilient, capital-efficient, low-volatility compounders that behave well across many macro regimes."

I don't know about that. The drawdowns look pretty rough for IAK. It then told me that IAK isn't the best proxy even though it gave me the ticker in the first place.

At that I point I threw in the towel. Seeing how PCPP trades might shed some light or maybe IAK is a proxy for something else that Copilot isn't teasing out. What's going on then? Leave your thoughts in the comments.

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. 

Tools, Not Return Engines

We've got a lot different things to tie together related to portfolio construction and diversification. 

Cliff Asness wrote a long Tweet in support of a paper from AQR that said bonds don't diversify equities, they dilute equities which I think is a fascinating way to phrase it. There's been commentary from various sources that bonds no longer diversify equities they way they used to (I have said that repeatedly) but Cliff believes "bonds never mattered all that much in 60/40" because as the AQR paper goes on to explore, there are other diversifiers can do the job that people think bonds can do. 

I disagree a little bit, bonds mattered for a long time. They were reliably negatively correlated in a way that doesn't exist anymore. Compensation stopped being adequate for duration long before the top in late 2021 but they did help...until they didn't. 

The actual paper starts off talking about the mistake of replacing bonds with things that actually have more equity-like risk than bonds. They cite "most buffered funds" as one example, they cite private credit as having a 0.63 correlation to equities with equity beta of 0.70. They also noted that some believe Bitcoin can function as an equity diversifier but they are very dismissive of that idea. Per the paper they favor long/short equity with a market neutral bias and managed futures. 

Many of the blog posts boil down to me trying to refine my approach on how to build the 40 in a 60/40 construct. There's value in backtesting but there needs to be a grain of salt added to the process of backtesting per a paper from Long Tail Alpha. Done incorrectly, the process can lead to building around hindsight bias that relies too much on the past repeating. 

How often do we backtest a heavy dose of managed futures and then contrast that to the actual experience of owning managed futures? Too much allocated to any diversifier creates risks to the portfolio regardless of whether there's ever a consequence for that risk. Managed futures always backtests beautifully but since the resurgence in popularity of managed futures starting in late 2021, there have been two very rough stretches, one in early 2023 and then going into the Tariff Panic. I've seen a couple of different sources say how bad early 2025 was but I actually recall early 2023 being worse. Managed futures are great for slower, longer declines but really a flip of the coin for fast declines. 

This is a great quote from the Long Tail Alpha paper.

we’re keenly aware of the historical bleed of a typical left tail hedge, whose value does not come from a strong CAGR, but rather from smoothing out left tail events in a larger portfolio

Or, diversify your diversifiers. You can smooth out the left tail events, meaning reduce a portfolio's sensitivity to outlying, downside market events by owning several different strategies that each have their own unique risks. This approach makes the portfolio more robust in case the next long, slow decline is the one where managed futures doesn't work. Thanks to liquid alts, there's no logistical barrier to having many different diversifiers. 

This chart is from Man. The way to read it is that the green combos provide better diversification than the pink combos.

The take away is not to allocate this way, I think the way to take it is as a reminder that during a draw down, a portfolio that goes narrower than broad based indexes will have things that go up. As we noted the other day, during Friday's puke down, healthcare, financials, REITs and staples generally went up. Whenever the next real bear market comes along, there will be stocks and maybe even a couple sectors that go up. If a couple of alts work as well as a couple of plain vanilla holdings go up or are even just flat, then a the portfolio has a good chance of weathering something more serious than a bad week or month.

Hedgeco.net provides rationale for using alts that aligns with my beliefs.

Investors have become more aware that the classic 60/40 portfolio can fail when stocks and bonds fall together. Inflation shocks, rate volatility, geopolitical events, and liquidity stress have all exposed the limits of relying solely on long-only equity and core bonds.

They go on to talk about alts not as "return engines" but as tools that can fill portfolio gaps. The gap in the context for today's post is how to build the 40 or whatever percentage not allocated to plain vanilla equities. There's even a shoutout to litigation finance (we've looked at this a couple of times) which at this point doesn't exist in a wrapper with daily liquidity. "Liquid alts are most useful when they are mapped to a specific portfolio role." How often do we talk about this point? A lot, because it should be an obvious conclusion. 

Adam Grossman weighed in at Morningstar about his concerns for a coming lost decade. A key to success from 2000-2009 was knowing where else to look. I have no idea if we are going to have another lost decade but the process of planning in case we do should have started a long time ago.

A final note, in Friday's recap, I should have included how the autocallable funds did. We've talked about them some so it makes sense to check in when the market does poorly.

ACYN is from First Trust and pretty new. ACYN targets an 11% "yield" which is lower than the others, Copilot says that ACYN should have less sensitivity to equity declines. That panned out of Friday anyway. 

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. 

Hola San Felipe!

On Saturday night I went down a fun rabbit hole of retiring as an expat to San Felipe, BC Mexico. The catalyst for my rabbit holing was a video on Instagram from a couple selling something to help people figure out how to retire to places in Italy that are just as pretty as the tourist spots but off the beaten path with no tourists. So they said, I obviously have no idea. 

A couple of months ago a dog lady acquaintance of my wife's moved to La Paz, Mexico which is way down near Cabo. San Felipe is about two hours south of the Calexico/Mexicali boarder crossing. In college, we used to go to San Felipe for the first few days of spring break. 

The picture is actually Rosarito Beach, that's me at the net setting the ball in 1989. It's as close as I can get to San Felipe without pulling stuff out of storage. Between the Italy video and the friend in La Paz BC, it just popped into my head, what's going on in San Felipe? 

Based on pictures on the internet, the town has grown a lot which is not surprising but it still very much looks like an outpost to me. It looks like the desert, just next to a body of water, the Gulf of Baja. 

That's a 4 br house for $239,000 on a 30,000 square foot lot. It's in a community that has a golf course with a lake and you can see the gulf in the background. The house needs some work the listing says but the house looks cared for as opposed to neglected. There's weirdness with the garage from the above picture. One of the pictures shows a mini-split.

There are plenty of cheaper houses there too. This one below is asking $179,000, it has 3br but is in a neighborhood. There are complexities to home ownership that are not insurmountable but do need to be worked through. Because San Felipe is on the water, there are a couple of legal residency statuses and each one has requirements for home ownership. There is also a complexity to the land the house sits on. Hawaii has something similar, the terminology in Hawaii is fee simple where you own the house and the land or leasehold where you own the house and lease the land. You'd have to dig in more but this is not unheard of.

For the internet, the best bet is probably Starlink. There is reliable cell signal in town. Many houses there have solar so that's not a problem in terms of rules, it seems like it's kind of recommended along with a generator. The water is still not safe to drink and there is not enough rain for catchment to be viable. Property tax for a $300,000 house would be $300-$750/yr plus there is another annual fee that AI described as sort of a banking/administrative fee to own a house which might tie into the residency issues. 

For serious medical issues, you'd probably need to go to Mexicali which is to say you'd really need to go to San Diego or maybe Phoenix. For routine physicals and dentals, San Felipe has adequate services, likewise for injuries but not Level 1 traumas. Prescott can't accommodate Level 1 traumas either, that is common for smaller towns. 

For under age 65, health insurance can be pretty cheap. Americans can go through a process to enroll in Instituto Mexicano del Seguro Social which would be $2000/yr for both ($1000 each) but doesn't cover preexisting. Paying for services out of pocket sounds cheap, a full battery of blood work would be about $80. 

There is no Costco, Walmart or Home Depot in San Felipe. There are several grocery stores including one that is owned by Walmart so there are Walmart brand items in town. There is hardware store. Interestingly, Amazon delivers to San Felipe.

In terms of safety, the area is rated 3: Reconsider Travel. Highway 5 is the main corridor from Calexico to San Felipe. The suggestion is to drive during the day and stay on the pavement. The Highway is not riskless to be sure but it is in the interest of the crime organizations to keep the highway clear with traffic moving but really, stay on the pavement. The town of San Felipe is significantly safer than the road to get there. 

The population has about tripled since I went there in the 80's but it still is very much an outpost sort of town. Out of 20,000 people who live there, 3000-5000 are American or Canadian. 

We're not moving to Mexico. 

Coincidentally, this morning there is another Barron's article about retiring to another country, primarily Canada, Mexico or the UK. That article tilted more toward people feeling like they need to leave the US for political reasons. The driver here is the financial aspect of trying to problem solve for an underfunded retirement. 

My only experience with healthcare in another country is the care my father received in Spain. He lived there for about 35 years, he got cancer shortly after his 88th birthday and died about six months later. The care he received was terrible. All the years he was there and getting just normal care like annual physicals and treatment for a broken hip when he was 71, the care was perfectly adequate. 

Because I think it plays a role in just about every retirement decision, someone who believes they need to retire in another country to make the numbers work will have dramatically more optionality if they have their health dialed in. 

For the 20 plus years I have been blogging, I have talked about the potential for "something having to give" if the desired retirement lifestyle won't work as a function of dollars and cents. Usually that has meant figuring out how to spend less, working longer in a primary career or taking up some sort of post retirement gig. Something else that might have to give is living in the US. Many countries are considerably cheaper.

We've looked at Ecuador countless times in this context over many years. Since then, political instability and cartel activity have both increased. I've noted that and said maybe an American couple would want to leave in the face of that and maybe they would but according to Gemini, the real story is that Cuenca and other inland expat areas have been unaffected by what has transpired elsewhere in the country. 

Interestingly, Gemini says that Cuenca is far cheaper than San Felipe.

Cuenca is probably safer too. I say probably because San Felipe's stats appear to be lumped in with Mexicali and Tijuana. The climate in Cuenca is quite moderate compared to Felipe being very hot.

Panama gets favorable attention as an expat destination. It is safer than San Felipe and about the same as Cuenca. For costs, it is much more than Cuenca and a little more than San Felipe. The climate in Boquette, Panama is similar to Cuenca because both are at elevation and Panama's healthcare appears to be the best of the three. One other thing going for Panama is that they use the US dollar for its currency. 

Gemini suggests a 3-6 month test run before moving to an expat destination and that the test run should include the worst time of the year like a rainy season or in the case of San Felipe, the summer. That many months should allow time to get a general sense of what it is like to live there (pick an area that you'd actually live in), learn about doing general errands, understand the infrastructure constraints and get a sense of whether a social network can be built. 

It seems like it is getting more difficult to accumulate enough to make retirement work. Whatever anyone wants to attribute the reasons to, it seems like that is a financial reality. Moving somewhere else can be the answer to some (probably) small slice of the population. 

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. 

Rough & Rougher

Wall Street got kicked in the stomach on Friday, or maybe a little further south than that. Stocks were down a lot. Big tech was down a lot more. Bonds with duration were down a good bit, not a ton. Managed futures were mostly lower. Gold was also down a lot. Broad commodities were down a little less than gold. Bitcoin spent a little time below $60,000 for the first time in ages.

Client/personal holding BTAL was up a lot....yay? I'm glad it "worked" today but if BTAL is your best performer then things are going badly. REITs, staples, some financials and healthcare were generally green. 

Are markets worried that rates won't get cut anytime soon with the jobs data the most recent nail in that coffin, or are markets worried that there is no end in sight to the war, is it the excesses related to capex spending/debt issuance/equity issuance in the AI/data center theme, were we simply overdue for a pullback or was it something else? Yes.

Today is a great microcosm though for a lot of the portfolio construction theory we play around with here. Let's detour for a moment to what today's blog post was originally going to be about. Finomial Tweeted out a thread of a portfolio review for a capital efficient strategy that looks a lot like something we would work on here.

Here's the backtest result versus 80% equity/20% bonds (Finomial chose that benchmark).

The portfolio that Finomial posted has certainly been more volatile but hard to argue with the longer term result. It's easy to see that volatility on display in both the Tariff Panic last year and the broad reaction to starting the war with Iran. In the Tariff Panic it was down 18% versus 13.8% for 80/20. That is probably attributable to managed futures getting hit very hard during that event and the portfolio has close to 18% in managed futures. 

The point isn't to pick on the portfolio, it is to understand what the experience of riding through with some huge number in managed futures, or gold, or broad commodities or something else would actually feel like and how difficult it might be emotionally.

This sort of day would be challenging for anyone who is heavy in any of these.

We've talked about 5% in TECL which is not heavy IMO but 20% in one day is not nothing. We've never talked about SOXL which is 3x semiconductors. If it is as simple as looking at RSST and subtracting SPY's result to see how their managed futures sleeve did, then it was the biggest decliner of the ones I follow. I threw in HFGM because it targets twice the volatility of global macro. 

What would that table look like if this was the start of a meaningful move lower? Do you remember that fast panic that happened at the end of 2018? Most clients don't but in that fast event but TECL fell by 60%. Sixty percent in an event that many people don't remember. From July 2024 into early August, so just one month, RSST fell by 18%. I remember one or two very bad days in the first week of August but I'm not sure why RSST would have fallen that much but at the same time VBAIX was only down 4%. RSST came back obviously without issue but how difficult would it have been for someone who was heavy in RSST going down 18% in a down 4% world?

This is a difference between theory expressed in backtests versus actually enduring a market event. How did the portfolio that Finomial analyzed do today? Down 3.41%. That's probably not a number that will induce a poor decision but what about a week from now if equities continue lower and the things under the hood of managed futures continue to run counter to the recent trend (managed futures is likely long equities, long gold and long other commodities)?

I hope I am consistent in saying not to go too heavy into any of these diversifiers but if you are going to put 20% into something like managed futures or gold, I would spend time envisioning what it would really feel like when things take a meaningfully negative turn. 

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. 

Solving Problems

The picture is of the engineer's compartment from Walker Fire's brush truck (type 6 engine).

The hardware pictured is a reducer, an inch and half double female, 2.5 inch double male and a 2.5 inch double female and you can see there is other items in the bin. These tools allow us to change hose size, make connections to truck outlets and even pair up incompatible thread types (there are two types of thread for some reason). The way I have been describing this to new firefighters has always been to say there is no problem that can't be solved out of this compartment, you just need to know what you're looking for. 

The ETF universe is of course similar. I mentioned taking in a new client for my subadvisor relationship early this week. The client came in with 55% in tech with heavy weightings in many of the names that are front and center for the AI/semiconductor mania that we are currently in.

I am hesitant to use the word bubble, I think mania might be a better word. Semantics aside, there is clearly an excess in this theme. Tech/communications is too big to zero out but I've been saying here for ages that I have been underweight. As of right now, tech plus communications adds up to 50% of the S&P 500. History has not been kind to sectors that get above 30%. Obviously there is no way to know when or even if there will be a consequence but the sign of excess is clear. No exposure is a non starter, repeated for emphasis but underweighting is viable.

For this new client, I sold a lot of the smaller names and shaved down the exposure to the major names he held. My usual tech holding for clients is broad based sector ETF that is heavy in many of the names I was keeping for him albeit in smaller percentages than what we walked in the door with. Loading back up on a sector fund that was top heavy in all the same names made no sense and would have left him very exposed to the same stocks that would be in real trouble if there is ever a consequence to the current AI/semiconductor excess. 

While 50% in tech plus communications is a non-starter for me, 10-12% is too light so into the engineers compartment for the Invesco Equal Weight Tech ETF (RSPT). Instead of 45% in semiconductors it has about 25% and obviously there are no holdings in the low double digits or high single digits. Weaving RSPT in with the holdings we kept/reduced allowed for dialing in some pretty precise percentages to bring him inline with other clients. 

Sort of related with the tech excess, back in May I swapped out market cap weighted ETFs for the few clients who had one for the momentum/quality/value combo we discussed a while back. The momentum ETF is kind of like MCW on steroids and the other two differentiate considerably from MCW and I think the three will combine to give a better result with a less total tech exposure than MCW.

The takeaway here is a point we make regularly which is I am not trying to predict anything, I am trying to avoid, or in this case underweight and obvious build up of risk. 

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.