A Completely Different Allocation Strategy

Christine Benz wrote about four dangerous assumptions that could hurt your retirement plan. The four were overestimating market returns, underestimating inflation, that you'll be able to retire when you want and whether you might get an inheritance. The article was fine but I want to home in on overestimating market returns in some period relevant to your retirement planning. 

Testfol.io can backtest simulated S&P 500 back to 1885 and for the entire 141 years, the index compounded at 9.63%. For the last 15 years, the S&P 500 has compounded at 14.80%. 

Five hundred basis points above the long term trend is huge. That's a long time and a lot of basis points. It's right to wonder how long it can last and think about what to do if it doesn't continue. Again, this is not about predicting anything, it's about trying to look around a corner at what could go wrong and be ready if it does go wrong. There's a big difference between those two. 

All of the time we've spent looking at replacements for traditional fixed income has been driven in part by the belief that bonds with duration are no longer reliable diversifiers. Put slightly differently, we're relying less on traditional fixed income. Should we rely less on traditional equity exposure too, especially if after years of growth above trend, equities go on a run where they compound below trend? 

There are many types of alternative strategies that we look at, one type seeks steadier returns with less volatility like some long/short, macro and multi-asset. These types of strategies won't keep up with 14.80% compounded but be meaningful sources of return if equities spend a while below trend. 

I put the following together to start this conversation. 

AQRIX is an AQR fund that used to be risk parity and is now multi-asset which doesn't seem that different. It has a decently long track record and although it has not been perfect, it's had a good return without relying on simple equity or bond exposure. 

Anchoring around a fund like AQRIX is what I'm talking about. Actually putting 60% into one fund is a non-starter versus dividing that 60% anchor among several funds but it will do for Portfolio 2 for this post. Portfolio 3 is a little closer to reality splitting the anchor between equity long short and managed futures. 

Both 2 and 3 rely some on simple equity exposure but it is more of a satellite exposure than the alternative core. The volatility and drawdown characteristics of Portfolio 3 are attractive but if the S&P 500 continues above trend it will not keep up. It might stay closer by splitting SCHD, pairing it with a tech sector ETF but that will probably change the volatility and drawdown numbers. 

The THOR Conservative Risk Dynamic ETF (THCR) just started trading this week and might turn out to be one to include in the 60% alt core we're working with today. It's an active fund so what it looks like now could be very different a month from now or a year from now but the basic idea is it's a "multi-strategy ETF that seeks capital appreciation using a risk-first allocation framework targeting a 5% standard deviation."

Its holdings are very differentiated. Its largest position in the Energy Sector SPDR (XLE) at 21% and BTAL at 19%. That's a huge overweight to energy and that much BTAL should suck a lot of volatility out of the rest of the holdings as follows. 

It's easy to backtest the current allocation but again, if the turnover ends up being very high, this may not be much help.

I included AQRIX, LCR is another multi-asset fund that is willing to do some different things and that we've looked at once or twice. BTA is a new risk parity type of fund that we dug into a couple of weeks ago. None of these have a lot of equity beta which is preferable for this project. 

We can keep an eye on THCR to see how frequently it makes changes. XLE was down a ton on Wednesday based on the idea that the election results could bring a faster end to the war in Iran. I don't know whether that is a reason to back off of 21% in XLE or not but I will be curious to see what they think about 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.

Diversify Your Income Sectors

Jeffrey Ptak wrote favorably about bonds at current levels noting that yields are at decent levels and that the risk versus reward are pretty close to being balanced which was not the case when yields were at 2% or less. He references iShares 7-10 Year Treasury ETF (IEF) a couple of times so presumably he was talking about duration. 

Here's a concise version of the bond math he was talking about courtesy of Gemini. I assumed ten year treasuries now at 5% and what the price decline would if the prevailing yield went to 6%.

The chances of 4% aren't impossible if something bad happens but I don't think 3% could happen anytime soon. I doubt we'll see 7% anytime soon either but that seems more plausible than 3%.

For a while I have been framing this as being about adequate compensation. Is 5% adequate compensation for the risk and volatility of going out ten years? That's up to each of us to figure out for ourselves. My answer is an easy no. There are many ways to get similar or better yields with nowhere near the interest rate risk or volatility. 

The ETFs above track 3 year, 10 year and 20 year treasuries respectively. I included their yields in the green box and you can see the volatility numbers off to the right. Again, this is for each of us to decide, is the extra yield worth the extra volatility.

Collateralized loan obligation ETFs have become a huge income market niche. I've been using JAAA for a while but here are a couple of I've never heard of that look pretty similar.

They both yield around 6% and sticking with phrasing from previous blog posts, I think that is what people want their bonds to look like. 

At about a 5% yield, it's safer to add some exposure to duration but not 40%. I wouldn't put 40% in CLOs either. I wouldn't put 40% in any income sector. We talk a lot about owning different income sectors to help mitigate the risk. Anyone comfortable with the risk and volatility with ten year treasuries doesn't have to load up on them. 

Diversify your diversifiers? Diversify your income sectors. 

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 Flood Of Investments

We have had crazy, crazy rain here. Our impact from the El Nino weather phenomenon is a lot of rain. Based on people sharing their rain gages on the community Facebook page, we had more than five inches just on Saturday which is far more than the ground can absorb. I did a little bit of a patrol (fire department related) on Sunday morning.

There are three houses and another parcel on the other side of that bridge.

There are probably 20-25 houses on the other side of this intersection.

It got worse from there before receding some today.

On Sunday, the neighboring fire department, with the help of two other departments had to perform a very serious water rescue. Here's a screen grab from a video of the incident.

You can see how submerged the black pickup truck is. The two occupants are standing in the bed of the pickup truck cold and wet. They were there for hours. The personnel on scene had to set up a line so that half the firefighters on scene could zip line across, under water for much of it, because they needed people on both sides of the "river" to effect the rescue.

It worked out but this was very serious in terms of danger that the passengers put themselves in and also the risk they forced about a dozen responders to take. 

I have done one swift water "rescue" that was actually kind of funny. People drove into moving water and got the nose of their vehicle stuck. I showed up first on scene in our command vehicle (a duded up Chevy Suburban), I looked around, walked up stream, crossed over, walked to the back of their SUV, opened the hatch and said "alright, let's go." No drama, just a long time on scene, both occupants spent a couple of hours getting warm in my vehicle. 

That's the only picture I've got and it almost looks like I took it by accident. 

In both instances, people made poor decisions. I would argue, they maybe obviously poor decisions. On Sunday morning, our dispatch called me, a resident wanted the fire department to come watch him try to cross the river at the bottom of his driveway. "We can do that and we can get you out but we have no equipment to get your car out. This would be an obviously bad decision." It took a little more but thankfully I talked him out of it. 

This doesn't seem much different from loading up on a lottery ticked biotech stock. Not an appropriately sized speculation, I mean loading up.

This doesn't seem much different from loading up 2X ETF on a very volatile stock. Not an appropriately sized speculation, I mean loading up 

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 Path To Efficient Capital

A short post today with an example of a different kind of capital efficiency. The first three portfolios are all 10% Direxion 3X Technology (TECL) and 90% catastrophe bonds. The name of each of the three is how often they rebalance. 

All three outperform 60/40 with less volatility and a lower beta. It's not something that anyone should do with their money but it is a simple example of a concept we frequently discuss. A small exposure to a volatile holding is providing a lot of growth to the portfolio. If TECL does something hideous, that would be unfortunate but far from ruinous. 

Diversifying the TECL sleeve would make sense but might not be crucial, clearly 90% in SHRIX is a terrible 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.

What The Hell Is Wrong With Gold!?!

It doesn't matter! Or, I don't know! For the last few months gold has not been much help as a diversifier uncorrelated to equities. The S&P 500 has been choppy but not necessarily trending lower but maybe we'll view that differently in a couple of weeks. Gold though made a lower high in early September and had arguably been trending down for the duration of that chart. Frequently, on individual days that stocks go down, gold goes down too. 

Maybe we can figure out why but that doesn't change anything. This is a great example of why you diversify your diversifiers and why I am big on small exposures to diversifiers with disparate risks. Stocks are choppy and reported price inflation is escalated. Gold should be killing it right now but it isn't. Diversify your diversifiers. 

The following image is telling and fascinating even if not surprising. 

SPXT tracks the S&P 500 excluding the tech sector. Who knows if this is the start of something serious in the market or not but for now, not all correlations are going to 1.00.

There were a lot of tech and tech adjacent stocks that got punched in the mouth over the last few days including Intel, AMD and Sandisk. Reddit got my attention too.

Yowza! 

It's not the end of the world to get caught in one of these, that can happen every so often and probably goes with the territory of owning individual stocks or even industry funds. SOXX and SMH, both semiconductor ETFs, were down 8% and 7% respectively on Friday. The important thing is sizing. Before the last week or two, semiconductors made up about 18% of the S&P 500. Owning 20% or 22%  would be unlucky but not ruinous the way 40% might be. 

Figuring out how much you own of various things like sectors or countries or anything else in a portfolio of ETFs is not too difficult but I don't think it is a common practice believe it or not. ETF providers want holders to know. It just requires looking at the holdings and then a little math or spreadsheet work. What am I saying? Now AI can do this work even faster. 

Finally, I took this screenshot before the open as a follow up to the WBMO fund we looked at earlier this week. 

It's just one day but we were skeptical of WBMO. Here's the same four at Friday's close. 

The idea underlying WBMO is interesting but I think it will be more volatile than other broad, multi-asset funds. 

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 Daily Interval

On Wednesday of this week, Alphabet (GOOG) reported earnings that were not well received by the street. A couple of the metrics missed, raising questions about whether the company is spending too much money on capex for AI, too much relative to what they can make back. Earlier on Wednesday I saw an ad for the T-Rex 2X GOOG ETF which has symbol GOOX. 

We've looked at leveraged products from several different angles including the idea that the more volatile the underlying, the more the 2X fund will deviate from it's reference security when looked at over longer periods. Looking at GOOX, it's been pretty close to 2X most of the time, not all of the time but most of it. 

Here are the month by month results.

Of course it is not perfect but many of the individual months are pretty close. Many of the stats are 2X too....except growth rate which is 50% more than the reference security. 

Figuring out the capital efficiency is interesting. There is clearly no assurance that GOOX will capture 2X GOOG for more than a day despite many months where it has come close. Stocks that are a little less volatile have less volatility drag and have the opportunity to come closer to 2X over a longer period. 

Sandisk (SNDK) is far more volatile than GOOG and so SNXX has been more like 1.1X over the shorter period that it has been trading. I would also throw in that since the start of 2026, GOOX is down far more than 2X GOOG. I think it is useful to revisit these every so often even if the likelihood of using them is very low. 

Related to leverage, the 2026 ReturnStacked Symposium was held in Chicago this week. During the event they Tweeted out photos with quotes attributed to the speakers like the following. Last year, after the event they shared a lot of the content so we'll see if they do that again this year. The content and the theory of course fasciate me.

We haven't been able to make it work best by stacking them all. The following is a variation of what we've looked at several times before. 

Both portfolios have the same 40% to equities, the same 20% to managed futures replication, the same two fixed income funds and then in the portfolio leveraged with RSST, we added APHPX which is like a global macro fund. The premise from ReturnStacked is not about leveraging up, it is about adding diversifiers without having to give up equity or fixed income exposure. 

I also ran it with 40% in JAAA as opposed to an additional alternative and that also lagged by a similar amount. The lag is slight and it is only a touch more volatile so it's not bad, it's less volatile than AOR which is 60/40 and had a higher Sharpe Ratio than AOR too. That's good but the leverage isn't adding anything versus not being leveraged. 

The problem is highlighted. I think RSST versus SPY/DBMF is a reasonable comparison, one we've used before and RSST seems to always lag. I've said this before, I'm not sure this is actually solving a problem. 

Last one is about the tokenization of funds. Here's another angle on this related to interval funds,  evergreen funds or any other fund that does not have daily liquidity. We are not yet at the point I am going to describe. The big idea is that it will soon be possible (probably) to buy a tokenized version of something like Ark Venture Fund (ARKVX) or the KPC Litigation Finance Fund and be able to sell it on chain without the limits or gating. ARKVX was profiled in this context in that link I dropped and KPC is a fund I've written about once or twice before, it doesn't have a symbol.

You can think of the tokenized version of a fund as being a different share class of a fund like mutual funds have. That's a little too simplistic but it paints a good picture. Whatever limits there are to buying the funds through the actual company like being accredited or needing an advisor would still be in place. It is not clear to be whether those restrictions would still be in place for someone buying a fund on chain. 

One big issue though could be the pricing when you try to trade on chain. Maybe it will be close to NAV but maybe not which is a risk but there is a price that you'd be able to get out if you had to. 

This concept will make its way to brokerage accounts which will make every aspect easier. Again, it's very early, we're not there yet, this is simply a concept that I think could be useful. A small slice into something like litigation finance interests me but there is no scenario where I am giving up daily liquidity. Maybe as described it's more of a step toward daily liquidity. 

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 Clear Path To Catastrophe

The new VanEck Wealth Builder ETF (WBMO) looks interesting. It sort of comes from a model portfolio of ETFs that VanEck has been running for a little over two years. It's not a precise description but it appears to be similar. 

• 44.8% Domestic equity
• 7.7% Foreign equity
• 38.2% Fixed income 
• 8.6% Alternatives; gold, bitcoin, inflation, infrastructure, energy

I was able to tease out a backtest from Grok but fair warning, the numbers from Gemini were different. 

CAGR: 15.21%

Annualized volatility: 11.81%

Sharpe ratio: 0.91 (using ~4.5% risk-free rate) / 1.29 (rf = 0)

Total return: +45.71%

Max drawdown: –12.39%

The hypothetical backtest goes back to January 11, 2024 which is not a huge sample size but in that time frame we can make a comparison to SPY, VBAIX, PRPFX and AQRIX.

AQRIX is a multi asset fund and I think that it speaks well for WBMO that it was close to AQRIX. The fund is not a static allocation so the back test of just taking a snapshot today and going back a couple of years isn't that tight but I do tend to think that stats related to volatility can stand up even if the growth rate is off by a little. So that's the positive. The....maybe not negative but to me questionable is some of the largest holdings. 

• SPYM 17.52%
• QQQM 11.72%
• SMH 3.08%

There are some holdings with larger weightings between QQQM and SMH but SPYM and QQQM are the two largest and SMH is also in the top ten. There's a lot of overlap there. I think having the S&P 500 and NASDAQ 100 in the same portfolio is questionable. I asked Gemini about SPYM and QQQM and its initial response was to rationalize it by talking about making an active decision on cyclicality and mega cap tech and that SPYM/QQQM was a cheaper alternative than the only other choice of buying an actively managed fund instead.

Buying a more expensive actively managed fund is not the only alternative, not even close. Gemini backed off of that assertion. I asked if SPYM/QQQM might be an attempt at capital efficiency to increase the equity exposure with volatility and beta and Gemini said yes to that. My last question on this point was with all of that, does the 3% to semiconductors via SMH support the idea of capital efficiency or does it support my skepticism about overlap and questionable portfolio construction?

The 3.01% weight to the VanEck Semiconductor ETF (SMH) is the ultimate piece of evidence supporting your skepticism of overlapping index exposure.

It completely undermines the "clean tracking" or "capital efficiency" narrative and serves as a classic example of unnecessary duplication in portfolio design.

Ok, skepticism doesn't have to mean it's a bad fund but there are ways to get the same beta and volatility, if they are operating at that level, without overlapping like this. I do take a dim view of this sort of portfolio construction but you can check out Meb Faber's thoughts on his Twitter feed, I think he's said even harsher things. 

Now autocallables. One of the Innovator ETF guys was interviewed by ETF.com at Future Proof and part of the conversation was about autocallable ETFs. Innovator has two of them (at least two anyway), ACEI and ACII. The dispersion between the two is a great example to learn from without needing to dig all the way into the complexity of these funds.

ACII targets a 9% distribution and owns a series of autocallables on broad index ETFs. ACEI targets a payout of 13% or so and owns autocallables on individual stocks. 

A useful building block of understanding that we've been working with is that everything else being equal, the higher the yield of an autocallable fund, the more volatility it should have. ACEI and CAIE have very similar yield targets and the volatility is similar but ACEI appears to have really struggled. 

ACEI owns autocallables on individual stocks and CAIE owns autocallables on a more volatile variation of the S&P 500. Because of this, ACEI is more exposed to single stock volatility, it's more sensitive to equity volatility, versus index volatility for ACII and CAIE. 

This is another example where it's easy to get taken in by a mid-teens distribution but a 9% payout with less volatility is a very solid outcome and likely to be far less difficult to hold onto. If you want to step in, just keep the sizing right. A 60/40 portfolio with 40% in a bunch of different lower yielding autocallable funds seems like a clear path to catastrophe. 

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.