IQQI Not Icky?

Barron's shared a brief research note from BMO about the "underwhelming" results of the standard 60/40 portfolio this year noting it has "clearly been held back by the bond component." BMO then tried to look ahead to what a 5% ten year yield might do to improve the results. Getting 5% would certainly be an improvement but it wouldn't help with the volatility or how reliable the ten year is as a diversifier. 

The above chart continues the same conversation we've been having for many years about avoiding duration but we added a small slice to PCN after looking at it yesterday. PCN is a hot potato of a closed end fund that has a pretty high yield. Portfolio 3, the one without PCN, yields closer to 3.1%. The backtest is short because of client holding JAAA but the outperformance is not all from 2022. The approximate 2% better CAGR over the SPY/AGG combo for the three portfolios adds up quickly in just six years. I think the drawdown and volatility numbers are meaningful but not earth shattering. 

Regarding PCN, is the extra yield worth the extra volatility? That's hard to say but the very small weighting does have a visible impact even if, again, not earth shattering. 

With the meltdown on Nvidia (NVDA), I thought it would be a good time to follow up on a couple derivative income ETFs that reference NVDA common stock.

ANV is a single stock autocallable fund from GraniteShares and NVDY is the YieldMax covered call fund. The common has not fallen enough to suspend the distributions from ANV. The barriers currently start at $139.70 and work lower from there. ANV was immune to the volatility of the common until it wasn't. 

Obviously there's no way to know where/when NVDA will bottom but the 10% drop for ANV is not bad when you think in terms of autocallables generating yield from equity volatility, the yield doesn't come from fixed income market drivers. Going forward though, ANV is likely to be more volatile than it has been because of the jump up in volatility of the common until the volatility goes back down. Trying to quantify what that will mean would be a lot of guess work. 

The price only decline in NVDY generally makes sense, it has paid out about 4% in distributions since the beginning of October. Sometimes the payout can cushion the decline but not always. I think price only is constructive because it captures the experience of being a share holder. NVDY closed Friday under $9 so my hunch is a reverse split could be coming soon.

Last one for today, Quantify Funds is throwing it hat in the broad based index, derivative income fund ring with the Income Q NASDAQ 100 Premium Income Fund (IQQI) which should start trading this week. It will not sell covered calls, it will buy deep in the money calls to capture the upside and sell put spreads to generate income. Part of the marketing is "full exposure with uncapped upside."

Covered calls cap the upside. If you buy a stock at $90 and sell calls at $100, your upside is capped at $100. XYLD and QYLD show this very plainly. They sell monthly calls and the price only returns are nowhere close to the indexes they reference. 

I was quite certain that the long call/short put spread strategy existed already somewhere in the Tuttle realm and they do with the Income Blast suite of funds. DRMP is the Tuttle Memory Stack Income Blast ETF and the green line is Roundhill Memory ETF (DRAM) which is a fair comparison. 

Selling put spreads doesn't cap upside but doing so inside of a fund would have to cap the upside in a way. The DRMP website shows the current distribution rate at 31.07%. If it pays out that much, then with each distribution, the NAV gets reduced (that's how going ex-div works). Covered call or not, a fund yielding 30% needs to overcome those ex-div reductions otherwise the NAV will erode. DRMP started out staying close on a price only basis but staying close isn't sustainable at 30%. 

Trying to piece IQQI together it looks like it will be closer to NEOS QQQI in terms of yield level and ROC distributions. 

A scenario where long call/short put spreads could be better than covered call funds would be in quick rallies. In a large decline though, long call/short put spreads could do worse than covered calls because the long calls would get hit hard and the price of the underlying could go below the long leg of the spread and stay there. If you don't know what that means, I would avoid these until you can spend time learning.

If someone is wants a covered call fund but not an NAV incinerator and long call/short put spread will look similar most of the time but with a chance for more upcapture in a fast rally? Yeah, it might be a better mouse trap occasionally. I'd be more interested in one of these that referenced the S&P 500. For now, it does not appear anyone has filed for an S&P 500 version but if IQQI works close to how it's been billed there will be. If/when an S&P 500 version comes, in addition to comparing to covered call funds, I would also want to compare to WTPI from WisdomTree which just sells puts. 

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.

Be Careful With Closed Ends

Two quick items today.

First up is a closed end fund that I don't think we've looked at before; PIMCO Corporate & Income Strategy Fund (PCN). It was mentioned in an article on Yahoo Finance that was so bad I'm not even going to link to it. PCN has done well relative to closed end funds and to AGG. Its total return has compounded at 9.15% over the last 23 years compared to 2.92% for iShares Aggregate (AGG). The yield over that time has been about 10.5% but the yield has had some variability, CEFconnect shows the yield currently at just over 12% and the leverage shows 22%. 

On a price only basis it has compounded negatively at 1.44% for a cumulative negative 28%. The negative compounding isn't necessarily a deal breaker when sized correctly. At 10 or 11% it is providing a disproportionate amount of yield for anyone who wants distributions out of their portfolio.

The tradeoff is a lot of volatility which is to be expected with closed end funds. They have some brutal drawdowns.

The drawdown chart hovers over the financial crisis low when it was down 66%. I highlighted a bunch of other big declines that happened along the way. The back test I built looks pretty good and if we played around with other backtests they'd probably look good too but man. Putting 30% into PCN is a hyperbolic example that I think would invite frequent misery. While a small slice is probably more palatable, I think you really have to look long and hard in the mirror for these. Barron's writes frequently about closed end funds but they don't hit on the occasional massive declines that go with the space. 

The Wall Street Journal had a doozy of an article; How To Prepare For A 60 Year Career & Save For Retirement. The tone of the comments, always read the comments, could be summed up with 60 years? GFY.

The idea of planning to work until 80 is ridiculous but is there a bigger message that might be more useful? I think there are two points. If they had replaced the word career with income steams, it would have been more useful because I think many readers took the 60 year idea literally. If someone is 80, enjoys painting and sells paintings, that seems like a great outcome compared to commuting to an office job everyday all through your 70's because you have to. A former fire board member here in Walker is a sculptor, sells pieces and until recently worked one day a week at the artists co-op in town. He's 78.

The other point for me was about optionality in case you have to work not until 80 but longer than you were planning to work. If someone is 65 and financially needs to keep at it for a little while to make their math work, it would nice to be able to do that. 

Repeating from a couple of hundred other posts;

• Eat less sugar
• Eat less processed food

I think it is vital to lift weights. Plenty of people do not enjoy lifting but it is vital. It can be very quick and simple to make improvements even if not a thorough full body workout. 

• Deadlift
• Squat
• Farmers Carry
• Pushups 

The picture is of a landmine squat which has very little chance of injury compared to resting the barbell on the back of your neck.

There are substitutes for deadlifts like bent over rows or dumbbells that again, greatly reduce the odds of injury. 

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.

Massive Fund Distributions

Just a couple of quick hits today starting with the Glenmede Global Secured Options Fund (NOVIX). 

That's a price only chart. Here's total return.

The fund isn't very yieldy. The one huge drop huge drop off is a $9 capital gains distribution. In an IRA account it doesn't matter, the distribution can just be reinvested but in a taxable account, that could be a serious problem. Not every strategy fits neatly into the ETF wrapper but where you have a choice, go with the ETF. Mutual funds report any unrealized gains or losses to help people avoid buying a fund right before a massive distribution. NOVIX has had a couple of the disproportionately large distribution in its history but nowhere close to the one for $9.

Last month we looked at a Bloomberg article about "dividend nomads," some of whom live off of distributions from derivative income funds. The Trillions podcast did a follow up on the article that was fun to listen to. Hosts Eric and Joel had the writer of the article on (make sense) and an advisor who doesn't have any clients doing this so I don't know why he was on. The general take was that it can work with funds that have JEPI-like yield but it would be optimal. 

That's pretty similar to our conclusion but there does need to be an ability/willingness to live on less of a pay out in a down market. The S&P 500 isn't going to go out of business so any fund referencing the S&P 500 and not incinerating its NAV should also not go out of business. That doesn't mean it's optimal, just that there's not much risk of it completely failing. Here's one that I think is an NAV incinerator, continuing to erode quickly and eventually reverse splitting.

I don't think JEPI or SPYI are NAV incinerators. Living on derivative fund income still probably better thought of as a bridge to the next financial milestone rather than something a 40 year old FIRE guy should plan on sustaining for 50 years. 

Those are price only returns and you can see the income levels for $500,000 invested. These portfolios are not very robust. 100% in JEPI has no robustness. Putting 10% into BTAL potentially becomes a source of funds if the market drops a lot causing distributions to go down. If the S&P 500 drops 30%, the need to hedge with BTAL or anything else becomes less. You probably don't need to hedge against a large decline after a large decline. Mixing SPYI and CAIE isn't really diversifying, they both reference the S&P 500. Portfolio 3 has a higher yield than the ones that own JEPI but I don't think of that as NAV incinerating but I would expect erosion if the market has smaller gains than it has in recent years. Portfolio 3 wouldn't owe taxes for a while as both funds return capital for their distributions. You can look up why that is if you are unfamiliar. 

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.

Linear Modeling, Lumpy Living

In response to yesterday's post about living on dividends without spending principal, a buddy left a comment on Bluesky noting the strategy/idea is more difficult than it seems which is where the title for this post comes from. At his suggestion I took a look at a preferred stock ETF and I threw in PFD which is a closed end fund that invests in preferred stocks. 

IUSB has been no great shakes either but yikes for PFD and PFF which is an iShares Preferred Stock ETF. Preferreds sound good in theory but they are tough to live with in practice. This was also the case for individual bank preferred stocks in the Financial Crisis, they got pasted. 

I try to really hit on what it's like to actually own various types of assets and strategies versus just looking at a pretty backtest. 

Managed futures always backtests fantastically well as part of a diversified portfolio, gold too to a lesser extent but nine years is a very long time to compound at zero. A 3-5% diversifier is one thing but 25% is something else entirely. It's not that a portfolio couldn't succeed in that nine year period but sitting with a huge allocation to something that isn't growing for nine years will be very challenging. 

The portfolio with 25% in GLD had a two year run in the middle where it lagged noticeably but the overall nine year period, the back test is fine. I know 25% in one alt is the wrong path for me, I'm not saying it's wrong for anyone else, you all can decide for yourself, but it is important to consider what enduring a long stretch of an asset just sitting there doing nothing would feel like if it happened again. 

If I was forced to own just one fund, I guess it would be BLNDX. It's hard to argue with that backtest. It has delivered in terms of the expectation that I believe the managers set when the fund launched. I doubt that the period inside the purple box would have bee very challenging as it went sideways while 60/40 had very painful drawdown. During the period in the green box though, BLNDX again traded sideways while 60/40 did very well. If BLNDX does well because it is willing to differentiating, that's part of the story, then anyone buying the fund needs to be ready for a repeat of the pattern in the green box or maybe worse.

Actually the idea for BLNDX came about because as strong of a diversifier that managed futures is, it is very difficult for many investors to hold on through thick and through thin. Blending the two is an attempt to solve that problem. 

It's easy to throw a bunch of things into testfol.io and play around until you get something that looks good but hopefully you also take my context of trying to paint of a picture of what owning these various alts and strategies will actually be like, repeated for emphasis. 

One last point.

The blue line portfolio is a variation of an idea we looked at a couple of weeks ago that puts 60% into diverse alts and 20% each to equities and fixed income. The backtest is fantastic but look at the year by year results.

How difficult would it have been to stick with it after stumbling out of the starting blocks and that three year period where the lag was enormous?

Linear modeling, lumpy living. 

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.

Living On A Dividend

From Ben Carlson;

Is it realistic? How realistic is it? What parts are realistic? In his blog post Ben talked about the mechanics of how dividends work. If you have $100 in stock and the company pays out $1 in dividends, you now have $99 worth of stock and $1 in cash. If you spend the dollar, then you just have $99 in stock and that's it. Maybe I misunderstood but he seemed to discount the idea because of these mechanics and needing to price appreciate that $1 in dividends back.

He did say that just living off the dividends without touching the principal was the "retirement dream." People like dividends/distributions so the better questions is can a dividend-centric portfolio in this context outgrow its yield? If so, then it is at least partly realistic.

Quite clearly is it possible. The above three funds' numbers go back to late 2011, those are price only returns. Whether owning one or more dividend ETFs is a good idea or optimal is another discussion but if the stock market goes up most of the time, it is a reasonable probability that dividend funds that are not crazy high yielders or NAV incinerators can have a growth rate that exceeds its yield. The next time we have a lost decade that might not be the case but then if we have a lost decade, growth for simple market cap weighting would also be lost. 

This mix allows us to backtest just over 20 years. I've owned JNJ and BNS for clients since 2004. I owned MO back then but switched to PM when the company split. 

Using BTAL speaks to the reader's concern about drawdowns. Having 10% in BTAL brings down the volatility and helps with drawdowns but there are some declines that portfolios can't hide from. 

But, 2008 was the only calendar year where the price only version exceeded a 15% decline. There were a handful of very fast declines though where the 15% level was breached. That could be offset with more than 10% in BTAL but the more in BTAL, the less that is producing income. There's a tradeoff here that the reader would need to sort out. 

Here's an updated version that swaps out 20% in IEF for 20% in SHRIX. This allows us to go back 10 years. 

We're getting far more income obviously which is what the reader wants but the tradeoff is a lower price only growth rate.

There's still 6.8% in growth after taking out the income versus an inflation rate of 3.39% for the period tested. The dividends for the stocks and ETF should be qualified but not the dividends from SHRIX. 

This can work with tradeoffs. Here's an example of something that probably can't work as a long term plan.

Funds like JEPI, SPYI or BALI have distributions in this neighborhood. 

That goes back to mid-2013 and actually is better than I expected as I was typing the previous sentence. Adjusted for inflation, SPXX compounded at a negative 0.48% and XYLD negative 2.33%. While this is not a great long term portfolio strategy, we've looked at this sort of thing in the context of a bucket strategy needing to last maybe eight-ten years to get someone to the next financial milestone like Social Security or RMDs. Success here is not riding out SPXX for 30 years but being willing to exhaust a smaller piece of money over a much shorter period. 

Success would be something like hoping make this type of bucket or bridge last for 10 years like I said, getting to ten years having depleted most of it but maybe having enough leftover for an emergency fund. In 2016 someone did this with $400,000, they've been taking a long term unsustainable $40,000 out per year and instead of having zero today in that account (which would be ok), they have $100,000 left over for a robust emergency fund. Saying it more plainly, you expect to deplete the account but instead you have some left over. That is plausible, counting on 11% forever is probably doomed because of longer term growth rates not being that high and loss of purchasing power.

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.

Looking At Leverage

The Monday email from Finominal looked at whether there is any added benefit to leveraging up investment portfolios. My use of the word up is not fair, really the idea is whether using leverage for better diversification is additive. The following is what they studied.

We can't go back 100 years on testfol.io but I think we can go far enough back to be useful.

The result for 90/60 being better than straight S&P 500 is consistent with the backtesting done by WisdomTree to support their NTSX ETF. The next image adjusts the growth rates for inflation. 

A real return of 5% is a common target for endowments. Portfolio 4 obviously has the lowest growth rate but it also has the lowest volatility by far and a pretty small max drawdown when you think about all the crazy things that have happened since 1988 and the beta is only 0.18. All good but the differences in compounding is meaningful. Portfolio 4 has grown to $224,000 while simple 60/40 is $335,000. Yes 100% equities did much better than both but someone really needs to look themselves in the mirror about going 100% equities and being able to hold on no matter what. 

Someone could put it all in NTSX, so levered up, but that would have meant being down almost 30% in 2022 versus 18-19% for SPY/IEF. The math checks out of course but enduring 30% requires enduing 30%. There's not a tidy this is best for everyone answer here. We talk frequently about understanding our own emotional limits for our investment portfolio as well as the tradeoffs to whatever we decide. Going full NTSX should result in a better long term result but with more pain along the way. Portfolio 4 is very unlikely to keep up with the others but I would expect very little anguish along the way. 

Where this exercise is quadrant inspired, the Permanent Portfolio Fund PRPFX compounded at 7.08% for the period studied with a volatility of 8.94%. I feel like most of the investment industry would consider the permanent portfolio idea to be valid but clearly not always optimal but then nothing is always optimal. 

I don't think it is that difficult to assess the pros and cons of most of the portfolios we explore here. With today's example, a portfolio with a 25% weight to equities might be all weatherish, I would say Portfolio 4 fits that bill, it's not going to keep up with a portfolio that is 60% equities. 

The other day, we used a Twitter fight as an opportunity to look at a new (to us) ETF that fits in with some of other funds that we've looked at over the last few weeks. Over the weekend, the Twitter fight drew a lot more attention, really a lot. I think this screenshot gives some context of how the instigator engages on Twitter.

The Hedgeye company that McCullough runs is a research shop, they have some ETFs and there is a very active trading service. Hedgeye's runs a lot of ads about learning their process which includes a universe of 140 ETFs that allows them to "go anywhere, not everywhere." 

Based on all the back and forth I read over the weekend (I couldn't help it!), the success is very questionable but there are plenty of people (or bots maybe, I don't know) that were very supportive of Hedgeye. But the 140 ETFs and I also believe there are individual stocks involved too, is interesting to me. 

The trading appears to be very active and if they exercise all 140 ETFs frequently, that is going to be hard to keep track of. This all helped me crystalize a couple of things we do here that I hope are productive for readers but that I know helps me.

You have probably noticed that when we explore portfolio theory we use a much narrower universe of funds. I am very much a believer in holding long term when possible. By using far fewer funds for blogging purposes I think it creates the effect for regular readers to get a sense how these funds do through various events. I first started writing about SHRIX for cat bonds three years ago. Cat bonds are a core holding, the weighting is small though, and most portfolios we experiment with include SHRIX. Love the idea or hate it, if you're reading this blog regularly you are getting a sense of how they do. 

There are others too of course, cat bonds is just an easy example. Clients own EMPIX, not SHRIX, SHRIX has a much longer track record which makes for better backtesting. EMPIX is managed to have even less volatility than SHRIX which is why I prefer that one. 

The continuity makes it much easier to learn versus being all over the place with very frequent trading changes. 

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.

Twitter Fight!

A skirmish broke out on Twitter.

I don't know the starting point of the beef but the Hedgeye guys went after Ryan who responded with the following.

Then Corey jumped in and based on the screenshot and the thread, there's ongoing beef there too.

The HECA ETF is a new one to me. Based on the factsheet, it is a multi-asset strategy, based on a proprietary process for evaluating macro factors related to increasing/decreasing GDP and increasing/decreasing inflation. The four conditions are referred to as quads so maybe it is quadrant inspired? It seems like it performs an analytical assessment versus just maintaining an allocation to all assets relying on at least one of them doing well no matter what is going on which is what PRPFX does. HECA is trying to get out in front of macro changes and PRPFX is trying to be ready for whatever comes.  

The fund's website includes the term all-weather and the factsheet says HECA could either be a core holding like some of the mutli-asset funds we've looked at recently or a satellite holding as a diversifier. The primary objective appears to be never going down more than 15% and then providing growth when possible. 

This backtest provides some good context.

Why is HECA doing poorly this year? 

The holdings don't tell the story. Gemini says the turnover is 671% which is very high and that the fund got caught wrongfooted on equity trades including thematic ETFs earlier in the year. The way this is framing itself, HECA reminds me of BIVIX and DYMIX in terms having no idea what to actually expect from the fund. 

The funds aren't necessarily bad or good. it's just that at times they look like the broad market and at other times they look nothing like the broad market. If they never look like the market then ok, low correlation diversifier. But if the correlation changes by a lot and does so frequently, that's tougher to implement. 

The 15% max drawdown sounds like a 15% buffer which is why I included BJUL in the first backtest. Unfortunately for HECA though it has lagged far behind BJUL and done so with much more volatility. Here's some harshness from Gemini.

The idea of a fund that solves all problems is intellectually appealing so I am always going to want to dig in but whatever someone wants to get out of HECA, there are probably better ways to get it. 

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.