Or Just Diversify Your Diversifiers

More quickish hits today.

First, more on the DYMIX mutual fund that we looked at yesterday. The fund has done well performance wise but has been very volatile. It has about the same level of volatility as the S&P 500 but is only 50% equities. The mix of equities and macro has meant the fund has taken a very different path to a similar result as SPY. 

A 50/50 blend of the two brings the volatility down noticeably, improves the Sharpe Ratio and has a meaningful impact on max drawdowns and average drawdowns. I have no idea if this can carry forward or not as it probably relies on DYMIX continuing to make good decisions but it is a good and simple example of blending two very volatile things to get a result with less volatility. This is why BTAL has worked as a way to hedge portfolios but 50% to BTAL is absolutely the wrong weighting, that should be much smaller. 

Yesterday, I said that the FOXY ETF from Simplify might turn out to be a useful fund for adding currency exposure, it is a variation on the carry trade. We've also looked at a couple of stinkers from Simplify too. I think we were early to realize that its Tail Risk fund which had the symbol CYA wouldn't work because of the way it relied on going long volatility via the VIX and sure enough the fund went down a ton and closed. 

We've been curious but skeptical of the Simplify Multi QIS Alternative ETF (QIS). QIS stands for quantitative investment strategies. 

Stinker. It's more difficult to look through QIS' holdings to understand what the story is compared to CYA but Copilot thinks that QIS has also been hurt by going long volatility. Ouch.

Very quickly on autocallables, ProShares posted a glossary of terms that might be useful if you're trying to learn about them. 

ETF provider Kurv just listed a capital efficient fund along the lines of WisdomTree or ReturnStacked with the Kurv US Large Cap Tax Optimized ETF (LCTO). The prospectus allows it to be 100% S&P 500/100% fixed income which will usually be municipal bond ETFs. Currently though, it is only 58% in munis so for now the weighting is similar to NTSX from WisdomTree but that fund owns AGG-like exposure instead of just munis and it allocates 90% to equities not 100%.

LCTO is actively managed so this backtest doesn't give it credit for any good decisions related to shortening duration it might have made if it had existed. LCTO has done noticeably better but it has more S&P 500 exposure. Just peeling out the muni bond ETFs, that sleeve compounded at 1.01% for the same period versus -0.23% for AGG.

You can listen to this podcast from Kurv to learn more about what they have in mind. 

LCTO was discussed in the podcast as a portable alpha strategy. I'm not a huge fan of implementing portable alpha this way. 

If an investor puts 67% into NTSX or LCTO, they have 33% left over to either add yield like T-bills or add alternatives to better diversify the 67% they put into the levered fund. That sounds good in theory but how difficult would it be to have 2/3 of your account down 30% as was the case in 2022? Salvaging 2022 would have required really dialing in the exact alts to mitigate that decline. Having to get that right seems much more difficult than avoiding the leverage and diversifying your diversifiers. 

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 Farmland ETF?

A lot of (hopefully) quick hits today.

On Wednesday I got a call and an email from the Blueprint Chesapeake Multi-Asset Trend ETF (TFPN). Similar to MFUT from Cambria that we looked at the other day, Jerry Parker is the brains behind the fund and the point of differentiation of the strategy underlying both is they use individual stocks as part of the mix. 

The returns are not identical, if you're curious you can look at the two funds to try to figure out the differences. The website for TFPN has a lot of information including this asset mix that excludes cash. Quick note, managed futures funds typically hold a lot of cash/T-bills to collateralize the futures positions.

I read that as 50% fixed income, 20% each to equities and currencies and 10% to commodities. It feels quadrant inspired or adjacent. I plugged those weightings in as follows.

True to yesterday's post, it has 20% in unconstrained equity beta with SPMO. Commodities with ARCIX might offer some of the attributes of managed futures we talked about yesterday but just with commodities.

That mix offers a very smooth ride. With so little in equities it might have trouble keeping up with the other two longer term but, CEW was the only fund I could come up with for currency and it added almost nothing to the growth rate. Given more time, the FOXY ETF from Simplify might turn out to be a better mousetrap for this idea.

About a month ago we looked at the Dynamic Alpha Macro Fund (DYMIX). The fund is essentially 50% equities and 50% macro. For a macro fund, it has very few moving parts. A month ago the macro positioning held gold, copper and five year treasuries. In that first post we saw that it was struggling and following up on yesterday's post, we did do a little attribution analysis. The decline in gold and to a lesser extent, the decline in copper hurt the fund. One month later and the fund is long corn, sugar and the yen in addition to gold and it is short coffee, cattle and the five year treasury. 

Fast forward a month, gold was up a lot and corn was up 10% which helped the fund lift 9% since that last post. I like the idea of 50% equities with 50% macro but DYMIX might be more of a multi asset fund than a macro fund. I'm not sure but I am keeping tabs on it.

This is something I've been talking about for 20 years. Not so much an ETF, but figuring out how to invest in farmland and if that turns out to be an ETF, cool!

A long time ago, I went down this rabbit hole looking at some very small foreign stocks that owned plantations and the like. It was very difficult to get decent information and just watching the stocks for a while, they were not investible. I will be very interested to see if it comes to market and what it actually will do. This is a very useful alt but I have no idea at this point if this fund will be the answer. More to come. 

Last one. ProShares has thrown its hat into the autocallable ring. 

• ACSP references the S&P 500
• ACQQ references QQQ
• ACRT references the Russell 2000

I sat in on a webinar which focused primarily on ACSP. A couple of high level points; autocallable ETFs actually track more volatile versions of the reference indexes to get the yield up. ProShares also said repeatedly that autocallables are like complimentary cousins to covered call ETFs. They didn't word it this way but covered call funds sell....ahem...call options while autocallable strategies are better thought of as selling puts. 

The presentation included "pre-inception" performance going back to 2010 and showed the year by year yields ranging from 14%-20%. They put up a chart comparing the S&P 500 to the higher vol index (autocall index) used for ACSP and it showed going up less but with more volatility most of the time. In a few of the serious drawdowns, the autocall index actually went down less. If I understood correctly, the distributions are not in jeopardy until there is a 35% drawdown in their respective indexes. Admittedly that won't happen very often and if ACSP is anything like Calamos Autocall (CAIE), then there is a mechanism where distributions resume after some amount of recovery.

I submitted a couple of questions to better understand what the real risk is but they were not answered. We are in a 4-5% world. Supposedly, ACSP will range from 14-20%, the website for the fund shows 18% currently, so there is risk there. The extra 14% is compensating for something and I cannot figure out what that is. Taking that sort of risk is not necessarily bad but I think taking that risk without understanding it is a bad idea. 

JELM from Janus seems to be the lowest yielding of the autocallables at more like 9% (please leave a comment if you know otherwise). In a world of crazy high yielders, it can be easy to lose sight of 9% being a fantastic payout rate. The track record is nowhere long enough for me to use the fund at this point but everything else being equal, 9% will be less risky than 20%.

And "pre-inception?" Really? I felt icky just typing 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.

Next Level Backtesting

Morningstar has a few model ETF portfolios. Maybe I was the last to know but either way, they have a basic portfolio, a defensive portfolio, factor based and income oriented portfolio. This is the defensive portfolio;

Below is a comparison of their defensive portfolio to the basic which is 40% VTI, 20% VXUS and 40% BND. The objective of the defensive portfolio is lower volatility, smaller drawdowns and a better risk adjusted return. Going back almost 15 years, it appears to have done that.

The defensive portfolio reduces bond duration versus putting all 40% of the fixed income sleeve into BND which tracks the same index as AGG. This alone helps reduce the portfolio's volatility. 

Using nothing but min vol ETFs for the equity exposure isn't a great idea. Implementing the defensive portfolio as presented means having very little chance of keeping up with the broad market when it has a decent or larger move up. If you look at USMV compared to SPY, you will see it was very close to SPY for its first seven or eight years, since then USMV has lagged meaningfully. Copilot says USMV changed its methodology to get more defensive starting in late 2018. 

Instead of going heavy into USMV, I think it makes more sense to have some exposure, maybe a smaller percentage, in something that has normal equity market volatility like market cap weighting or some other factor that gives a better opportunity for growth. Yes, that is pretty much AQR's argument against using buffer funds. Just own less equity. 

If a portfolio has some exposure to SPY or something else that has a chance to keep up with markets and the market absolutely rips, you'll have something that captures the effect. Some exposure to unconstrained equity beta is pretty important.

It is also important to have some exposure to something that gives the opportunity to protect against a downturn in markets or has the opportunity to provide "normal" returns in case equities can't get it done for a short period like 2022 or a longer period like the 2000's. Something with these attributes probably helps more than having a min vol ETF. For me, managed futures fits this bill. Having a negative correlation (sometimes) or no correlation means it can go up when stocks go down. This isn't infallible as we saw in the tariff panic but managed futures did do well during the Covid Crash which was a fast decline and slower declines like 2022 and the Financial Crisis. 

The following portfolio kneecaps the domestic equity exposure with BJUL but allows foreign equities to capture the full effect for better or worse. SHRIX and FLOT avoid duration and we talked about managed futures already.

This is intentionally suboptimal but it keeps the domestic/foreign equity balance about the same. 

Portfolio 3 has the return of Morningstar's Basic but the volatility of the Defensive. VXUS was mildly additive and AQMIX going up 35% in 2022 was meaningful. 

There's something very interesting in that last screen shot. It only goes back eight years. For the last eight years, the Morningstar Defensive Portfolio does not have a better risk adjusted return as measured by the Sharpe Ratio like it does above in the first performance table covering 14+ years. The difference is the methodology change in late 2018 that I mentioned. 

The following only goes back three years but you can see the Defensive not having better risk adjusted returns.

This will be harsh but it seems plausible that in assembling the Defensive Portfolio, they did not account for the methodology change. USMV's first few years kept up with SPY which might have skewed their backtesting in putting the model together. I don't think the model has reasonable probability of a better risk adjusted return going forward either. 

This post is now going down the road of a more detailed attribution analysis. I usually throw in a tidbit about what might have helped a portfolio we experimented with or held it back, like comment above about VXUS being mildly additive. Knowing a portfolio might struggle when a portfolio has too much or too little in foreign stocks or if managed futures struggles is one thing but missing a fund's strategy shift is more problematic. Maybe that didn't happen in this case so the takeaway is to be aware of the possibility that a fund will change its strategy. AQRIX is another example, usually I say something like it used to be risk parity and while it changed its strategy it is still influenced by risk parity. 

A different type of attribution thanks to a reader comment on Twitter; on a recent post I talked about multi-factor equity funds potentially blurring the effects they are seeking. The reader noted that the Vanguard Multi-Factor ETF (VFMF) has outperformed on a three year and a five year basis. Yes but there's more to the story.

The YTD and one year numbers appear to be anomalous. Just looking at the holdings doesn't give an answer so this is an example where AI can help with the attribution. Copilot said that overweights to energy, financial and healthcare have helped. Maybe, maybe not but it has never outperformed to the upside like that before. The one other time it outperformed by a lot was 2022, when it was only down 5.66%. Going year by year, in nine full and partial years to look at, VFMF has outperformed SPY three times.

I'm not bagging on VFMF even a little bit. Lagging a little most of the time but offering crisis alpha is perfectly valid. The point is that three year and five year performance are valuable datapoints but may not be sufficient to understand what you're getting. I asked if there is any basis to expect the outperformance of the last year to continue and Copilot said the outperformance is "episodic" not persistent and that the "fund behaves like a high‑tracking‑error mid‑cap value strategy whose returns oscillate around the market rather than compound above it."

In future posts, I'll try to talk a little more about attribution for these ideas we play around with. I do think I touch on it but more in passing than in depth. Backtesting is helpful but the next level for real world use is understanding why a fund or portfolio did well or did poorly and this work is easier with AI. It was easy to spot the performance anomaly with VFMF and know to question it but in this case it was not easy to understand why without AI.

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.

Black Sheep Portfolio

A couple of weeks ago, we looked at a blasphemous portfolio that combined derivative income and buffer funds. It was blasphemous because while so many professional market participants hate them, many individual investors love them. The results from what we looked at were fine despite the various flaws that derivative income and buffer funds have. They do have flaws and while hopefully we can learn something from these funds, the flaws don't go away. 

Either as a coincidence or maybe prompted from the above linked post, I've been having a conversation over LinkedIn with with a portfolio manager at another firm that uses buffer and floor products somewhat heavily. As a very round number he mentioned a 35% allocation to buffers and floors. That seemed high but according to Copilot, that is well within the norm of models that use these funds. Moderate model portfolios tend to range from 30-50%. I wouldn't have guessed that but there you go. 

It's a short period available to study. BJUL is a buffer fund that we have looked at a few times. It protects the first 9% down for one year while allowing 18% upside. BJUL just reset on July 1. SFLR sort of does the opposite, there is exposure to an initial leg down but offers more protection if the S&P 500 goes down a lot. HEQT uses puts to hedge and USMV is optimized to have lower volatility than the broad market. Here's a summary from Claude;

In 2022, BJUL was down 7.38%%, USMV was down 9.42% and HEQT was down 8.25% compared to 18% for the S&P 500. 

I wanted to update the blasphemous portfolio to be even more hated with a value ETF and low volatility managed futures. In addition to the negative sentiment toward buffers and derivative income, it seems like very few people are interested in value stocks and low vol managed future is an odd ball that is worth exploring more. 

Either version really is a Black Sheep allocation but even still, with nothing I'd want to own, the results are interesting.

The intuitively weighted version yields less than 2% while risk weighted version yields about 3.70%. The compounded real returns were 6.19%, 4.60% and 6.01% respectively. 

There was no place to hide during the 2020 Covid Crash, the important thing from that event was simply not to panic. That was a fast decline and fast declines tend to snapback most of the panic very quickly. In 2022 though, both versions of the Black Sheep portfolio was dramatically better than 60/40. There was no real help in the Tariff Panic of 2025.

To the extent the Black Sheep portfolios did well, there is some equity beta to capture upside and they avoid bond duration. The blending's result is obviously close to 60/40 most of the time which is ok but differentiated when most needed in 2022. In terms of weaknesses, 85% of the portfolio has some sensitivity to equity downside which again, was fine in 2022 but not during the few fast declines that occurred during the back test. 

I have no argument about this combo being optimal but it is valid. Something could go wrong with a buffer fund or index based derivative income fund but that hasn't happened. Market cap weighting obviously hasn't malfunctioned but has cut in half a couple of times this century and while that's not a malfunction (repeated for emphasis) cutting in half is a rough thing to endure. 

Trying to apply any of this to real life, putting 35% into one value fund like VTV is not terrible. Maybe it would lag market cap weighting and other factors or maybe not, no way to know but the structural risk is pretty much null. If you want to do something substantial with buffer or floor ETFs, I would suggest breaking that up into funds from different providers. It's not that I expect something bad to happen but where there are derivatives and complexity, there's no harm in diversifying issuers. 

One last chart about managed futures that I thought was interesting in terms of capturing performance dispersion. 

The chart only covers 15 months back to MFUT's inception. QMHIX and MFUT are both relatively volatile implementations and the difference is huge. Over the next 15 months, maybe MFUT will outperform by that much, there's no way to know. Most clients have exposure to managed futures through BLNDX and another fund that is just managed futures. Managed futures is great but if you want to go heavy, use more than one fund. 

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.

Deeper Dive On Equity Factors

We've talked several times about the challenges of using multi-factor funds, most recently here. I believe factors can be effectively blended together but it probably makes more sense to do it yourself than buy a multi-factor fund. One point I didn't emphasize in the most recent post but have talked about before is that blending factors together in one fund can result in all the moving parts diluting the multi factor effect such that you end up closer to market cap weighting than what you originally intended. 

QVML which targets quality, value and momentum is 39% tech and 11% communications compared with 37% and 10% respectively for iShares S&P 500 (IVV). Other than iShares MSCI USA Value (VLUE) which is 38% tech (due to the huge run up in Micron), there aren't too many value index funds that heavy in tech yet somehow, QVML is supposed to give access to value? 

Finominal did some research on different ways to access multi-factor strategies. 

Combination models blend together stocks from each factor so if you built a multi factor strategy with two or three funds you'd be building a combination model. Intersectional means picking stocks that score well on all of the factors that a fund is trying to access. 

Copilot says QVML is a combination fund and that Goldman Sachs Active Beta (GSLC) which adds low volatility to quality, value and momentum, is intersectional. 

Um,

And the results are similar to each other and the S&P 500.

Yes, GSLC lagged behind the other two but that chart doesn't recreate the result that Finominal got. The SPMO/SPHQ/SCHD combo we've played around with here and that I've used in place of domestic market cap weighting in client accounts, has differentiated a little better than the above with almost 150 basis points of improved CAGR and noticeably lower volatility but not dramatically lower. 

Kind of related, ETF IQ reported that ETRACS is closing two ETNs that seem interesting. They have no assets to speak of but still interesting. MTUL is 2x momentum and USML is 2x low volatility. I tried to find a 2x low volatility fund for a blog post but USML didn't pop up. I think it was Cliff Asness that talked about leveraging up low volatility equities. 

SSO which is 2x SPY has tended to track double the reference index over longer periods (it's not infallible) so it is interesting to see MTUL and USML not do that very well except for the volatility on MTUL versus MTUM.

Going year by year there were a couple of instance where they did get very close to the 2x the result.

The idea is interesting but the result this way a little less so.

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.

Even More Unconstrainment

Let's continue yesterday's conversation about unconstrained strategies. 

Starting with another ETF from fund provider Monarch, the Monarch Ambassador Income ETF (MAMB) seems to delve into unconstrained territory. 

How has that impacted results versus AGG and IUSB?

MAMB was very close to AGG and IUSB until 2025 when its allocation to gold (per Copilot) added to returns. In 2022, there was no differentiation versus AGG or IUSB.

Their idea though can be implemented with different funds to get a differentiated result. Their idea is valid but could benefit from being more unconstrained. The following allocation is the where I would start trying to use MAMB's process.

TYLD can flip between short term bills and longer term income sectors based on how wide spreads are. Since its inception in 2024, TYLD it has only been in T-bills. I am using TYLD as a proxy for long term treasuries because it can switch to that if it ever becomes attractive to will but avoid that unreliable volatility in the meantime. Where TYLD has only been in T-bills since inception, we can use SHY which is also T-bills to get a longer look than just two years. 

The MAMB replication outperformed thanks to less exposure to duration which has probably been one of the most important themes we've talked about over the history of this blog but less duration also helped bring the volatility way down versus the MAMB ETF and IUSB. Usually, I include a slice of these studies to catastrophe bonds but I didn't think anything in MAMB's holdings was that close to cat bonds. Replacing half the BKLN allocation which SHRIX improved the CAGR by 30 basis points and lowered the volatility by just a couple of ticks. 

As I said yesterday, I think of unconstrained as looking different from some default fund or strategy. There's nothing wrong with MAMB when considered against AGG or IUSB but if an investor does not want their equity offset to look like AGG or IUSB then MAMB won't be the best solution. It's still interesting and obviously I think there is merit in their idea but with different 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.

What's In An Unconstrained Name?

This morning I stumbled across the Monarch Volume Factor Global Unconstrained ETF (MVFG). The fact sheet wasn't crystal clear but Copilot says the fund allocates based on fund flows, will typically be an equity proxy but has a process for flipping to treasuries. 

We've looked at the Artisan Unconstrained Fund (APHPX) a few times and that is essentially a hedge fund. It's not an equity proxy, it intends to be more of a macro hedge fund strategy.

A third one that we've never looked at is the Manning & Napier Unconstrained Bond Fund (MNCPX). It is a fixed income strategy. It's a three star fund so pretty ordinary and while it resembles AGG (correlation is 0.72), there is differentiation, in 2022 it was about 650 basis points better than AGG. MNCPX is a bond fund that hopefully adds value for its holders.

So that's three different funds, all "unconstrained" but all doing very different things. The first point today is the importance of sifting through how a fund is named to make sure you understand what it does. It's not obvious to me how the word unconstrained fits with MVFG, which is fine, from Monarch's viewpoint I am just some rando on the internet, the fund will either do well or not but on first glance there doesn't appear to be anything obviously wrong with it. 

I like the word unconstrained. In the investing context, it means looking different somehow and to me it implies being innovative in an attempt to problem solve. If the default portfolio is 60% SPY/40% AGG or IUSB, that is a problem that needs solving for reasons we've talked about in hundreds of posts. 

Something related, a paper from Alliance Bernstein titled The 100 Year Portfolio: A State Of Mind Rather Than An Allocation, along with a TLDR from Idea Farm. Maybe 100 years isn't something we need to think about but there were a couple of interesting ideas all the same. 

Across the past century, a 60/40 portfolio’s chance of beating inflation approaches a coin flip, despite unusually strong post-1980 performance.

This hits a point we make very frequently here. There was a 40 year run that concluded in late 2021 of fantastic bond returns that cannot be repeated. Carving out that 40 year period, 60/40 isn't so hot according to the paper. If 60/40 with the 40 in AGG or IUSB is the default and the great bond bull market is over, then we're back to coin flip territory. Again, that is a problem to solve. 

Alliance Bernstein estimates a real return of 4.5% (CPI plus 4.5) for equities going forward versus the historical 6.7%. We've talked about a common return target of CPI plus 5 using a diversified portfolio for endowments and foundations. So 4.5% may not seem so bad but I take from the paper they mean 100% equities to get CPI plus 4.5 not an endowment style allocation which typically is not 100% equities. 

Broken record, this is a problem to solve in an unconstrained manner with differentiation and innovation. We express that here and in client portfolios with trying to make portfolios a little more yieldy (cat bonds do this), have a slice of negative convexity, managed futures, alts that aren't typically sensitive to cycles and a couple of other ideas. 

There is no way to know whether 4.5% will turn out to be correct, it doesn't make sense to me to try to predict when or if bad things will happen, it is far more robust to simply be ready if it ever happens. 

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.