Boo Dividends, Boo!

Sam Hartzmark from Boston College sat for Meb Faber's latest pod where they explored the flawed thinking people have regarding dividends. Listen to the pod but I think I can sum it up with a poll that Meb ran earlier in the week. Essentially, a lot of investors don't understand how the ex-dividend process works. If a $100 stock pays a $1 dividend, you still have the same $100 of total value. The day before the ex-date the total value was the price of the stock, $100. After the ex-date, you still have $100 total value comprised of $99's worth of stock and $1 worth of dividends. 

People also muddy their own waters, according to the conversation, using total return and price return incorrectly. If people spend all of their dividends, then the return leftover, available to make the account grow will be much less. That is important to understand for anyone taking their dividends out.

Many years ago I referred to the "dividend zealots" that dominated Seeking Alpha content and comments. That group was probably a magnified version of the attachment and mental accounting that goes with dividends. We looked recently and some whistling past the graveyard about how "good dividend stocks" can take bad turns or some of the tax inefficiencies when dividends aren't qualified. Sam and Meb also tackled the underwhelming nature of dividend centric funds, even dividend growth centric funds but listen and draw your own conclusion.  

On a similar track, here's this exchange about derivative income funds.

This from me about covered call funds.

The difference between the total return and the price only return supports the point made from the podcast. Anyone buying ISPY (in my ownership universe) or SPYI is not getting the S&P 500 if they take out all of the dividends. This isn't a problem for people who understand the mechanics. The pitch for covered call fund of upside with downside protection tends to be overstated. 

With the proper understanding of how they work, taking out all the of the distribution and still getting a few hundred basis points of price-only return is a pretty good outcome when sized appropriately (small) as one of many distinct income streams but it's not capturing the index, repeated for emphasis. 

Here's a YieldMax fund that we haven't looked at before but is similar to many crazy high yielders.

TSMY's total return lags meaningfully behind the common stock because it is not the common stock. TSMY has paid out about 55% based on this chart. As we have seen with other YieldMax products, it makes sense to expect that at some point, TSMY will do a reverse split. The bleed thus far is TSMY hasn't been that bad but that is because the common is up more than 60%. 

If the common had only been up 25%, would TSMY be down 30%? It's probably not that linear but you get the idea. It's less problematic when people understand this. Knowing how it works and buying it anyway that yields 55% might not be optimal but based on the many comments that YieldMax gets about this issue on Twitter, a lot of people don't understand, speaks to one of the ideas Meb and Sam discussed.

The crazy high yielders are better thought of as products that sell the volatility of their respective reference securities.

Following up on MHIP and MHIG that we mentioned yesterday. Copilot was able to find some holdings and asset allocation information.

So they are multi-asset and seem to be quadrant inspired. The funds are heavy to health-related companies but not exclusively invested in that sector. Maybe the idea with the overweight to healthcare is that since the healthcare system will cost a lot, the funds make the healthcare companies cover fundholders' medical costs. 

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.

Digging Into Healthcare Inflation

Yesterday we looked at an article in the WSJ about a lack of confidence that people have about being able to afford retirement. Today Barron's wrote about the same study as cited in the WSJ article and added a couple of other interesting things. 

This really jumped out;

In a separate survey, just 36% of those without a financial advisor reported knowing how much they needed to retire comfortably, versus 66% of those working with a financial advisor

The point from me is not that everyone should have an advisor, I realize that most people will not hire one which is fine but anyone choosing not to work with an advisor does need to spend some time on the basics. Chances are most people won't spend some time on the basics but they should (repeated for emphasis).

It has never been easier to put some sort of basic framework together thanks to the plain old internet and also AI. 

• How do I plan for retirement?
• How does Social Security work?
• What role does my savings play in retiring?
• Should I work part time after I retire?

None of those questions are particularly sophisticated. They're probably good starting points. This is very much in the no one will care more about your retirement than you discussion. 

The article had a mention of the recent $1.46 million estimate needed to retire comfortably survey. That would pay either $58,400 or $73,000 at either a 4% or 5% withdrawal rate. Will you have $1.46 million when you retire? Is $58,000-$73,000 an adequate amount when combined with your expected SS payout? Should you assume a 23% haircut to SS? How do the numbers look after that? 

Something new to me was the attempt to quantify healthcare inflation. Barron's cited Millman who comes up with an expected inflation rate for healthcare of 6.8% annually. Millman has a calculator that you can you use. It's not detailed but this is what it thinks based on our (my wife and I) particulars. 

The number is bigger than the Fidelity number that gets cited by just about everyone. This year, Medicare Part B for a couple making $100,000 would be $405/mo (covers both). If it inflated at 6.8% per year (if that is what Millman means) then it would cost $784/mo ten years from now. Part G in Arizona right now would be $400/mo (round number estimate from Copilot) and in ten years it would be $772. So part B and G in ten years would add up to $1556. I guess Millman's numbers include some sort of prescription estimate (I left out Part D, small outlay but I concede the flaw). 

To try to figure future needs for prescriptions, at 60, I take no prescriptions. Copilot says the odds that I will be able to get away with zero prescriptions at 70 are 30-40%. The odds that I only need 1-2 prescriptions at 70 are 40-50%. Interestingly, if I make it to 70 without needing prescriptions, the odds of not needing any at 80 are 25%-35%. This seems like a decent example of the Lindy effect. You can repeat this same exercise for your situation into the AI of your choice.

The polypharmacy number for 60 year olds stunned me. You can see where this is going. My odds for no prescriptions at 70 are so-so at best but if I only need one or two (my wife is just as much of health nut as me) at 70 then we can take a meaningful bite out of Millman's number. I know one person who at 74 a few years ago was taking no prescriptions (patient on a call for an ATV accident) and he might be the oldest person I've ever met to be on zero meds.

One idea I've had about how to approach, I will call it older ages, not necessarily retirement, is to break it up into segments. What will you need financially from whatever age you stop working until you start taking RMDs. What will you need physically for some immediate block of time like 60-72 maybe? What might you need from 72 to 85 and then maybe in the last segment of life. Sidebar joke, back at the original iteration of my blog, a reader commented about expecting to get shot by a jealous husband when he was 110. 

I'll try to think that idea through a little more and blog about it in the future. 

I'll close out that Millman just launched two ETFs that try to combat healthcare inflation. MHIP tries to "generate returns that over time exceed the U.S. healthcare cost inflation rate" and MHIG tries to "generate returns that are generally equivalent to the U.S. healthcare cost inflation rate." The funds just started trading a couple of days ago and unfortunately, the website for each fund doesn't really have any information yet. I think they are multi asset funds but I will update when there is more information available. 

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.

If You're Not Puking, Are You Really Diversified?

Allan Roth had a short writeup at Barron's about why low volatility stocks are not bond substitutes (agree) but he does like the idea of paying off debt when the relationship between the interest on the debt exceeds the yield earned by owning bonds. He also said this about AGG.

The iShares Core U.S. Aggregate Bond ETF has earned a respectable 4.69% annually over the three years ending December 31, 2025. That pales in comparison to the 22.25% annual return of the iShares Core S&P Total U.S. Stock Market ETF. I predict that when stocks tank, you will be glad you have some boring bonds.

Ok, so fair enough about AGG.

But if you'd be ok with AGG then you might also be ok with more total return, less volatility and smaller drawdowns than AGG. All of those are in my ownership universe. Instead of one big allocation to AGG, it appears to be safer to split between several alternatives like the ones above. 

The Wall Street Journal had an article about Americans losing confidence in having enough to retire. This anecdotal quote caught my attention, "Janet Kieffer, 73, estimates that her spending is about 20% above the level a year ago, because of rising prices for items like groceries, gas and her Medicare Advantage plan. The Georgetown, Texas, resident recently paid $400 for a new medication."

A couple of things here. One is she is spending more than she expected, like her hand is forced if we're talking about food and other essentials. Price inflation is not an outlying event, it's an easy thing to go wrong and force adjustments. The other item is paying $400 out of pocket for medication. Not talking in absolute terms but many chronic medical problems can be reversed or prevented by cutting sugar consumption and lifting weights. Yes, I am absolutely a broken record on this point but if someone is living a modest retirement on $4000/mo, maybe $2000 from Social Security and $2000 from portfolio income, it would be great to avoid spending 10% on one drug if at all possible. 

This Tweet caught my attention.

We have made this exact point countless times. Believe me when I tell you, a lot of people don't understand this. Even advisors who I am going to say should absolutely understand this point, do not. Jason Buck has talked about the few holdings in this context that make you want to puke. Hopefully, it's not that bad, maybe I would use the word frustrated, holdings that cause frustration.

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.

Managed Futures Palooza

The week is off to an very busy start on a personal front, all good stuff though. A very short one tonight with an idea that I was curious to look at. We've talked about the dispersion between different managed futures funds and whether or not to consider more than one fund for even small allocations.

The following looks at nine different managed futures funds, equally weighted then 10% to TECL which is the equivalent of 3X technology plus the same nine managed futures fund and of course VBAIX is plain vanilla 60/40.

The long term result, ten years is a decent timeframe, of Portfolio 2 is pretty good as are the stats and the year by year but it seems sensitive to fast declines due to two things, I believe. There were a few times were managed futures got whipsawed by bonds and of course if the S&P 500 gets a bug bite, TECL will get flesh eating disease (trying to make a joke). 

Not that anyone would allocate 90% across nine different managed futures funds in real life but that many funds blends away the various spasms that these funds have from time to time. 

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.

Fascinating Observation From William Bengen

A lot of ground to cover today. A week ago, the WSJ wrote about which generational cohort had more challenges; boomers or millennials. Apparently the comments included a lot of what about us from Gen-X readers so the WSJ followed up with How Gen-X Stacks Up Financially. I am older Gen-X, born in 1966.

If this topic interests you to the point that you've done some reading then I doubt you got too much that was new from the article. The financial crisis was hard on Gen-Xers in terms of home purchases, our average net worth dipped below the boomers because of that, now we appear to be ahead of the boomers but are quite a ways behind millennials when adjusting for age. Oh and you read that correctly, they used average not median to study net worth. 

Student loans are still an obstacle for Gen-X which isn't shocking to me in terms of younger Gen-X being in their mid-40's and although not quantified in the article, often when people in their 50s and 60s have student debt it is because they borrowed money to put their kids through school.  

The comments covered a wide range of we had it easy, we had it hard, stop whining and whatever with that last one being a stereotypical reaction that Gen-X has to everything.

Let's quickly circle back to the average net worth numbers. The median net worth for 50-65 year olds ranges from $325,000 to $350,000 according Copilot with about half of that being home equity. 

I'm not too interested in comparisons, you can look for yourself, it would be an easy query into AI but the numbers aren't great for 50-65 years (obviously a lot of overlap with Gen-X). Keep those numbers in mind as we look at a Bloomberg article that paints a grim picture for the economy. The TLDR is "after years of repeated economic shocks, the world has been left woefully unprepared to deal with the next one." The article primarily blames the war in Iran for the conclusions drawn.

As usual, I am not concerned about whether the article is correct or not but would be more concerned with trying to understand if the argument is plausible and if it is plausible, does it pose any kind of threat to anyone or anything that I care about? 

On the list of things I care about are client retirement outcomes and how think I about what my later years might look like financially which gets us to a fascinating interview with Bill Bengen who devised the 4% rule for retirement withdrawals. 

Bengen's original study goes back to 1925 and Barron's asked him what was the worst year to retire. It was not 1929 on the eve of the Great Depression it was actually 1968 because of the very high inflation rates of the 1970's. I don't recall ever reading anything from Bengen that went down this road.

The 4% rule says to start at a 4% withdrawal rate (a little higher actually) and then adjust the withdrawal rate up by the rate of inflation each year.

Year	Inflation Rate (%)
1970	5.84%
1971	4.29%
1972	3.27%
1973	6.18%
1974	11.05%
1975	9.14%
1976	5.74%
1977	6.50%
1978	7.63%
1979	11.25%

You can see then how adjusting upward in that fashion could have a relatively bad outcome. The outcome wasn't across the board catastrophic, but it ran out of money after 30 years. My take on the 4% rule has been to forget about adjusting the withdrawal percentage by the rate of inflation because the growth of the portfolio will handle that. It requires some flexibility for the years in which markets decline. My idea is much simpler. Each quarter, look at your balance and take no more than 1%.

This quarter, you have $950,000, cool, take $9500. Next quarter, $971,000? Take $9710. If the market does something hideous, that might require some belt tightening or this threat can be mitigated by raising expected cash needs ahead of time, maybe get 18-30 months ahead to avoid the likelihood of having to sell low and/or really cut back on something. 

So what happens if Gen-X cannot collectively retire on (reduced?) Social Security and their savings? What if there are long lasting economic impacts from the war that hurt the economy and capital markets? The point is not predict what will happen or rationalize why it will or won't happen but to plan in case things turn out to be that negative. It's your life and no one will care more about it than you.

This is why we talk all the time about building resiliency and creating optionality. Yesterday at fire training, one of the firefighters drew my conclusion about doing incident management team (IMT) work (I've talked about this many times as an outlet from my FD involvement) as a Plan B. "Yes!" The firefighter in question is 38 so I added or if you get to some age you think is old and realize you either want to do something different or feel you have to do something different, you can start to build that optionality now. She helped at the Basin Ops Drill (the live fire exercise I write about every year) in the planning section checking people in. That little bit is barely an introduction but where I've talked about this to the group before she now has a first hand sense of the opportunity which I feel good about. 

The IMT example is just one possible income stream from my stuff, everyone hopefully has one or two things from their life that could play out as an income stream if ever needed and if not, get started trying to solve that right now. The longer the runway the better the odds of success.

No one will care more about your retirement than you ~ Joe Moglia. 

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.

Sectorology

A couple of weeks ago, we discussed how the S&P 500 was turning into a tech fund. Barron's took up the conversation this weekend and included a list of ETFs that should help reduce tech exposure. 

If you're interested, you can look through and decide for yourself if any of them are worth owning.

The message from from my post was that if you build a portfolio at the sector level, it is easy to just reduce the exposure you have to tech/communications and you can also layer in small exposures to negatively correlated strategies to reduce the portfolio's beta. A little more nuanced would be to use SPXT which is the S&P 500 excluding technology. Using SPXT would allow for very precisely dialing the tech exposure. As you can see from the top holdings though, there is plenty of what I would call tech-like beta.

Back in March we looked at a broad based index strategy from Research Affiliates that combines quality, value and momentum. We built the idea by equal weighting SPHQ, SCHD and SPMO. Owning those three instead of market cap weighted S&P 500 would combine to a 33% weighting to tech plus communications versus 45% for the S&P 500. QVML is an ETF that combines those three factors but its weighting to tech plus communications is just over 44%. 

If a portfolio went 2/3 domestic with SPHQ, SCHD and SPMO and 1/3 foreign (20% ACWX 13% EMXC), then the total to tech plus communications would add come down slightly to 32%. ACWX is light on tech, EMXC is heavy in tech from Taiwan Semi, Samsung and SK Hynix. 

Yahoo had a weak retirement article that included a discussion about how to allocate to bonds and the idea that Social Security is essentially an annuity. 

One guy was all over the comments banging the dividend zealot drum. This comment captures where he is coming from.

If one invest in quality stock for dividend then the dividend income will always be there and the stock will go up in the long run. If your interested in dividend why would one care about stock going down? Quality company will always recover, dividend will at least be the same or more throughout the recession and recovery !

There is a stock market graveyard full of the exact type of companies he is talking about that were once quality stocks with "good" dividends. Washington Mutual, General Motors, JC Penny, Walgreens and countless others I am forgetting. 

Who knows what he actually means but the comment reads like he is oblivious to the possibility that down the road some quality stock with a "good" dividend that he cares about could disappear. The strategy he favors is of course valid but guy, great companies disappear. How about Bethlehem Steel and most of the rest of the steel industry?

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.

Bloomberg Bashes Buffers

Nir Kaissar wrote an article at Bloomberg titled Buffer ETFs Are Insurance You're Better Off Without. His general argument echoed the one made by AQR in 2025 which generally says you'd be better off just lowering your equity exposure. Eric Crittenden from StandPoint has made the point that they turn the risk/reward upside down, there is more potential risk than reward. Plain vanilla buffer funds cap the upside and then protect against the first X% down like maybe the first 9% down or the first 15% down. After that, investors are subject to whatever losses the underlying incurs in the period defined like maybe one year or one calendar quarter. If the stock market falls 30% in a year then a buffer fund that protects the first 9% down, would end up dropping 21%....essentially. 

Since then, there have been quite a few products that adjust or try to improve on that very general framework. I don't do a whole lot of work to study them because I believe the arguments are more right than they are wrong but I wouldn't dismiss buffer funds entirely. BALT is in my ownership universe for clients. 

First, I agree, don't count on them to ever deliver equity market returns. If there is some suite of them intended to capture the stock market's upside that I am missing, please leave a comment with some symbols. 

BUFR and BALT have both been around for a while. BUFR protects the first 10% down for one year. It owns a ladder of different buffer funds and the cap ranges from 13-17%. You can see from the chart that it has a bit of equity sensitivity. At its low in 2022, BUFR was down 13.52% versus 24% for SPY. It has compounded at 9.42% versus 12.26% for SPY with a vol level of 10.63% versus 17.30% for SPY. It's not better than SPY and it is not worse than SPY because it is not SPY it seeks a different outcome.

BALT protects the first 20% down and resets quarterly. The upside cap is also reset quarterly and is usually just above 2%. It uses the S&P 500 as a reference but it is not intended to function as an equity proxy. The symbol BALT is a play on bond-alternative. Copilot says that in the last 50 years there have only been three calendar quarters where the S&P 500 fell 20 or more percent; the 1987 crash, 2008 and the Covid Crash. In each instance the drop for the respective quarters was 20-23%.

You'd be better off reducing your equity exposure. 

I tried to create that effect here. Portfolio 2 tries to combine SPY and SHY to get the same growth rate as BUFR and Portfolio 4 combines the two to get the same result as BALT. The growth rates are close but Portfolio 2 is somewhat more volatile than BUFR and Portfolio 4 has twice the vol as BALT.

To get Portfolio 2 down to the same volatility has BUFR, the weighting to SPY would be 62% but the growth rate of Portfolio 2 would lag BUFR by 92 BPs annually. To get Portfolio 4 down to the same volatility as BALT, the weighting to SPY would be 16% but the growth rate of Portfolio 4 would lag BALT by 230 BPs annually. 

I don't use BUFR and don't plan on doing so, I personally wouldn't think of it as an equity proxy but maybe some folks might. BALT is definitely not an equity proxy. Both have risks and quirks that need to be understood and if necessary mitigated, but that is no different than any other non-equity thing you could possibly buy. 

What does some buffer fund you might be looking at reliably do? Is there a need or room in your portfolio for the result that this buffer fund you're looking at reliably gives? That would be the first question I would address. Then, how does it deliver this result? Is there a basis to believe it can continue to deliver that result that you have at least some interest in? Then, if you look under the hood and don't like the details, don't buy it. For me, BALT has a differentiated, fixed income-like return stream without taking interest rate risk and less volatility than many fixed income proxies. 

The return profile, combined with a volatility of 3.35% makes sense to me as a fixed income substitute. It is not equities, repeated for emphasis. Keep in mind that the weighting is small, 5-10% of the fixed income sleeve so pretty small. If something breaks, the impact on the portfolio would be minimal.

Kaissar also talked negatively about bond buffer ETFs. I didn't know there was such a thing. I'll just take a quick look at the Innovator 20+ Year Treasury Bond Buffer ETF (TBJL). The fund references TLT, protects the first 9% down and the upside cap for the year ending June 30 is 48%. Hedging bonds is cheaper than hedging equities. 

To even consider TBJL, you'd have to be ok with TLT-like exposure which I am not. TBJL seems to have done what it is supposed to. In a long, shallow downtrend for TLT, TBJL is down less. I threw TLTW which sells covered calls on TLT into the chart for a little more context. Anyone who understood TBJL and has been holding it is probably satisfied with the relative result. Part of Kaissar's argument against funds like TBJL is that there are no distributions. That's true, the fund owns an options combo, not 20+ year bonds. 

From the top down, long term bonds are just the wrong part of the market, full stop. So anything that references the wrong part of the market is a pass for me. Mark Baker says that when you're on the wrong train, every stop is the wrong stop. I think that applies to TLT, TBJL and TLTW. At some higher yield than we have today, I'd be interested in probably no further out than ten years. If there is ever a yield that adequately compensates for holding that long, I'd probably just rather have the simple yield.

One quick snippet. Calamos launched another autocallable ETF with symbol CAGE. The info page says the "weighted average coupon" is 29.16%. Meb Faber found this;

I don't know the story yet but on the surface, this is drifting into crazy high yielder territory.

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.