A YieldMax That Doesn't Yield 40%?

You've probably noticed that Microsoft is in a serious drawdown going back quite a few months. This is far from unprecedented in Microsoft's tenure. At some point it will bottom out and I'm sure it will recover and eventually rip higher at some point, obviously I don't know how long any of that will take. 

It seems like a good time to check in on how the YieldMax MSFT ETF is handling the drawdown. The crazy high yielders are fascinating but must be very difficult to own. The total return for MSFO has actually held up better than the common. The marketing pieces talk about covered call funds possibly going down less because of the distributions and that is working out for MSFO this time on a total return basis.

Anyone taking out the distributions is down 40%. The nature of the crazy high yielders is that they should not be expected to keep up with their distributions, they will continue erode at some rate of speed and then reverse split. 

Not all the YieldMax funds are crazy high yielders. The YieldMax U.S. Stocks Target Double Distribution ETF (DDDD) started trading earlier this year. It seeks to pay out twice the yield of SCHD which currently yields 3.3%. SCHD is in my ownership universe. It's too soon to evaluate its ability to generate twice the yield but at a six point something percent yield, it won't be a on a fast path to eroding into a reverse split. 

DDDD reminds me of the Pacer Metaurus US Large Cap Div Multiplier 400 ETF which tracks the S&P 500 and tries to quadruple the yield. So far, it looks like it has done a little better than that. 

There are probably more wrong ways to get more yield (a large allocation to crazy high yielders) than correct ways but it's worth continuing to look. 

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. 

No One's Going To Be Happy

Yahoo syndicated an article from Fortune about the retirement woe facing many baby boomers. The headline talked about boomers hoarding wealth but the article talked about how much trouble many boomers are in. Editors, amirite?

The comments were a hoot, people just going off on the writer because of the boomers hoarding wealth quip but again, that wasn't what the article was about. There probably wasn't anything too new in there but this caught my attention. 

Only about 40% of workers in their early sixties are on track to sustain their standard of living in retirement; the typical near‑retiree faces about a 24% income gap, roughly $9,000 a year.

Thinking about a number, $9000 in this case, and trying figure out how to cover it is a slight tweak to how we and many other blogs cover it. 

If $9000 is some sort of common shortfall, how can it be covered? I think that too many people don't actually break out their expected expenses for when they retire. We've been quipping for years that you don't need to save for retirement after you've retired. At some point a house will be free and clear of the mortgage. The first thing I thought of for trying to find $9000 is to wonder about car payments. A $40,000-$50,000 vehicle is far from a shitbox and also not extreme luxury. The typical payment for a car in that range is about $800/mo. Drive your car longer and there's your $9000.

I don't know how many people that example helps or how often it can be that simple but ultimately, it comes down to spreadsheet work, itemizing expenses. What do fixed monthly expenses add up to now (for context) and what are they likely to be after retirement. If $6000/mo at 55 years old includes a mortgage payment and a car payment and those will be paid off, then maybe $6000 drops to $3000 or $3500 at age 65?

Now, how much are regular expenses that only get paid once or twice a year like maybe car insurance or property tax? Are these likely to change? Our list is about $13,000/yr which includes very expensive homeowners insurance due to where we live, property tax and propane (only need that every 3 years or so). I realize some of these can be paid monthly. 

Unbudgetable one-off expenses is a line item we talk about frequently like new tires, a veterinarian bill or something else in the low four figures. My own belief is to earmark maybe $1000/mo but if you're sort of unlucky with this stuff (we had a very unlucky year a few years ago with a plumbing issue and car issues) then maybe earmark a little more. 

How much would you like to set aside for affordable fun? If expensive trips are unlikely, what is there that you're interested and that is accessible? From Arizona, there is no shortage of hiking, national monuments, national parks, the San Diego Padres all within one day's drive. 

Once all of that is dialed in, what do the known income sources add up to? How does that compare to expenses via the process we just went through above? If the income barely covers the expenses, that's not a bad outcome but there's very little margin for error. If the income is just a little short, then maybe just a little belt tightening can solve it. If the gap is big, like $9000, what can you do if the car payment example or something like it doesn't solve the issue?

Can you work some sort of part time gig or monetize a hobby? Downsizing where you live might be a little more difficult than it use to be but in Arizona, the median price for a three bedroom house in Phoenix is $475,000 (seems low) and in Scottsdale it's $875,000 versus $350,000 in Tucson. In terms of family considerations, it's only a two hour drive. 

This is obviously a problem that we all need to solve for ourselves. The more effort we put into solving it, the better off we'll be. 

And a quick pivot to a plan promoted by Senators Moreno (R-Ohio) and Warren (D-MA) to solve the Social Security problem by eliminating the income cap. At some income level, $184,000 in 2026, people no longer pay employment tax. Eliminating the cap has long been a regular talking point about how to address, either fully or partially, the shortfall that awaits Social Security. This seems like it would be especially painful for people making $200,000-$300,000 and living in very expensive cities. 

The comments on the article are very negative of course. It is worth remembering that whatever they come up with, it can't possibly be "fair" to everyone. A couple of weeks ago I invoked a cliche about a good negotiation being one where no one feels good about it. That might be where we are headed with Social Security. 

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. 

Retirement Planning Isn't Always Tidy

Some very quick hits today.

That free money from SpaceX deep in the money calls that we looked at on Saturday is looking a little less free and the options are looking a little less deep after today's close.

Again, I certainly don't know what SPCX will do but the options market doesn't usually give money away. 

David Blanchett has a paper out titled The Foundations For A Truly Successful Retirement. It covers the usual suspects in terms of social connections, a few others including that having more money makes for a more enjoyable retirement, go figure. There was one interesting point that we've probably talked about but that Blanchett worded differently that I think is useful regarding annuities or some other way to get lifetime income. 

The paper says that both retirement accounts and lifetime income streams are both wealth (read the paper for context) but people are far more emotionally comfortable spending from some sort of lifetime income stream than they are from their retirement account. Yes this makes sense almost to the point of being obvious but it resonates. If some income stream is guaranteed, it's not that you are taking zero risk, it's more like you're not seeing the risk. That's not very tidy intellectually or mathematically but emotionally? Sure why not? I continue to believe there will be ways to annuitize income without annuities as we know them today, we'll see. 

Long time readers might recall how involved I used to be with Seeking Alpha. For a while, I had the most followers of their contributors. I was a very early outside contributor. It's possible that I was literally the first outside contributor. I feel like the site sort of evolved into being more of a 10 Stock Picks For Summer! type of publisher. A few years ago, I submitted something to see what the publishing process was like and the feed back was they wanted stock or fund picks. I broke off with them when they edited out a mention of a book I wrote from one of my posts. 

Every now and then, I circle back to see if I am missing anything in terms of content quality. I used to poke fun at the dividend zealots that dominated the content and while I don't know if anything dominates the content now, I took a look and found an article on a closed end fund that interests me. I'm not linking to the article but it belied a misunderstanding of many aspects of closed end fund investing and the fund itself. One of the two comments was more useful than the actual article. 

Carter Worth, you might recognize his name as a regular on CNBC many years ago (is he still on?), has a new derivative income fund with symbol WRTH. It sells straddles on stocks that have moved 10% in reactions to their earnings. The website shows that other that treasuries, it only has straddles currently on two stocks. It will target an 11-12% distribution which would include about 1/3 of the distribution coming from the T-bills it holds. 

It's not obvious to me if it will be able to always maintain the 10% earnings move strategy. What if there aren't any?

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. 

Should You Prepare For A Lost Decade?

We spend a lot of time here trying to study and learn about how to make portfolios more robust to various types of risks including market risk (bear markets) and event risk (usually resulting in fast declines). One market risk might be a so called lost decade. A report from Gorman, Keel and Randazzo went into depth on lost decades. 

I added the green rectangle because that doesn't look very lost to me, but the red rectangle would seem to fit the bill. If you were around for the lost decade of the 2000's you know first hand that even in a lost decade, there will be pockets of the market that will do at least ok, if not better than ok. 

In the 2000's, dialing up foreign exposure was pretty important for example. Someone who builds a portfolio that includes individual stocks would reasonably have at least a couple that would do just fine if we have another lost decade. There are now more ways to build a portfolio that includes all weather types of funds or tools that would allow investors to build their own all weather portfolio to succeed in a lost decade. 

Ares tried to make an argument for (private) infrastructure to play a role in a lost decade (my interpretation) because they say it tends to go down less, has fundamental tailwinds behind it and doesn't necessarily rely on a favorable economic cycle. It's not that infrastructure is reliably countercyclical but money can still be spent on infrastructure development and various forms of tolls can still be collected. 

Maybe private infrastructure can offer crisis alpha or maybe it's just volatility laundering but I wouldn't count on getting crisis alpha from infrastructure stocks or ETFs. I use PAVE for clients with part of the thesis being, we need to invest a lot into our infrastructure, I believe the money is going to be spent no matter what is going on, even if it happens in fits and starts. I've talked frequently about my belief that publicly traded financial financial markets are also part of the infrastructure theme as toll takers. I use CBOE in this context which also benefits from VIX trading volume despite getting kicked very hard over the last couple of weeks or so. In 2022, PAVE and CBOE were only down 7.18% and 2.17% respectively but I am saying I would not rely on that to repeat....great if it does. 

The Ares paper explores leveraging up with a sort of portable alpha strategy to add 20% in infrastructure to a 60/40 portfolio. Here's how I built their idea out.

Compared to plain vanilla 60/40 comprised of SPY and AGG.

It does outperform but with more volatility and the max drawdown was much higher. The infrastructure portfolio went down less in 2022 but down more in every other significant drawdown available to look at. 

According to Copilot, the main driver of the outperformance is the leverage, then avoiding duration with FLOT and MERFX (both client holdings), we always avoid duration in these exercises, with the infrastructure exposure being the least important driver. While I believe in infrastructure, I am skeptical that it can do the sort of long term heavy lifting implied in the Ares paper. 

Kind of funny, on the flip side of a lost decade for equities, Robert Pozen made the case for 90% equities instead of 60%. We can get a sense of what 90/10 would look like versus 60/40 from the last two previous lost decades cited above. I'll use the IEI ETF for the fixed income allocation, testfol.io can't go back as far as we need with AGG.

If there is a lost decade anytime soon, I wouldn't want to rely on bonds helping as much as they did in the last two lost decades. In the most recent lost decade, the SocGen Trend Index compounded at 13.43%. The index was not around in the 70's but Gemini theorized that managed futures trend would have done better than 13.43 from 1968-1974.

Having some managed futures seems like a good idea to help with a lost decade and I would consider more than one fund to build out this part of the portfolio and maybe a higher volatility managed futures fund should be considered. 

Gemini thinks that global macro, equity market neutral, merger arb, commodities and reinsurance would also work in a lost decade. 

Selling volatility doesn't seem like a great idea but Gemini said that covered calls might be a strategy that could work. 

There isn't a great sample size to study on that point but I certainly wouldn't go heavy if at all into crazy higher yielders. 

It makes sense to think about what you'd do if equities start to sputter. Getting the timing exactly right seems like a low probability outcome so I wouldn't make dramatic changes. Dialing down equities a little and dialing up diversifiers a little can work to improve results in a lost decade without being completely left behind in case it's just a lost month. 

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. 

Is The Options Market Giving Away Money?

A reader left an interesting comment on this week's Striking Price column in Barron's. The article was about SpaceX. The reader said he sold deep in the money calls against the stock, really deep at $110, he didn't say where the common was when he put the trade on. Despite being that deep in the money, there was a ton of time premium in the price of the option.

Usually when there are calls that are that far deep in the money, there isn't much time premium (time premium is where changes in volatility are reflected) because the odds of the stock cutting in half or whatever are very remote. 

With markets closed it is easy to take a look at where the stock and a couple of options are pricing without it being completely different 10 minutes from now. On Friday at 4pm, SPCX common closed at $185.00. The January 100 call was bid at $90.90 so the time premium was $5.90. With something like this you could compare $5.90 to how much interest you might get on the $9410 you'd need to put this on as a buywrite. That annualizes out to a "yield" of almost 11%.

The trade runs into problems if the common drops below $94.10 ($100 minus the time premium taken in). If SpaceX drops to $110 or $120, the buywrite would still intact and be profitable when the option expires, the call sold gives up everything that happens above the strike price. You might be sweating it, if the common was at $110 or $120 next month, you'd still have a long time to go. The reader called his strategy "conservative." He believes he is avoiding the volatility in the stock prices but is benefitting from the options volatility. 

Obviously, there is no way to know what will happen to SpaceX' price between now and the January expiration but to the title of this post, the options market doesn't give money away. I take the time premium in our example to mean that the market thinks the stock could go below $100 between now and January. 

If it works out, then the reader did a great job of exploiting SpaceX' volatility but either way it's a fascinating trade. 

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. 

Steep Hill To Climb

We had a very challenging wildfire yesterday. Walker Fire trucks are red and the Forest Service are green.

It was very close to the road which made it easy for us to find but it was down an insanely steep hill. I've never done any sort of fire activity on such a steep hill.

We got there just a couple of minutes before PNF 633, it was on federal land so they had command of the incident which was probably a good thing, no obvious obstacles to ordering up air support. 

Now, on to today's post. Alpha Architect has put out a lot of content and information lately promoting its High Inflation And Deflation ETF (HIDE) as a substitute for managed futures. There is some amount of trend following in the HIDE process and part of the pitch is HIDE can be a way to avoid the fallout when managed futures struggle or otherwise do poorly. The most recent incidence of this was the few months going into the Tariff Panic in early 2025. 

You can see from the drawdown chart that when DBMF and QMHIX get colds, HIDE barely gets the hiccups. 

The tradeoff is that in 2022, HIDE might have been down based on replicating it. A reasonable expectation for managed futures is that it will hopefully go up when markets have longer, slower declines. HIDE seems like it is setting a different expectation. 

Here's a fun idea.

The funds will take any dividends earned by the underlying equity portfolio and use them to buy Bitcoin. Or you could just buy Simplify US Equity PLUS Bitcoin Strategy ETF (SPBC). Or you could just buy a Bitcoin ETF. 

What will be the yield of the equity portfolio? A little over 1%? Maybe? I don't know why this would be someone's best choice to add Bitcoin. 

A couple of weeks ago, we looked at a portfolio from Finomial that they called Leveraged Equity + Diversifiers Portfolio. Today I got an email about their review of Leveraged Equity + Diversifiers Portfolio II. The differences between the two is slight.

Version 1 has pulled away the last couple of years, I think the difference can be attributed to the position in FEGIX which includes mining stocks. Gold miners tend to have bigger moves in both directions than just plain gold. 

The results are compelling. The Finomial portfolios have had quite a bit more growth with about the same volatility as putting 100% in the S&P 500 often with smaller drawdowns. The Finomial portfolios are 100% equities with alts on top. 

There's never been any sort of hideous path for SSO versus the S&P 500 but it's not impossible going forward, 50% in SSO could be difficult at times. That said there a couple of concepts here that I think are useful and overlap with what we talk about and do here. One is the willingness to include traditional mutual funds in the mix. ETFs are generally the better wrapper but not in every instance. I don't think it is logical that one wrapper must always be best and I don't think ETF-only models make the most of what is out there. In building or managing your own portfolio, if a mutual fund is the best way to capture some exposure, use the mutual fund. 

The other thing is that I'm learning from a project I am working on for the Del E. Webb Foundation is that these are "institutional caliber" portfolios. That doesn't guarantee results and that doesn't mean portfolios like this can't be poorly assembled but these sorts of things really are sophisticated concepts that are accessible for individual in their brokerage accounts.

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. 

Style Is Tricky

Sorry I haven't posted in a few days. It's been very busy (good busy) and I haven't seen a whole lot that would spur a blog post. Here's a quick something though. 

The weighting is microscopic but still, what's the deal? Dave Nadig weighed in. It's a long article so the TLDR is "SpaceX was added to the Schwab U.S. Large‑Cap Value ETF (SCHV) not because it looks cheap, but because the Dow Jones style methodology couldn’t classify it as growth—so it defaulted into value by process of elimination."

That comes on the heels of our conversation the other day about the VLUE ETF having 22% in Micron. If Dave is right, it's value because it's not growth, then to the point we made the other day, there's not much utility to the growth or value labels. 

That may not matter as much with an actively managed stock picking fund. To buy that sort of fund is to buy the manager. The SpaceX weighting is so small in SCHV that if the company went out of business tomorrow, it probably would not be detectable in the NAV but for anyone trying to build a style oriented portfolio, it is tricky, maybe trickier than it should be. 

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.