Rebranding An ETF?

It looks like the Simplify Risk Parity ETF (TYA) changed its name to the Simplify Intermediate Term Treasury Futures Strategy ETF, keeping the same symbol. Risk parity typically involves using leverage to get the same amount of risk from various asset classes. The simplest expression of this is leveraging up fixed income exposure to the point where the risk from fixed income equals the risk from a much smaller allocation to equities.

That's not what TYA does and the new name makes that clearer. It's funny, I remembering seeing something on Twitter where someone Do-It-Yourself-Return-Stacking Twitter asked one of the Simplify guys why it was called Risk Parity when what it actually does is just leverage up exposure to treasuries as implied by the new name. 

The fund has almost all of its assets in T-bills and cash and 320% notional exposure to ten year treasuries via futures contracts. There are other leveraged treasury ETFs, there's the ProShares Ultra 20+ Year Treasury ETF (UBT) and the Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF). Both UBT and TMF appear to target a longer maturity and they reset on a daily basis while TYA resets quarterly. 

The TYA literature makes it clear that the fund is intended to be a tool for capital efficiency. We've been talking about the concept of capital efficiency here for ages, where you get the effect of a full portfolio with a smaller allocation to risk assets, long before the term capital efficiency became common. My introduction to the concept came more than 20 years ago when I worked at Fisher Investments. A couple of the smarter dudes there used to talk about getting a return equal to the S&P 500 from a very small allocation to shorting Nikkei Futures and having the rest in cash. I don't know if they were right or not but it's a good example of the concept. Then a few years later, Nassim Taleb used to talk about putting 90% in T-bills from around the world and going high risk with the other 10% which is similar to the Nikkei Futures idea. 

In the last few years the concept has proliferated with many mutual funds and a few ETFs offering some version of a capitally efficient portfolio. TYA is not a capitally efficient portfolio, it is a tool for investors to create their own capitally efficient portfolio. So does TYA actually do that? The track record is very short but the answer for now is a solid maybe. So far it looks like it does thanks to Portfoliovisualizer.

 

VBAIX is plain vanilla proxy for a 60/40 portfolio, NTSX is known as the 90/60 ETF such that a 67% allocation to it should get the same result as VBAIX, SSO is 2X equity exposure and of course TYA. Here are the results;

 

They're pretty much identical. The 16% to TYA is pretty close to equaling a 40% allocation to plain vanilla exposure. The time frame is very short, that's what Portfoliovisualizer produced. One difference is that TYA can only pay a dividend based on the cash and T-bills, not a bond portfolio. That payout has been going up as interest rates have risen. It pays monthly. In June it paid out $.017 and for October it paid out $0.06. 

This lends itself to some very sophisticated portfolio construction along the lines of some of the complex-complexity funds we've looked at. I still am not a fan of those funds versus the idea of putting this together myself using simpler products. 

I am not going to use any of the funds mentioned in this post, let's be clear about that. Many years ago, we talked about funds becoming more sophisticated allowing investors to build very robust portfolios and today's post is just another example of that. Capital efficiency is now easy to access, that's a good start. I might prefer to wait for second or third generation capitally efficient funds to learn from any problems that might arise from the first batch before going too far down this road. 

For now, my comfort with capital efficiency is a little more equity exposure paired with alternative strategy funds that should offer more protection, offset more volatility, than a "normal" allocation to fixed income.