The Power of Negativity!

Eric Balchunas from Bloomberg made an off the cuff Tweet about the Noble Absolute Return ETF (NOPE) being the anti-ARKK which is of course the flagship ETF managed by Cathie Wood. Eric was implying they have a negative correlation. Although NOPE has only been trading for a few months, in that short period, they do appear to have a negative correlation.

 

First a little about NOPE. Based on what is on the website and the ETF.com page for the fund, I can't figure out what the fund is actually trying to do. Here are some bullet points from the literature;  

• Absolute Return Funds are full-cycle investment strategies that aim to deliver a positive ('absolute') return to investors, regardless of whether markets are rising or falling, although a positive return is not guaranteed.
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• Keep Up With What’s New: monitor changing market environment

  Simple Investing Approach: focus on the key drivers that account for most investment returns

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• Exploit dispersion across regions, sectors, and factors
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• Capture returns from idiosyncratic investment circumstances

Those could mean anything. Calling it an absolute return fund would lead me to believe it tries to be a horizontal line that tilts upward. That is not the case it is very volatile in both directions. From the top down, I'm just not sure what to do with that. Eric's comment about the negative correlation to ARKK made me curious of what that would look like blended together. Plugging in the following...

 

Gives us this;

 

The blend of 50% SPY, 25% each to ARKK and NOPE is about a smooth as you could hope for with market equaling returns, the standard deviation is a fraction of the S&P 500 and the Sharpe Ratio might be the best I've ever seen. 

The difficulty with this, aside from the ridiculously short period available to study, is that I don't think we can rely on two actively managed funds that have had a negative correlation will maintain that negative correlation. They might but there's no way to know. 

What this exercise does do is reinforce the idea of blending in volatile assets, NOPE is a firecracker, with low to negative correlations into an equity portfolio to manage overall volatility.

I have no interest or intention of using SPY or NOPE for clients or personally. One client directed me to buy them ARK a few years ago, it went up a ton for them, I took their original investment out and they still own some otherwise no interest in using this fund either.