Dissecting Complexity

A new fund popped up thanks to a blog post from Nomadic Samuel. He does interesting deep dive interviews with various ETF execs and investors/adivsors (including me!) with the latest being the Simplify US Equity PLUS QIS ETF (SPQ). QIS in the name stands for quantitative investment strategies and QIS is also the symbol for another fund from Simplify. QIS is a global macro, multi-strategy fund that embeds anywhere from 10-20 strategies at a time. QIS is pretty new and SPQ is newer. SPQ is a leveraged fund, it invests 100% in the S&P 500 and 50% in QIS. It essentially uses return stacking but that term is trademarked by another firm so we can just call it leveraged or capitally efficient. 

You can click through on the QIS link above to watch a short video that goes into more detail on what the fund does. Like most other leveraged or capitally efficient funds, SPQ leverages up with something that should have no correlation to equities or have a negative correlation. To try to back test this, I will use AQR Macro Opportunities Fund (QGMIX) as a proxy for QIS.

If it is not clear, Portfolio 1 is 100% S&P 500 and 50% QGMIX. The time sample is decent and although the CAGR for Portfolio 1 is quite a bit higher, most of the advantage came from 2022 when Portfolio 1 was only down 4.46%, VBAIX was down 16.87 and the S&P 500 was down 18.19%. In the other years it's kind of a flip of the coin between Portfolio 1 and the S&P 500 as to which outperformed. The CAGR is better by 177 basis points and the standard deviation is better by 31 basis points. Of course Portfolio 1 is way ahead of VBAIX and the standard deviation is much higher. 

As the next graphic shows, it compares the 100/50 version of SPX/QGMIX and an unleveraged version that keeps the same proportion. No real surprises with the second chart. The most interesting point is the performance and volatility of the unleveraged version when compared to VBAIX. Its CAGR is better than VBAIX by 235 basis points and the standard deviation is slightly lower. 

You can see the bar chart comparison between the unleveraged in blue and VBAIX in red that year to year is also a flip of the coin other than 2022. I write all the time that I do not want to take on fixed income duration but it's not because I expect another year like 2022 with declines of 15-30% being so common. My reasoning is not wanting to take on the increase in volatility that I believe to be less reliable than it was for several decades going into 2022. Part of all this work is to learn more about building portfolios that look like what 60/40 used to look like but without the duration. That seems attainable to me based on dozens of different portfolios we've looked at here over the last year and a half. 

As far as SPQ, this was a worthwhile study. I've seen too many funds from Simplify not do so great, their CYA fund is now down to 29 cents, and I have trepidation about using leverage to increase exposure versus decrease it or as we've called it, leveraging down. 

And finally a quick hit on covered call funds after ETF.com posited that the strong performance run might be played out. The nitpick I had was that these frequently are not plain vanilla equity proxies but in the second half of the article the author acknowledged this point. 

I have limited exposure, not across the board. Some of them deliver decent growth with low-volatility but that growth doesn't keep up with plain vanilla over longer periods. 

When worked into a portfolio in a small slice, I do think they can be additive to managing volatility but someone who need "normal" stock market growth from their portfolio isn't getting it with huge allocations to this strategy. I own a few shares of MENYX personally with very limited client exposure. 

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.