Behavioral Festival

Bloomberg had an unintentionally funny article that seemed to lament owning anything in 2023 other than an S&P 500 index fund. 

The success of broad-market indexes masked a rough year for many varieties of tactical investments, particularly those premised on safety. Options-linked ETFs promising extra yield, which entered the year as trader darlings, racked up billions of dollars in inflows but delivered tepid results. The most famous, JPMorgan’s Equity Premium Income ETF (ticker JEPI), gained about 9% on a total-return basis, trailing the S&P by about 17 percentage points.

It was a similar story for ETFs focused on dividend strategies, which raked in more than $60 billion from defensive-leaning investors in 2022. Dividend-focused ETFs took in just $1.5 billion this year, one of the lowest hauls on record after most funds missed out on the tech-led rally and underperformed the S&P 500. One of the worst performers is the $18.8 billion iShares Select Dividend ETF (ticker DVY), which returned just 0.8% after all-in bets on utilities and financial stocks fizzled.

A year ago there was serious lament, desperation is probably a better word, from a lot of investors who found out at the wrong time they had too much exposure to the S&P 500. And the wrong part of the bond market while where at it. Are you sure you want to own the S&P 500 for all market environments? 

The chart looks at the S&P 500 and the Magnificent Seven stocks in 2022. In 2023 the S&P 500 was up a lot and the seven were all up more, in several instances much more. In 2022, it was the exact opposite. Going along for that full ride is absolutely valid but it is also valid to want to avoid every last basis point of that ride which is why someone might want JEPI or DVY or some of the alternative strategies we look at regularly here.

Yes, JEPI lagged by 17 percentage points in 2023 but in 2022 it outperformed by 14.66%. DVY was actually up slightly in 2022.

This is not to weigh in on whether to own or not own JEPI and DVY but to understand how they are likely to perform in different environments. Someone expecting either one to keep up in a year like 2023, doesn't understand what they own. 

We talk frequently about smoothing out the ride. The 75/50 portfolio concept ideally does that for example. As we talked about in the posts about 75/50, attempting to smooth out your ride with something akin to 75/50, which sort of describes what I try to do, means you are going to lag at times and that requires patience.

It's a terrible drawing but you can see that if you tried to be the green line in your portfolio, there would be years that you'd lag by a lot. For my money, there is nothing wrong with a far less volatile ride to the same destination but as bad as the drawing is, the lagging periods are apparent.

A lot was made in 2023 about the extreme divergence between the S&P 500 and the Invesco Equal Weight S&P 500 ETF (RSP). RSP was up about half of what the benchmark was up. For years, really quite a few years, RSP blew the S&P 500 away. Here's one example.

If you accept that 2023 was an outlier for how big the difference between the two was, then the difference captured on this chart is very big at close to 7% in just 12 months.

We talk all the time here about strategies that are reliably, negatively correlated to equities. With such a big up year for the S&P 500, you'd expect something with a negative correlation to be down. Managed futures? Most were down quite a bit, not blown up, but down. Client and personal holding BTAL? Down. Volatility products, also mostly down. 

The type of alts that we talk about as horizontal lines that hopefully tilt upwards were for the most part either side of flat by less than 100 basis points in 2022 and then up mid-single digits in 2023. They are not supposed to look anything like equities and they haven't looked like equities which I would call a win. More importantly, that is the type of reliability I want taking up a small slice of the portfolio to help smooth out the ride. 

What about funds that can go up no matter what? Do they exist? That's a solid maybe from me. Some of the AQR funds have done that but I'm not sure I would want to rely or expect them to go up every year, that doesn't seem realistic but great if it happens. Client and personal holding Standpoint Multi Asset (BLNDX and REMIX) combines equities and managed futures, it started trading in 2020 and so far four for four in up years. Should that be relied upon? For my money no. I do think Eric Crittenden (the portfolio manager) knows what he is doing and I will certainly stick with him and the fund but emotionally banking on being up every year doesn't make sense but, again, great if it happens. 

The last few years have been a fantastic microcosm for so many of the things we've been blogging about since the beginning at the original URL for this blog. I assure you, there is no great skill here, just the very obtainable insight into how markets tend to work and how to figure out how to navigate through in whatever manner is best for you. 

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.