Digging In On Portfolio Theory

Let's see if I do this right.

Nobody:

Cyber Hornet ETFs: New fund symbol ZZZ that's 75% S&P 500 and 25% Bitcoin!

ZZZ started trading last week but oddly a search on Yahoo Finance doesn't recognize the symbol. I was eventually able to find it on Yahoo via a Google search. The reason to make that lame joke to start the post is that supposedly we are on the cusp of a flurry of spot Bitcoin ETFs hitting the market. If that actually happens and you want Bitcoin, you might be better off just adding one those funds instead of something like ZZZ. 

Maybe ZZZ will work, I have no idea and a few days trading is too early to tell. We recently mentioned the Simplify US Equity PLUS GBTC ETF (SPBC) which is 100% S&P 500 and 10% GBTC so it is leveraged. From that post, an investor would have been better off building what SPBC does themselves. If you are hell bent on buying ZZZ then obviously a 10% weighting to ZZZ would give you 7.5% to US equities and leave you with a 2.5% allocation to Bitcoin. 

Speaking of Bitcoin, I wanted to back test an idea using GBTC which is the Grayscale Bitcoin Trust. To my knowledge it is the longest standing Bitcoin proxy, imperfect though it may be. The back test allocated 5% to GBTC, 20% to the AQR Macro Opportunities (QGMIX) and 75% to the SPDR T-Bill ETF (BIL) and rebalances semi-annually. This tests a couple of concepts. It is a form of capital efficiency with only 5% in something that could go up a ton or blow up over some random weekend. It kind of barbells the risk and volatility along the lines of what Nassim Taleb used to write about. If a 5% weighting did blow up one weekend, that would be a bummer but probably not sending too many people to the poorhouse.

I think it also supports the notion of small allocations potentially going a long way. Here are the results.

Remember, the rebalance is semi-annually not the annual default for Portfoliovisualizer. Looking annually it is a little choppier. Portfolio 2 is 100% to Vanguard Balanced Index Fund (VBAIX) a proxy for a 60/40 portfolio. The portfolio stats are across the board better than VBAIX. The worst year, max drawdown and Sharpe ratio data points are remarkable. This is really surprising to me. The backtest beat the market with very few dollars exposed to volatility. With 75% in T-bills as constructed, the portfolio is pretty resistant to an adverse sequence of returns. That the standard deviation has an 8 handle tells you how volatile GBTC is.  

Lastly, I am intrigued by the idea that one of the S&P 500 with an options overlay could possibly end up being a better mouse trap versus a plain vanilla index fund. It's not that I am expecting one of them to be, just intrigued by the possibility. 

• iSPY is brand new, it owns the S&P 500 and sells 0dte covered calls.
• SPYI owns the S&P 500 and sells call spreads.
• OVL owns the S&P 500 and sells put spreads.
• XYLD owns the S&P 500 and sells monthly covered calls.
• JEPY is very new, it owns no stocks, it just sells 0dte put options.
• VOO is plain vanilla S&P 500. 

The chart is so short because ISPY is brand new. There is no conclusion to draw for most of these because they are also fairly new. XYLD has been around for a long time. XYLD, and we could throw in Invesco S&P 500 BuyWrite ETF (PBP) which has also been around a long time, looks nothing like the S&P 500. The annualized total return for Vanguard S&P 500 ETF (VOO) going back ten years is 11.99%. For XYLD it is 5.94 and for PBP it is 4.79%. It's not that XYLD and PBP have no role in a portfolio, they very well might, but they are not proxies for the S&P 500.

OVL is interesting and has been around much longer than some of the others. 

It tracks very closely to the market cap weighted (MCW) index and it has about double the yield of MCW. It is more volatile which has played out so far as going up more in up years and it was down more in 2022.

I think we can draw a couple of conclusions with a medium degree of confidence about OVL. Slightly more volatile with more yield is not clearly a better mouse trap, anyone might think so and that would be fair because of the extra yield but fours years is enough time to think it doesn't offer much of a defensive component.  

It's ok to look for a better mousetrap S&P 500 proxy and I follow all of these but I am not holding my breath either. 

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.