Let's Light This Candle

I thought of this commercial from the Internet bubble, it was a classic and it is relevant now.

The other day I mentioned that Grayscale filed for a Bitcoin covered call ETF that would track GBTC using a synthetic exposure (long call/short put) to replicate long exposure and then sell calls to generate income. Roundhill beat Grayscale to the market, sort of, with the Bitcoin Covered Call Strategy ETF (YBTC). 

YBTC will track the ProShares Bitcoin Strategy ETF (BITO) which is futures based, not a spot fund like the 11 new ETFs that listed last week. Similar to the Grayscale filing, YBTC uses a synthetic exposure (long call/short put) to replicate long exposure and then sells calls to generate income. 

At some point options will list on the spot Bitcoin ETFs, the Blackrock fund already has $1 billion in AUM, then I bet there will be more spot Bitcoin covered call funds than just the Grayscale, after that maybe 0dte Bitcoin covered call ETFs. Blackrock is a client holding.

However far this goes, I would not expect these funds to be proxies for Bitcoin. The might be very volatile, like Bitcoin, and they might have huge payouts but if Bitcoin ever has another 10x year, I don't think the covered call funds will keep up. They might be great holds (or not, no idea), I just don't think they will capture what people hope they are getting by holding Bitcoin.

Maybe related, Nate Geraci Tweeted that ProShares has filed for leveraged and inverse Bitcoin ETFs. In a different post, I looked at how a 5% weight to Bitcoin could create the opportunity for serious capital efficiency by barbelling a lot of return into that small slice, 5%, of Bitcoin. The filing for the leveraged creates a potential scenario of getting the same effect we looked at the other day with just 2.5% in Bitcoin. 

That was a backtest of course and there is no way to know if the backtest is even a little repeatable but it is fascinating. The post the other day showed that very little could do a lot of lifting which is useful regardless of whether its relevant to Bitcoin going forward. Starting at 5% is way more than I would consider but the theory is simple as long as you remember that Bitcoin could be bullshit that goes to zero faster than you can sell. 

Following up on something else from a recent post, the YieldMax Universe Fund (YMAX) started trading this week, It is a fund of their funds, their funds are single stock, covered call ETFs so YMAX owns all of their funds (or most of them anyway) which should mute the volatility a little and probably bring down the yield versus the single stock versions by a little bit. 

The mania for covered call funds seems to be escalating even though the year they did fantastically well is a good bit behind us, 2022. It really is a mania, not bubble, and while there's nothing wrong with a small exposure, going too far from plainer vanilla in the past has usually been a bad idea.

Pivoting to factors, @etffocus on Threads shared this chart.

This is pretty interesting. Fifteen years is a good sample size. That it includes buybacks is useful because we've looked at that one before, quite a few years ago. There used to be a couple of different buyback funds but the field has narrowed. For modeling purposes, the Invesco Buy Back Achievers (PKW) might be the best one to look at. Invesco also has an international buyback fund and America First appears to have a mutual fund that targets buybacks. PKW is a billion dollar fund so I am surprised the field is so narrow. Portfolio 1 is PKW and Portfolio 2 is the Vanguard S&P 500 ETF (VOO).

This may be the best example of a point I've made before about factor investing. They tradeoff being the outperformer almost every year. Is one really better than the other? VOO has a slight CAGR lead of 20 basis points. Surprisingly, PKW's standard deviation is higher by 218 basis points but both are valid proxies for the US market.

I'm not sure how you argue anything other than a flip of the coin between the two. I don't really do much with broad based factor funds but I do think they are useful to study as I put a focus on trying to manage portfolio volatility and there are a lot of factor funds that try to manage volatility. As opposed to relying on a factor fund to get an outcome I want, I think the randomness between PKW and VOO argues that you're better off building the effect yourself or at least some effects. This is why I write so frequently about blending plain vanilla with various alts to explore different ways to manage portfolio volatility. 

Where some factor funds try to sell us on the idea of outperformance, I don't see that play out very often. 

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