You Build The Exposure Yourself!

I've mentioned at least one other time how funny I think the Drivetime App commercial is, where the people are so excited that "I made the deal myself!" It's silly but funny.

AXS is filing for a suite of 50 single stock and index ETF, levered funds that don't reset daily. For each security, there will be one that resets weekly, one that rests monthly and one that resets quarterly. Here's an example with the funds that will track the S&P 500.

And there are some inverse funds including in the 50.

We've played around with the ProShares Ultra S&P 500 ETF (SSO) to experiment with capitally efficient portfolio construction.

SSO, despite the daily reset, is not as far off as you might think versus the plain vanilla. You can decide for yourself whether it tracks close enough to actually own but for portfolio theory, it has been useful. The new AXS funds look to be an evolutionary step toward creating a capitally efficient portfolio yourself instead of having a fund provider do it for you. I've been very skeptical, but intrigued, of these funds noting something in the implementation seems off. A reader comment pointed out that the ReturnStacked funds reset daily so maybe that is the issue when we compare them to DIY.

Funds that reset quarterly seems like an easier path to doing it yourself and maybe cheaper, we'll see when the filing is updated to include fees. Building it yourself is consistent with what I've been saying since I first found this niche and if the AXS suite turns out to not be the answer, maybe something else will. 

The context here for any sort of leverage has been to lever down, not up. If you put the entire portfolio into SPYK, the quarterly reset ETF above, you are leveraged up, you are increasing volatility and increasing risk. Fine if that is what you want to do, but the more interesting idea to me is whether we can use leverage to reduce volatility and risk. 

A simple example would be someone wanting a 50/50, stocks/bonds portfolio could put 25% into SPYK, 50% into whatever bond proxy they want and leave 25% in cash to pursue better risk adjusted returns or allow the cash cushion to help manage sequence of return risk. If this is even suitable for anyone, it's probably more appropriate for a qualified account than a taxable account. I could see a scenario where it would make sense to sell it right before it resets and then buy it back after the reset. If I'm thinking about this the right way, the resets could be nasty after a great quarter for stocks. 

One aspect of capital efficiency seems to focus on building some sort of all-weather portfolio or adding in some all-weather as an attribute. On a webinar last week, Andrew Beer from DBi said 60/40 is dead, now it's 50/30/20, equities/fixed income/alts. The 20% to alts can potentially help with the all-weather attribute and in the context of leveraging down, the new funds from AXS might enhance the effect even more.

BTAL is a client and personal holding. You can see differences aren't huge other than 2022 when 60/40 was down twice as much as the other two. I split the alt exposure between managed futures and global macro. Where we leveraged down in Portfolio 1, the performance was pretty close but we were able to build a full allocation and have a lot leftover in cash which protects against sequence of return risk. We've gotten similar results with plenty of other blends too. This isn't riskless though, and the further you get from plain vanilla, the greater the chance that something malfunctions. 

A quick admin note, a friend let me know that the old Portfoliovisualizer interface can be found at https://legacy.portfoliovisualizer.com/ which is what I used for this post instead of the new version.

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.

Carry On Wayward Son

A Cliff Clavin footnote to start is that the Kansas song is called Carry on Wayward Son, not my wayward son, obviously the lyrics include the word my but not the title. 

The ReturnStacked US Stocks & Futures Yield ETF (RSSY) starts trading on the CBOE on Wednesday. We've taken a couple of looks at carry as an investment strategy and hopefully we can dig in a little deeper to learn more. RSSY stacks carry on top of equities using leverage. 

The first thing you might think of for a carry trade is a long/short trade, going long high yielding currencies and shorting lower yielding currencies. That trade can capture the spread in yield and maybe some positive basis points of return with the idea being that higher yielding currencies are preferable to lower yielding currencies. It doesn't always work that way of course but that is the idea.

That sort of long/short has been applied to other concepts like arbitrage and managed futures. Carry as a term has also been applied to futures curves going long futures where rolling to future contracts can be done profitably (backwardation) and short futures where rolling forward is more expensive (contango). 

There seems to be some overlap with managed futures, going long and short various futures but managed futures looks at trend, usually 10 month/200 day trends whereas as carry is more about exploiting term structure. 

Finomial took a closer look at the comparison between managed futures and carry and for their money, managed futures is the more effective portfolio diversifier. They might be correct but there are some nits to pick with their blog post. The context of carry in the post seems to just be long high yielding currencies/short low yielding currencies. They mention that managed futures has outperformed carry as follows.

They note however that carry tends to do better with higher interest rates. We had very low interest rates for ages and carry traded sideways for the most part. The carry index does appear to start moving higher in late 2022 or early 2023 as the effect of higher rates started to kick in. Maybe it can do better now that rates are higher? The chart also shows that carry has not helped as crisis alpha in either 2008 when it dropped dramatically or in 2022 where it looked like a horizonal line with a slight tilt upwards. 

In a post looking at carry earlier this month I used Vanguard Market Neutral (VMNIX) as a proxy for carry. I'm not aware of any funds that just focus on carry but VMNIX looked like a reasonable proxy after playing around with some currency carry trades. I think the chart above also shows that merger arbitrage or convertible arbitrage might also be proxies for carry. 

The new RSSY ETF looks like it will focus on carry as applied to roll yield dynamics. I am not aware of a way to back test it with another fund. In their presentation for the fund they provide some information. 

No correlation to stocks or bonds is not a bad thing when allocated in small doses. Stocks being the thing that goes up the most, most of the time, most investors shouldn't be too far away from a "normal" allocation to stocks but small exposures to uncorrelated return streams as carry might be can help smooth out the ride. Similar to the cross currency version, the roll yield carry strategy went up slightly in 2022. I said it wasn't crisis alpha but let me know if you disagree. The futures yield line looks very absolute-returnish.

Despite the conceptual overlap between managed futures and futures yield, they appear to be different types of return streams and so I don't think the comparison Finomial is making is the right thing to study. Alternatives that are better suited to compare are arbitrages as I mentioned above and anything else that looks like a horizontal line that tilts upward. 

Carry is also applied to the yield on an instrument, irrespective of price movement. If a long term bond yields 5%, the price might be very volatile but it will still pay that 5% until maturity...probably. I had a thought about how to apply a carry-ish strategy to the extremely high "yielding" covered call ETFs related to the person who had to retire early and start living off their portfolio sooner. This could be a way to slightly stretch a portfolio's yield until Social Security kicks in. 

YieldMax was an early mover in this space with mostly single stock, covered call funds but also a few that have exposure to multiple stocks including the YieldMax Universe Fund of Option Income ETFs (YMAX). For purposes of this study, I wouldn't use a single stock YieldMax because it would be too easy to use one that is "working" like Nvidia and avoid one that is floundering like Tesla. The fortunes of those two could switch at anytime. I calculate the trailing "yield" for YMAX at 27%. Assuming that's right, my thought is to allocate enough to it to generate 1% for the entire portfolio. If 27% is correct, then I get a 3.7% weighting to YMAX to account for 1% for a portfolio's total yield. 

The 27% "yield" isn't static of course but how much yield and growth could could be had with the other 96.3% of the portfolio? Putting 57.78 into an S&P 500 fund and 38.52 into the SPDR T-Bill ETF (BIL) which is proportionally correct for 60/40 after putting 3.7% into a high yielding covered call fund at the start of 2022. That would be a very unlucky starting period resulted in 1.97% CAGR not including dividends. The total return was 4.13% annualized plus the theoretical 1% from the covered call fund with that very unfavorable starting point. Looking from 2023 onward would be more favorable because T-bills yielded 5% all of that year and stocks went up in 2023. 

Really I'm just fumbling around with this idea. What I think would happen is that the rest of the portfolio would more than make up for possible erosion of the covered call ETF. I believe I have the cred to build the example using T-bills and not an aggregate bond index because I've been saying to avoid or greatly minimize exposure to duration for many years. 

If that idea isn't crazy enough, GraniteShares has filed for a suite of funds that will own 2x single stock ETFs and sell calls against them and funds that will own 3x index ETFs like the Direxion Daily 3x Bull S&P 500 ETF) SPXL and sell calls against those. I'll try to dig in on them if they ever see the light of day. 

Closing out on carry, I am of course curious to see what RSSY does but I am not convinced it offers a differentiated attribute, differentiated from other strategies that offer a similar return and volatility profile that have longer track records in fund form. RSSY did trade over 5 million shares on its first day so someone certainly has confidence in it. Congrats to the ReturnStacked guys for a great first day.

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.

My Backup Took A Big Step Forward

Yahoo Finance had an article about the comments on an article about retirement which itself drew a ton of comments. Read the comments. Always read the comments. They provide insight into what people are thinking, maybe seeing some good ideas and seeing what people don't understand. 

As always, there were a lot of success stories as some sort of combination of selection bias and confirmation bias. There are a few sad stories and a few comments blaming politicians. The success stories include people retiring young as well as people retiring late or never retiring. There were also comments bagging on the people who want to keep working. 

Working can contribute to having a sense of purpose. My own beliefs though are work if you want to work but hopefully, your vocation is not the only facet of your life. Having different and disparate aspects to your life makes things far more interesting in my opinion. 

There was acknowledgement of the challenges of late 50s/early 60s being "forced" into retirement either due to some sort of downsizing or health issue. We've talked about this plenty and I think it is a real threat. I shared my own scare with this due to partner malfeasance at my old firm (I was never a partner) so I fully respect this issue. 

I've written a couple of hundred posts about the importance of focusing on things that we might be able to control or at least things we can do to improve our resiliency in case something unexpected happens.

First is health. Life is far less expensive without chronic maladies that need to be managed with prescriptions. Cutting carbohydrate consumption is practically miraculous for how many chronic maladies can be reversed and for losing weight which prevents/solves a bunch of other problems. Although it might not work for everyone, there is no downside to eating less junk food. Lifting weights is the other big component here. Aside from building/maintaining muscle mass which it vital for successful aging, there are countless metabolic benefits.

Resiliency is also enhanced by living below your means. In the face of job loss, it is obviously much easier to cover a $5000/mo lifestyle than a $10,000/mo lifestyle.

One thing that some commenters seemed to not understand is the cost of health insurance. If you lose your job and income takes a big hit, then odds are very high that insurance through healthcare.gov will be very cheap or maybe even free. If you're in this position, there is no reason not to investigate this. Think about a $5000/mo lifestyle where $1000 goes to health insurance. Things get much easier if that premium drops to $300. 

And a quick update on my Plan B of working on large fires on an incident management team (IMT). Last week I had my first, away from home, paid assignment working on the Wildcat Fire down near Phoenix on the Tonto National Forrest. This one ended up being a short assignment thanks in part to a very cloudy and humid Monday that included a 30 minute rain storm. They also dumped a lot of retardant and water on it from the air when it first started. 

An ongoing idea to retirement planning here for many, many years has been monetizing a hobby to create an additional income stream should it ever be needed. I've been consistent with encouraging taking a long runway to figuring out whether a particular hobby can be monetized and then getting on a path to do so before you retire. Starting early increases the odds of success.

My job title is liaison, I'm still a trainee and it will take a while before I'm fully qualified into the position. Basically the liaison is a conduit of information in both directions between the operations of the fire and various relevant agencies and fire departments (plus a few other constituents). There are a couple meetings during the day and briefings before the operational periods start. The rest of the time I am at a desk by the computer and on the phone when necessary. In four days on the fire last year, I had to go out into the field a couple of times but not for very long. On this one, I didn't go out into the field at all.

I won't post 47 selfies of me at a desk but I will include a couple of fire truck pictures. 

I've been very actively volunteering since 2003 and the chief of our department since 2012. Liaison is very high up on the org chart of IMT, the person I worked under on the last assignment equated it to be an assistant chief but of course it's a professional realm so it is a huge opportunity I've been given. 

The opportunity for me to do this is the byproduct of what I talk about all the time, a very long runway to making it happen. In this case a little over 20 years. I will try to get enough assignments to get fully qualified into the position but I will not be going out all summer doing this. The end goal for me is to be able to help anytime there is a threat locally and maybe take one assignment outside the area every summer to maintain my status. 

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.

40% In Commodities? What?

Barron's had an interesting article about a BofA study showing that over a period of many decades an asset allocation of 60% equities/40% commodities outperformed an allocation of 60% equities/40% fixed income by 0.80% per year. You might expect a tradeoff of having to take on more volatility for that extra return but the article didn't really dig in beyond noting bonds tending to be less volatile. 

I got similar results plugging a 40% allocation into the revamped Portfoliovisualizer which only goes back for ten years on the free tier. The CAGR for 60% domestic equities/40% Invesco DB Commodity Tracker (DBC) was 8.86% versus 7.42% for Vanguard Balanced Index Fund (VBAIX) which is a proxy for a traditional 60/40 portfolio. The standard deviation was 3.5% higher with the 40% allocated to commodities but the 2022 decline was much less at 3.97% versus 16.87% for VBAIX.

I'm pretty sure that I've never put a full 40% into fixed income so 40% into commodities is certainly not going to happen but it's an interesting idea to play around with.

It is surprising how little difference there is in terms of CAGR and even standard deviation between the three which were all superior to VBAIX over a decent timeframe. 

An article at Vettafi about alternatives sent me down a short rabbit hole into GlobalX' lineup. I haven't looked in awhile I guess but yowza, a lot of option-centric funds. So a quick look at the Global X S&P 500 Tail Risk ETF (XTR) which owns the S&P 500 with a put option overlay and the GlobalX S&P 500 Risk Managed Income ETF (XRMI) which owns the S&P 500, sells a covered call, buys a put and has a very high "yield."

XRMI actually compounds negatively but didn't spare too much pain in 2022. The way the put overlay is implemented in XTR results in a pretty noticeable lag of plain vanilla S&P 500 but the protection from the puts only saved holders 51 basis points of downside in 2022. I threw in a simple, build it your self blend of 95% Vanguard S&P 500 (VOO) and 5% client and personal holding BTAL which had the best CAGR, 304 basis points better than XTR. It also offered a little more protection in 2022 than XTR by 138 basis points. The VOO/BTAL blend seems like the more effective way to capture the exposure. 

The point is not to run out and put 95% in VOO and 5% in BTAL but to consider building the exposure yourself. Right or wrong, I would say blending a plain vanilla with whatever alt or combo of alts is simpler than buying it all in one wrapper. 

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.

Simplify Says We Should Rethink 60/40 And They're Right

Simplify posted a short paper in support of some of their liquid alternative funds around the idea of replacing 60/40 with 60, 20 in fixed income with the rest divided evenly between Simplify Managed Futures (CTA), Simplify Market Neutral Equity Long/Short ETF (EQLS) and the Simplify Quantitative Investment Strategies ETF (QIS). The description for QIS reads like it is along the lines of a multi-strategy, multi-asset fund.

I certainly an very critical of some of their funds but a couple of them appear to do what they purport to do. To their credit, the company is trying to democratize sophisticated strategies but in some cases there is something in the implementation that doesn't work or maybe the strategies just don't lend themselves to an ETF. The knowledge base is good and the ideas are interesting like the one in the paper we're looking at today. 

QIS and EQLS have very short track records, less than a year, and CTA isn't much older at just over two years. For what it's worth, CTA's chart looks very similar to AQMIX and EBSIX which we use here regularly for modeling portfolios which is a positive for CTA IMO. "Rethinking" 60/40 is always going to intrigue me of course so I wanted to play around with their idea with substitutes that have longer records for us to look at.

Benchmarking to the Vanguard Balanced Index Fund VBAIX which is a proxy for a 60/40 portfolio we can the following results.

It does offer improvement. The CAGR is 200 basis points better which is quite good although the standard deviation is about the same. A big chunk of the long term outperformance is attributable to 1000 basis points of outperformance in 2022. The two have been close every other year except this year where through April, the replication is ahead by about 400 basis points. 

Although I usually bag on Simplify, the blend they wrote about seems like a pretty good idea even if I wouldn't be in too much of a hurry to use their funds. A 60/40 portfolio, generically speaking, can get the job done. The 60/20/6.66/6.66/6.66 tracks pretty closely to  to 60/40 most of the time but sidesteps it when 60/40 hasn't done so well. It would be nice to have a better sample size before drawing a firm conclusion. I'll try to follow up on this one in a few months to see if anything has changed.

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.

Orthogonality On Steroids

Jared Dillian had a fascinating blog post titled The Life Hedge. Dillian is fairly well known in FinTwit. He spent time at Lehman Brothers, then was/is affiliated with John Mauldin and does other writing too. He has some unique ideas that are often very thought provoking. 

The post starts with looking at a scenario where an economic downturn occurs and someone gets laid off from their job while their investment portfolio gets cut in half. That's a double whammy and Jared points out the potentially high correlation to job loss and a meaningful decline in the stock market. This is very stressful he says and that 99% of country lives that way meaning high correlation between their job and investment account. There may never be a consequence for the risk of that high correlation but the risk is there is his point. 

Jared goes out of his way to not live with that overhang. He says his portfolio is constructed "in such a way that it might limp along or be flat during expansion, but explode higher during recessions." It is high on his priority list to be counter to the US cycle or as we've put it before, he wants to be orthogonal to US cyclicality. He goes into some detail on how he does this including having put options kind of like a tail risk fund of which there are a couple, he is also short US equities to a small extent and also long gold and other commodities. He says he is "diversified in ways you cannot imagine, across the world, in various asset classes."

A big part of his being able to do this emotionally is that he has trained himself to have no sense of missing out when US equities are going up which as we talk about all the time, they do far more often than not. He gives a nod to just being in cash right now which at 5% is more compelling that it has been in years. That's far behind what equities have been doing but 5% on cash is pretty good. 

Jared thinks his returns are about keeping up with the S&P 500 without obviously being long US markets. I am not doubting him but I tried to recreate a portfolio that kept up with the S&P 500 while being short the US and I couldn't find a way to get there. This makes me think there might be a lot of trading on his part or some outstanding stock selection. For example, if he has a basket of stocks doing as well as client holding Novo Nordisk (NVO) along with some Bitcoin while being short the S&P, then yes, he could be keeping up or doing better. The point is it would be tough to recreate his result just using broad based funds and a couple of alts but that doesn't mean we won't try.

I built the following three portfolios that I think come close to what he is describing but the results are nowhere close to the S&P 500. The portfolios are similar, but with tweaks and a couple of them include Bitcoin exposure which it seems plausible he'd own.

Portfolio 1

Portfolio 2

Portfolio 3

If someone had an interest in being net short US equities, I think client and personal holding BTAL would be better than things like the ProShares Short S&P 500 (SH) or the AdvisorShares Ranger Equity Bear ETF (HDGE) which both compound very negatively over the longer term whereas BTAL actually compounds positively by just a few basis points. 

The results

A quick note, Portfoliovisualizer totally overhauled its interface and I am still trying to figure it out. All three compounded positively over a decent number of years so that alone is a little surprising but they are far behind the S&P 500 Index which compounded at 12.1% for the same period. Whether coincidence or not, all three portfolios had higher returns, mostly, as inflation started to pick up in the last couple of years or so including being up close to 10% in 2022. They might then accomplish a version of Dillian's desire to be counter cyclical.

It is not clear to me why too many people would need to go to this extreme but it is a fascinating concept. He touches on an idea I first mentioned before the financial crisis about the fact that investment professionals are very exposed to the ups and downs of the markets. This is something Meb Faber talks about regularly as well. All investment professionals are levered to the ups and downs of markets. Their business and their own money potentially. My answer has always been to simply have a smaller allocation to US equities than most people and to use alternatives to greatly reduce the volatility of my bottom line number which allows me to not sweat the occasional large declines in markets. In addition to preferring to not be stressed out, the last thing clients need is for their advisor to be obsessed with their own portfolio at the expense of time and energy devoted to client assets. 

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.

"Tell Us What We're Supposed To Do"

The title of this post was a comment left on a retirement article at Yahoo that generally pointed to our collective desire to retire in our early 60's not matching up with our collective financial reality. If you read a lot about personal finance then this has been ingrained. Average retirement account balances are in the very low six figures even for people who are getting close to what is thought of as "normal" retirement age. At the same time, corporate downsizing and poor health is forcing the hand of many people into retiring early, whether they are ready or not.

Cutting to the quick, if someone wants to retire and their income sources, probably Social Security, maybe a pension, and a hopefully sustainable amount from their accumulated savings, aren't enough then something will have to give. They either keep working in their career, take a post-retirement career where maybe they earn less but supplement their income or spend less money. 

In past posts, we've talked downsizing into a smaller house and getting cash out of the trade. That is possible but I believe has become harder to do with the huge run up in housing prices. We've also talked about moving to a foreign country which I believe is now harder to do as the world is a little less stable. Ecuador has been very popular in this context but the stability has deteriorated in the last couple of years. Anyone interested in moving some place, I stand by my suggestion of not selling your house here in case you need to come back and renting it out for the income. 

There was another comment that I really liked.

It framed some of my beliefs very well. Both vlad and Keith are expressing different aspects of independence. Owning your time, setting your own schedule might have to be the lens through which "retirement" is now viewed. Not fair and any other sentiment like that is probably correct but fair doesn't matter. There's no feel good coming to help people. As an ongoing theme here and paraphrasing Joe Moglia, no one will care more about our retirement than us. 

So it is up to use to solve our own problem. My first introduction to this idea, and I've blogged about it 100 times, was moving to Walker more than 20 years ago and seeing people make their retirement work because they had to, they had no choice. From those observations, I know it can be done but it really is a lot of bottom up work to understand expenses now and in the future, figure out how to get to "retirement" with hopefully no debt, understand how engage with markets, understand basic personal finance or maybe not so basic as I am referring to Social Security and RMDs, a big one for me obviously is to dial in the health aspect of this by lifting weights and cutting carbohydrate consumption and figure out how to create an income stream to supplement SS, a pension maybe and accumulated savings.

Hopefully that doesn't come across as any kind of short cut, I don't think it is. Assuming that this is not the only finance reading you do, your level interest probably puts you in a better spot than most people. The combo of lifting weights and cutting carbs actually is a short cut. If you're overweight and you start today, the odds of you being down 20 pounds a month from now are very high. If you start lifting weights today, you'll have the biggest gains early on then slowly plateauing out to maintenance and incremental gains. 

This is a challenge to solve and I think there is great life purpose to be had from figuring out a path to your individual desired outcome. 

Because it's related, Yahoo had another article about Social Security, different from the one I mentioned the other day and it has the updated projections that mentioned but did not link to, that SS is now looking at a 17% cut now starting in 2035. I spelled out my thinking in that recent post but basically I think across the board cuts are very unlikely, means testing seems more plausible but that only future payees will be impacted like everyone born from 1975 onward maybe, those folks will be 60 in 2035. I would model out what impact a reduction would have on you as part of the work I described higher up. 

One other thought that I didn't mention the other day but that I have mentioned before is that if they really do cut SS across the board-ish, one way to do it would be to eliminate spousal benefits, not survivor benefits, but spousal. As an example, the way it maps out for us is my age 70 amount (I plan to wait) is $4600, my wife would take it at 64, getting 50% or $1400 of what would have been my age 64 benefit. So we would not get her $1400 and if I died first, she would get the $4600. 

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.

Overly Academic?

Corey Hoffstein had a thought provoking Tweet thread that started with "leveraged portfolios are subject to variance drain." The conversation went on to compare the effect of variance drain in leveraged portfolios, which is what the ReturnStacked ETFs do, versus variance drain in more common, long only portfolios. 

Variance drain is a fancy term for the potential underperformance that could be caused by volatility working against a portfolio's result. Corey goes on to "prove" his point in the thread. When I see things like this, I will ask myself whether this can actually help what I do or is it overly academic which creates the possibility of being too clever by half. 

The theory of leveraging up is probably correct but as we've looked at before, actually pulling it off in a fund is not simply a given. I've questioned the ReturnStacked funds as well as ETFs from Simplify, they are leveraged but the benefit, for now, is hard to find. Here's another example with the Simplify US Equity PLUS GBTC ETF (SPBC). It is 100% S&P 500 plus 10% in the GrayScale Bitcoin ETF (GBTC).

Portfolio 1 is straight SPBC, Portfolio 2 is a build it yourself version that does leverage up and Portfolio 3 is an unleveraged version of build it yourself. The comparison does a couple of different things. The lag of SPBC is larger than the expense ratio of the fund. Its best year was no where near as good as the other two portfolios, its worst year was worse than the other two, it had the biggest max drawdown and it's Sharpe Ratio is quite a bit lower. 

The leverage as SPBC is using it, makes it worse. Portfolio 2 sort of supports Corey's point with the build it yourself leverage helping returns. But SPBC disproves his point along the lines of Karl Popper. All the positive results can't prove something, but it only takes one negative result to disprove it.

I don't feel the need to apply Popper literally, more like back to SPBC itself where something isn't quite right with how they implement the strategy. Maybe there is a friction with how the fund is rebalanced. That would be the easy thing to point to but I might be wrong. 

Back to the original question of an idea being overly academic. We can each decide for ourselves whether Corey's point should influence us in any way. AQR seems to do a good job incorporating leverage and there are others like maybe WisdomTree, but it is difficult to do and I would not jump in too enthusiastically with investment dollars. I am all in on studying these and wanting to learn more but my actual exposure is quite limited. 

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.

Same Strategy, 4 Different Objectives?

A new, interesting and expensive fund popped up on my radar from something I saw on Twitter, yes I am still calling it Twitter.

The Invenomic Institutional Fund (BIVIX/BIVRX) is a long/short equity fund that has been around since mid-2017. The fund's literature goes out of its way to note that it only positions in domestic stocks. It has a 5 Star rating from Morningstar and in its five full year plus two partials, it has had two huge up years. It was up 61% in 2021 and in 2022 it was up 50%. All the other years it was up ranging from 3+% to 16% except for this year, it is down 5.97% through the end of April.

As I try to understand what the fund is attempting to do, I come to the conclusion it wants to be a high beta, out-performer. That is what it has been doing for the most part. To keep this consistent with past blog posts, I would say high beta outperformance is the expectation it is setting. 

A different long/short equity fund that I don't think I've mentioned before is the AQR Long/Short Equity Fund (QLEIX). It is also a 5 Star fund that is very expensive. It's been around a little longer but I believe it sets a different expectation. Its performance is far less volatile as closer to low volatility equity exposure or high performing absolute return but with a CAGR that is less than BIVIX and a standard deviation that is less than BIVIX.

Arbitrage strategies are typically long/short one way or another, I use merger arbitrage for clients and the expectation I think being set there is a horizontal line on the chart that tilts upwards. Whatever is going on in the world, my expectation is that it will be up a little with very little volatility. 

The fourth type of long/short to mention is the AGFiQ US Market Neutral Anti-Beta ETF (BTAL) which is a client and personal holding. Its expectation is that it will have a negative correlation to the broad US indexes. 

All four are long/short but all do different things. BIVIX and QLEIX are kind of close but nothing like the other two. 

In the same period, the Merger Fund (MERIX) which is a client and personal holding compounded at 3.63% with a standard deviation of 3.10%. They all look very different and do different things in a portfolio. BTAL lowers correlation very reliably. MERIX lowers volatility very reliably. The following tracks BTAL, QLEIX and BIVIX weighted at 20% with the other 80% in the Vanguard S&P 500 ETF (VOO).

The most interesting thing is that despite BIVIX being much more volatile than QLEIX, a 20% allocation to each has the same standard deviation when paired with 80% VOO. The BTAL blend is as advertised in terms of lowering the correlation.

I've never used long/short to try to add outperformance or volatility to a portfolio. QLEIX has had a couple of serious down years which would be ok for BTAL but there is somehow less reliability, in how I view things, in trying to outperform with a long/short strategy. 

The bigger take is about expectations, understanding what a potential holding should do. It may not do it all the time but is the performance reliable enough to hold on to? If something should be a horizontal like that tilts upward, does it actually do that? If so, how frequently? QLEIX helped in the decline of 2022 but not in the decline in 2018. Does that matter? That is up to the end user. BIVIX creates a good first impression to be sure but no plans for now to do anything other than try to learn more about it.

A quick note is that shorting stocks is expensive which contributes to why these funds appear to be expensive. 

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.

Digging Deep

On this week's ETF IQ, they had a quick segment on the YieldMax ETFs. These are the single stock, covered call ETFs that have extremely high yields that we mentioned yesterday. We've talked about these quite a few times noting that they have trouble outpacing their distributions and that the YieldMax TSLA ETF (TSLY) has already done a reverse split. I said that I'd do a quick look at how many of them are actually in positive territory on a price basis after looking at the YieldMax NVDA ETF (NVDY) which has been up 29% over the last year versus a gain of 210% for the underlying. 

Of their 24 funds, only a few have been around for a year and I also looked at funds in their second batch of funds that came out last summer.

In case the symbols aren't clear, APLY corresponds with Apple (AAPL) which is up 8% in the same time period, AMZY corresponds to Amazon (AMZN) which is up 41% since AMZY's inception, GOOY is Google (GOOG) up 29%, NFLY tracks Netflix (NFLX) which is up 40%, OARK tracks ARK Innovation ETF (ARKK) was down 17% and FBY tracks Meta (META) which was up 44%. 

The dispersion between the common and the covered call version is very wide. It's not that they are not working as intended but how they are supposed to work means they are not proxies for the common stock. I obviously don't know whether all of them will go down and then reverse split but that is very much on the table. If you bought NVDY hoping it would tread water and have a big payout, then you're pretty happy. If you thought you were buying something that would sort of track NVDA then you're pretty bummed for having chosen the right company but the wrong way to own it. 

If you've looked into any sort of covered call fund, you know the potential for the upside to be capped at the strike price of the call sold against the stock. Here are a couple of examples I found that show the underlying taking off without the covered call version. 

LQD is a widely held corporate bond ETF and LQDW tracks that fund with a covered call overlay.

IVV tracks the S&P 500, and IVVW sells options against IVV. IVVW hasn't been around very long but long enough for what you see in the chart. Again, it's not that I think the funds are malfunctioning or executing poorly, I think we're just seeing known drawbacks playing out. Hopefully the drawbacks are known to the holders of these funds anyway. 

On plenty of occasions I've said something like I think there could be a way to incorporate one of these in to a portfolio to add a few basis points of yield without completely missing normal market returns.

VOO is the Vanguard S&P 500 ETF and XYLD is the Global X S&P 500 Covered Call ETF. I chose XYLD because it has a long track record. The growth numbers assume dividends are not reinvested. The 80/20 mix compounded at 8.00% which is clearly not the CAGR of VOO by itself but pretty good for someone needing to be sort of close. 

Allocating just 20% to XYLD had the effect of more than doubling the portfolio's income in recent years versus just boosting it nicely in the early years of the backtest. 

Mixing 80/20 doesn't seem like an obviously terrible idea but going very heavy into covered call funds is probably not a great idea. Where they are selling volatility that arguably makes them an alternative strategy. We've talked about volatility as an alternative asset class/strategy which to my way of thinking makes them a complimentary exposure if anything, certainly not a core 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.

Let's Have Some Fun(d)!

YieldMax promoted the one year anniversary of the YieldMax NVDA Option Income Strategy ETF (NVDY). The fund is a single stock, covered call fund with a crazy high yield. More correctly, it is synthetically long the stock, buying a call and selling a put for the stock exposure and then selling a call against that combo.

The chart compares it to the underlying common stock and a 2X version from GraniteShares. To get the total return of NVDY, you could add in the dividends which total $13.63 or 69% and the fund has almost doubled compared to a 210% gain for the common and 370% for the 2X. I always say with these covered call funds to plan on reinvesting most of the dividend because they can't outgrow the huge yield. NVDY has been an exception that proves the rule and it took 210% for the common to do it. Something like NVDY could fit into certain portfolios I suppose but it is hard to argue it is a proxy for NVDA, but it does benefit from NVDA's volatility. We know that the Tesla fund from YioeldMax has already reverse split, I will try to do a study of their older funds to see how many are keeping up with their payouts.

Back in January the Cambria Tactical Yield Fund (TYLD) started trading. It's kind of a risk on/risk off fixed income ETF. The strategy looks at yield spreads between T-bills and various income sectors like corporates, high yield, TIPS, REITS and so on. When spreads are narrow, the fund will own T-bills and when spreads are wide, it will own those income sectors. As I read the prospectus, TYLD is allowed to own some T-bills and some from income sectors. Since it started, it has just owned T-bills. 

It's Cambria, so I don't doubt the research but it would be very difficult to try to back test this. The idea makes intuitive sense to me, sort of applying trend following to top down income sector selection. I am a long way from wanting fixed income exposure that is AGG-ish in the slightest but the idea is interesting enough to share here and to follow it to see what markets look like when it makes its first rotation into an income sector.

A reader left a comment with the following portfolio equally weighted at 25%. A lot of sophisticated and expensive funds that blend together for an interesting result, it's somewhat all weather but compounds better than many all weather-ish funds tend to do.

I think the names are self explanatory, two of which I'd never heard of. It backtests to 2014.

It never had a down year which I wouldn't get too excited about, even all those years, that could be a matter of luck. What is interesting is that it is close to traditional 60/40 in terms of growth with about half the standard deviation. I'd say the same thing if it was VBAIX that was slightly ahead in terms of growth. I trust the standard deviation as being repeatable moreso than the CAGR. I am also struck by how heavy it is in various forms of long short.

LCSIX is a multi-manager fund which probably accounts for some of its 2.18% expense ratio. Click through to the fund page and then the fact sheet to learn a little more. According to the fact sheet it has a 0.62 correlation to managed futures so it is similar but different and a 0.24% correlation to equites, so a little closer to equities than managed futures. Carry looks like it is a small part of the fund, one of the six managers mentions it on its fact sheet blurb. 

I wanted to circle back to the FIG Replication portfolio. I've been critical of the actual FIG ETF, the Simplify Macro ETF, it is really struggling but I think the fund's idea for asset allocation works for the most part. I built the FIG Replication using a recently launched fund for the fixed income proxy which was short sighted, I thought about and realized there are plenty of fixed income funds that go back further in time that don't take interest rate risk so I rebuilt the fund with the iShares Treasury Floating Rate Bond ETF (TFLO) as follows.

Again, those percentages are how I believe FIG has allocated its assets, using different holdings of course. Let's compare the longer version to simple VBAIX.

The CAGR is a little better than VBAIX and similar to the Reader Portfolio but the standard deviation is a little higher than the Reader Portfolio. Repeated for emphasis, I think the allocation idea works but there's something in FIG's implementation that doesn't work.

Back to Cambria, when I was looking at TYLD I remembered the Cambria Trinity ETF (TRTY) which is also something of an all-weather/macro fund that allocates 35% to trend, 25% each to equities and fixed income and 15% to alternatives which is in the ball park for a lot of these types of funds. Like other funds in this category it too seems like it struggles a bit. Below is TRTY compared a home made version of their allocation with essentially the same funds as Longer FIG and VBAIX.

The result between TRTY and the replication I built is dramatic. We don't spend a ton of time talking about Sharpe Ratios but yikes, that is a huge difference for the same asset allocation. 

The idea that one macro fund could be all-weather enough to be the only holding is appealing on some level but as we have seen, they can be difficult to execute. 

A quick administrative note is that when I build these sorts of portfolio combinations to look at, I try to use funds that I don't actually own for clients whenever possible. AQR Managed Futures (AQMIX) is a good example. I use it for modeling because it is a good representation of the group, not necessarily the best, and it has been around for a while making for decently long backtests. I own a fund for clients that is similar to TFLO but am glad I thought of it instead of the much newer AGRH for the FIG Replication that I hope to revisit and now also the TRY Replication that we build today. 

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.

The Battle Of When To Take Social Security

Barron's had two articles about retirement, one about Social Security and one saying that most workers don't want to work past 62. The sentiment of that second one, there are articles all the time that say different things about the desire to versus the need to work and so on. The better framing of this IMO is to have a Plan A of what you intend to do and then some sort of backup in case your hand is forced somehow (layoff or health) or you get to some age and decide you've got to do something different. 

If you want to retire at 60, great, do the planning and the work but be adaptable if something doesn't work out. Plan to work until 72? Ok what is your backup if you can't. The important thing is knowing what you actually care about and then figuring out how to plan toward that outcome. My own pitch is that these things become much easier when you have a workable Plan B. 

The first article gave an update about when and by how much the looming cuts in SS payouts will be but it had different figures than what I saw earlier this week, sorry no link. The first thing I read said the cuts had been pushed back to 2035 and that now it was pointing to only a 17% cut realizing the precise details change every year. 

The article didn't talk about how unlikely it is that a cut will be implemented all or nothing with everyone taking an x% cut on day one. Current retirees should not expect a cut (the article did say that) and there is some birth year that cuts, if they really happen, would be imposed like everyone born after a certain year, maybe 1975 or something? Of course cuts actually happening is very unlikely. At some point, fearing for their jobs, it is a good bet that Congress would intercede. Planning around the idea of them failing is prudent but total failure is a low probability outcome. 

I will again interject the idea of means testing though, I think that is more plausible for higher income people or those with more assets. Got a million bucks (in today's dollars) and not quite 50 years old? Yeah, you might get means tested. 

There were two thoughts on claiming strategies, one I liked and one I thought was cringe. Don't make changes to what you have in mind for when to take it over concerns about a cut. That makes sense, and there is plenty of time to Plan B in case that turns out to be wrong. Someone born in 1975 or later to stick with my made up example could face a cut regardless of when they take. Born in 1980 and it does end up cutting reduced, it would be reduced whether the person born in 1980 takes it at 62 or 70. The advice I thought was cringe was implying that everyone should wait as long as possible to take it. "there's a clear payoff to delaying as long as possible." 

There are endless different scenarios to dictate when an individual should start Social Security. The idea that everyone should take the same action doesn't make sense to me. I think everyone should understand how it works in terms of the size of the monthly check going up the longer you wait, knowing that is important but holding out to some older age isn't the  answer for everyone. There's no wrong answer assuming someone is making an informed decision. 

The comments are always worth reading on these articles and more of them favor taking it early than waiting. Back to making sure you're informed, taking it before your full retirement age while still working is not a great mix for tax reasons. Go learn about that before taking it early. 

There were two interesting ideas in the comments I want to touch on. One is to offset SS pay cuts by lowering or even eliminating the tax owed on IRA distributions. In the early years of taking an RMD it would be a nice offset but it wouldn't equal out in too many instances but later in retirement it would become more meaningful as the RMD percentage increases. Those are different pots of money by the way. Cutting that tax doesn't take from the SS program. Yes, it's accounting but that's how it works. 

The other idea was to take it at 62, put that money right into the stock market and presumably live off savings, passive income or have earned income below $22,320. There seems to be a lot variables here but lets just keep it simple for now and assume someone's age 62 payout it $2000/mo. They'd be able to put in all $2000 in for three years before Medicare starts. 

I backtested May, 2015 to May 2018 which included one pretty good year, one average year and portions of two years that were flat. If that number seems too big, it isn't. For 36 months, this person put in $2000 per and then got some growth. Then at age 65 in May, 2018 this person would start having Medicare deducted, let's assume $200 which is a little high leaving $1800 to keep buying VFINX every month for, let's say the next five years until age 70.

So now they have $313,000 in this account in May, 2023 at age 70 from SS going into VFINX, actually more because starting in 2018, the $1800 would have been a higher number due to COLA. If they had waited until age 70 to take SS instead, they would be getting $4400, less $200 (still too high) for Medicare, so $4200 versus $1800 plus 4% of $313,445 which is $1044; $2844 versus $4200. 

If the $1800 monthly SS check starting at age 65 is adjusted up by 3% per year from age 62 then he would have been putting $1966 per month for five years (that actually pads it a little), bringing the total up to $327,165 so still not as much as waiting but please let me know if there is an error in my process. 

There are other reasons to take it early and they either resonate enough for you to take it early or not. I continue to plan on waiting until 70 not for any numerical reason but to leave my wife the largest survivor benefit possible if I die young-ish. But I would suggest she take it early (for her) at 64 and two months, the same time that I turn 70.

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.

It Ain't Easy Being Macro

John Authers' column the other day was titled It's Dangerous To Stay Out Of Stocks. I think that is consistent to the conversations we have about stocks being the thing that goes up the most, most of the time. An investor needing something close to equity market returns for their financial plan to work needs something of a "normal" allocation to equities. Maybe that's 50% or maybe 60% but it's not 20%. Not that 20% is universally wrong, not everyone needs close to equity market returns for their financial plan to work.

For all the blog posts about about how to build alternatives into a portfolio, the idea from my perspective is how to compliment the equity allocation in a manner that is more effective than traditional fixed income exposure which hopefully leads to a better long term, risk adjusted returns. 

The process then is to sift through a lot of funds and strategies to learn about and at this point, it should be reasonably clear that this is a fun hobby that just so happens to support my day job. The other day we mentioned that the Simplify Macro Strategy ETF (FIG) has been struggling. Since its inception in June, 2022 it has compounded at -3.16. It appears to be trying to deliver an all-weather sort of result so negatively compounding through a period that includes a year like 2023 where stocks were up a ton creates the impression that something isn't right with how FIG implements a macro strategy.

FIG is not intended to negatively correlate to markets, they want it to be "a modern take on the balanced portfolio, built to help navigate today’s toughest asset allocation challenges." So far, it hasn't done that. More productive than bagging on FIG is to start to ask questions about funds that try to take on macro strategies. It is not easy to do based on how many of the funds have done poorly. 

In the post from the other day about FIG we looked at the following replication:

• Vanguard S&P 500 ETF (VOO) 35%
• AQR Managed Futures (AQMIX) 12%
• iShares Interest Rate Hedged US AGG ETF (AGRH)  25%
• Catalyst Millburn Hedge Strategy (MBXIX) 21%
• iShares Gold Trust (IAU) 7%

It compounded positively a little better than Vanguard Balanced Index (VBAIX) which is a proxy for a 60/40 portfolio with a much lower standard deviation. I am not too excited about that back test, it only goes back two years, a little less actually, the point is that macro could have worked during FIGs time line. But I think that it might make more sense to build it yourself if some sort of macro looking portfolio is important to you. 

Another macro fund that came a few months after FIG from Fidelity has also been struggling since its inception, down even more than FIG.  

There are a couple of macro funds that have done well, the point is to be selective. The prompt for this post was some disillusionment toward FIG on Twitter from a couple of people who had been favorably disposed when it launched. A point I try to reiterate here is to give alternative funds time to prove out. The more complex, I'd argue the more time you might want to give something to prove out. 

Macro strategies can be very complicated. If you spend the time looking, I think you'll find more funds struggle than not. The DIY approach is interesting. The time frame for the one bullet pointed above in interesting but again very short. I will try to circle back to it in a few months to see how it is holding up or maybe more correctly to see how it is keeping up.

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.

Can FIRE Coexist With All-Weather?

ETF Think Tank had a fun article looking at a bunch of specialty ETFs in pursuit of building a FIRE (financial independence/retire early) portfolio. The article was right up my alley as far as looking beyond the standard VTI, AGG and so on. The point is not read the article and then run out and buy those funds but is there anything to learn from the article about portfolio construction or how assets blend together? Maybe yes, maybe no but even if no, articles that explore in this fashion are worth the time.

The article veered away from simple equity beta instead preferring anchor around risk parity, managed futures and hedge fund replication. There aren't a lot of risk parity mutual funds or ETFs with decently long track records. The AQR Multi-Asset Fund (AQRIX), looks like it used to be called AQR Risk Parity and looking under the hood it looks like that is the strategy. There are plenty of managed futures funds that go back close to ten years but hedge fund replication is tougher to find. In the last few years, a lot of funds that could full under that description have listed but the older ones tend to be very low volatility products without much upside capture but as you'll see, I found one with decent upside participation.

Inflation is also highlighted and it makes sense conceptually. Someone retiring at 40 or 50 is likely to endure some inflationary periods. The article looked at three ETFs each with very different attributes. IWIN from Amplify owns equities that should benefit from inflation like materials and REITs. There was another fund that hedges rising interest rates that has symbol RISR. It owns derivatives and it did great in 2022. The last one was CPII which appears to be a variation of inflation expectations kind of like ProShares Inflation Expectation (RINF) which does have a long track record. 

The last category of funds considered were the newer derivative income ETFs (selling calls, puts or combos) that have crazy high yields. Conceptually, adding a source of high yield makes sense for income but as we've looked at many times, these types of funds can't keep up with their payouts and seem likely to go down, reverse split and repeat. In the real world, if you want to dabble in this space, plan on reinvesting most of the payout. 

I don't think the premise of the article was to build a portfolio with just these three broad categories, more like add these exposures around the edges but let's have a little fund with what this would look like. 

The funds differ from what was mentioned in the article but allow us to test it for quite a few years. The ETF Think Tank FIRE Portfolio has a lower CAGR than 60/40 but also has a much lower standard deviation. 

In the above comparison you can see I'm comparing to Ray Dalio's All-Weather. I also looked at the Permanent Portfolio (25% each to stocks, bonds, cash and gold) and for the period studied, PP compounded at 5.55% with a standard deviation of 7.55. Of the four, only the ETF Think Tank FIRE was higher in 2022.

Looking at the results built with very limited choices for the reasons I mentioned earlier, the ETF Think Tank FIRE seems more all-weatherish to me which is not a bad thing but may not be so hot for a 40 year old looking at maybe a 50 year time horizon. As an all weather sort of portfolio, I think it actually looks pretty good. 

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.