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.