Rebuilding A Struggling ETF From Scratch

A few different things for this post.

First is a fascinating blog post from Finomial about factor investing. Finomial looked at the excess return generated long only factors like momentum, quality, various valuation metrics and I would add covered call fund to this discussion too. They also looked at long only multi-factor ETFs like the Goldman Sachs Active Beta US Large Cap Equity (GSLC). The short version is that for quite a few years the group has not had excess returns versus market cap weighting. 

We've looked at a lot of factor blends in pursuit of better risk adjusted portfolio construction without much luck. If most factors have been in a chronic dead spot for several years, not doing what they'd done previously then it makes sense that finding a compelling blend has been hard to do. Finomial expanded the definition of factor funds to include long/short in addition to long only and it used the AQR Market Neutral Fund (QMNIX) which we use frequently in blog posts as the star of the group. QMNIX is long/short equities based on, you guessed it, a bunch of different factors. Finomial laid out how long/short factor investing has worked out better in the last few years than long only factor investing. 

First thing I would say is that if factor investing hasn't delivered excess return lately, that's an argument for investing in it now. That is not a comfortable thing to do and more of a academic observation. Part of me wonders if long only factor investing hasn't "worked" because of the huge amounts of AUM going into ETFs created in the last 10-15 years.

We may have stumbled into one factor blend via Cliff Asness. You can read more about it here but basically it combines momentum, trend (managed futures) and carry although we used market neutral as a proxy for carry.

The results are compelling and the period studied is decently long. This was interesting stuff and I will try to explore it further. 

We've talked a few times about the YieldMax ETFs. These are covered call funds that for the most part track single stocks with a covered call overlay. A little more correctly, the funds are synthetically long the stock by buying a call and selling a put and then selling a call against the synthetic long position. YieldMax also has a few products that repeat the above with several individual names not just one. The issue they have is that the payouts for most of them are so huge that the market price erodes, their fund tracking Tesla has already done a reverse split. if you have to own any of them, I'd suggest reinvesting the dividend but to be clear I don't own any of them.

The reason to bring up YieldMax in this post is that they are launching a covered put fund on Tesla that will have symbol CRSH. If you've never heard of covered puts, basically it is the trade of selling short a stock and selling a put against the short sale. If the put is assigned, the stock put to the option seller offsets the short sale to close it out. 

This new type of ETF will again be synthetically exposed to the stock through buying a put and selling a call and then selling a put against that combo. I will be curious to see how this trades in the market.

Finally, Yahoo had an alert that the Simplify Macro Strategy ETF (FIG) hit a 52 week low as it fell 8% as of late day Thursday. Looking at the ETFs that FIG owns, it is not clear why it is getting hit like that. We tracked Simplify's Tail Risk fund as it was imploding and I could at least come up with a theory related to that fund's VIX exposure. Cocoa is getting crushed again and while it is not crushing the Simply Managed Futures ETF (CTA), I  wonder if FIG has direct exposure to cocoa, coffee it getting hit to a lesser extent.

Reading FIG's fact sheet makes the fund out to be Permanent Portfolio inspired, maybe all-weatherish noting the likelihood of challenging times, as of 2022 when the fund launched, for "classic balanced portfolios" which was a good call. It allocates to equities, managed futures, hedged fixed income and it seeks out "idiosyncratic macro dislocations." The fund owns a lot of other Simplify ETFs, a gold fund and futures contracts. Most of the funds held by FIG are very complex making FIG itself even more complex. I would also note that the fact sheet benchmarks the fund to a 60/40 portfolio and that comparison has gone poorly for FIG despite plain vanilla fixed income struggling. 

I build a sort of FIG replication using the same broad exposures weighted as close to FIG's weightings as I could figure.

MBXIX is a proxy for FIG's macro sleeve. In the comparison below, Portfolio 1 is Fig and Portfolio 3 is VBAIX which is a 60/40 mutual fund.

The time period is short obviously but the asset allocation appears to work. The performance of Portfolio 2 is very close to 60/40 with a much lower standard deviation. The light equity exposure caused Portfolio 2 to lag 60/40 by quite a bit in 2023 but that was balanced out by missing that drop from the end of July, 2022 into the October low. I wouldn't expect the FIG replication to keep up with 60/40 very often but I do think it could maintain that lower standard deviation and I would call it a success if it captured 75% of 60/40's upside over a longer period. 

FIG might be an example of being too clever by half. The complexity is off the chart, kudos to Simplify for having the stones to try these things but they don't always work as CYA showed us. 

As an aside, I'd never heard of AGRH but in its short life so far it appears to be hedging out everything I think is wrong with AGG.

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