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.
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