Weekend Updates

Jeff Ptak from Morningstar Tweeted out that the Stone Ridge LifeX funds we've been talking about lately have started a "conversion" to the ETF wrapper. It's a little confusing but it appears that when the cohort reaches age 80, the ETF will convert to either a longevity pool for males or females, depending, that is referred to in the filing as a closed end trust or holders can simply cash out. 

The big idea remember is that these funds annuitize the income stream similar to an annuity without being an actual annuity. As the age cohort ages beyond 80, the people who live the longest get the most benefit from what should be increasing payouts until age 100 when the survivors split what ever is left. 

I've been consistent in saying these funds are an evolutionary step toward more ways to annuitize income beyond the annuity structure. The conversion of LifeX from mutual funds to ETFs, assuming Jeff is correct, is probably an improvement. The holdings are simple enough for the ETF wrapper, not everything is, and so the soon to be named Longevity Income ETFs might get some tax benefits that are unavailable to the mutual fund wrapper. 

I will repeat from previous posts on these, I don't know if they are the answer but this is a space to keep tabs on. If they do what they're supposed to, these funds could end up being a difference maker for people who are somewhat undersaved.

Now an update on covered call funds. From now on, we should call them derivative income funds as the options strategies used go beyond just selling call options. The chart goes back to the inception for the ProShares S&P 500 High Income ETF (ISPY) which sells 0dte call options. I continue to test drive ISPY in one of my accounts to see if I would ever consider it for client accounts. 

The green line is the S&P 500, XYLD is the Global X Covered Call ETF which sells close to the money calls that expire monthly, JEPY is the Defiance S&P 500 Enhanced Income ETF which sells 0dte put options and OVL is the Overlay Shares Large Cap Equity ETF which owns the S&P 500 and sells put spreads on the index. 

The Yahoo chart captures price only. In looking at the chart I think there are four different types of return streams. OVL has some appeal compared to plain market cap weighted (MCW) S&P 500. I've looked at it many times and it seems to always be very close with just a little more yield, Yahoo shows it yielding 2.98%. During the 2020 Pandemic Crash, it fell the same amount as MCW. In 2022, at its low it was down quite a bit more than MCW. On a total return basis, it has had a better CAGR than MCW by 49 basis points but with more volatility. 

From the start of the chart, so not its inception, JEPY has paid $3.54 in dividends. Adding the dividends back in would give a total return of 7.8% which is pretty good but is a reminder of why reinvesting most or all of the dividend is important. To its credit, JEPY's volatility has been far below the MCW index but anyone spending the dividends is enduring some serious erosion. 

Looking at ISPY, we can add back about 4% in dividends to get a more accurate total return number. That is still noticeably behind MCW which might not be so bad but I think I see the spread between MCW and ISPY getting wider. However long it takes the S&P 500 to gain its next 100%, if ISPY was only up 60%, would that be tolerable? There would be many different answers to that and it would depend how ISPY was being used. It's probably not idea as a core equity holding for an investor who needs "normal" equity market growth for his plan to work. As a smaller, non core holding to enhance yield a little or dampen volatility or if an investor can figure out some other factor to pair it with to get a better result in either absolute returns or risk adjusted returns, that certainly could make sense. It could also be part of the solution for an investor who does not need "normal" equity market returns. 

XYLD doesn't really have any upcapture on a price basis. Yahoo shows it yielding 9.56% which is a little higher than what ISPY is on pace to annualize out at but lags far behind ISPY on a price basis. It also, unfortunately, goes down almost the same as MCW during tumultuous events like the Pandemic Crash in 2022. What I mean by that is it captures most of the downside of MCW with very little upside.

I think part of the process of ongoing portfolio management is to circle back to strategies, funds and correlation studies like we regularly do here. Aside from being fun, it is time well spent in search of the occasional idea that can be added to the portfolio. 

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.