Cats & Chaos

Sure enough, a covered call ETF provider selling less downside. From an email sent out by Global X.

I mean, how are they defining lessening downside risk? Here's the Pandemic Crash of 2020.

Here's the worst of 2022 although in the firs half of 2022 it did a little better than the S&P 500.

And The Great Hiccup of August, 2024.

Ok, 40 basis points is not nothing but how much solace do you think XYLD provided at the lows of The Great Hiccup of August, 2024 if indeed the lows are in?

For the longer periods, if they are including the dividends paid, yes the total return was higher in 2022 by about 600 basis points but that didn't help anyone who spent the entire dividend. I do think there can be a role for these but they should not be counted on for downside protection. 

About a month ago, I mentioned a filing for the Brookmont Catastrophic Bond ETF (ROAR). This space is essentially reinsurance or as Warren Buffet has called it, risk transfer. In terms of portfolio construction, it is very attractive for low volatility, yields above risk free and doesn't correlate to anything. Here's a primer from Larry Swedroe. Swedroe has been writing/talking about this space for a long time. I have a small exposure for clients through a multi-strategy fund. 

I thought there was only one fund dedicated to the space but then I got an email about another one and in starting to do some research I found a third. The three as follows.

• Stone Ridge Hi Yield Reinsurance Risk Premium Fund (SHRIX)
• Ambassador (EMPIX) this is the one I got the email about
• Pioneer Cat Bond Fund (CBYYX) I found this one on the same search that led me to the Swedroe article

This is a space to learn about.

I didn't include CBYYX in this chart because it is younger and would miss the big dip in SHRIX in late 2022. Charting all three against TFLO back to Feb 2023, CBYYX lands in between SHRIX and EMPIX for both CAGR and standard deviation. Keep in mind that most of the total return captured by Portfoliovisualizer is yield. 

The lower performance from EMPIX is sort of on purpose, it tries to be less volatile although that doesn't show up in the standard deviation of the fund. I have a call with that fund next week and will see if I can get that addressed. 

We'll see whether ROAR ever comes to the market but I have some doubts about whether this space lends itself to the ETF wrapper. 

Here's a great quote from Steve Sears in Barron's. "After decades of wasting money on high-price index puts—because stocks generally bounce back—some investors have seemingly learned that it is better to monetize the fear of other investors." Selling volatility isn't easy and maybe you might decide it is not right for you but there is also wisdom in the quote about what not to do. 

I think I am starting to understand the Alpha Architect Tail Risk ETF (CAOS) a little better. I've been skeptical that it actually functions to protect against adverse market events whether we're talking about fast declines or more protracted drawdowns. It'd be ok if it only "worked" for one of the two but it wasn't clear that it would work in either one, fast crash or slow decline. Based on how the fund acted last week and then this week, it appears to me that there was a change in positioning made to make it more reactive to market moves. It is actively managed and so that is plausible. If that's right then I'd have more confidence in it as a diversifier. 

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.