New Fund Alert

The Bridges Tactical ETF (BGDS) is a new to me ETF that I stumbled into. It is actively managed and allocates to equities and or cash based on a process that I'll get into a little bit below.

At a high level it is trying to provide equity upside with less risk. There are of course many different ways that funds try to deliver that result. Narrowing in slightly, the fund uses a three step approach that I'd describe as top down to determine risk on or risk off. That determination is somewhat opaque but the prospectus does give some color. The first step is an assessment of macro factors like Fed positioning or earnings revisions. Step two focuses on market breadth which is one form of technical analysis. And the third step from the prospectus gives some color to the process for selling holdings. Read the prospectus though if you want a little more detail than that.  

As I look at the holdings on Wednesday, it appears to be risk off with about 71% in cash proxies and the equities exposure allocated primarily to broad based equity ETFs but it does hold individual stocks which at the moment are mostly big tech stocks. The blend of ETFs and individual names appears to have a much higher beta than if the equity exposure, currently 29%, was just in the S&P 500. It's sort of an example of capital efficiency.

As I was comparing to the S&P 500 it occurred to me to also compare it to the Simplify Hedged Equity ETF (HEQT) and I threw in a derivative income fund too. With JEPI's high payout, you'd need to add about 850 basis points back in to get a correct total return number. BDGS and HEQT look remarkably similar but oddly, Portfoliovisualizer says the correlation between the two is only 0.69.

With the line for BDGS you can see where it appears to have been defensively postured far more often than not. I assume where the line is flat and tilting upward it was mostly cash like it is now. The little event in the first three trading days of August, it's hard to be certain whether it was defensive or not but I am pretty sure it was. The smaller drop would make sense that it was less than 1/3 of the fund dropping while the cash was unchanged. 

If you'll grant me that BDGS and HEQT do track closely, they do so with very different strategies. Each one has positives and negatives to consider. BDGS has a simpler portfolio. Some combination of stocks and cash. Not even bonds, cash and cash proxies. The negative is it is built on an analytical process that could get it wrong leading to being positioned incorrectly which could result in either going down a ton with the market or missing a huge rally. HEQT owns the S&P 500, that's it for equities and it pairs that exposure with with option combos to dampen volatility. The combos sell calls that are out of the money and buys debit put spreads that are also out of the money. The positive is there's no analysis to get wrong but the option combos make for a much more complex portfolio with a little more potential for something to break. 

HEQT is a little noisier than BDGS and while HEQT lagged in the Great Hiccup of August, 2024 they both capture some upside with less downside volatility. Do they have enough upcapture? There's no blanket answer, do you think they've captured enough of what the market has done in the last 15 months or so? That two very different strategies get to almost the same place is useful for understanding portfolio construction. I've said before that I think HEQT is working as intended. I'm not sure whether BDGS is or is not working as intended. That is not a knock, I don't know. In 2022, HEQT was down less than half of what the S&P 500 fell. BDGS' willingness to not look like the index leads me to believe it could have gone down less in 2022 as well. 

It's probably not realistic to expect something that goes down less than half in a year like 2022 to keep up with a run like the index has been on since BDGS' inception. So in that context, again, is that enough upcapture during the market's up times? There is a tradeoff and I'm sure for some investors (a lot of investors?) it would be. 

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