I had a chance to dig in a little more on the LifeX product line with a webinar on Wednesday and then a call with Stone Ridge on Thursday. These originally were mutual funds but Stone Ridge, the provider, revamped the whole line to make them more accessible, ETFs versus advisor approved funds, and to also make them simpler, that's Stone Ridge talking, maybe they're simpler or maybe not. As ETFs, they are definitely more accessible.
As mutual funds, these seemed pretty simple. You buy the mutual fund for your birth year and then at age 80 they converted into a longevity pools that could no longer be sold. If you died at 81, then the other participants in the fund-turned-pool "won" for having your investment provide them with income and you would have "lost." I was struggling to understand the ETF version. They pretty much scrapped most of the mutual fund structure which makes the ETF format easier to understand.
For now, they run from 2048 to 2063. Where these pay a fixed income until the year in the description, you pick the year you want the income to run through. If you buy the 2051 version, regardless of your age, you should expect it to deplete in 2051. There is more to this to learn about, follow up with LifeX if you're interested.
There is still an option to access a longevity pool. Later, but I am not sure if age 80 is relevant, you could sell the ETF and buy into the longevity pool that resembles a closed end fund. The advantage to doing this would be a higher income off the assets but the assets would stay in the longevity pool (closed end fund) after you die.
There are two versions for each year. One version with regular treasuries that for now has a higher yield and a version with inflation protected Treasuries, TIPS. Like other funds, the income stream off the funds is partially interest earned from the holdings as well as a return of capital (ROC). ROCs are tax friendly on the front end but reduce the cost basis for when/if you sell. Returning capital is not on it's face a negative. Regardless of what you think about these funds, getting over the block that ROCs are bad would be a good hurdle to clear.
The funds are interest rate sensitive so they are going to be volatile. The chart tracks the 2060 fund compared to iShares 7-10 Treasury (IEF) and iShares 10-20 Treasury (TLH).
The way this is countered by Stone Ridge is that it is better thought of as holding an individual bond. They say the income will be constant but that the price will fluctuate like holding an individual bond. Yes, that is the experience of holding a long term bond. They are correct that in holding it for the income until the year in the name of the fund, 2060 in the chart, the price level shouldn't matter because the holdings in the fund all mature at par. That's great unless there's an expensive emergency where you have to sell something. Selling one of these 20-30% down would be a permanent impairment of capital.
The next chart provides some good context for how to position them.
There's a capital efficiency aspect to the idea. The inclusion of LifeX and their willingness to return capital expecting to deplete in whatever year like when a holder is 90 or 100 means the "income" can be higher than a regular bond portfolio. I don't know for a certainty these will work but knowing the company, I lean toward giving them the benefit of the doubt. The question then is, ok, good idea, is someone else doing this or something similar that is better than LifeX?
In prepping for all of this, I circled back to the NASDAQ 7 HANDL Index ETF (HNDL). I looked at this a few times when it first listed in 2018. The big idea is that it targets a 7% payout that will include ROC. I was skeptical but the fund is doing what it said for the most part. The payout has been pretty steady. The price held up pretty well in the 2020 Pandemic Crash but in 2022 it fell 19%. Since inception, Yahoo has it down 13% on a price basis.
I think a reasonable expectation for HNDL is that it will slowly deplete and then reverse split. I think the fund has done an admirable job having so little depletion in almost seven full years. It has done better than I expected. Its seven year life has been a useful test in terms of length and for seeing it navigate through several different kinds of averse market conditions. If it will deplete at some slow rate and pay out 7%, why wouldn't you buy HNDL instead of one of the LifeX funds? I asked that question on the Thursday call. They weren't familiar with HNDL but in eyeballing HNDL's holdings they said they thought the LifeX strategy would be a more reliable income stream. Several of the LifeX funds are close to 7% now. They then talked about some sort of combo of HNDL and LifeX which might make sense for an income or annuitized (not annuity, annuitized) bucket if the LifeX funds prove out as being uncorrelated to HNDL.
Using IEF as a proxy for LifeX, the matrix below argues that an income bucket with both could be a reasonable idea for answering the correlation question. I threw in XYLD because it seems like it is in the same neighborhood, high income with a very slow depletion.
Occasionally, I will ask what problem a fund or strategy is trying to solve. I think LifeX is trying to solve the right problem but I am not convinced for now that it's the best way to solve this problem but I will try to learn more about them.
In the next post, I'm going to look closer at HNDL's composition. It looks like it has evolved over time and it is intriguing.
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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