Crapping All Over A New Fund

All right, let's get into this. Today the STKD Bitcoin & Gold ETF (BTGD) appears to have started trading. The fund's website says October 15 is the inception date but Yahoo Finance doesn't have it yet. It's from Quantify Funds but Newfound Research, ReSolve Asset Management and Return Stacked ETFs are all involved too. BTDG leverages up to own 100% Bitcoin and 100% gold in a similar fashion as the ReturnStacked suite of ETFs. 

I don't think this is going to do what people hope it will do. First, this blend was tried a few years ago albeit with a very different strategy. The Ranger Funds RG Agrium+ Fund was actively managed and combined Bitcoin and gold in a manner that typically favored gold. Going from memory it was something like 75% gold/25% Bitcoin most of the time but that was not static. 

Gold is the green line and GLDPX is the blue like. I tried to include Bitcoin on the chart but it made both GLD and GLDPX look like horizontal lines. Bitcoin was mostly up a ton. The chart shows a mix of GLDPX sometimes looking like GLD and sometimes being negative correlated. In the 3rd quarter of 2021, Bitcoin doubled and you can see GLDPX didn't capture any of it. It did capture the decline in Bitcoin that ran from November 2021 to Feb 2022. The fund did not last long.

Here's a backtest of what BTGD does compared to just gold and just Bitcoin.

Whatever reason someone might want gold, the 100/100 blend isn't capturing it, it looks just about identical to Bitcoin. I could have gone back further with this test but Bitcoin was up so much that it made the chart pretty noisy looking but you can look for yourself, the 100/100 always looks like Bitcoin. 

I think I know why it doesn't work. It's a mismatch of volatility profiles such that Bitcoin crowds out gold. Above, GLD shows a standard deviation of 13 versus 65 for Bitcoin. Below, I rejiggered it to match the volatility profiles with 300% in gold and 50% in Bitcoin and the result shows some differentiation between the 100/100 which we've already established looks just like Bitcoin.

I said it shows some differentiation. Does it show enough differentiation? The gold smoothed out the ride when Bitcoin was more volatile in 2021 and lately the 300/50 blend has been pulling ahead. We've looked at very small slices to Bitcoin being able to add a lot of basis points of return to a portfolio. I've been clear that unless you're a true believer, the story is about asymmetry. A 1-2% allocation that goes to the moon will favorably impact a portfolio and if it goes to zero, a diversified portfolio could make that loss up very quickly. Gold has the tendency to go up when stocks go down. That's not infallible, it's merely a tendency. 

Assuming BTGD really did start trading on 10/15, I think it will just be a proxy for Bitcoin but with the "uncompensated complexity" that something bad and unforeseeable happens with the leverage. 

Part of what the various 100/100 funds are trying to offer is a way to add in exposure to some sort of asset class or strategy without having to reduce exposure to the building blocks of equities and bonds. They place a high priority on doing this to avoid tracking error. First, tracking is probably not as important to the typical advisor or do-it-yourselfer as they think. Arguably, you want some tracking error. When I talk about smoothing out the ride, that means tracking error. Too much can be an issue at times but I believe you do want some tracking error. 

Ok though, let's say you place the same priority on tracking error as the ReturnStacked guys. Look at the funds. Are they actually avoiding tracking error? You might know what I think but so what, what do you think, are they avoiding tracking error? Below is their first fund. It owns AGG-like bond exposure combined with managed futures so comparing it to AGG for tracking error makes sense. 

RSBT and AGG are slightly, negatively correlated. Leave a comment if you have a different take but this is not solving a problem, it might be causing a problem. As we talked about the other day and I used the phrase above, this seems like uncompensated complexity. 

If you think you have to do this sort of leverage, portable alpha type of thing, there would be less complexity using a leveraged S&P 500 ETF. There's still plenty of risk with those but there is less complexity. They lever up one asset, not blending two together with leverage. 

I continue to monitor the Tradr leveraged SPY ETFs. Above is SPYQ which just started two weeks ago and resets quarterly. For backtesting on Portfoliovisualizer, I use ProShares Ultra S&P 500 (SSO) but I think SPYQ will prove out to be a better mousetrap. All the SPYQ chart tells us is that it is making a good first impression that is sort of consistent with SSO long term. If you play around with SSO on a chart, you'll see it is reasonably close most of the time. Not all the time, most of the time. 

In past posts we've looked at combining a plain vanilla index ETF with a small slice to a leveraged fund to then make room for an alternative strategy. Putting 50% into a plain vanilla ETF and 5% into SSO or SPYQ if that one proves out, equals 60% to equities with 5% for an alternative. 

Out of curiosity, I looked for a 2x momentum ETF. The plain vanilla momentum funds do some interesting things, maybe a 2x would too. Maybe, but no. For whatever reason, the one 2x momentum ETN, it's not even an ETF, doesn't appear to "work."

Oops. Leveraged funds are tricky. The risk of 5% into SSO or SPYQ is not huge but it might very well drift into uncompensated complexity. 

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.