Crazy Or Brilliant?

The TLDR answer to the title is a little of both. 

There's a new ETF provider called FIRE Funds that target the Financial Independence/Retire Early movement, aka FIRE. For now, they have two funds, FIRE Funds Wealth Builder ETF (FIRS) and FIRE Funds Income Target ETF (FIRI). Whether they actually have anything to do with FIRE is less interesting than the allocation ideas. We'll see how they work going forward but I do believe a lot of effort went into constructing these and that's worth exploring. 

The page for FIRS says "FIRS seeks long-term capital appreciation and diversification across four strategically constructed ETF baskets that align with Prosperity, Recession, Inflation, and Deflation conditions." So it is permanent portfolio inspired. It has a lot allocated to gold and Bitcoin. 

Here is the full constituency.

There are very few familiar names in there. I read something in there somewhere that the FIRE Funds will try to use funds from Tidal, a white shoe provider, where possible which is why so many of the names are unfamiliar. Some of the funds are brand new, so new that backtesting doesn't really work so I made a couple of tweaks which gets us a year to look at. That is still very short but better than a couple of months. 

I compared it to the Permanent Portfolio Mutual Fund (PPRFX) and Vanguard Balanced Index Fund (VBAIX).

I built it without reinvesting dividends on the presumption that if someone was living off this in early retirement they'd be pulling some amount of money out. In the period backtested, it paid out a little over 5%. There was no Calmar Ratio information but the FIRS backtest had a Kurtosis of -0.02 compared to -0.57 for PRPFX and 0.51 for VBAIX. For Kurtosis, lower is better. 

FIRS has a lot of complexity, really a lot, but the result seems in line and if it can sustainably kick out a 5+/-% yield in a 4% world with decent upcapture, that sounds pretty good.

FIRI has a couple of different challenges. Here's the constituency of that one.

It has about 26% in very high yielding derivative income funds, highlighted in yellow. GDXY has only been around since May but its payout annualizes out to 32% and price only, it is down 20% since it debuted. Yahoo Finance shows QQQY yielding 93% and down 45% on a price basis since it listed 14 months ago. ULTY listed in February, the yield annualizes out close to 60% and the fund is down 50% price only. XOMO yields 23% and for one year it is down 7% in price terms. YBIT's yield annualizes out to 54% and in price terms it is down 23% since it listed in the spring. Bitcoin is up 43% since YBIT started trading. Extrapolating an annual yield is not rigorous but paints a good enough picture for a blog post.

YieldMax talks about the importance of reinvesting the dividends their funds pay out. These extremely high yielding ETFs are not going to be able to keep up with their dividends. We'll see how that plays out for FIRI but the prospectus says it targets a 4% annual income level. 

It looks like the fund will yield quite a bit more than that based on the holdings. FIAX yields 7% per Yahoo Finance, MSTI is north of 5%, SPAX yields almost 8% and VETZ yields 5% and the very high yields of the derivative income funds. FIRI too might be a situation where any payout north of maybe 5% should be reinvested to offset the price erosion. 

The backtest is true to the current makeup of FIRI so it only goes back to June but in just five months it is down just over 6%. On a total return basis, it is up 1.99%. I'm less confident in this one but maybe once it has a year under its belt it can put in a good showing. 

And in other ETF news, Bridgewater is partnering with StateStreet to package Ray Dalio's All-Weather Portfolio into an ETF. All Weather is a variation on risk parity which as we've looked at many times and has been difficult to make work in an ETF or mutual fund. The default Dalio All-Weather is prepopulated in Portfoliovisualizer as follows. 

Here's how it has done compared to 50% equities/50% managed futures (another version of all-weather?) and VBAIX.

The bond allocation has of course hurt the portfolio very much. I couldn't find the prospectus for the proposed All-Weather ETF but the Bloomberg link says that Bridgewater will deliver the model that StateStreet will implement. Where Portfoliovisualizer has a static allocation, it sounds like this new SPDR ETF will not be static. I will keep an eye out for a prospectus or if you find the link, please leave it in the comments. 

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