Boxing Day ETF Spectacular!

At the start of December, Simplify ETFs listed the Simplify Gold Strategy PLUS Income ETF (YGLD). It is in part a proxy for gold with derivative income strategy overlay. At the moment, most of option positions are short put spreads on some broad indexes as well as MicroStrategy (MSTR). 

With this sort of multi-asset/strategy fund it would make sense that a prospective investor would expect that it will be a proxy for the underlying, gold in this case, to at least some extent. If YGLD looks exactly like gold but with a high income overly then maybe a small piece of a gold allocation to YGLD would make sense. But looking exactly like the underlying isn't realistic. Where most of the options are index options, that should mean most of the income is 60/40 but check with the fund company. If YGLD looks nothing like gold, what does it look like and does what it looks like have a place in a diversified portfolio? 

With less than a month under its belt, I'd say it certainly has resembled the GLD ETF (pink line) with more volatility in both directions but it is way too early to draw any conclusion. 

A similar product is the Simplify Bitcoin Strategy PLUS Income ETF (MAXI). I have a small position that I have been test driving for a while. MAXI's put positions are very similar to YGLD but not identical. 

On a total return basis, MAXI is pretty close to underlying Bitcoin through the end of November, you can decide if it's close enough. On a price basis though, YTD Yahoo Finance has Bitcoin up 133% versus 49% for MAXI. Is that close enough or should MAXI be thought of as a proxy for something else? As I've mentioned before in talking about very high yielding derivative income fund, I have been reinvesting MAXI's dividend.

The argument for YGLD is not yet apparent. The argument for MAXI is that there is some upcapture compared to Bitcoin. Some sort of combo of Bitcoin and MAXI heavily favoring plain Bitcoin could be a way to squeeze some yield out of an allocation that doesn't otherwise have yield. In terms of barbelling yield like we talked about the other day, MAXI seems to do that and YGLD might have the same result. Here's how barbelling a small slice into MAXI with T-bills as an income sleeve looked.

Dividends are not reinvested. Below is the income they each produced.

The 95/5 blend is intriguing. It produced a yield of 6-7% in a 4-5% world with only 5% exposed to risk assets. The risk here is Bitcoin cutting in half, or worse, again. A 60% decline in Bitcoin might result in a 3% drag on the portfolio which could possibly be offset by the fund's income. If that big of a decline happened to Bitcoin at the same time as some sort of meaningful stock market decline, the impact should be worse as selling put spreads is a bullish strategy that would be adversely effected by a crash.

The MAXI example is flawed because despite the "78% distribution yield" per the website, the fund is up on a price basis. I would not expect that most of these can stay ahead of their payouts. Barbelling like this can still work by reinvesting a portion to buy more shares. And of course this may not be attractive from a tax efficiency standpoint for a taxable account and if the payouts from the fund(s) you choose are taxed as ordinary income. 

The other day, we looked at a couple of off the wall alternative assets including music royalties and we looked at the Hipgnosis Song Fund. A buddy told me about another music royalty fund that still trades.

It's so small that I'm not going to name it to avoid pumping, not even a micro cap or a nano cap, this thing is like a pico cap (had to look that one up). It has a high yield which makes sense and a negative correlation to the S&P 500 but the volatility is surprising. From the start of the backtest, through 2021 it had five years of huge outperformance. In 2022 it fell a little more than the S&P 500 and has lagged the previous two years. 

The behavior of this pico cap fund is intriguing enough for me to want to be on the lookout in case something like this that is more investable ever comes a long. It's worth learning a little about in case this space ever evolves. As I mentioned the other day, people are making money in this space and it is getting bigger, Pink Floyd just sold its rights to Sony for $400 million. Securitizing a portion of that along with royalties from other artists doesn't seem like that far of a stretch none which means it must be a good portfolio holding, I don't know yet and that is probably several years off if ever. If you're playing the long game and are naturally curious, I would keep tabs on this space. 

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.