From James Seyffart on Twitter, iShares is throwing its hat into the Managed Futures ring with an ETF filing. Managed futures really is an incredibly valuable diversifier but can be brutal to hold during strong equity market uptrends. Here's a list of some listed and filed for managed futures funds from ETF Hearsay.
VolatilityShares filed for a bunch of 100/100 leveraged ETFs matching cryptos and cryptos, cryptos and equities and most interesting to me, a fund that goes long 100% S&P 500 and 100% short mid-term VIX futures. Selling VIX futures is tricky business as the 2018 Volmageddon showed but the blend strikes me as offering an interesting effect to a portfolio. We can check back if it actually lists.
Tuttle capital filed for several single stock, putwrite ETFs. Selling volatility is a valid (repeated for emphasis) but very tricky strategy that is worth learning about and understanding.
A quote I saw the other day that is attributed to Leonardo da Vinci, "simplicity is the ultimate sophistication." I'm bummed I'd never seen that one before but I believe it ties in with the idea we talk about here all the time about constructing portfolios that are based on simplicity, hedged with a little bit of complexity. Hedging with a little bit of complexity is not essential but I think that approach makes navigating through an entire stock market cycle much easier to endure.
Simplify ETFs hosted a webinar that featured a discussion about the Simplify Multi-QIS Alternative ETF (QIS). QIS stands for quantitative investment strategies. Here's how the fund has done.
The featured speaker was Roxton McNeal who took over management of the fund in early October. The chart is a little unfair because it does have some yield which Yahoo doesn't account for in its charts. Yahoo has the yield at 4.32%.
I am unlikely to ever be interested in this ETF but there was some very useful tidbits as they laid out what the fund is trying to do and how it's trying to do it.
The webinar asked and answered questions in the manner we like to frame them here, or at least pretty close. It is intended to be an alternative strategy, a compliment to a 60/40 type of portfolio. Ideally, it would have a beta of -0.30. A beta of 1.0 would equal the market and not be much of a diversifier, an inverse index fund has a beta of -1.0. At -0.30, they are trying to have a negative to zero correlation.
There is a lot of complexity under the hood of QIS targeting more than 25 different strategies (per the fund literature) but all of that complexity can be sorted out into two different buckets (per the webinar). There is a "carry" bucket in which they include trend, absolute return and selling volatility. The carry bucket targets an income market-like return which is to say not much volatility and it is this bucket that would drive returns most of the time when markets are more stable. Think about how choppy everything but equities has been for the last year or so and the struggle that managed futures has had in that time so this part of the QIS objective tracks.
The other bucket is the "defensive" bucket which mostly means tail risk types of strategies or other sources of positive convexity. They talked very briefly about dispersion trades being in this bucket too. They didn't dig into this point but high dispersion, CBOE has a futures market for dispersion, would be considered to have positive convexity.
With regard to the defensive bucket, they are trying to pull that off with minimal bleed which as we've looked at can be tough to do in ETFs. The TAIL ETF from Cambria has some amount of bleed to be sure but has also had headwinds from being long duration. The CAOS ETF from Alpha Architect doesn't seem to have much bleed but it also doesn't seem to offer much protection either. It is possible that none of the downward moves in the market since CAOS began have been large enough for the convexity to kick in but I will say that CAOS was up dramatically on 8/2 on the first day of the Great Dip Of Early August, 2024. It did give most of that back though on the succeeding two days.
McNeal just came in to take over management of the fund a couple of months ago so maybe it can do better under his stewardship than the chart shows but the ideas underlying what they are trying to do were very helpful. There will be a replay posted on their website if you want to get more details. In terms of trying to mimic a carry bucket and a defensive bucket to build your own alternative sleeve, a simple combo of client and personal holding BTAL (defensive) and a managed futures fund (carry) would appear to get very close to what QIS is trying to do.
The backtest is too short but there very well could be something to BTAL plus managed futures equaling QIS. Both Portfolios 1 and 2 allow for an increased weight to equities versus VBAIX but with a lower standard deviation and the Kurtosis numbers are better too. I believe in what QIS is trying to do, just not sure they can pull it off in one ETF.
One question asked was how they decide to eliminate strategies from the fund. McNeal said that if they don't know why a strategy is working, they would eliminate it or if the strategy is unreliable, they would eliminate it. That is very close to the conversation we have here, especially where reliability is concerned.
Is QIS reliable? Going back to the chart, I don't know if you can draw a conclusion or not. For what it's worth, since McNeal took over in early October the negative correlation looks pretty strong. I mentioned BTAL and a managed futures fund to replicate QIS not as a suggestion but I view them as reliable and understand how they work well enough to account for when they do well and when they struggle, struggle doesn't necessarily equate to not working BTW. If you believe in using alts at all, hopefully you have some understanding of how the ones you use act, understand why they'd be working or not doing well.
From 10,000 feet I think we can have that sort of understanding with QIS but looking at the way the holdings are listed out, I don't think here is anyway to fully know what's going on. There are SPX and VIX options so we can probably decipher those but what is JPOSIGTRS which has a 20% notional weighting? It's probably a swap of some kind but tracking what, there's no Google search result. The fund's position page has a bunch of positions like this.
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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