New Year's Eve ETF Spectacular!

Matthew Tuttle runs Tuttle Capital and T-Rex, both ETF providers that offer some interesting thematic and leveraged products. You might have heard about him or his company when he listed an ETF that shorted Jim Cramer's picks and one that went long Cramer's picks. Either way, he sends out a daily email and while his focus is shorter them than we talk about here, there are some longer term ideas thrown in too. Today's email had a look at some fund ideas they are kicking around, here are some that are more relevant to our conversation.

• New ways to generate income. We filed for a slew of cash secured put ETFs but also have something else up our sleeves.
• A no, or little bleed tail risk ETF
• Some new levered and inverse names
• Some new things in crypto

To the first one listed, selling volatility is a valid strategy but tricky as I always say. It is easy to get too carried away with selling vol though. I have one fund in my ownership universe that most clients own that although very far out of the money can still be sensitive to certain types of declines. I can't see ever having meaningful exposure to a single stock covered call ETF that yields 60% for several reasons even though they are fun to blog about. I obviously don't know what Matthew has in mind here but it is very worthwhile to keep informed on how the strategy being bundled into funds evolves. 

If you believe in first responder defensives, then his second point should resonate. The Alpha Architect Tail Risk ETF (CAOS) does a good job managing the bleed that could go with buying puts that expire worthless but I'm not completely convinced about how much it can go up in a broad market selloff. 

New levered and inverse names are more about blogging fun and "new things in crypto" is probably 80% blogging fun, 20% being curious about any asymmetric opportunities that could pop up. 

Since the quarter closed, I wanted to revisit the Tradr 2X Long SPY Quarterly ETF (SPYQ). Tradr also has a monthly version and weekly version. The intension with these is to remove the tracking issue that can go along with a daily reset fund like the long standing ProShares Ultra S&P 500 (SSO). We've been taking occasional looks at SSO for many years and while there should be no assumption of infallibility, SSO stays very close to 2X the S&P 500 for periods longer than a day. 

The first thing is that SSO, SPYQ and the monthly SPYM are all within a few basis points of each other and none of the three were up the implied 6.2% (SPY was up 3.1% implying a 2X fund could be up 6.2%). There is nothing on the Tradr website to indicate that any of its levered SPY funds paid a dividend while SSO had a $0.25 distribution which would nudge up SSO's return slightly. The Tradr funds appear to cost 40 basis points more than SSO.

That being said, using SPYQ to leverage down into a 60/40 portfolio appears to have yielded a better result than doing the same with SSO or just plain vanilla 60% into SPY. The Sharpe Ratios seem to be off so maybe the backtest is invalid. Whatever happened, this first quarter was not a catastrophe for SPYQ. We can circle back again to see how it continues to do. 

The realistic application (that may be a stretch) would not be 30% in a 2X S&P 500 fund because maybe the fund does exactly what it's supposed to do for years and then one day it malfunctions in some unforeseeable way causing serious problems. The context for ever considering these would be like 50% in very plain vanilla with 5% to a 2X fund leaving 5% for some sort of diversifier or maybe playing 40% plain vanilla, 10% in a 2X leaving 10% for diversifiers. 

The ReturnStacked guys updated their model portfolios and I wanted to revisit their ReturnStacked 60/40 that we've looked at several times before. All of the models are behind and advisor sign in so I won't detail what the portfolio is made up of but it is very leveraged in line with their portable alpha research. The model has eight funds in it and it looks like seven of them use leverage one way or another. 

Allocation wise, the portfolio has 62% in equities (about 1/3 is foreign), 50% in fixed income including 27% in intermediate treasuries and 60% in alts including 46% in managed futures. They are able to build the portfolio using leveraged funds including their own. In modeling out ReturnStacked 60/40 to compare it as follows, I switched out ReturnStacked Global Stocks and Bonds (RSSB) for PIMCO Stocks PLUS Long Duration (PSLDX) to make the backtest a couple of months longer.

The limited period available to study with the current portfolio configuration probably reduces the value of the CAGR numbers but there probably is some usefulness from the standard deviation though. Regardless of the leverage, approximately 1/4 of the assets in managed futures will frequently be difficult. Playing around with it, reducing the managed futures from 46% to 28%, which is still way more than I want, would improve the CAGR by 250 basis points. 

I would argue for the relative simplicity of Portfolio 2. I threw client and personal holding BLNDX in there as a stand alone because of its all-weather objective. And BTAL is also a client and personal holding.

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.