The ETF That Melted My Computer

Someone on Bloomberg TV said something to the effect that today was Jerome Powell's worst performance in a post-FOMC press conference in his tenure.

About the only thing that did well after the last hour carnage were first responder defensives like tail risk, inverse funds and VIX products. For what it's worth, the Alpha Architect Tail Risk ETF (CAOS) was up today. I mention that as a follow up because we've looked at it several times and it seems like it's not easy to know what you're going to get with that one. As another follow up, client holding CBOE Holdings (CBOE) was up 1%.

The chart today is just another datapoint for the theory/belief that CBOE is something of a proxy for the VIX complex which trades at the CBOE. It probably is not correct to say it is always going to function as a first responder defensive but the idea does hold at least a little water.

Over the last week or two, there's been some deterioration in markets in terms of leadership again getting narrower, favoring fewer stocks that is typically considered unhealthy market behavior. Who knows how this will play out, will it be no big deal at all, like the Great Dip Of August, 2024 or something more serious but whatever it will be, it will end at some point and then markets will start to work higher. I've been writing this same passage for I don't know how many years and every time, the only variable is how long it takes to end. 

The ReturnStacked Bonds & Merger Arbitrage ETF (RSBA) started trading this week. I've mentioned it a couple of times thinking that like ReturnStacked's other ETFs with fixed income, that it would have AGG-like exposure but instead it has a treasury ladder. The positions are not loaded onto the website as of this writing but the term "ladder" implies there will be at least some duration in the mix. Obviously if you like the idea of these products which create "portable alpha" using leverage, you have to want the exposures they have. For the bonds and funds of theirs you have to want AGG-like exposure or in the case of RSBA, a treasury ladder.

I still think it would be easier to use one of the Tradr 2X Long SPY ETFs for the leverage. They have one that resets Weekly, Monthly and Quarterly although the daily one from ProShares hasn't drifted that much over the years. If someone wanted 20% in alts and was concerned about tracking error (I think at times you want tracking error but please leave a comment if you feel differently), an example would be 60% in a plain vanilla S&P 500 fund, 20% in a 2x fund and then 20% in whatever alts you want. To me, there are fewer moving parts than a fund that combines two exposures. To be clear though, I don't want leverage in that manner. 

And finally the fund that melted my computer is from GraniteShares. They are right in the mix of single stock ETFs. I saw this from Eric Balchunas on Tuesday and figured, ok, more single stock covered call ETFs with a couple of indexes thrown in too.

Well sir, that is not what these are. I first need to say that it appears as though they only started TSYY on Wednesday and the webpage for TSYY isn't quite set up yet but in chatting with someone through the website, the YieldBOOST suite sells puts on 2x Long ETFs. So TSYY sells puts on TSLL.

There's almost no information on the TSYY webpage so I have no idea if the 3% decline versus 8% for the common actually captures what the fund is about but yes am I going to dig in more when/if more of them list and when there is real info posted about TSYY, probably tomorrow. I had an idea about how to use these crazy high yielding, derivative income funds. 

Conceptually, the idea would be like barbelling equities but for fixed income instead where in this case a disproportionate amount of the yield and volatility would be concentrated in the GraniteShares fund of your choice or YieldMax fund of your choice. 

We don't have a very long sample to look at. Dividends are not reinvested. Below are the incomes of each.

A quick note about the 85/15 blend, I'd think anyone taking this seriously would want to split that large of a portfolio weighting between several crazy high yielders not just one. Despite the incendiary nature of the crazy high yielders, working in just 5%-15% in those products with the rest in T-bills backtests as far less volatile than TLH with much more yield. I'd be confident that the volatility profile of a 95/5 blend would stand up with most if not all the crazy high yielders but I'd be far less confident about the 85/15 blend standing up in that manner. 

The crazy high yielders (I am repeating the word crazy very frequently on purpose) should be expected to deplete but they're not instant vaporware. The worst of these I've seen is the YieldMax TSLA Covered Call ETF (TSLY) which is down 58% on a price basis over two years. In its first 12 months, TSLY fell just over 40% on a price basis with a "yield" of close to 50%. 

Back to the NVDY portfolios above, as sort of a mental accounting for this, the T-bill yield could very possibly cover rebalancing NVDY back up to 5% while the NVDY payout is withdrawn. There's very little capital at risk in case the crazy high yielder chosen blows up. 

This is of course theoretical. The drawbacks to the idea include the possibility that all of these get destroyed in the next bear market, they are taxed as ordinary income which makes it unwise in certain circumstances and hopefully everyone now realizes they are not proxies for their reference securities. NVDY is not a proxy for Nvidia common stock, it is a product that sells Nvidia volatility which is different. 

Based on the Defiance put selling ETFs, I doubt the YieldBOOST suite will have less bleed from the put selling versus the synthetic covered calls in the YieldMax funds but I will study them all the same.

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.