Managed Futures Is So Back!

 Who knows if it's back or not but the last three months have been pretty good for most funds in the niche.

Managed futures can go up when stocks go up but it's not a good expectation to have. After a phenomenal run in 2022 followed by some struggles, it's nice to see it having a positive stretch. All but two of those funds were down in 2024. Coincidentally, all but two also fell in 2023.

Twenty percent into managed futures as a permanent allocation, or higher, is such a bad idea.

Short one today.

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.

Fly On The Wall

This was interesting;

Corey went on to say that this person proposed replacing a traditional bond allocation with cash which Corey thought was a bad idea. There's a thread if you want to read more. Part of Corey's argument in favor of bonds was increased certainty in terms of yield for a longer time period. I am guessing then he meant actual bonds, not bond funds.

That is an interesting point so I will ask if it resonates with you? Does the certainty of a 4.xx% yield justify the volatility? What about the less reliable correlation between stocks and bonds? The question of correlation comes up in the thread too. 

I've mentioned that some higher level of yield would justify the potential volatility and the now unreliable correlation but that 4% isn't that level and neither is 5% (don't read that as 6% being the answer).

We spend an lot of time here trying to solve the dilemma that I believe a traditional bond allocation poses so you can judge for yourself from previous posts but I am many years in on using most of what we look at here so I believe in the approach of some short term plain vanilla, some bond substitutes and some of the more niche income market sectors. 

The person Corey spoke to asked about T-bills and Corey replied "I'm going to ignore, for a moment, that somehow the same allocators will tell you how timing equity markets is impossible are somehow experts in timing duration." We've talked about this a little too. If the mindset is trying to time the bond market or predict what interest rates will do, yes, that is a losing game. It's not realistic to expect to continuously be correct about what interest rates will do. 

But this doesn't have to be about guessing about anything. It took no great skill or cunning to look at 2% yields, or less, for ten year treasuries from a few years ago and simply decide too risky or not enough compensation or however else you might frame it. It's similar to equities in one respect. If you can buy equities after a 30% decline, there's no way to know whether you're buying at the bottom but buying after a 30% decline will work out very well after a few years (maybe sooner) even if it causes regret a few weeks later. I'd argue that 7% for risk free for ten years is probably worth it even if yields kept going up after touching 7%. That is not a prediction, more like hey, if it ever happens...

And maybe because the following is relevant. Each one has 50% in RISR and 50% in the ETF named in the portfolio. RISR is a hedge with a history of high yields and going up when rates have risen.

If you gots to have bond market duration, there might be a way to neutralize some of the volatility. 

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.

TIPS Ladder Palooza

Alpha Architect posted an article that was both interesting and vague. Interesting because it was about building a portfolio that was a blend of TIPS (ladder) and equities that favored TIPS. The weightings are what was vague. It talked about a process to determine the weightings but did not offer or explore any proposed weightings. 

The TIPS sleeve is intended to "deliver a real, predictable" income stream. IRL, this point is why you should use individual issues not ETFs. The equity sleeve would provide growth to rebalance into more TIPS over time and increase the income potentially or make the ladder last longer. 

I've come to believe that anyone interested in TIPS is better off in individual issues than funds. They are also simpler to hold in IRAs than taxable accounts. I am not a fan of going heavy TIPS but for exploring portfolio theory, why not? 

iShares has a suite of single year maturity TIPS fund similar to Invesco's Bullet Shares suite that offers corporates and high yield. The iShares funds' symbol methodology is that IBID is for 2027 for example, IBIF is 2029, IBIH is 2031 and IBIJ is 2033 and those are the funds we'll use for this post. 

First lets look at the TIPS sleeve by itself and a couple of substitutes that do not use equity proxies. 

Both Copilot and the iShares website shows the real yield for the IBIx funds to be less than 2%. Copilot generically used 3% as an assumption for inflation but it was not clear what data point iShares was using for inflation to calculate the real yield. To keep it simple, we used nominal yield less the rate of inflation. 

The total return two mystery portfolios are almost all yield. The price only growth of both is less than 2%.The returns of the two mystery portfolios are compelling but I would caution against projecting those CAGR numbers forward. I would be more comfortable assuming the relatively lower volatility numbers could persist versus the iShares TIPS ladder though. And I think the mystery portfolios could continue outperform the TIPS ladder CAGR even if the spread between the two was less. 

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.

No Dividends From Maui

We're in Maui for a few days.

The FT senses some cracks in Strategy (MSTR) versus Bitcoin. The last three months was rough on a relative basis. They issued stock to pay preferred dividends and they also are diluting the common a little more aggressively in terms of ratios they would consider than they said they would. 

The company owns just under 4% of Bitcoin and has said it will keep buying. The stock has become a leveraged play on Bitcoin but the last three months' price action was a sort of delevering. For the life of me, I don't know why anyone would want to touch this thing.

Both the Wall Street Journal (gift link) and Yahoo Finance had some Gen-X doom. This is different doom than what we wrote about a few days ago. The WSJ was about student debt doing in Gen-X and Yahoo seemed to blame a transition period from defined benefit to defined contribution plans causing Gen-X to get left behind. 

Younger Gen-X would seem to be more vulnerable to higher student loan balances and when I started at Schwab in early 1993 at 26 years old, "ok, and here's your 401k," pensions were only for public service and manufacturing jobs as I recall. 

This comment (always read the comments) on the Yahoo article caught my eye. 

Nobody thinks they need $1.6 million to retire lol. They must have done that poll in Beverly Hills. Most people I know think they will need around $300-$400k. Especially if you have your house paid off. I don't know one person in retirement, that has more than that and all our living great.

What is interesting about it is the idea that maybe the number doesn't need to be that huge but also it's enough to create a useful income stream. The income stream generated from $300,000-$400,000 may or may not be sufficient but it can be meaningful. 

Frequently, we say dividends, being taxed as ordinary income, are not optimal. This article from Aptus Capital is a great primer for what the logic is. I'm not anti-dividend but have never been a fan of the dividend-only type of approach that is/was preached at Seeking Alpha. A total return approach that includes a little bit of selling to meet income needs is valid and as Aptus goes into great deal on, far more efficient. 

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.

Retirement Optionality

There were a couple of interesting retirement-related articles over the weekend, one from Yahoo and the other from the Wall Street Journal. 

The Yahoo article tried to refute some basic rules of thumb with Jean Chatzky. Most of what she said are things we've been saying here forever. She said rules of thumb like replacing 80% of your income and the 4% withdrawal rule are good starting points but that you need to "understand the math" behind them which is literally what I've said before. 

She also said that one expense that will go down for sure is the amount you save for retirement or as I've said it, you don't need to save for retirement after you've retired. Another expense that will disappear is the 7.5% you're paying into Social Security which is kind of a big number.

Chatzky also talks about doing the actual spreadsheet work, another point we make here frequently, to understand what your regular expenses will actually be. She said "if the math doesn’t work, you may need to adjust your cash flow" or as we say that here, something will have to give. I'm not saying she borrowed anything from our conversation, she is making obvious points. Maybe, taking in obvious points from various sources can help better drive these messages home. 

The WSJ profiled four people who waited until at least 75 to retire most of them still have an income stream beyond their investment portfolios and Social Security. One of them gets a small income from having sold her business with a balloon payment coming in a couple of years for example. 

Yahoo talked about mapping out your expenses and the things you want to do in retirement. Want to do included family, travel and home remodels and you probably have some of your own. There are some basics where there really is nothing to give and if the math doesn't work for those then the easiest choices I can think of would be to keep working or figure out how to downsize in such a way that you end up cashing out to some extent. 

A lot of the comments on the Yahoo article talked about moving to a zero tax state or low tax state. Some states have no income tax, Arizona is pretty low I'd say at 2.5%. For $100,000 of income, Copilot says the states with the highest marginal tax rates are California at 9.3%, Oregon at 8.75% and Hawaii at 8.3%. While that seems high, Copilot also says that those states do not tax Social Security. Only nine states tax Social Security according to Copilot. Any sort of move for tax reasons needs to include looking at sales tax and property tax to make sure that if lower taxes is the objective, you're actually lowering your taxes. 

Years ago I wrote a few posts about living in a state with no income, near the border of a state with no sales tax. Washington/Oregon was one example as was Wyoming/Montana. 

Adding other income streams beyond portfolio withdrawals and Social Security adds optionality. If someone's numbers just barely work with little room for error then adding that financial optionality is pretty important even if the way they do this is not their first choice for things to do. If, as was the case for some in the WSJ article, an income stream can be derived doing something you enjoy, why wouldn't you keep doing that to some extent even if not as a full time endeavor? 

If you think you might need financial optionality, how much of your time would you be willing to trade for that sort of peace of mind? Saying "no time spent is worth it" is a valid answer but isn't the answer for everyone. 

I place so much importance on optionality because we never know what we will want to do in the future or what we will need to do. Reducing the uncertainty of that potential want or need is important to me. 

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.

Lottery Ticket Biotech Goes Boom

Every so often we throw around the term lottery ticket biotech which might be a term I can claim originality for. This first came up in 2006 when a company called Pozen had a migraine drug that didn't get full approval because of safety concerns and the stock fell 61%.

We have another one today that resulted in an 89% decline as of early on Monday.

MLTX' late stage drug to treat hidradenitis suppurativa didn't have safety issues but was less effective than a drug made by a competitor. 

I don't know the company or the story beyond the Bloomberg report but it seems reasonable to conclude that the stock/drug presented an asymmetric opportunity, the opportunity soured obviously and the price reaction show the downside of allocating to asymmetry.

The message from me is not don't do this but to understand the risks and size the asymmetry correctly. Don't start so heavy that a wipeout does serious financial harm. It's a little trickier if you started small with something like 1-2% and it grows to 10-20% so have that mapped out going in so you don't react out of greed or fear or some other emotion.

YieldMax Tweeted a survey about what fund they should come out with next and the comments were predictably brutal telling them to fix the NAV erosion on the current funds and there were a lot of complaints about their Strategy fund MSTY.

Maybe MSTY is down a lot (it is) but my first thought was TSLY, their Tesla product. 

This is a pretty good sampling of the Tesla ETF ecosystem. TSYY sells put spreads on TSLL which is a 2X fund, TSLY is the YieldMax covered call fund and CRSH is a YieldMax product that sells short (synthetically) and sells puts.

Several of the funds really got punished by the decline in the common during the worst of what I will call crazy CEO fallout. The lift in CRSH is interesting. The fund is synthetically short the common so it probably should go up when the stock falls but the covered puts could get in the way of that and while they did a little, that the fund went up at all in the spring is impressive. 

The erosion here really is brutal. The volatility drag is harsh. The stock is very volatile and the crazy CEO risk makes for a difficult hold. When they first came out with CRSH, my initial reaction was to wonder if this might be a better mousetrap strategically. I don't think I said this on the blog so it doesn't count.

If you do a similar study on Nvidia and look at DIPS which is the same strategy as CRSH, it had declined by 36% on a price basis since it listed, NVYY which is the equivalent of TSYY selling puts on a 2X NVDA fund is sort of flat, down just 6% against the common which is up more than 50%.

This really is crazy stuff that is interesting to look at and if nothing else, this reiterates that these funds do not track the common. The performance of the common is an influencer but the bigger story is that these funds sell the volatility of the common.

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.

Alternatives? JPM Has The (Data) Goods

The Idea Farm shared JP Morgan's most recent Guide To Alternatives and there's plenty to chew on. 

They have the real yield on a 60/40 portfolio as being negative. There's a strong tax-efficiency argument for why yield is not the optimal way to take income from a portfolio but people do love yield all the same. Where more and more high yielding products bundle ROC into their distributions, there can be instances where much of the payment is not taxable as ordinary income. The cost basis goes down with ROC distributions so when the high yielding product is sold, the capital gains tax might be bigger. If the crazy high yielder of your choice erodes down to a dollar or the like, maybe you never need to sell it though. No sale, no tax? Ask your CPA.

Of course in IRA/Roth/HSA accounts this isn't a tax issue. We look at plenty of ways to get higher yields than the Agg, often with less volatility but spreading out the risk is very important. 

Let's have some fun with this one;

You can see which allocations we're playing with here. All three alt portfolios are the same in terms of splitting the fixed income between SHRIX and client holding BKLN and for the alt I just used QSPIX. Trying to tease out the yields here, 60/40 yielded 2.22% for the period studied, 40/60 yielded 2.39%, 30/50/20 yielded 5.44%, 50/30/20 yielded 4.63% and 60/20/20 yielded 4.22% while inflation ran at 3.44%. Testfol.io has more than half the total return for 30/50/20 coming from yield. 

The volatility numbers of what we built were a little higher than what JP Morgan came up with but so were the returns. Anyone interested in taking this sort of approach would need to diversify beyond the two fixed income holdings and one alternative. 

The next chart reiterates a point I've been making for 20 years. REITs are not good diversifiers. They fall prey to the heuristic that in a bear market, all correlations go to 1.

I'm not anti-REIT, they just shouldn't be counted on to help in bear markets.

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.

Is Infrastructure Really An Alternative?

Let's hop around to a few things today starting with a list of different investments that Christine Benz says people don't need. I'm not going to tit for tat argue in favor of what she says we don't need but will reiterate a point we make frequently which is that simply putting it all into a basic allocation fund like a 60/40 fund (VBAIX or AOR as examples) combined with an adequate savings rate and the ability to avoid panic selling should get the job done. 

Anything we might do beyond simply buying one fund needs to be considered in that context. Am I really adding value with narrower exposures, alternatives and/or any active decisions I make? Obviously I think there is value to be added in this context but more time invested in learning how to do this is pretty important. There are plenty of tools and exposures that are easy to use incorrectly. There is also a balance between slight enhancements to improve risk adjusted returns versus overtrading and chasing the thing that was previously hot. The way the blog has evolved, it's become a fun and I believe useful way to explore portfolio theory and understand how create more robust and resilient portfolios.

Speaking of things that many people probably don't need, here's the latest on the Granite Shares YieldBOOST Bitcoin ETF (XBTY). The fund is pretty new, it sells put spreads on BITX which is a 2X levered Bitcoin ETF. After four and half months, the distribution annualizes out to 100% payout.

BITY is a Bitcoin covered call ETF that "yields" 25%. The difference in the "yields" is obviously a big part of the story behind the difference in the respective price only returns. It's worth looking at the total return numbers too.

Again the time is short due to when XBTY listed. The total return comparisons aren't so bad but love them or hate them, the derivative income funds, XBTY and BITY in this example, are far more about selling/exploiting/harnessing the volatility of the underlying, Bitcoin in this post, than about tracking Bitcoin. 

Let's dovetail off that to go all alt to try to seek out a 75/50 result. 75/50 tries to capture 75% of the upside with only 50% of the downside. If you play with the numbers, you'll see it works out for a better long term result.

• Saba Capital Income & Opportunities (BRW) combo of relative value and event driven
• WisdomTree PutWrite Strategy Fund (WTPI) sells/exploits/harnesses volatility
• Absolute Convertible Arbitrage Fund (ARBIX) event driven

And the year by year;

2024 was the year it lagged VBAIX the most and that year the total return captured 71% of VBAIX' upside. The other three years it lagged, it captured more than 75% of VBAIX' upside. In 2022 it did far better than half the downside. 

The price only result shows that almost all of the return was from distributions. Both BRW's and WTPI's distributions have been a mix of ordinary income and ROC but with no real consistency in the percentages so the tax efficiency is a potential flaw worth noting. For someone utilizing some sort of depletion strategy, the portfolio has paid out 8-10% the last couple of years without eroding and someone just looking for a smoother ride would need to reinvest the distributions. 

It's an interesting idea but I'm always going to say what a bad idea it is put those kind of percentages into individual alt funds. 

Finally, lets marry a post from June that touched on infrastructure interval funds with the Lazard Infrastructure Fund (GLIFX) we looked at a few days ago. In the post this week, I said GLIFX appears to be alt-ish. On second thought, maybe not quite. 

The top table is correlation and the lower table is beta. The other symbols are infrastructure mutual funds that Grok found and VOO of course is the Vanguard S&P 500 ETF. There is more differentiation with the beta so maybe GLIFX is alt-ish. If you look at the year by year returns, the range does seem to be narrower, certainly they all held up very well in 2022 with low to mid single digit drops versus 18% for VOO. 

CAFIX and MIFAX are two of the infrastructure interval funds we looked at in June. At first glance, CAFIX appears to have it going on but it looks like much of its performance lead occurred in early 2024 while this year it's been in the middle of the pack other than MIFAX which has much lower returns.

I will watch these, there's not really enough data yet to draw a conclusion. I can't see using an interval fund but like I've said before, I think it is important to keep tabs. The reason to look at infrastructure funds, interval and otherwise, is that infrastructure is often pitched as being an alternative as touched on above. Alt-ish maybe, I'm not sure but the argument is far from being a slam dunk in favor of the niche being alternative. The one I own for clients is not alt-ish, it is heavy in materials and has a lot of equity beta.

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.

Gen-X Is Worried

There are some memes and other types of jokey posts about Gen-X being tough, I remember one where a millennial said that if there was a zombie apocalypse that somehow Gen-X would know what to do. I'm older Gen-X and I don't know whether we're tough or not but to hear Barron's tell it, we've made financial mistakes and we're willing to talk about it. 

For the few readers who go back to the beginning with me in 2004, the article captures a list of all the things I started talking about back in my 30's, I'm 59 now. Nassim Taleb used to talk about the wisdom of grandmothers, we learn a lot of what we need to know as children from our grandmothers and it is up to us to just keep it simple and do what they told us. 

A recurring sentiment was wishing they'd started saving earlier. There were comments about not being able to envision getting close to retirement age and as a result 2/3 of Gen-Xers surveyed by Cerulli have less than $100,000 saved for retirement. There's a theory about not being able to understand beyond 50% greater than your current age. A 30 year old wouldn't be able to understand what it would mean to be 60 for example. There's something to it anyway and not envisioning pre-retirement age would seem to play into that theory. 

Cerulli cited a misconception that there was plenty of time to start saving." The youthful perception of time is one of abundance—planning for a decades-away event such as retirement can be hopelessly abstract." 

There was a segment of Gen-Xers surveyed who regretted years of overspending and taking on too much debt. 

"...many Gen Xers now say they wish they had prepared for challenges such as the loss of a job or personal issues such as a health crisis or the death of a loved one when they were making financial decisions in their youth."

We've been tackling these exact issues for more than 20 years not because of any keen insight but because they are all obvious things. We literally learn as children to save for a rainy day. At some point as children we heard something about too much debt even if we didn't hear it enough. When you were a kid, did your parents ever have you save up for something you wanted and have you buy it with your own money? There are all kinds of lessons in that exercise including delayed gratification which I think ties into optionality. 

You can buy a pack of baseball cards every week or save that money to buy a new baseball glove later. I'm not sure about the baseball cards in that equation but that is how I bought my Rawlings Reggie Jackson baseball glove in 1977 that I still have today. Sticking with example though, after a couple of months or whatever, I had the option to buy a ton of baseball cards or the glove. 

There were hints about living below your means but I have always placed a very high priority that. Whether it was the baseball glove episode or not, the importance of optionality is something I figured out a long time ago and living below your means (saving more) is the path to financial optionality. This becomes easier if you can figure out what you really want. I want freedom (setting my own schedule, owning my time) not riches. It takes a lot less in the bank to be free than it does to be rich. 

If someone is 50-55 with $100,000 in their 401k and wondering how they are going to retire, they'll figure something out because they have to even if it's not their idea of an ideal or easy retirement. At that age there is time left for those gainfully employed to make some changes, all the better if they catch a tailwind in terms of market returns. The one thing they can't do is throw a pity party for themselves and give up. 

There is still time to turn a robust emergency fund ($100,000 in this context is a pretty good emergency fund) into a big enough piece of money to be a useful income stream by putting more into 401ks if at all possible and letting the stock market do its thing. Contributions limits are quite high, $31,000 for ages 50-59, going to $34,750 for ages 60-63 plus any employer match. Not everyone can save that much I realize but 10-15 years of contributions plus matches plus compounding will add up. 

Of course I am also going to say that physical optionality is just as important as financial optionality. Harshness coming, if you don't have a gut, keep doing what you're doing to avoid getting one and if you do have a gut, cut carb and processed food consumption and see how quickly it goes away. And just as important, lift weights to build muscle mass. No gut and building up some muscle mass is a path to physical optionality. 

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.

This ETF Will Self Destruct In Three Years (or 5 or 10)

One intriguing idea that we talk about occasionally is that of letting a taxable account deplete while delaying Social Security and/or IRA distributions. While I have used the word deplete/depletion to describe this, other place might refer to it as a drawdown strategy. My attempts at trying to articulate this have been sort of clumsy I have to say but either way LifeX funds has three ETFs that implement this idea over different timeframes.

• LifeX 2028 Income Bucket ETF (LIFT)
• LifeX 2030 Income Bucket ETF (BCKT)
• LifeX 2035 Income Bucket ETF (LDDR)

The symbol of of the 2035 fund tells you what these are, simple treasury ladders. Similar to BulletShares funds, the Income Bucket funds will terminate in the year indicated but unlike BulletShares, the Income Buckets will be depleted. The distributions are a little bit of treasury interest and a lot of return of capital. 

Yes, this is quite doable for individuals, especially these first versions that just use treasuries but the Income Buckets only charge 25 basis points so for some people, this would be worth delegating the work.

Using LIFT as an example, someone is 64 and would rather wait until 67 +/- to take Social Security

That's LifeX' calculator. 

I sat in on a webinar for these and there was a question about what would happen if interest rates went down a lot, would the payout drop? They said no because the bonds are already purchased. The largest holding is a T-bill that matures August 31, 2027 and it yields 3.56% currently.

LIFT has about $1 million in it. If it yields 3.50% (very round number) and six months from now rates have dropped to 3% and at that time a $20 million buyer comes in when it's yielding 3%, what happens to the 3.5% yield the early buyer was getting? I asked that question and was told it would function like bond fund, the NAV would go up which would lead to it maintaining the payout in the end. 

We will find out whether that stands up or not, if rates to get cut as aggressively as some are hoping for. 

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.

Don't Frown, Leverage Down

Let's start with this from Eric Balchunas.

The existence and use of leverage isn't what does people in so much as the misuse of leverage. There is of course a lot of complexity to leveraged funds and in addition to misusing these funds, I think people can run into trouble not fully understanding what they're getting into. 

There is a cost to the leverage in these funds. There are different ways to observe the drag/cost of the leverage, you can see a difference between the target and the underlying when looked at over longer periods. There is the issue of understanding the daily (usually) reset and the compounding of the reset that can cause a levered fund to diverge meaningfully from its intended objective over longer periods. The boiler plate is always clear about how to use these but still.

Tesla is much more volatile than Netflix which impacts the 2x levered funds of each. NFXL, the 2x Netflix, since it's inception is kind of close to the underlying. The common is up 75% and the 2x is up 146%. The difference could be thought of as a cost of doing business. The 2x Tesla is a whole different story. The common up 79% and the 2x up less than that. 

Here's the month by month breakdown;

The point here is to understand the product. There are drawbacks and they probably outnumber the positives but I think it is worth continuing to explore. Using leverage the right way, leveraging down, can work. 

The 30/70 portfolio uses a little leverage but I wouldn't say it leverages up.

ROM is 2x technology so while 30% is allocated to equity funds, the exposure is 45%. GLIFX which we looked at yesterday owns equities but I think it is alt-ish. MERIX and CBOE are client and personal holdings. The equity mix is higher beta which is another form of leverage embedded in the 30/70 so it is really 45/65 and 5% gold. 

TSLL is not 2x Tesla, NFXL is not 2x Netflix and ROM is not 2x XLK. Framing them the way have started to do over the last couple of months, they are each the underlying reference security plus the volatility of the underlying reference security. Unlike derivative income funds which sell that volatility, the 2x funds buy the volatility. With TSLL, the long volatility has hurt returns. With NFXL it appears to have enhanced returns, same with ROM. 

So 45/65 and 5% gold is actually 45% equity/long volatility, with 65% in fixed income and fixed income proxies and 5% gold. 

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.

Exploiting Bitcoin's Volatility

Every advisor in the world gets inundated with various types of solicitous emails; funds, private placements, whatever is faddish, "got five minutes?" and so on. Occasionally, I will try to learn a little about what is being pitched as was the case earlier this week. 

The chart compares it to other alts that we look at regularly for blogging purposes and it seems like in generally falls in line with the other alts in terms of returns and volatility profile and like the other alts, it helped in 2022, it was down 1.30%. 

GLIFX is the Lazard Global Listed Infrastructure Fund and the chart compares it to three infrastructure themed ETFs. Part of the pitch for GLIFX is being defensive and the result appears to be similar to GII and TOLZ. PAVE is a client holding and it looks nothing like GLIFX and the others. Is PAVE a better fund than the others? No. GLIFX, GII and TOLZ seek a different outcome tilted more to utilities which tend to have lower volatility and are less cyclical which offers the opportunity to be defensive. PAVE tilts to the materials which is more cyclical and not necessarily defensive in a downturn.

Different objectives. We regularly talk about having the correct expectations for what a holding should do and this is a great example. GLIFX appears to be alt-ish and if correct, it gets that effect from a differentiated source of returns compared to other alts we look at which is always interesting.

This is happening on Wednesday;

IBIT is the iShares Bitcoin ETF. I thought the income blast suite paired synthetic long the underlying with selling put spreads but this says covered call so we'll see. I had a conversation on Twitter on Tuesday with a couple of folks and one of my comments was that on some level, exploiting the volatility is an intriguing idea. 

And kind of related, Calamos will be listing three Bitcoin buffer ETFs on October 7th. They will have symbols CBTO, CBXO and CBOO. Where a big part of the Bitcoin story for those who aren't necessarily true believers is the asymmetric potential, I don't know what capping the upside makes any sense. For anyone concerned about the volatility, just own less. If it turns out that CBTO, CBXO and CBOO offer some sort of interesting effect not necessarily related to Bitcoin's asymmetry then we can take a look then.

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.

A Minefield Of Positive And Negative Asymmetry

Quick hits today.

There are a couple of hundred filings and the path to approval has apparently become much simpler. This is a minefield of positive and negative asymmetry. I won't say don't buy these but I will say size this stuff appropriately if at all in case your the last one in before the music stops. There will be catastrophe here. Maybe a lot, maybe just a little but definitely some. 

0dte is zero days to expiration options. The context appears to be buying 0dte. If buying them is expensive then that makes an argument for selling them somehow. I believe the only ETFs that do this are covered call ETFs that reference broad based indexes. An ETF that sells any kind of call on a broad index should not be expected to track that index, the fund would combine the index and selling the volatility of the index which is a different thing. 

Chances are that most people do not need any derivative income exposure (there is validity to the strategy), but the ETFs that implement a 0dte version of the trade seem to have far less erosion. 

I wanted to circle back to a report from iShares that we looked at a few weeks ago that highlighted their factor rotation ETF DYNF, Rick Rieder's bond ETF BINC, a derivative income fund BALI and Bitcoin. A study we did not do when we first looked at the report as follows.

I used JEPI instead of BALI just to get a little longer back test. I did not substitute BINC because the fund has done well and want to capture its return stream in case it is a uniquely good broad based fund. Portfolio 2 is similar but uses funds we regularly use for blogging purposes. 

Removing Portfolio 1 to get a slightly longer study period.

The ReturnStacked guys put out a short paper about leveraging up to add what I think was 20% sleeve of absolute return to improve returns over a plain vanilla 60/40. I'm not sure the following is what they had in mind but if you click through, you'll see where I got it. 

Their backtest added 114 basis points of CAGR over 60/40. What I build got close.

But the leverage wasn't additive. The unleveraged outperformed the leveraged by seven basis points with slightly less volatility. 

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.

Don't Dismiss Mutual Funds

Alan Dunne wrote a fun article about The Hidden Fragility In Many Asset Allocation Plans. Admittedly there is some confirmation bias for me happening here as Dunne notes the recent unreliability of bonds for diversification and a misplaced expectation that private equity should somehow hold up well when public markets decline. 

Dunne says the above is a typical asset allocation of family offices and asks rhetorically, looks diversified, doesn't it? But looked at through a different lens, the above looks more like this;

Not quite as diversified as it first appears and if we're in a period where debt can also go down in price like in 2022, it's not a very robust allocation strategy which is a point we've been making here since I don't know how long.

Similar to another another paper we looked at recently, Dunne noted that the type of diversifier matters too. It takes some sifting ability to piece together when an alternative does or does not have a lot of equity beta. A lot of equity beta is neither bad nor good, this is about expectations. For example I would expect client/personal holding BTAL to offer far more protection in the long/short category than AQR Long/Short (QLEIX). BTAL is short biased and QLEIX is long biased. One is not better than the other, they do different things. 

Dunne is not a fan of small weightings to diversifiers. I think it makes far more sense and takes far less risk to diversify your diversifiers. The idea that only 3-4% in one volatile diversifier like BTAL or managed futures may not help is probably true but that doesn't mean you must have 10% in BTAL or 15% in managed futures. If 12% is optimal (12% is just an example), that could be divided between 3-4 volatile alts carried in small weightings. 

Dunne doesn't say this overtly but there is a distinction between high volatility and low volatility diversifiers. Below are some low volatility diversifiers that we've talked about many times for blogging purposes.

I think these are important too as an add on to high volatility diversifiers. Other than the occasional blip, the one that did the worst in 2022 was down 3.37% that year. Echoing Dunne's point, the low volatility diversifiers do something different than high volatility diversifiers.

One of the above low vol diversifiers is a catastrophe bond mutual fund. Earlier this year the Brookmont Catastrophe Bond ETF (ILS) listed and it is struggling on a couple of different fronts. Bloomberg reported that it only has $12 million in assets and that there is also an operational issue. It launched without a lead market maker and Bloomberg did not report that the matter had been resolved, a Google search also says there is no lead market maker. 

More than a few times, we've talked about the ETF wrapper not being the solution to every single strategy and perhaps that is the case with catastrophe bonds too. ETFs may not be ideally suited for full implementation of managed futures as another example as opposed managed futures replication strategies which trade far few markets than full implementation and fit very well into the ETF wrapper.

Don't dismiss an entire wrapper, like mutual funds, mutual funds are better for some strategies. 

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.

What If There Is A 'Never Happened Before' Volatility Event?

In case I haven't stated it plainly, I think there is a lot of value in looking at other people's strategies and ideas for asset allocation and then building their idea with holdings you think would work better. 

We've looked at Cambria Global Asset Allocation ETF (GAA) which is 45% equities, 45% fixed income and 10% alts as well as Cambria Trinity (TRTY) is which 35% trend, 25% equities, 25% fixed income and 15% alternatives in this context several times. TRTY seems quadrant inspired to me. GAA has compounded at 5.98% since its inception in 2014 while price inflation has run at 2.99 and VBAIX clocked in at 9.01%. TRTY has compounded at 4.90% since its inception in 2018 while inflation has run at 3.63% and VBAIX compounded at 9.63%.

Both GAA and TRTY might be having their best years in 2025. GAA is up 14% YTD, it's had two years in the past where it was up 15% so I am extrapolating to say this might be it's best year. TRTY is up 11%, it had one year it was up 15% so it's a coin flip at this point whether 2025 is its best year. 

The homemade GAA in Portfolio 2 certainly has worked and done far better than GAA. Same for the homemade TRTY below.

Using three or four funds is fine for blogging expediency but not something I would do IRL. And as we've talked about in previous posts, I wouldn't go anywhere near that heavy into managed futures, cat bonds or a single alternative strategy. 

Pivot to the Rational Reminder Podcast crapping all over covered call ETFs. I'm unfamiliar with these guys, Meb Faber Tweeted the link to their podcast. It's a pretty thorough take down. Their starting point is that dividend investing is fine, suboptimal but ok, they are total return guys as am I for the most part. A diversified portfolio that goes narrower than a broad based index fund should include the attributes that dividend payors typically offer. 

At the other end of their spectrum, the podcast guys put single stock covered call ETFs. The risk return tradeoff of capped upside with all the downside is a bad tradeoff as they see it. At about the 20:35 market though, one of them sort of makes the point we make here about them. They say that if someone is trying to exploit volatility, that maybe derivative income funds aren't so bad. They quickly noted that the fund providers are not marketing them that way and that they don't believe individual investors are trying to do that either. The first point is definitely true and the second one is probably true. 

A few weeks ago or more I stumbled into framing all the derivative income funds as absolutely not being proxies for the underlying reference securities. The context in the Rational Reminder Podcast seemed to try to tie them to the reference security except at the 20:35 mark, where they talk about exploiting the volatility. I think that is close to how our conversation about them has evolved. The derivative income funds combine the reference security and the volatility of the reference security. NVDY and NVYY shouldn't be expected to track Nvidia, they combine Nvidia and selling the volatility of Nvidia which is a different thing. 

If you have an interest in any of these, once you let go of them tracking the underlying and accept they combine the underlying and the volatility of the underlying then I would say you're exploiting the volatility. The next level then would be whether you're exploiting it in an effective manner or maybe better put, a closer to optimal way. 

This popped up on Twitter on Friday.

In the replies, someone noted that CAIE sells volatility and tail risk. It is certainly doing well in nominal terms right out of the blocks. In July I said that 14% in a 5% world clearly has risk regardless of whether we can figure out what the risk is. CAIE is complex and anyone buying it needs to realize that and I would encourage making sure you can wrap your head around what the risk is. To the extent it sells volatility and tail risk (great way to frame it), owning CAIE, one of the crazy high yielders and something like JEPI all take different variations of the same risk. There may never be a consequence for loading up on all of these but the risk is still there. Splitting 10% between a bunch of these types of strategies may not constitute loading up but if some sort of never happened before volatility event occurs, I would expect all of them to get hit to varying degrees. 

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.

Just Don't With Interval Funds

The mass sales pitching of private equity and credit seems to be accelerating and I don't think it will slow down in the near future. For the record, I do not think this will end in widespread catastrophe, I think more like it will just wither away as having been a lot of hype about nothing or at least very little similar to the manner that ESG is withering or similar to the even shorter arc for direct indexing. 

My work email gets bombarded with solicitations for private whatever including the occasional email about an interval fund. Last week I got one about the Calamos Aksia Alternative Credit and Income Fund (CAPIX). CAPIX is an interval fund.

Part of my conclusions about these is that chances are, whatever you're trying to do, can probably be done cheaper and easier with better liquidity and transparency than the interval wrapper. The fact that we are talking about an interval fund shows my willingness to keep learning and keep an open mind, similar to crazy high yielding derivative income funds and portable alpha funds.

The blue line and shaded area is CAPIX and the other three are the three catastrophe bond mutual funds I am aware of. The ILS ETF just started trading earlier this year so I didn't include it. 

PRIVX is a private equity interval fund. If you have interest private equity, what are you hoping it does?

Yes, it's just one fund and maybe it is the single worst equity interval fund in existence but it doesn't take any keen skill to pick a broad based tech sector fund like XLK for the slice of an equity portfolio that is expected to outperform. Contrast that with something like staples or utilities that probably won't outperform but should help manage volatility. 

The quick and dirty with interval funds is just don't. At least not yet.

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.

Selling Volatility Is Easy To Get Wrong

RCM Alternatives shared conclusions from Dunn Capital about the types of alternatives to use and how to size them in a portfolio. Cutting to the chase, they say it is more effective to have 15% in volatile alternatives like managed futures than to have 30% in low vol alternatives. I would think of low vol alternatives as being various types of arbitrage or the way client/personal holding PPFIX sells volatility that is very far out of the money. 

The argument is similar to the argument for capital efficiency. While I am not a fan of 15% in managed futures, putting 15% in high vol alts should be just as effective as a larger weighting to low vol diversifiers. Using their numbers, 15% in high vol alts allows more of the portfolio to be in equities which are the thing that goes up the most, most of the time. 

 

A 14 year sample size is pretty good. Clearly, 30% in low vol alts in Portfolio 2 caused a lag but the volatility was also noticeably lower which is probably more about the smaller weight to equities than the alts. The Sharpe and Sortino numbers don't show much difference. It's not clear to me that one approach is obviously better, some will be willing to have volatility to get more basis points of growth. 

The lack of differentiation between Portfolios 1 and 4 it noteworthy. Portfolio 4's result is essentially identical but it allows for better diversification with 5% each in three different high vol diversifiers instead of loading up on managed futures. 

Quick pivot, GraniteShares is continuing to add to its YieldBoost suite. The basic idea is that these funds sell put option spreads, a bullish strategy, on 2X levered ETFs. I believe YSPY which does this with a 2X S&P 500 ETF is the second longest tenured fund in the suite with one for Tesla being the first one. Sticking with YPSY to avoid crazy CEO risk, here's what YSPY has done.

And here is the one for Nvidia (NVDA) which started trading in May as NVYY compared to NVDY which is the YieldMax covered call fund.

These are not proxies for their underlying reference securities. They one way or another sell the volatility of the underlying reference securities and that is a different thing. 

The erosion of these, every time I look is always pretty swift but the total return is almost always positive. I can't think of an instance where the total return has been negative but there probably are at least a couple. Again, these should not be expected to track the common on a total return basis unless the common goes into a death spiral. Nvidia common stock is up 36% since NVYY started trading so not that far off but the articles that say these lag are correct in terms of simple numbers but miss the point of not being proxies for the common stock. And to make clear one point, whenever the next bear market comes along that lasts more than a month, all of the crazy high yielders should be expected to go down a lot.

GraniteShares listed two new ones including one AZYY which references Amazon. 

Selling volatility is a valid strategy but there are probably more ways to get it wrong than get it right. That alone might reasonably dissuade people. I continue to spend time on this because I am convinced funds that sell volatility will at some point figure out a way to lessen the drawbacks and I want to understand that evolution when it happens. 

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.