Turning 60/40 Upside Down

I wanted to do a quick experiment with a 60/40 portfolio. Can we get a similar result allocating 60% to some sort of fixed income sector and 40% to some sort of muted equity exposure. The first thing that came to mind was 60% into a convertible bond fund and 40% into a defined outcome "equity" ETF. For the period I studied, convert plus defined outcome was about 300 basis points short which surprised me, I thought it would be closer. I tried asking Copilot which fund or ETF is most correlated to the S&P 500 and it said CWB which is the first convertible fund I tried. I thought that was funny. 

Portfolio 2 is interesting. It's had the same growth rate as plain vanilla 60/40 but with only 2/3 the volatility. 

The first question might be whether Portfolio 2 just captures a low volatility effect. Short answer is no.

The point of this is just to underscore the importance of understanding not only what a fund owns but what the strategy, if there is one, is trying to achieve. We've used the example of long/short many times in this context. Some long/short funds are trying to offer equity beta, trying to outperform, some are absolute return/market neutral and a couple are essentially inverse funds. 

Short post tonight.

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.

The Internet Hates Michael Green

Michael Green was out with Part 2 of his much discussed and somewhat controversial look at the poverty line in the US. We looked at the post here and then discussed some of the reaction here. Here's Part 1 from Green. 

Most of Part 2 turned out to be point/counterpointing with some of the critics, most notably, Scott Winship whose article we also dissected. From there, Green pretty much said home ownership is a scam, 401ks are a scam and so is higher education. There's more nuance which we'll get to but my reaction was pretty much... 

With owning a house, he said price appreciation is actually just inflation. If you buy a house for $200,000 and it goes to $1 million, what then? If you sell it, you'd just be trading into another $1 million house. Home value appreciation is just an illusion that is encouraged to make people feel wealthier without any actual wealth he said. 

He touches on trading down but seems to dismiss the possibility. If someone needs to access the equity in their house for retirement, having the house gives them optionality to downsize, assuming it's paid for. It will take some work to find the right downsize situation but it is possible. 

Green refers to the 401k mirage, noting that only the wealthiest benefit, the wealthiest own the majority of the stocks (true) and that typical 401k participants own target date funds. I am certainly not a fan of target date funds but they can work.

That goes back ten years. It assumes starting with $1000 and putting in $1000 every month (so no raises along the way) and both funds have created a decent retirement balance, not enormously wealthy but pretty good for ten years. Testfol.io had clearly incorrect data but Copilot said that starting with $1000 in 2007 when the funds launched, adding $1000 every month the balance now would be;

Again, I don't think target date funds are optimal but they are valid. This doesn't seem like an illusion to me. 

Green correctly sounds a cautionary tone about private equity eventually making its way into 401k plans. He said what we've said, they need more suckers. 

The last thing I will mention is his taking down of the "great wealth transfer." I've been hearing about this since the late 80's with money going to boomers back then from their parents. Did it happen? Hard to quantify but Green says the money that millennials and Gen-Z expects to get will instead pay long term care bills. If you google it, you might find that the health department says 70% of older American will need long term care. 

Anecdotally, that seems absurdly high. I asked Copilot to dig deeper. The 70% includes family helping their parents and grandparents. Copilot says 35-40% will need to go into a nursing home with only 10-15% staying more than two years. Ok but copilot says there are now 1.3 million Americans in nursing homes but the population of people 70 or older is 37 million. Yes there will probably be growth in the number of people who need nursing home care but 35-40% is still way too high. 

I think counting on an inheritance makes for a terrible retirement plan for several reasons but the healthcare angle the Green takes is far more pessimistic than the reality. 

Green in both essays (a Part 3 is coming) paints a bleak picture. The internet is falling all over itself trying to debunk and bash what Green has written thus far. It's kind of odd actually. If you want to delve into the details of Green's numbers, go for it but it is hard to look at the big picture of the questions Green is asking and feel optimistic. 

I'm always going to bang the drum of taking matters into our own hands to minimize reliance on other people figuring it out for us. If "they" (the government) figure it out great but that is clearly not their top priority and in meantime we're living our lives now while "they" spend time not solving any problems.

Live below your means, take care of yourself physically and stay curious/engaged.

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 Do You Mean FIRE Is Obsolete?

Sam Dogen, aka the Financial Samurai and an early proponent of the FIRE movement had an intriguing post saying that Early Retirement/FIRE is becoming obsolete. The TLDR is that having more opportunity to work from home (a Covid byproduct) has created more of a sense of independence from better time ownership and the lack of a commute makes work more enjoyable. 

FIRE is an fun topic to write about and explore but the focus here has always been on the financial independence aspect, the FI in the acronym. The commute comments really resonated with me, that was a big driver for me trying to get to the point of working from home which I did, starting in 2003. Anytime I tell someone I've been working at home for that long I always throw in "thank God for the internet" which always gets a nod and a chuckle. 

A little while back I commented that I thought I've been in coast FIRE mode for awhile which means not necessarily having to save more for retirement but still needing to let the money grow without living off of it yet. Sam crapped on that one pretty good but didn't elaborate, simply saying it's an illusion and a participation trophy. I wish he would have dug in a little deeper on that because below is a chart he shared that I take to support the concept coast fire.

It doesn't matter whether you agree with the expected amount needed column or not, you're in one of those demographics, you have some sort of framework of what you think you need and you have some amount already accumulated. I take coast fire to be about optionality. If you're 50 and you have 85% of what you think you need, it seems to me like you can coast with some optionality. That might mean gearing down into a lower paying job that you enjoy more or if you enjoy what you do, maybe you can allocate more of your income to whatever your idea of fun or discretionary spending might be.   

We all have our own opinions and beliefs about every aspect of retirement from whether to even do it, when to do it and how our finances should work which gets us to one article from Barron's and one from Yahoo, both about when to take Social Security. 

The comments, especially on the Yahoo article were worth reading. One common theme to comments on these posts is the belief that people can do better themselves by taking the money early and investing it in the stock market. Speaking to beliefs, ok, maybe you can do better yourself than the 8% annual step up in Social Security payouts but there's more than that, there's also the COLA adjustment. Here's the last ten years of COLA adjustments from Copilot.

Year	COLA (%)
2016	0.3
2017	2.0
2018	2.8
2019	1.6
2020	1.3
2021	5.9
2022	8.7
2023	3.2
2024	2.5
2025	2.8

If the average year in the stock market is 8-9% and average COLA is 3.11% or 2.65% for the median if you prefer, then the hurdle rate becomes quite a bit higher. Now add the complexity that there are very few years that the stock market hits the average return (usually more or less than the average) and this becomes even more complicated. If Social Security is like the fixed income portion of an investor's portfolio (Jack Bogle said that) then trying to capture the stock market effect with that money increases the exposure to volatility. 

It's not for me to say what someone else should ultimately do but it's important to make all of these decisions based on an accurate framing. This point is similar to whether to take Social Security early or not, irrespective of investing it in the stock market. Take the time to understand the differences between taking it early and waiting (meaning how the numbers and math works) and then once the math is dialed in, applying that math to your particulars. 

Uninformed people are going to make poor decisions. JP below is destined to make a bad decision if he doesn't take a little time to understand the problem

Social security payments aren't going away. Occasionally people will comment about taking it before the cuts potentially take effect. Making the decision based on thinking you won't endure a benefit cut is a bad decision. There will not be a cliff like that. Maybe people above a certain age won't be impacted (this is my belief) or maybe not but taking it early will not by itself spare you from a benefit reduction. 

If your age 62 payout is $2000 and there is a 25% haircut you'll get $1500, if your age 70 number is $4000 and there is a cut, you will get $3000. When you start won't change that. 

If you want to take it 62 but plan to keep working, they withhold $1 for every $2 earned above $23,400 and they do that until you it your full retirement age (FRA). You get it back when you reach your FRA but in the interim the payout would be small. Maybe that is still worth it, not for me to say but the point of digging into these things before you pull trigger is something everyone should do. 

I'm seeing more acknowledgment of what I think is an important determinant which is waiting until 70 so that the lower earning spouse has a higher survivor benefit. That's not to say it resonates with too many people, it doesn't seem like it does but that's ok, we each have our own beliefs. Part of the pushback on this point seems to be a notion of winning versus losing against Social Security. Like my breakeven for waiting until 70 versus taking it at 62 is 79 and three months. If I die at 77, then I will have "lost" even though I would have provided for my wife. I might be in the minority on this but if I get what I want out of it while I am alive, I don't understand caring about after I'm dead. 

Whatever your beliefs about any and all aspects of retirement and Social Security, invest the time needed to make the right decisions for what it is you actually want. The whole system is overly complicated and it easy to get important details wrong. 

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.

Want To Make Your Great Grandkids Rich?

Some quick hits today. We're hosting a late Thanksgiving today for my wife's family. We've been hosting for quite a while. The food is great, there's football on and we collectively do a very good job of leaving our very disparate political opinions at the door. 

A few times we've looked at the Leuthold Core ETF (LCR) which is a multi asset fund that I would say is trying to be a single ticker portfolio idea and I think it does pretty well in that regard. It's actively managed and they really do manage it actively. Since its inception almost six years ago;

A one ticker portfolio is intriguing for the simplicity and there are quite a few of them where the long term result would be valid but every so often they will get pasted in some sort of "never happened before" market event.

BLNDX and BTAL are client and personal holdings. Portfolio 3 with BLNDX certainly is differentiated but would have been very difficult to hold in 2023 and this year as BLNDX just sort of lingered. Splitting the 50% sleeve equally between LCR and BLNDX helped slightly with 2023 and 2025 but still would have required patience.

Ben Carlson shared a different take on sequence of return risk from a mentor of his that I thought was very interesting. Read the post but the short version is set aside four years worth of expected portfolio income needs in cash or the like so you don't have to sell stocks after a large decline but if there is no large decline, leave the cash alone and do sell portfolio holdings so long as prices are high-ish. 

The FT had a fun one about Austrian century bonds. There are three issues that mature from 2117-2121, they were issued when global rates were very low so the prices have absolutely cratered. The FT notes that one of them is trading at €0.0265, two and half cents on the euro which might be the lowest price ever for a bond that is not in default. The issues are small but it might be an interesting idea to create wealth for your great grandkids. 

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.

Incendiary Capital Management

Defiance ETFs has issued derivative income funds using at least four different strategies. One that I had not heard of was Lightning Spread. There's one fund with the strategy currently, the Defiance NASDAQ 100 LightningSpread Income ETF (QLDY). ETF Hearsay Tweeted that Defiance has filed for 18 more targeting some individual stocks, a couple of cryptos and a few themes. 

The big idea is going long with deep in the money calls and then selling 0dte put spreads for income with the intention of paying two times per week. QLDY started trading in mid-September and has paid out just over $3 in distributions versus its starting point price at about $50, so 6% in two months which extrapolates to 36% per year. Grain of salt on the 36% of course. 

The boilerplate on the fund page is very clear about erosion and the other obstacles these types of funds have. Somewhere in the Tuttle universe are funds that sell put spreads, notably on Bitcoin. Part of the pitch is that by selling put spreads, the upside isn't being capped like with covered calls. That might be true under the hood but QLDY is going have a hard time overcoming the very high distribution rate whether it is anywhere close to 36% or not. Here's the price only for just the two months it's been out.

We built this sort of thing many times before.

The blend "yields" about 5% and as the QLDY page notes, there will be a lot of return of capital so it very well could be tax efficient. The 70% in QQQ can be rebalanced into QLDY as its price erodes which it will do. QQQ has compounded at just over 10% per year which I believe can more than offset QLDY's erosion based on how I weighted QLDY in the portfolios. The only realistic way QLDY goes to zero would be some sort of malfunction in the realm of being a black swan, QQQ isn't going zero. Like we've said before, the likeliest outcome is they go down a lot and then reverse split like we've seen others do. The more volatile the underlying the quicker it's likely to need to reverse split (think Strategy, Tesla and Bitcoin). While QQQ won't go to zero, who knows about things like Strategy?

As I was working on this post I saw a Tweet from YieldMax about their funds reverse splitting as apparently there are quite a few coming up. The comments are incendiary. People are pissed. I'm pretty sure this is all about incorrect expectations. When I first wrote about them three years ago, I did not realize they were going to "yield" 50% or more. I referred to harnessing volatility to get some basis points but it then became clear from YieldMax itself when the distributions started printing that they had no shot of keeping up with their respective reference securities. The boilerplate was clear and their social media efforts talked about reinvesting the dividends (DRIP). They don't talk about that much anymore. 

The objective with the above income strategy isn't about keeping up with QQQ or whatever the underlying is because it's not going to do that. Someone needs income and thinks this can work. My context is some sort of finite window like retired but waiting to take Social Security or waiting to take IRA distributions If there is growth that outpaces the erosion of the slice allocated to the crazy high yielder and the overall return stays ahead of inflation, then I'd say it's working. Maybe not optimal, depending on how it plays out, that's unknowable going in, but working.

I had an additional thought on how to frame ever owning a crazy high yielder in the context laid out in the above paragraph. What might last longer, leaving the account in cash and just withdrawing until it's gone or some sort of higher "yielding" blend? If you avoid crazy CEO risk and avoid crypto volatility, plenty of the crazy high yielders avoid those risks, then something like Portfolios 2 and 3 can sustain for that finite window we talked about. It won't keep up, but that's not the objective. Repeating for emphasis, keeping up is not the objective. The objective is sustaining for some finite period of time. 

If you're 30 or 40 and still accumulating, I don't know why you'd ever buy a crazy high yielder. 

I haven't done anything remotely close to this for any clients but it's interesting theoretically. I would take these posts as being about exploration and theory that maybe becomes useful a couple of iterations down the road. If anything like this could ever make sense, I suspect it would have to do with selling puts not selling calls. 

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.

$140,000 Poverty? The Internet Has Thoughts

The other day we took a look at an essay by Michael Green that sought to redefine how we think about poverty in the US. Green worked through a process that arrives at $140,000 being a more accurate or updated number that accounts for the way life has evolved with respect to skyrocketing of certain costs far in excess of the increase in reported price inflation and the addition of new expenses that didn't exist when the framework for poverty (as the government tries to calculate it) was derived.  

A lot of different outlets took up the essay and several other posts went after Green's premise pretty hard. Scott Winship wrote about "debunking the worst poverty analysis I've ever seen" and the National Review included the phrase 'good grief' in trying to pick apart the Green commentary.

The Green essay is an interesting read because it challenges conventional thinking and I think it is useful to try to look at things differently versus some sort of consensus. If you read my first post on it, hopefully it was clear I wasn't trying to agree or disagree with Green so much as explore what if he's right and if so, how to try to start solving it from the bottom up. Like most of us, I have no top down ideas for issues of this scope.

Both rebuttal articles really went after the minutia of the food computation part of the poverty formula which seems to really miss the point. Winship especially went on and on. I'm just going to assume the guy is orders of magnitude smarter than me but the amount of time he spent on why the food portion is "wrong" seems like a first level-thinking festival. I took Green's comments about the food to be background context or maybe a starting point for his thesis, not his thesis.

Some numbers from Copilot that I would say get into the conclusions Green is drawing. In 2005 child daycare cost $39 per week per child, today it is $343 per week per child which is very close to the current $32,000 that Green came up with for a family of four. And as Green noted, there was a point further back than 2005 where child daycare wasn't an common expense for young families. Health insurance was $2585 out of pocket in 2005 versus $6850 out of pocket now. The $6850 seems light to me but it assumes most of the cost is being covered by the employer. Inflation was 2.5% per year, cumulatively 64% versus 150% for the premiums.

Has home insurance gone up dramatically where you live? We very recently used to pay less than $1000/yr. This year we are paying $3000 after getting quoted $5400 a year ago before shopping around. We're grandfathered in for some period of time but the company charging us $3000 is writing new policies here for $5000-$10,000 and I've seen other people here get quoted $15,000. The risk we're being penalized for is wildland fires. In other places it is hurricanes or tornadoes. 

The average cost of a new car in 2005 was $28,000 versus $49,000 now which is slightly ahead of the rate of price inflation in that time. Yes the safety features are vastly improved but cost has gone up at a rate greater than the reported inflation rate by the government. Citing new car data is a little different because there is an element of discretion over what type of vehicle to drive. We have one pretty new care and one very old one. While most people probably don't drive 20 year old cars (our Tundra is a 2006), what about driving ten year old cars? No payments (hopefully) on those. 

All of these items and others I am probably overlooking reasonably change the math on poverty even if $140,000 is not the correct number. In the past, I've laid out one definition of success as being able to pay the bills and save for the future with a little left over to have some fun. 

A two-earner family of four making $100,000-$120,000 isn't paying a lot of federal income tax but they have to pay the employee half of Social Security tax which would be $7500-$9000. Assume a $1500 mortgage implying they bought a few years ago (the current average is $2300) and that's $18,000, health insurance at $6800, only one child needs day care for $17,000. Home insurance for $2000 (no expensive perils in this example). Can we assume one car payment? That could be $800 ($45,000 loan for five years) or $9600 for the year which gets us to almost $45,000 in expenses. 

We've taken up 37-45% of this couple's gross income with out buying any food, meeting any of the kids' needs, paying any monthly bills or saving for retirement. Poverty might not be the best adjective for this scenario but it's very difficult to see these folks getting ahead. How many places would $100,000 not be considered middle class? There are a few according to Copilot but not many. The DC area, Massachusetts, New Hampshire and a few others but it is unlikely that someone bought a house in any of those areas just a few years ago and only has a $1500 mortgage payment.

The various expenses that Green cited and that I tried to capture in my example are certainly not going to go down in price but will the rate of increases slow down? If yes, then maybe people can start to catch up if not then the problem that Green is actually talking about will only get worse. 

Another point that was either ignored or given very little attention in the rebuttals that Green really harped on was potentially being worse off financially moving up into the lower end of the middle class as eligibility for government assistance for housing, food and health insurance is lost. It's sort of like a Freakonomics sort of unintended consequence. I am not a fan of government support while at the same time realizing that people need it and I don't know how to reconcile those two opinions. 

A quick pivot to an essay by aging expert Ken Stern titled I'm 62, Stop Telling Me I'm Old. The essay covers ground we've looked at including people being old at some random age or being young at that same random age. I think habits are a huge driver here but Stern didn't go too far down that road. He did mention the importance of retaining the ability to walk fast and maintain grip strength. Odds are you know people your age who can no longer walk fast and cannot give a firm handshake. Do whatever you need to in order to maintain both.

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.

Managed Futures Face Ripper?

Don't look now but managed futures have been doing ok for the last six or seven months. Not a face ripper, but pretty good. There's plenty of dispersion in the universe of funds but far from terrible like the last couple of years.

In terms of setting expectations, I would not count on managed futures to keep up with equities in a strong market but they don't have to go down when stocks go up.

Maybe on the heels of 2022 or maybe because of this year's decent performance, JP Morgan has filed for a 100% equities/100% managed futures product that is similar to the Return Stacked US Stocks & Managed Futures ETF (RSST). In response to the filing, Corey Hoffstein Tweeted out a list of several funds that combine equities and managed futures using varying degrees of leverage including the Catalyst/Aspect Enhanced Multi Asset Fund (CASIX). This fund leverages up to 100% 60/40 and 100% managed futures. I heard about this fund when it listed but haven't circled back until now. 

CASIX owns 40% in AGG, it gets its equity via futures and ETFs and then runs a managed futures program on top of that. There is a growing number of funds that blend managed futures with other things, some seem to work pretty well while others do not.

Testfol.io had some sort of distortion for CASIX that I think made the data erroneous. Portfoliovisualizer seems to be correct. I tried to get all of the portfolios to 60% equities, Portfolio 1 has more managed futures and I added absolute return where it would fit. Only Portfolio 3 avoids AGG-like fixed income exposure. 

CASIX seemed to get hit especially hard in April but since May it has traded right inline with the other three portfolios. The trouble acutely visible in April, actually started long before then.

These multi-asset funds really are a mixed bag. Some of them do pretty well to be sure but CASIX seems to have really struggled, it must have been the managed futures program that held it back. There really is dispersion in the managed futures space and it's not that the same funds necessarily always do well while a different batch always do poorly so maybe it's just bad luck with CASIX.

I can't quite see how CASIX would be used in moderation. If you put 50% in CASIX, that gives a 30% weighting to equities and 50% in managed futures which is a lot. If you put 100% into CASIX, that's obviously a 100% allocation to managed futures. If you play around with VBAIX (half of CASIX is essentially VBAIX) versus a bunch of different managed futures funds you'll see varying degrees of negative correlations which will offset some portion of the VBAIX-like exposure in CASIX weighing down overall returns. If you believe in managed futures as a diversifier, I do, then I don't see how the blending math in CASIX can work. If you wanted 20% managed futures, I'm not sure it makes sense to allocate 20% CASIX to get it. 

But if lower volatility is the goal, the are plenty of better ways to do that including Portfolios 2 and 3 which I pretty much just pulled out of the air. 

A funny follow up to yesterday's post. I mentioned that there has essentially been no differentiation between the iShares US Quality ETF (QUAL) and the S&P 500 Index which is of course market cap weighted. I got an email from an ETF provider promoting their quality ETF that noted....the lack of differentiation between QUAL and the S&P 500 Index.

And a quick closeout with a stock I've held for clients since 2004, having a monster year in 2025, up about 40% versus 14% for the S&P 500.

It's a relatively low vol name that is considered a defensive stock in blue. It drifted for a couple of years before ripping this year. You can observe on the chart generally much smaller drawdowns, only 7% in 2008 and it was up in 2022. Once you accept that no stock or fund can always be best, there's been no reason to sell the name the whole time I've owned it. Sometimes it's outperformed, sometimes it's lagged and that recent run of underperformance appears to be it's worst multiyear period on a relative basis for as far back as testfol.io goes. I expect the same, going forward. I think the stock price will be fine and I have unyielding faith it will continue to do well as a defensive hold. 

Impatience is an emotion that leads to bad decisions. No one can make the best decision every time but recognizing impatience seems a little easier to overcome than a fear based reaction. If that's correct, don't be too quick to throw in the towel.

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.

Factoring Expectations

Whenever we've talked about factor funds like momentum, buybacks or maybe something dividend related I usually say something along the lines of if you're going to pick a factor, it is very important that you stick with it for a long time. The odds of getting into a factor that has done well of late only to see it then struggle are high in a Murphy's Law sort of way. But if it is a valid factor, it will have its time in the sun. If there is any value to factor investing it is that it works longer term. Anything else and the result is likely just continually chasing the factor that was hot last year. This behavior will lead to underperforming. 

In selecting a factor other than market cap weighting, I think there needs to be some reasonable basis to believe it will differentiate. For example, based on how it has performed since inception, I don't know why anyone would choose the iShares Quality Factor ETF (QUAL). It looks identical to the S&P 500.

It's not the quality factor itself, it's the fund. There are other quality factor funds that don't track as closely as QUAL. 

I had the above thought about factors as I read this from Jeff Ptak about the difference between fund performance and the return that investors actually get from those funds. The difference or "gap" is not about the funds, it's about investor behavior like buying JEPI after its great 2022 only to sell it at the end of 2023 because it lagged by a mile. You could apply that example to managed futures funds. Jeff looked at several alt categories and the gap varied depending on the fund but other than precious metals funds, investors generally underperformed the funds they held due to poor timing buying and selling. 

The problem isn't the funds, it's investor behavior that causes the issue. For this article, Jeff looked at funds that...

...utilize approaches that aren’t tethered to the broad stock and bond markets. These types of funds boast high diversification potential and thus, in theory, could nicely complement one’s primary stock and bond allocations. But because they’re idiosyncratic, it’s also possible they could push investors’ buttons, nullifying whatever diversification benefits they might confer.

Dialing it in a little more precisely, I think this is about having the wrong expectation. "High diversification potential" means won't look like the stock market. Client/personal holding BTAL is a great example. It is reliably, negatively correlated to the stock market. There's no other reason to buy it other than for that attribute. If it's doing well, chances are everything else is doing poorly. You want BTAL to do poorly but watching it do poorly can lead to giving up right before you might need it again. Managed futures is another example. It can do well when stocks are going up but it goes long stretches of languishing when stocks are going up. Watching managed futures do poorly can lead to giving up right before you might need it again, repeated for emphasis. 

Investors might think they want this;

But it means living through this;

The blue line portfolio will get the job done but it will differentiate which means it will occasionally lag behind a more traditional 60/40 which is a breeding ground for impatience and giving up at exactly the wrong time. 

One nit to pick from Jeff's article is that with the correct expectations, I don't think buying at the wrong time is that big of an issue. Whether you buy something like BTAL when it's up a lot like in April of this year or now when it is down, going forward it is very likely to continue to be negatively correlated to equities. Regardless of when it is bought, if the next 20% for the S&P 500 is up, then BTAL should be expected to drop and if the next 20% for the S&P 500 is down, then I would expect BTAL to go up. 

A week or two ago we looked at the latest autocallable ETF and the performance thus far of the first one. Both are from Calamos with symbols CAIQ and CAIE respectively. A commenter noted that because of what the index underlying CAIE actually tracks, that the fund got much closer to having the distribution suspended. Down 40% and the payouts stop until it gets back above the down 40 mark. I replied that I was probably being sloppy in saying the S&P 500 when the actual index isn't quite the S&P 500, it is the Merqube US Large-Cap Vol Advantage Autocallable Index which is close but not exact. 

Today I took a look and maybe I don't get it yet but I don't think it got anywhere near the point where distributions would be suspended.

Here's the link to the Merqube site if you want to dig in closer. 

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.

90% Are Below The Poverty Line?

Michael Green from Simplify wrote a brutal article dissecting the financial plight of the "middle class" that pretty much blows up the dollar assumptions underlying the poverty line and the disincentive to move up financially from poor to middle class. Really, the lower end of middle class. Brutal may not be a strong enough word.

I will try to do the article justice but need to acknowledge that I've been lucky but also somewhat insulated. I live semi-rurally and I work from home. 

Green starts with an early definition of the poverty line from 1963 that pegged three times food costs based on food taking up about 1/3 of the family budget back then. Housing and healthcare costs have grown at rates far exceeding inflation and because both partners need to work, the element of expensive child daycare now needs to be added to the mix. There are also "hedonic adjustments" with the example given of landlines versus smartphones. Green figures that a landline adjusted for inflation should cost $58 month but life now pretty much requires a smartphone that he pegs at $200/mo. Yes we benefit from the utility of smartphones but the choice to have them has been taken away, he argues. This is true for things like 2FA or how parents interact with their kids' schools. 

Below the poverty line, people get help for housing, food, healthcare and daycare. As income goes up, people lose eligibility for these programs so while their salary may have gone up, their out of pocket for these things also goes up and as Green lays out, people may actually be worse off by a small income bump that is more than offset by even larger increases in those expenses. 

We recently looked at the health insurance subsidy from healthcare.gov for 2026. At $84,000/yr of income, the 2026 subsidy is over $2000/month. At $85,000 of income, no subsidy (per the calculator I found online). That example is exactly the thing that Green is talking about. "Every dollar you earn climbing from $40,000 to $100,000 triggers benefit losses that exceed your income gains. You are literally poorer for working harder."

He works through a long process to determine that the real poverty line for a family of four is $140,000. Copilot says $155,000 and up is top 10% or earners and that 12-15% of households make $140,000 or more. 

This was Part 1 of a series. The tease for Part 2 "the wealth you’re counting on—the retirement accounts, the home equity, the 'nest egg' that’s supposed to make this all worthwhile—is just as fake as the poverty line." Oh boy. 

We'll see what he means by that but whatever we're each counting on, that's all we've got and we've got to make that work. Green didn't seem to offer a solution in Part 1, I am not being critical, I don't have a societal solution either. But many of us can work from the bottom up to prevent/solve our own problem. 

Our retirement account becomes an income stream. Social Security, even if it gets reduced, is an income stream. These income streams can be somewhat quantified. Are your income streams going to be enough? Home equity becomes optionality for downsizing financially which may not be as easy as it used to be but there are places where it is possible. Tucson housing is relatively inexpensive for example. 

We've been talking forever about adding additional income streams if the big two (portfolio and Social Security) aren't enough. A big reason I place so much importance on creating income streams is because we have control over how much effort we put into cultivating income streams. I've talked about a long runway to monetizing a hobby. Here's an article from the WSJ of someone who did exactly that. Now 70, he retired ten years ago from a tech job and his hobby (my word, not his) was adventure racing. The article is about how he created a paying job for himself as an adventure racing official (like a course martial). He also threw in that it is motivation for him to stay fit.

Regardless of where Green goes in Part 2 (and beyond?), we are living our lives here, now. It is in our interests and up to us to try to get the outcomes we want. 

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.

Dividend Mockery

The Barron's Streetwise column made fun of Nvidia (NVDA) for only paying a one cent quarterly dividend. With the stock at $180, four cents a year yields nothing. One of the comments mentioned that it probably pays the penny so it can be included in dividend indexes. I'm pretty sure I've seen it included in a couple of dividend funds. 

We've had a lot of fun looking at the various crazy high yielding, derivative income funds. As I look at the YieldMax website, it says the "yield" for the NVDA YieldMax ETF (NVDY) is 52%. The distribution rate for all of these can be a bit of a moving target but these fund have had very high distribution rates.

The distributions are so high that there's pretty much no way that these products can keep up with their respective reference securities. We've described the crazy high yielders as being products that sell the volatility of their reference securities, not proxies for their reference securities. More precisely, they combine the reference security plus the selling of volatility which gives a much different result than just holding onto the common. 

Before the crazy high yielders existed, there were people trying to sell 3% per month covered call programs and every one that I ever looked at ended in tears. In blogging about those, I would typically say to frame it in terms of trying to squeeze out a fifth dividend by selling call options so if you think about it, the goal would be an extra 1-2% per year as opposed to 30%.

Selling calls far out of the money on Nvidia might create a version of manufacturing a humble dividend that doesn't necessarily prevent any and all upcapture. With the common at $180, the 220 call, expiring on December 26 was bid at $0.85 on Friday. Simplistically extrapolating $0.85 for a call about 20% out of the money every month would be $10.20 annually which would be a 5.6% "yield." 

The strategy would result in assignment (having to sell the stock at the strike price) only after a 20% gain in a single month. Is that something that happens very often, 20% in a month sounds like a big move? According to Copilot, over the last 12 months, it would have happened three times which is surprising. Selling options 25% out of the money would have also resulted in being assigned in those same three months but the options premium would have been significantly less than $0.85 per month. 

Does this approach make any sense? With a little flexibility, maybe so. The three months where the stock moved up more than 20% were around the time of the tariff panic when the common fell by about 1/3. Looking at the 21st century, Copilot says there have been 35-40 individual months where the common stock gained 20% or more so a little more than 10% of the time. Maybe tweak the strategy if the market just cratered by skipping a month or going 30% out of the money. If the stock just fell 30% in a fast panic, there's a decent chance the premiums up and down the chain would be elevated. 

Pulling this off would take a lot of time and selectivity but I don't think it's obviously terrible on its face. There is the opportunity to get a lot of upcapture from the common as opposed to NVDY where that is not the case. But then the trade off is how much in actual dollars will be made versus the time spent? Would you be willing to turn managing your portfolio into a full time job for an extra $20,000/yr? How about a 20 hour/week job for that extra $20,000? The trade off might not be worth it and while 20 hours/week is probably an exaggeration relative to selling calls on one stock position, you can see where there is a pivot point where the extra work doesn't justify the extra return, assuming it's even successful which might be a big if.

And a quick hit on a different type of option strategy.

The dark green line is the Vanguard S&P 500 ETF (VOO). Of the other three, one is a fixed income fund with very little volatility and the other two use equity options that try to create a result that looks nothing like the equity market. 

The two options based funds fall in the realm of defined outcome/buffer and I am warming up to them. Once you embrace that they are not equity proxies and figure out what should they do it becomes easier to assess them accurately. Do you have a reasonable basis to believe they can do what they intend to do? In the period studied there was a short-ish bear market and a full on panic. There are some squiggles along the way but they've been doing what they say they're going to do. 

There are complexities here because at some point of a large decline, they will start to look like equities. Down 20% in a calendar quarter is a common point where the option strategy stops offering protection so if these interest you even a little bit, fine but they should not be more than a small slice and if the market comes close to breaching the buffer, it might make sense to sell and let it reset for the next period whether that is a quarter or some other time frame. 

The utility is fixed income-like without actually being fixed income which I think is pretty important when sized appropriately. 

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.

The Future You Might Want To Fix Typewriters

Here's a glass half empty opinion. 

Is AI a black swan in terms of threatening jobs? It's hard to say that exactly but before Chat GPT three years ago, how much thought did you give to AI? That people in their 50's and 60's end up having to retire sooner than they plan to is not new, we've been writing about it for ages and of course the problem goes back much further than that. AI is maybe better thought of as the latest threat. 

On the flip side, here is a fantastic read from the NY Times about a guy who metaphorically "was dying a slow, workingman’s death under fluorescent light" in his mid 50s. He was moved by an article about a 92 year old typewriter repairman to quit his job and go learn from the 92 year old, eventually carrying on the tradition after his older mentor could no longer do so. 

Can you think of a better example of not knowing what the future you might want to do than becoming a typewriter repairman at 55? 

The comments on the unusualwhales post mostly express anger and denial from Gen-Xers. A recurring thought from me on that front is how important it is to not hold on to negativity, anger and resentment. It's bad for our health and doesn't solve anything. 

A more constructive path is to invest your time trying to prevent or solve your own problem. I don't think we can rely on anyone (the government) to fix whatever we each think is wrong. Great if they do but don't rely on it happening. 

The WSJ profiled a woman who successfully invested her time figuring out how to make retiring in Portugal work. She moved their four years ago at 55 and the article recaps her experience. It read like 75% of has gone very well with 25% of challenges she needed to sort out. She's had to move twice for example and there is a long distance issue with her kids but it seems like she's quite happy there. 

A big one for her is that she only pays $1840/yr for health insurance. She has some sort of auto-immune disease but reported no issues getting access to doctors or medication. The point is not to retire to another country unless you want to but if you read the article, it is clear she put in a good amount of time trying to find the right solution for herself. 

For the record, Portugal is pretty awesome so hopefully it works out for her.

Because I think it is related, here's something from Eric Balchunas.

Can you beat the market is the wrong question. A better question is are you getting what you need from your portfolio? Related to getting what we need from our portfolios, Barron's had an article titled These ETFs Promise Safety. There's A Steep Cost.

The article focuses on the iShares US Minimum Volatility ETF (USMV) and the JP Morgan Equity Premium Income ETF (JEPI). Both have "underperformed the S&P 500 for five years." But then it notes "to be fair, the funds are working as advertised." If an investor has the correct expectation and then the fund delivers against that correct expectation then it's hard to complain. 

JEPI came out of the blocks with great returns a few years ago but the last three years have shown very little price appreciation. I'm giving it the benefit of the doubt for 2022 when the total return was relatively strong.

JEPI looks more like Global X' XYLD fund since 2023, pretty much no upcapture for anyone taking the distributions as income. JEPI has outperformed XYLD though.

USMV has obviously lagged far behind market cap weighting but it has been less volatile. A 10% CAGR provides a real return after inflation (4.39% for the period per testfol.io) and a 4% withdrawal rate. These numbers aren't making anyone rich but for someone who had accumulated what they need, that's a pretty good outcome. 

I threw in the 85% SPY/15% client/personal holding BTAL in there. The volatility and drawdown numbers are almost identical to USMV but the CAGR is about 400 basis points higher. One of the comments on the Barron's article noted "for a retiree that needs income or can't take on more risk/volatility, these funds may be much better." If someone can handle the volatility of USMV then I would argue the slight pick up in vol from the SPY/BTAL blend could also be tolerated. 

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.

Derivative Income Disaster

Today's ETF disaster comes from Coinbase. Disaster might be too strong of a word but below is the GraniteShares Coinbase Yield BOOST ETF (COYY) and the underlying common. 

It may not be as bad as it seems. It is a weekly pay and so far, all the distributions add up to $8.75 which is a little better than a 33% "yield" from the August price in about three months. It should be pointed out that the distributions have also been trending lower along with the share price. On a total return basis, COYY is only a couple of percentage points behind the common. 

This chart compares the Nvidia Yield BOOST and the common.

The common up huge for just a few months and the price only chart for NVYY is still down double digits. It's not that these are malfunctioning in any way, I don't think they are, the point is how difficult these probably are to hold. I do think that as part of some sort of draw down strategy, a small slice can be useful with the right expectation. These are going to erode down to almost zero and then reverse split. Growth from the part of the portfolio that is some sort of normal equity exposure should more than offset any erosion from a very small slice someone allocates to a crazy high yielder. That will probably not be compelling to too many investors though.

Calamos is coming out with another autocallable ETF that will have symbol CAIQ and be tied to the NASDAQ. Eric Balchunas Tweeted that it will target a distribution rate of 18%. 

These are billed as not having a problem with erosion like the crazy high yielders. Looking at the chart I would say erosion has in fact not been an issue for CAIE but even if you agree with me on that, I would not say the science is yet settled on this point. 

The product in the ETF wrapper is a democratization of a a structured product that is usually only available to institutions. CAIE's distributions would be disrupted by a 40% decline the the S&P 500. I couldn't find the similar pivot point for CAIQ but some sort of hideous decline in the NASDAQ and CAIQ's distributions would be suspended too. 

I don't think the risk is so much a decline of the magnitude that would cause distributions to suspended because of how rare they are. It is not clear to me whether the market price of the ETF might deviate from the NAV of the autocallables held by the funds if the underlying index fell 25%. Assuming no malfunction or something breaking, a 20% decline for the reference index doesn't impact the underlying holdings, the actual autocallables. 

A key point in that last paragraph; "assuming no malfunction or something breaking." Anything that yields 14% like CAIE or 18% like CAIQ in a 4% world carries risk. Maybe you can figure the risk out and then you can make an informed decision as to whether the compensation is adequate for the risk taken. It is difficult for me at this point to think the only risk that the index falls 40% in a short period of time and that's it. 

A small slice to an autocallable ETF wouldn't be ruinous if it malfunctioned. There are several unrelated niches that have very high yields and could be added to a diversified portfolio to meaningfully enhance the yield. A meltdown in the autocallable market would have nothing to do with catastrophe bonds or a bank loan fund. 

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.

The Catastrophic Side Of 2X ETFs

How it started.

How it's going.

This general sort of catastrophic anecdote has repeated over and over forever and will continue on into the future forever. 

The modern version of 60/40? Simplify has some thoughts. 

The link talks about actively managed bonds and suggests their AGGH to fill that role. AGGH owns a whole lot of AGG with a treasury options overlay to generate extra income, 7.52% versus 3.81% for AGG. 

The data goes back to AGGH's inception on Feb 15, 2022. Yes the total return has exceeded AGG cumulatively and in all four full and partial years but not reinvesting the distributions makes for a tough hold. The idea of a 60/20/10 actively managed fixed income/10 alternatives that go a little broader than just managed futures can probably be structured to be very robust but 20% AGG plus 10% AGGH is very close to 30% AGG and would not be robust in the face of another big move up in interest rates.

Portfolio 1 is their idea but using DBMF instead of CTA to go back just a little further in 2022. Portfolio 2 is their idea using funds we talk about here very regularly, FLOT and BKLN are client holdings.

The max drawdown for Portfolio 2 occurred in April of this year, it didn't really offer the protection it did in 2022 as you can see below.

Yesterday, I mentioned a Twitter thread from Meb Faber about single ticker portfolios. Left off of Meb's list was Cambria's own Trinity ETF (TRTY) that someone else mentioned in the comments. We've looked at this fund a couple of times and over its seven+ years, it has struggled cumulatively but it has had a couple of very strong years in there. Testfol.io has TRTY compounding at 4.94% versus 3.58% for price inflation. 

Here's the year by year.

In four years (2019, 2020, 2023, 2024) it got left way behind 60/40 as measured by VBAIX. 

TRTY allocates 35% to trend, 25% to equities, 25% to fixed income and 15% to alternatives. If you look at the current holdings, it's not so easy or obvious to see how some things are categorized. For example, it has a position in the Cambria Tactical Yield ETF (TYLD) which flips between T-bills and other fixed income market sectors based on how wide or narrow yield spreads are. Based on the chart, I believe it has been in T-bills only, since it started trading. You could argue, that's a form of trend as opposed to fixed income. What about an equity ETF that tracks the momentum factor? Arguably that is trend too. 

Looking back, it doesn't look so hot but if there's a reason to be optimistic, I could see where TRTY benefits from the evolution of ETFs, TRTY is a fund of funds. Cambria are smart guys and it seems like a reasonable probability that TRTY can enhance the long term result finding better ways to build out their allocation that includes 35% in trend and 15% in other alts.

The following is similar to what we've looked at before in trying to understand TRTY.

I certainly don't know what if any constraints Cambria has for what funds go into TRTY but as is frequently the case, the allocation strategy works, taking their idea for Portfolio 2, with funds we regularly use here and the result looks good. 

This is another example of taking bits of process from various sources to create your own process.

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.