This Is A Full Fledged Panic

Down 8 or 9% in two days is absolutely a panic. It might be justified or not, I don't know and I'm not trying to predict anything but this is a panicked reaction. If you want to call it a crash, go ahead although I don't know if that is the best word. My comment about panic is more about observing behavior that has repeated in cycle after cycle, it doesn't matter to me in real time whether the word is crash, correction or something else.

The selling today is far more of a washing out than yesterday. There were quite a few things on my screen that were up yesterday and that is not the case today. 

That doesn't mean it is over but the washout nature of today is better than if the market panicked higher at the open and then failed. A unambiguously down day coming after another unambiguously down day is a form of capitulation. Well known investor Mohamed El-Erian used the term "necessary and sufficient" on Bloomberg TV this morning. The signs of capitulation are necessary but what we've seen so far, may not be sufficient in terms of having any idea when this event will end. But it will end.

Wading through this sort of thing stinks but the observations in this writeup are based on how previous scary events have played out before. The details are always different. In 2008 people thought the global financial system was going to end. In 2020, people thought the world was going to end. The current event is so illogical that it might not make sense to try to articulate it yet.

Even though the details are different, the market manifestations are always the same. The market goes down a lot, scaring the hell out of people, then it stops going down maybe for no reason at all and then it starts to work its way back up, eventually making a new high. The only variable is how long that all takes.

The worst thing to do in a panic is to go along with that panic. We do not know the duration of this event but we do know the outcome. I've been writing pretty much this same email in event after event for 20 years and it always plays out the same way. It ends and then markets go back up. And I promise you that when this one ends, at some point later there will be another market event with different details but the same manifestations. 

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.

Tough But Fair

Markets got pasted today of course. I saw where this was the worst single day drop since one of the bad days during the 2020 Pandemic Crash. Ok, so a quick reminder that bad days have happened before, obvious statement. There have probably been more truly terrible market days than any of us could possible remember.

I have no idea when this will end, I don't understand the rationale of what is going on and I have no idea if this will be a serious one or be like the one last August which turned out to be nothing. 

People who are selling into this are too late in a way. Yahoo has the S&P 500 down 12% from mid-February high. If the bottom comes down 25% then selling today would look like a good trade but what I mean by too late is that the time to put on defense is when you don't obviously need it or maybe better put, before you need it. 

To the person who sold today, what if today was the bottom? It is far easier to endure these types of events when you don't have to be correct about anything in the middle of it. I sold one stock for clients a long the way closer to election because I was concerned that threatened tariffs would really hurt because they're heavy in Vietnam. The last increase of defense was in mid-February when I bought gold.

I've had positions in various types of alts with short duration fixed income as we talk about here almost every day. Most are doing what I would hope they'd do with managed futures being the biggest let down as we've been talking about for a while and today was a rough one too. The green one is a mutual fund and that is Wednesday's price, while the rest are all managed futures ETFs.

It is empowering to put something in place and see it mostly working, you're not going to bat 1.000 but if your strategy is mostly doing what you designed it to do then you need to mostly ride it out, not that there won't be any other action, it depends on how it plays out. The tough part, arguably tougher than now, will be when to start increasing long exposure. Maybe that means selling SH or maybe it means buying something or both. I've bought panic a few times before but not every time. 

To repeat from past posts though, the mindset should not be you are buying the bottom but that you are buying low and there is a difference. The S&P 500 was at 6000. If you can buy it at 4500, that is buying low, regardless of whether it goes to 4000 before going back up. 

Nate Geraci Tweeted out that "any sort of market, economic, or political “turmoil” offers a window into your financial advisor, portfolio manager, etc…" Tough but fair. If you are an advisor, what are you doing to try to make it better for clients. Hopefully what you are doing to make it better will be effective but at least you're trying. If you're not trying, then what are you even doing? Tough but fair?

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.

Endowments Are Struggling?

FT Alphaville wrote a doozy about The Death Of The Yale Model that included some harsh criticism about the way endowments and similar pools of capital use alternatives. Obviously they've evolved to go very heavy into illiquid alts and from the article, consultant Richard Ennis thinks it's a very bad idea. "Alts bring extraordinary costs but ordinary returns."

"A whopping 65 per cent of the average large US endowment fund is now invested in alternatives of some kind" which might seem like a lot but it's not like this just started last quarter. For the last few years, more than half has been common from my casual observation.

The article noted that "endowments lagged 70/30 indexed portfolio." If stocks are the thing that goes up the most, most of the time and you have more than half your portfolio, or endowment or whatever in something that goes up less than stocks, yeah, performance may not be what is hoped for. 

It wasn't clear to me where 70/30 came from as a benchmark but 80% S&P 500/20% client and personal holding BTAL looks pretty good against 70/30. In the backtest below, the VOO/BTAL combo outperformed 70/30 in eight out of 11 full and partial years.

This entire concept goes back to Jack Meyer who ran the Harvard Management Company and a little more famously to David Swensen at Yale but as the article points out, most investors have not been able to replicate Swensen’s more well known results.

Alts, here the context is always liquid alternatives, are precise tools as opposed to core allocations. Most of the alts we look at here are doing what I would hope they would do which is good although managed futures has struggled due to how choppy some of the bigger markets have been. 

Twenty years ago, yes it has been that long, I blogged about not going too heavy into REITs, MLPs or gold. Then a few years ago when managed futures became popular again, I had the same message, don't go too heavy, you never know when they won't "work." When the current event ends and we move on to the next adverse market event, maybe managed futures will be the star like in 2022 and things doing well now will struggle the way managed futures has been this year. Keep allocations small and diversify your diversifiers. 

Who knows if this will carry over into the regular session tomorrow but it's probably a good time to dust of an important concept. Every now and then the stock market goes down a lot (we are nowhere close to down a lot at this point) and scares the hell out of people. Then, it stops going down and works it's way back to make a new all time high. The only variable is how long that all takes. 

As far as what is going on now and appears to be moving markets, the logic is lost on me but at some point the event ends and the market goes back up.

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.

Why Use Two Funds When You Can Use 18 Instead?

In the last few days, I've had the opportunity to look at a couple of different model portfolios from different places and providers that I would describe as being overly complex. I'm not going to call them out publicly or anything but I think we can learn some things. 

As you can see, there are 18 ETFs in the model and it outperformed by a hair, nothing wrong with that, but it clearly looks identical to the basic two index fund portfolio I used. Managing and rebalancing an 18 fund portfolio for an extra $404.49 for a $10,000 starting point over 7 1/2 years may not be worth the effort. 

Having 50% in one broad equity index fund and 50% in an aggregate bond fund might be too simple but 18 funds to take the same path to the same result doesn't seem like a good tradeoff. A different path, like maybe a path with less volatility, to the same result would be a different story but that's not what's happening here obviously. 

The next one is a little more fun. 

It doesn't go back very far but here is the year by year.

Their allocation works, meaning how much they put into stocks, fixed income, commodities and alts. Even the unleveraged version has done well, about 4% better than VBAIX in just eight months with quite a bit less volatility. 

With their actual model, there seems like there's an element of being too clever by half. It's different than the first example where there are 18 funds to do the same job as two funds could do. The model only has eight funds, I built my versions with six funds which I don't think is a discernable difference but most of the funds they use very complex with a lot of different things going on. 

This is one reason to spend time looking at other people's, in this case, models. There are things to learn or reiterate. When possible, keep things simple. Not everything can be simple. Relative to plain vanilla equity and T-bills, managed futures are not simple. They can be understandable without being simple. 

This second model has way too much in alternatives for me. Yes it has worked, backtest with managed futures often look great, but the consequence of it going wrong would create a mess of anguish for clients, an unnecessary mess of anguish. In this context, we've talked a lot about my preference to hedge a lot of simplicity with a little complexity. If you read about this sort of portfolio construction you might read 60/20/20, stocks, fixed income and alts, or 50/30/20 and others. 

Is 20% in alts a little complexity? That's in the eye of the end user but it is very easy read about a lot of very smart and sophisticated strategies and sophisticated applications of those strategies and go overboard with allocations to these products. I would encourage learning a lot and doing a little. 

Stocks are going to be the thing that goes up the most, most of the time. Let them do the work, let limited exposure to alts smooth out the ride a little bit. 

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 Should Make An ETF Of That

There exists an S&P 500 Annual Dividend Futures Index. I am surprised there isn't an ETF to track it. It is what it sounds like, it tracks the dividends of the S&P 500 which is not to say it is a yielding instrument and I wouldn't expect any ETF tracking it to be a yielding instrument. Maybe. If it existed, it would hold a lot of T-bills and enough futures contracts to create the effect of owning the index so it might kick out some interest. 

In a way, it would be better than the actual dividend stream of the S&P 500 for tax reasons, so maybe that benefit would not relevant for IRA and other qualified accounts. But, could such an ETF be differentiated return stream to consider for investors interested in alternative strategies?

It took some doing to find a chart where it could be compared to the S&P 500, the blue line . It's pretty much a horizontal line that tilts upward. The S&P Global website says the three year annualized return is 11.20%. 

If you know of a website that can run correlation analyses between futures and mutual funds/ETFs please let me know but for now, AI thinks it is uncorrelated to various alternative strategies including macro and absolute return but it did not go too much deeper. I asked about the correlation to the S&P 500 and it thought the correlation would be high-ish between 0.50-0.80 and while the correlation might be that high, it seems to be far less sensitive to movements in the stock index. 

Unrelated, the Brookmont Catastrophic Bond ETF is going to start trading tomorrow under symbol ILS. The website is up and running here. Here's some info from the page.

I'm all in on the concept but I will be curious to see whether the space will work inside of an ETF. A fund representative was on ETFiQ on Monday and when asked about liquidity and market making operations, he talked about bank loans having a similar profile so they could be a way to help manage intraday creations and redemptions. We'll see, but if the ETF doesn't work, I do believe in mutual funds to access the space in a modest proportion. 

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.

Checking In On The United States Sovereign Wealth ETF

John Davi from Astoria Advisors hosts a weekly CIO call and I listened for the first time yesterday. John has some interesting views and things to say. One bit I've seen from him in a couple of different places is that right now he likes the Schwab US Dividend ETF (SCHD), presumably for broad-based exposure because his firm also offers and uses narrow based funds too. 

Is 2025 going to be a good year for SCHD as a broad based or core holding relative to other strategies or factors? There's no way to know of course but if 2025 turns out to be a bad year for the S&P 500 then there's a pretty good probability of SCHD doing better than market cap weighting (MCW) and maybe most of the other factors. 

For the last couple of years, I think a lot of people gravitated to just using market cap weighted in their accounts, that seems like it has been the conversation and for 2023 and 2024 the returns for MCW have been great. MCW also did great in 2021, 2020 and 2019. Occasionally of course, MCW gets pasted. 

The table is interesting because despite all the great years over the last ten, MCW was never the best performing factor. It certainly has been valid the whole time. It was no more valid in 2023 as it was in 2022. It just so happens that 2022 was a year that it went down a lot. The quality factor was the top performer in just one year. It was no more or less valid in the other nine years beside 2023 when it was the top performer. 

So maybe SCHD will be the one to own this year but if it is, then statistically, it is unlikely to be the one that does best next year. The ten year compounding for all five factors was greater than 10% which is enough to get it done. The next ten years may not compound at such a high rate of course but whatever the market gives, they'll all be somewhat close.

A point that I haven't made in a while that I think the table mostly confirms is that if you choose a factor, just stick with it no matter what. There is potential in a relatively bad year to get impatient, then chase the one that just did best but then last year's best becomes this year's worse and then it just repeats. Maybe the answer is having a couple of different factors. Sure, but whatever blend someone might choose will also have individual years where that combo will be wrong. 

A 50/50 blend of momentum and quality had a better ten year growth rate than every single factor listed except for market cap weighting but like market cap weighting, it was never the top performer in this study. To someone with the wrong mindset, that blend didn't work. Again, for the wrong mindset. 

A portfolio with an enormous weighting to one or two broad based factors is not really what I do but it clearly can work but just like any other strategy you can find, it won't always be optimal. 

To what extent are you using AI. My wife uses if for writing bios of dogs that go up on the website for the rescue she runs and occasionally for writing email replies. When I do a Google search, more often than not I am hoping it will default to Gemini for a more useful result. I have also used Grok and chatGPT to do more problem solving (may not be the best term) queries. I've never gotten a real result from something that is too vague like "what is the optimal portfolio allocation" but I asked Grok what is the optimal weighting for BTAL to reduce standard deviation of a portfolio by 25%?  The answer was lengthy. First it summarized what I was asking, then defined some terms, worked through three different formulas doing a trial and error to get to a 16% weight in BTAL being the answer, explaining why the wrong answers were wrong.

Then I asked What is the best alternative strategy available in a fund to pair with BTAL to reduce volatility? So not even asking for a specific fund, just a strategy and it spat out AQR Managed Futures (AQMIX) which we use all the time for blogging purposes. I looked at the sources that Grok was relying on and none of them were posts I wrote so it was just a coincidence I guess.

This isn't necessarily game changing but it does nudge up the productivity of the time I spend researching which is useful. 

I'll close out with an update on The United States Sovereign Wealth ETF that I made up and first wrote about on March 5. The prompt was a mention of the Cambria Global Asset Allocation ETF (GAA) somewhere and since the market has done so poorly, I though it would be worth revisiting.

The first chart goes back to the mid February high for the S&P 500. Both USSW (I'm giving my fake ETF a symbol that isn't already in use) and GAA have held up well. Flat with very little volatility is a good outcome for what has been a lousy tape. I am surprised how similar VBAIX and HFND were for the period.

To revisit a longer period, I removed HFND because its inception was late 2022. 

Speaking of AI, Grok seems to like the portfolio.

With SHRIX correctly framed as a catastrophe bond fund, this portfolio shines as a diversified, defensive play for turbulent times—think inflation spikes, market shocks, or disaster seasons. Its 10% SHRIX allocation adds high-yield, low-correlation income, but event risk looms. It’s light on growth, favoring stability and hedges over capital appreciation. If 2025 brings volatility or disasters, you’re well-positioned; if it’s a bull market, you might lag.

If any ETF providers are interested, please reach out via Twitter or Bluesky DMs. 

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.

Hockey, Leverage And More Leverage

When there is a fifth Saturday in a month, I have the day off from fire department stuff (unless there is a call for service) which means time for a lot of reading, March Madness but don't sleep on cawlidge hawkey (IYKYK), what think will be a very fun blog post and I already got some exercise in early today.

First up, Phillip Toews who runs an asset management shop and who wrote a book about about behavioral portfolio construction wrote about understanding market history and a section on how to build robust portfolio that reads like he could have outsourced that part of the article to me. It covers a lot of the same ground that we cover here. The link is a gift link, I need to get better about using gift links for these posts. 

He mentions risk management, which ok yes but he doesn't get that specific. Weaving in the historical part of the essay he points out that in addition to 2022, there have been several events before 1981 where the traditional 60/40 did very poorly, he seemed to be blaming the 40 allocated to bonds. But this quote is something I could have written, "Rather than attempt to predict which crisis might emerge, prudent investors will build portfolios resilient to the full range of historical market environments—not just those they have personally experienced."

We spend a lot of time here trying learn more about how to do exactly what Toews is talking about. That I talk so much about holding BTAL is about trying to reduce volatility which it has done looking backwards and I expect will be the case looking forward. So holding that ETF then is not about trying to predict anything, it's about the effect it can add to the portfolio. Other tools that help out in different ways that have been very long term holds, merger arb is an example, are also not predictive, they are about the effect they can add to the portfolio, repeated for emphasis. 

There is ongoing study though of prevailing risk factors which is something I learned from reading John Hussman many years ago, kind of like a diffusion index, at least I try to keep it that simple. I've mentioned adding ProShares Short S&P 500 (SH) around election time in previous posts. While I can't push back on someone thinking that was a prediction, that was not the mindset. I perceived risk of market volatility going up and right or wrong, I wanted to reduce portfolio volatility against that backdrop. It would have been of course better if the market had rocketed higher from the moment I bought it. You don't want your hedges to be your best performers. 

Ditto, adding gold in February. Risks of the bad kind of volatility seemed to have increased versus November and so I added gold as a hedge not knowing whether that would turn out to be a good entry point or not. Right here, still down a little for the S&P 500, the consequences of the risks I think are front and center could still play out with a far more serious decline. If the current event does resolve with a 25 or 30% decline then taking hedges off in order to increase net equity exposure starts to make more sense. If that is how this plays out, that won't be a prediction either. 

To dust off a phrase I used to use often, the risk of a large decline, is a lot less, after a large decline. Down 30% or whatever and selling SH or any of the others won't be about trying to time the bottom, it will be about buying (selling hedges is pretty much the same as buying) low, irrespective of whether it goes lower. Buying low isn't that difficult in terms of execution, not talking emotionally. "The S&P 500 is down 25%, I am going to buy some." That is buying low. That has nothing to do with bottom ticking which is very difficult, more a matter of luck for most of us. 

Cliff Asness posted a paper about hedging and capital efficient portfolio construction in support of a filing for four new AQR mutual funds that combine equities and different alternative strategy in a 100/100 fashion similar to PIMCO's StocksPLUS suite as well as the ReturnStacked product line which he mentions by name. The branding for the four funds will be Fusion. 

AQR uses leverage in many of its funds so that isn't new and I am aware of one other fund of theirs that uses leverage to own equities and just one other alternative strategy so maybe they are expanding into what I would say are some simpler funds versus the macro funds and other products that have quite a few strategies going on at once. What might be a little different is very specific volatility targeting of the alt sleeve of each fund. That's not something that most of us would be able to do on our own beyond owning more or less of the alt strategy but that isn't really the same thing as what AQR can do or what Cliff is writing about. 

There was a passing comment from Cliff about how to size these. The idea was similar to what ReturnStacked talks about in terms of adding enough alt exposure to matter without giving up equity exposure. "Now imagine you take 25% proportionally out of 60/40 and put it into the uncorrelated alternative." So I take that as a good number to study for this blog post.

Each of the three portfolios allocates 67% to WisdomTree US Core Efficient ETF (NTSX). A 67% weighting to that fund equals 100% in VBAIX so the NTSX allocation allows for adding, in this case, 25% into the alternatives labeled in the names of the portfolios with the final 8% just going to TFLO as a cash proxy.

In terms of crisis alpha in rough times, convertible arb didn't really help in 2022 but managed futures and macro did. In 2018 you can see that two of them helped with just a few basis points. A year like 2018 constitutes down a little and is probably less important than protecting against down a lot like in 2022. I chose the three alts randomly, only two are part of the AQR filing. In the up years, all three were right in line with VBAIX. To use NTSX though, you have to want aggregate like bond exposure which of course I do not.

I took a different run at this using the same alts without leverage other than any leverage inside any of the alternative funds.

So with these, there is 60% in the S&P 500, the same 25% in the corresponding alt strategies, the same 8% in TFLO and I added 7% in gold. The CAGRs are slightly higher, the standard deviations are slightly lower, the Sharpe Ratios are a little higher, there was somewhat more protection in 2022 but not really for 2018. 

Putting 25% into the AQR Fusion suite to leverage up could very well workout much better than the first backtest in this post, but between the two observations today, the thing that mattered more was the top down decision to avoid bonds with duration. Getting back to predictions, I have no idea whether bonds with duration will go up or down but it is a good bet that they will remain volatile. 

The alts for the study done today were used in a very limited fashion, dumping 25% into just one which is not something I would do. Part of what I think Toews is talking about is trying to look around a corner at what could go wrong, not necessarily why it would go wrong. In the current event, managed futures are not really helping while plenty of other alts are. Maybe, convertible arb didn't work in 2022 but will be the star of the next bear market, there's no way to know which is a good reminder to diversify your diversifiers. 

Finally, Barron's had a writeup that was a little favorable towards the latest Microstrategy Preferred Stock (STRF). Barron's was not all in but they didn't seem concerned that there isn't really much of a cashflow to pay the 10% (based on the par value) yield. The other preferred which has symbol STRK doesn't pay out but it is convertible at about double the current price of the common. 

The chart is a little tough to read but it goes back just a few days to when STRF started trading. The two that are down a lot are the common stock and the YieldMax equivalent, we are talking about yield after all. You might expect that the preferred issue with the yield would be less sensitive to movement in the common stock but if Bitcoin pukes down another $20,000 then that makes it harder to pay the distribution because there will be less Bitcoin yield which is a term that I believe Michael Saylor made up. With a further nod to Toews, without trying to predict anything, what happens if Bitcoin drops to $40,000?

Giving the benefit of the doubt that Microstrategy isn't an actual fraudulent endeavor, if nothing else, there is visibility for plenty of eye-watering volatility. There are plenty of sources of high yields with nowhere near the potential volatility of these preferred stocks or anywhere near the CEO risk. I will circle back when these have some more history under their belts to see whether they've been as volatile as I think they'll be. 

It looks like STRK started trading on March 3 (Yahoo Finance) and so far it is down 9%. Unless you worship at the altar of Saylor, I don't know why someone would want these. 

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 Different Kind Of Barbell

ETF.com asked a provocative question. Are Financial Advisors Lazy To Recommend Active ETFs? It was a thin article that came down to advisors knowing their limitations which is of course useful for anyone in any of their endeavors. 

Also noted was what the world looked like 30 years ago when the author worked as an advisor. There were just a couple of ETFs, some index mutual funds but the landscape was dominated by old style active mutual funds. 

There has now been a proliferation of actively managed ETFs but not all of them are active in the traditional sense of stock picking and trying to outperform markets. The YieldMax ETFs are considered actively managed but the sought after outcome is to track a stock or narrow basket to generate a very high income. The Nvidia YieldMax ETF is going to track the underlying to a great extent. If the common goes down 20%, the corresponding YieldMax fund won't somehow magically have its price go up 10%.

Instead of active or passive, I long focused on the intended outcome of a fund/strategy and whether it meets that expectation. Here's a good example with an old, old name, the Fidelity Magellan Fund (FGMAX). It is a straightforward tries to beat the market stock picking fund which it usually does to the upside. The tradeoff is that it usually goes down more when the market goes down including so far in 2025.

This observation is not infallible, nothing is, but it's pretty reliable. You can play around with it yourself on testfol.io. You'd expect Magellan to be more volatile than just an index fund, which it is even if it's not like trying to hold onto a fire cracker. In terms of portfolio construction, buying something like Magellan adds volatility versus balancing that against some other holding that would typically lower volatility like maybe something from the utilities sector or consumer staples. 

Pivot to an article in Barron's about hybrid target date funds offered in 401k plans where upon retirement (minimum age might be 65), some or all of the balance can be converted into an annuity. The usual caveat, I am not an annuity salesman, I've never sold an annuity and the negatives to me outweigh the positives but I can see where the income stream would be reassuring. 

I would argue there are far fewer drawbacks to building something akin to a normal portfolio, probably not 60/40 where the 40 is in bonds with duration as we say repeatedly here but you get the idea. 

I continue to be intrigued by the idea of barbelling income where a big chunk of the portfolio's income comes out of a small portion of the portfolio. Things like the YieldMax funds strike me as being capable of malfunctioning so I am not trying to sugarcoat that risk. As Dave Nadig will tell you, they return a lot of capital as part of the distributions. I still don't know why that is a bad thing. If, in a made up example, a $1million portfolio is taking $45,000 out as income and $10,000 of it comes from some a small allocation to a crazy high yielder as non-taxable, again I don't see that as bad. 

Here's a slightly different version of how we've talked about this idea before.

I don't think we've allocated that much to PUTW in previous posts but despite the risk of put selling when the market goes down, not sugarcoating that risk either, we can see the extent to which it's kind of tracked the S&P with a yield that has been rising in recent years.

Something that can compound positively despite paying out a large distribution is worthy of consideration in this conversation. PUTW has gone down less than the market in some events but has fared worse in other events including YTD 2025. The odds of a malfunction in PUTW are far less than I believe with the YieldMax funds. I used the Apple YieldMax fund for the backtest because it it the oldest one that doesn't have serious risk beyond normal risks associated with an individual stock. 

I think the Tesla YieldMax fund has serious CEO risk beyond the company executing for example. Companies like Amazon, Meta, Google or Netflix to name a few are not obvious candidates for a catastrophic outcome. They might do well or do poorly and based on history, if the S&P 500 goes down 40% I would expect those names to go down more but they aren't going to disappear due to their own bad decisions or obsolescence in the next few years. May it will be different 15 or 20 years, who knows?

The performance is adequate, the test is short because of APLY but the yield is pretty interesting.

If dividends are not reinvested, the Barbell Yield compounded at 8.07%. Barbell Yield has enough in equities that it will compound positively if the broad market is compounding positively. Client/personal holding BTAL helps smooth out the ride a little as might SCHD. The income funds are clearly not riskless but they are not volatile and they are short dated. You could split those up further if you wanted to derisk the income sleeve more than that. 

APLY, or any other YieldMax fund should certainly be expected to erode considerably but the other 95% of the portfolio is likely to compound at a higher rate than the 5% to APLY will erode. If APLY malfunctions catastrophically, the hit should be manageable for the very small starting weight. And of course, 5% in APLY could be 1% in five different YieldMax funds to mitigate idiosyncratic risk. 

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.

Digging Into Closed End Funds

Boaz Weinstein from Saba Capital sat for an interview at a conference with Barry Ritholtz posted at his site that is very well worth the time. Closed end funds have intrigued me going back to the 80's. The short version is that the shares trade throughout the day but unlike ETFs the share count is fixed which usually results in the market price deviating from the net asset value (NAV). For the last few years, probably longer, most CEFs have been trading at a discount to their respective NAVs. I can remember stretches a long time ago where it seemed most of them traded above their respective NAVs.

Gaming the discount or premium to NAV is a complicating factor to using CEFs. Another complicating factor is that many of the funds use leverage which increases the yield on them but can result in larger drawdowns too. As we've looked at before, many funds have the tendency to erode on a price only basis as the first chart shows. 

Both PPT and MIN have been around a very long time. Working the yield back in, both funds have compounded in the mid-two's. 

The CEF part of Saba's business focuses on playing an activist role in working with or sometimes against, the fund managers to take actions to close the discount. To this end, Weinstein and Ritholtz talked about activist engagement with closed end funds hopefully resulting in equity like returns with bond like volatility. For example, if a CEF is trading at a 15% discount to NAV and an activist can actually get the market price back in line with the NAV over the course of two years or less, that is where the equity like returns come from. And while waiting for that to happen, the fund trades with bond-like volatility. 

Ok, yes...but. There have been plenty of instances where markets caught a cold and CEFs caught flesh eating disease. There was carnage in 1994 and 1999, June/July 2003 left a mark, PPT fell 31% in 2008 and MIN fell 15% in 2022. 

CEFS is an ETF of CEFs that Saba manages. BRW used to be a Voya fund, there was some sort of litigation, the net of which is that Saba now manages the fund. In the interview, Weinstein talked about steps taken to get the market price of BRW up closer to NAV, it currently shows trading at a 5.83% discount on the fund's page. Both CEFS and BRW have done well. The equity like return is a defendable argument, the bond like volatility less so but that's ok. 

BRW may not be what you think it would be. At least it's not what I was expecting under the hood.

The asset allocation, sort of.

Closed End Funds (Globally)	22.66%
Corporate Bonds	18.56%
Private Fund	13.96%
Senior Loans	13.70%
Common Stock	12.52%
Investment Trusts	8.79%
Unit Trust	3.58%
Simple Agreement for Future Equity Contracts	2.09%
Preferred Stock	1.14%
Mortgage-Backed Securities	1.10%
Money Market Funds	0.94%
Options	0.90%
Futures Contracts	0.55%
Sovereign Debt Obligations	0.54%
Special Purpose Acquisition Companies	0.53%
Credit Default Swap	0.44%
Credit Default Swaptions	0.24%
Investment In Affiliated Fund	0.23%
Forward Foreign Curreny Contracts	0.14%
Warrants	0.08%
Rights	0.01%
Participation Agreement	0.00%
Preferred Stock	-0.05%
Total Return Swap	-0.22%
TBA MBS Forward Contracts	-1.07%
Corporate Bonds	-1.46%
Exchange Traded Funds	-3.06%
Common Stock	-13.11%
Sovereign Debt Obligations	-53.81%
Cash, Cash Equivalents, & Other Net Assets	70.08%

There are a lot of holdings that include individual issues, mutual funds, closed end funds, ETFs and currencies. It seems global macro-ish to me but I don't know if Weinstein would describe it that way. 

Yes, the holding and composition data is stale. That is common with mutual funds and CEFs. The fund charges 98 basis points per cefa.com but a Google search gives a lower number and I didn't see it on the BRW page. It yields about 13%, $0.085 per month which implies that at least some of it might be ROC which I don't think is a bad thing in terms of taxes. For what it's worth, BRW was down 4.64% in 2022.

When we look at trying to put together advanced asset allocation ideas, one strategy that I typically avoid is relative value. I'm not really sure how we could access it in a retail-accessible fund. Weinstein described closed end fund activism as a form of relative value which is part of the story with CEFS. He would know better than me but I'm not sure that would present itself as being a differentiated return stream as Portfoliovisualizer has CEFS having a 0.85 correlation to the S&P 500.

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 Doozy Of A Quote

I'll cut to the chase and then work from there. “You’re not a fiduciary if you don’t consider alts.” That came from a Bloomberg article about private equity firms trying to offer their funds in 401k plans for participants to invest. 

This coming to pass would of course benefit all of the operating companies like Blackstone (BX), Apollo (APO), Carlyle Group (CG) and others but maybe not KKR as we looked at yesterday. Some sort of allocation to private equity inside of 401k plans would be a huge windfall for these companies. Actually allocating though as an end user, managing your own 401k or maybe even getting help with that, I don't think it is a great idea. The expense, the illiquidity, the manner in which these things tend to not be marked to market, the complexity, the gating of redemptions, man I wouldn't do it. If you gotta get in on the action, I think it makes more sense to benefit from the fees with the stock of one of the operating companies than to be the one paying the fees in your 401k or anywhere else. 

We'll get to that doozy of a quote in a sec. Morningstar had an article about preretirees derisking their portfolios with bonds. They cited some historical data to make the case without differentiating maturities. Anyone doing any sort of modeling with bonds using historical data is relying on some or all of a 40 year rally on bonds that mathematically can't be repeated until intermediate term yields triple from here but even then it is unlikely the ten year ever gets to 58 basis points again. We've looked extensively at the volatility and the change in correlation behavior of bonds that has occurred in the last three and half years. If you still want bonds, ok but relying on backward looking analysis like what is in the Morningstar piece and plenty of other articles is a bad idea. 

So, can you call yourself a fiduciary if you don't consider alts? That is an interesting question that has a bro, do you even lift feel to it and I don't know the answer. Alts cover a lot of ground including private equity and private credit. Both have become hot talking points as it feels like we're on the verge of much broader access.

We spend a lot of time looking at so called liquid alts here and I use quite a few in my practice, combined with more exposure to very plain vanilla exposures. We've taken to referring to this sort of portfolio construction as a lot of simplicity hedged with a little complexity. For as much as I write about liquid alts (I don't really use that term very often), if you read this site even occasionally then you must have at least a little curiosity, you are considering alts then whether you are your own fiduciary or an advisor of some sort.

If you buy into the idea that longer term bonds don't protect portfolios the way they used to, then that sort of forces you to consider alts, liquid alts anyway. The observation made at the first iteration of my blog 20 years ago that funds and ETFs (the term liquid alts wasn't common or maybe did not exist yet) would become increasingly sophisticated to offer retail sized accounts the opportunity for more robust portfolios has of course come true and there will continue be further sophistication in the future maybe to the point where the word alts will no longer be used. 

Closing out, a final note on the Innovator Defined Wealth Shield ETF (BALT). I got a marketing email from them and it said the "estimated cap range" for the quarter starting on Tuesday will be 1.97%-3.01%. This helps with a point made yesterday that in the right, albeit unlikely, circumstance of a massive decline in the S&P 500 that far exceeds the buffer (decline protected against) inside of a calendar quarter could take years to claw back to even. If anyone actually wants to buy BALT as a fixed income proxy, ok but I would suggest not holding on if it looks like a 20% decline inside of a quarter is going to happen. 

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.

Leverage & Income?

Here's a useful chart from Jake at Econompic on Twitter.

He said that in real terms, investors may never get back to even. This sort of thing is exactly what I blogged about so much, albeit elsewhere, that I wanted to avoid. Going forward, who knows what interest rates further out the curve will do. Right here right now, there's no visibility for 7% on the ten year or further out but if it happens, the price drop would be almost 30%. Yes, an individual bond would return to par....but that really is a grasp to rationalize a bad outcome. For a bond fund, there of course is no par value to return to. 

At what yield would you be willing to go on what could be a wild ride for maybe eight and half years. At some short maturity, the volatility would go away which is why I said eight and a half. In previous posts, I've talked about 7% as being close to a tipping point that would get me interested realizing that may never come. I do know that 5% wouldn't be enough though. 

Bloomberg reported that KKR is going to change some or most or maybe even all of its strategy from an operating company managing various funds for investors to becoming a "mini-Berkshire Hathaway." Flipping the entire company that way seems unlikely but I don't know. The reason to mention this is we use KKR for blogging purposes as a way not to access private equity but more like how to benefit from the fees. Again, it's not clear to what extent the company is going to change but it's worth following given how we've talked about the company before although we've used Blackstone (BX) far more often in this context. 

Roundhill came out with a few ETFs that combine a little leverage and derivative income. We can look at the AAPL WeeklyPay ETF (AAPW) to get a sense of the idea. The leverage is 1.2x resetting once a week and I found buried deep in the prospectus it will pay weekly <joke>. The holdings list as having 19% in Apple common stock and 99% in a swap position the presumably to get the leveraged equity exposure and the derivative income. For all the fun we have playing with leveraged funds and derivative income funds, of course we're interested in what this will be.

In looking at leveraged funds other than 2x long S&P 500, it is difficult to fund too many that "work" for any longer period of time. Maybe there can be less variability with such a modest leverage amount. The idea of 1.2x would be interesting too in some sort of modest capital efficiency application if funds that just do that every hit the market and gain any traction. 

The chart compares AAPW to the underlying and the YieldMax equivalent which is APLY. The chart is a little distorted, AAPW has already paid four dividends totaling $0.79 which adds about 1.5% back in to the total return which gets it pretty close to 1.2x the decline in the common. All shows for such a short period is not a horrendous first impression. 

I wanted to add an important follow up point to the discussion the other day about the Innovator Defined Wealth Shield ETF (BALT). We dug in a little on whether it could function as a fixed income substitute trying to make it crystal clear it is not an equity proxy. BALT spares holders the first 20% down in the S&P 500 and then will go down with the index from there. From the literature, if the S&P 500 dropped 100%, BALT would drop 80%. 

I made a comment that if it got down 18 or 19%, maybe just sell it if there was a concern that the index would breach the 20% threshold. Note that the 20% resets quarterly. If on the last day of the quarter, the S&P was sitting on a 19% decline and assuming BALT was working, it would be essentially flat. The next day the fund would have a new buffer 20% down from there. The S&P 500 doesn't fall 20% in a quarter very often but obviously it can happen, it happened in Q1 of 2020 and the 3rd quarter of 2008 and I imagine there were others. 

If someone is actually going to use this, it is crucial they sell before the 20% threshold is hit. The current cap, the most it can go up, for the quarter expiring on Monday is 2.41%. In what is admittedly an extreme long shot outcome, if the S&P fell 40% inside one calendar quarter, BALT would be protected for the first 20%, then ride down the next 20%, the quarter ends with BALT down 20%, the new quarter starts and BALT is capped and would miss most of any fast snapback and in the "wrong" scenario could take four years to get back to even if successive cap periods are in the mid-twos. 

If that isn't written clearly, just sell if it's down close to 20% inside of one quarter. It wouldn't be a panic sale because assuming no malfunction, the fund wouldn't be down. You'd be mitigating a possible, even if unlikely, structural risk to the product. 

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 Use Case For The Unusable?

A frequent point we make is about certain fixed income exposures having equity-like volatility and comparing what they look like versus alternatives that behave the way investors hope fixed income will behave. 

Based on the opening paragraph, you can probably guess which line tracks the traditional fixed income bond fund. Two of the other four lines are alternative fixed income products and the other two are not fixed income strategies but they behave in the way I believe investors hope fixed income will. 

The primary attribute that we're seeking a reliable offset to equity volatility. A couple of the charted funds provide pretty good yield and the other two have no yield. While the one traditional bond ETF was down 25% in 2022, the other four ranged from a decline of 2.51% to a gain of 2.54%. Tell me if I am wrong, but I can't imagine the typical investor would want a fixed income exposure with that kind of volatility, prone to that type of decline. 

The four funds all do very different things and while the correlations among the group aren't that low, there is differentiation of risk factors despite how similar the charts are for the four. 

The prompt for this post was a writeup at AQR bagging on defined outcome/buffer funds. One of the four charted above is a defined outcome fund. The whole defined outcome/buffer space has evolved in many directions offering a lot of different strategies, really a lot and it is not a rabbit hole I intend to go down. The TLDR for the AQR piece is it makes more sense to just lower your equity percentage, putting the excess into T-bills, than to use the typical defined outcome/buffer fund and I agree. The earliest versions of these limit the upside with unlimited downside minus the first X%. Again, limited upside, unlimited downside. It doesn't make sense to me.

Corey Hoffstein Tweeted out a link to the piece too and is negative on these. A follower of his asked about using them as fixed income substitutes. Some of the variations are marketed this way and Corey replied that he's never seen anyone do this. So from here, forget about them as equity holdings, can any of them behave like fixed income? And if they can, should anyone use them in that manner?

One of the bigger funds in the space is the Innovator Defined Wealth Shield (BALT) not to be confused with BTAL which is a client and personal holding that I write about all the time. Where some of the defined outcome/buffer ETFs have a maturity date, BALT is perpetual, it resets every 90 days. BALT is one of the four funds charted in the above backtest. It appears to quack like a bond substitute. For the current period which ends on 3/31, the upside looks like it was capped (limited) at 2.41%. The downside, the buffer, protected the first 20% down  after which shareholders would ride it all the way down for the remainder of the quarter. Dropping more than 20% in a quarter doesn't happen often but it has happened.

Here's the current dip.

As far as the chart showing a 1.6% decline for BALT, that is from the start of the dip, not the three month period. YTD it shows down 0.2%, so it went up a little for the first six or seven weeks of the year, down very little from the peak and the YTD number could be as simple as the last trade hitting the bid. 

Is anyone using BALT as a fixed income substitute? I don't know but the AUM is over $1 billion so it is being used for something. BALT has never paid out a distribution so it is tax efficient. It's not going to go up if stocks drop, if it will help at all, it would be as a horizontal line that tilts upward. 

The constituency of the fund is that it holds a four legged option combo. It is long and short both calls and puts but in a way that is different than a box spread. If in some random future quarter, two months in or whatever, the S&P 500 was down 18 or 19%, a holder could just sell it if they were concerned that event was going to spill into a 30 or 40% decline. Beyond a 20% decline for the index, it should be expected to drop inline with the market. Again, I mean after that first 20%. If a 40% decline were very slow though, over the course of the year and assuming no malfunction, it could ride that out with no meaningful loss beyond a few basis points. 

As I sit here now, I don't ever see using this for clients but where I did nothing before but crap all over them, there is a use case once you understand the flaw, declines larger than 20% in a short period, and understanding this shouldn't be expected to look like equities when stocks go up by a decent amount, not even a lot, but a decent amount. 

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.