A Portfolio No One Would Want Part 2

In the middle of the trading day on Thursday, Tidal ETFs hosted a spaces event on Twitter to shine a light on its FIRE ETFs which are funds of mostly Tidal funds. They had the manager of the Folio Beyond Alternative Income & Interest Rate Hedge ETF (RISR) and the Academy Veteran Impact ETF (VETZ). Those two funds are different sides of the same fixed income coin which we will get to in a minute. 

During the Spaces, Mike Venuto who is top guy at Tidal, said "buying a passive bond index fund makes no sense." Stocks are a different story he said but the basic idea with the generic bond indexes if you didn't already know is that they are debt weighted like the more debt a company issues, the larger weighting it will have in the index which may not be a great idea. 

I've never owned something like AGG or BND for clients (or personally). Recently, I started subadvising for a couple of other advisors and cleared out a lot (in percentage terms) of BND.

There are two FIRE Funds, one is Wealth Builder (FIRS) and the other is Income Target (FIRI). I own a few shares of FIRS as I have disclosed previously. I've known Mike for about 12 years, he is a sharp guy, he is where I got BTAL from in 2018 when he was on the first episode of ETF IQ. 

There are a couple of very sophisticated things going on under the hoods of FIRS and FIRI which is part of the reason why I own FIRS. 

The Spaces started with an intro to what RISR does which is that it owns IOs which are a mortgage based product. IO stands for interest only, they are the income stream off of mortgage backed securities. Mortgage securities have some different fundamentals because prepayment risk goes down when rates go up. And the way it works out, the IOs have negative duration so they function as a hedge against rising rates. Since the start 2022, RISR is up a lot because rates have mostly gone much higher in that period. I would imagine that RISR would go down a lot if rates fell a lot. 

I don't know whether rates will go down a lot but as we've said countless times, I don't want clients' portfolios vulnerable to my being correct about interest rates. 

When they were talking about RISR, I immediately ran the above backtest and then asked about it on the call. The backtest looks a lot like client holding BOXX but the CAGR is higher. I asked if that is an expected result or if it was a fluke...it could be a fluke after all. 

RISR manager Yung Lim (coincidentally, I worked with him on a different fund when I was with AdvisorShares) replied that pairing IOs with regular MBS was a common institutional trade. Yahoo Finance shows RISR yielding 5.61% and MBB yielding 3.98% which averages out at 4.795% plus a little price appreciation with less than half the volatility of AGG. The RISR/MBB blend strips out the volatility to become a horizontal line that tilts up to the right. 

I would not pair RISR with something like floating rate or catastrophe bonds. Those two niches don't really take interest rate risk making RISR the wrong hedge. RISR could work in offsetting treasury duration but that is not truly apples to apples. 

It backtests well with TLT but there are some volatility spasms along the way pairing RISR with TLT.

Mike also talked about the YieldMax funds, he is a fan and said he owns YMAX which is a fund of YieldMax funds. It owns 29 different YieldMax funds with the weightings being between 3.5%-4% each for the most part so no large bets on any one stock and not too much exposure to crazy CEO risk. FIRI uses four different YieldMax funds, totaling 13.5% of the fund to capture a...wait for it..."barbell" yield effect like we talk about here. 

I built the above to not reinvest dividends but it does rebalance every six months. The 45/45/10 yielded 8.1% versus 3.66% for AGG but did so with less volatility for 11 months of 2024. This year so far, 45/45/10 has yielded 2.3% through April 30 versus 96 basis points for AGG, but AGG is having a better year so far for total return.

The YieldMax funds have crazy high yields and the fund NAVs can't keep up so the expectation should be a lot of price erosion and then eventually the fund will reverse split. The Tesla YieldMax did a reverse split quite a few months ago and I would guess most of the others will too. When we talk about the YieldMax funds, we usually talk about reinvesting most of the distribution but the context for this portfolio is taking the distributions out but rebalancing frequently. 

Actually splitting 90% of a fixed income portfolio the way we looked at above would be overly reliant on things working the way they are supposed to which could come around and bite. It could be an effect to incorporate into a portfolio which is what FIRI does, it offsets RISR against VETZ which is a niche mortgage fund, both ETFs are weighted around 9% each in FIRI. 

Now, trying to incorporate the RISR/MBB trade with a little YMAX in more realistic weightings with what we usually do with fixed income. The following portfolio is backtested for total return and then price only, compared to AGG.

MERIX is a client and personal holding.

A lot of the decline this year in the price only version came from YMAX which price only, fell by almost 1/3. The overall mix is pretty docile but it might be difficult to watch something like YMAX drop by that much in such a short time. 

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.