Lazy Advisors?

Some quick hits today.

A comment on an article at Yahoo about retirement mistakes said the following;

The thing to really do is 5 years before you are required to take the money you have in an IRA is Transfer all the money in your IRA into your Roth account.

Hopefully, everyone here realizes this would be a woefully tax-inefficient way to do a conversion for just about every circumstance. If someone has $500,000 in their rollover IRA and they convert it all at once and assuming no other income, the effective tax rate would be about 28% or $140,000. Converting $100,000/yr five times and assuming no other income would have an effective tax rate of about 8% or $8000/yr for a total of $40,000, $100,000 less in taxes. 

I doubt anyone's situation has that few moving parts but you get the idea and do you're own diligence on effective tax rates. There are a lot of ways to get these this wrong. Slow down, do some research and number crunching to make sure you get it right or maybe even just less wrong. 

Somehow I missed it but GraniteShares launched several new YieldBOOST ETFs. This is the suite of funds that sells put options on 2x levered ETFs.

As a reminder, I would think of these not as proxies for the underlying like Nvidia or the NASDAQ 100, they are products that sell the volatility of the underlying and there's a difference. It wouldn't make sense to buy NVYY if you're not favorably disposed to NVDA common stock but over time it won't look like the common on a price basis but might not be that far away on a total return basis. The chart is price only. NVVY has paid out about $1.80 so far which would add another 7% into the price based return.

I don't use these or any of the crazy high yielders but we've mapped out possible utility in the context of barbelling yield which is why I follow the space closely, maybe at some point it will make sense to do something with these. 

The late Paul Sherwen regularly used the phrase threw a cat amongst the pigeons as Phil Liggett's wingman commentating on the Tour de France. ETF.com may have done exactly that by asking Are Financial Advisors Lazy To Recommend Active ETFs? 

Actually the article is very thin and might not be worth using one of your free articles. Side note, the content quality at ETF.com has fallen off a cliff in the last few years, maybe more but at least they are now charging for access. 

I'll broaden my comment to include mutual funds as well as ETFs. With regard to ETFs, there are many types of funds that technically are actively managed that have nothing to do with old tyme stock picking. Earlier in the week I mentioned client holding Alpha Architect Box ETF (BOXX). It's a substitute for T-bills that the typical advisor would not be able to implement themselves. It's active but it doesn't pick stocks or bonds. 

How many times have I lauded merger arbitrage or client personal holding BTAL? Managed futures? Get out of here. The idea of trying to do merger arb or the others directly in a client's $800,000 IRA would be beyond stupid. I am obviously not a huge fan of the crazy high yielding, single stock ETFs but they are active and the AUM is collectively huge but again that they are actively managed is more of a technicality.

What about a stock fund that does do old tyme stock picking? I don't have any of those in my ownership universe but I do not think it is lazy. It may not be optimal with respect to a broad based fund like Fidelity Magellan. There's no way to have current information on the fund's sector allocation. Maybe a portfolio has an S&P 500 fund for beta exposure and Magellan for alpha. If S&P 500 has 40% combined in tech and communications and Magellan is 80% in those two (that's made up, I have no idea), then the portfolio could be taking on a lot more sector risk than an advisor or their client would like. This would be less of an issue with a stock picking, active ETF because of the transparency. 

Part of what advisors do is try to help people have enough when they need it. Part of having success on that front is minimizing behavioral mistakes that a client might be inclined to make. If an advisor can figure a way to do that by including stock picking mutual funds, it works and is good for the client, then why not? 

The comment about an index fund for beta and Magellan for alpha wasn't a random comment. Torsten Slok had a micro blog laying out the following allocation idea. 

There were no percentages given but the idea of fixed income replacements is something we've been talking about for many years. We've tried to find different types of strategies and niches that do what I think people hope that bonds will do. I don't believe that too many investors would want to load up on parts of the bond market that are capable of dropping 15-20% like AGG and longer dated treasury funds did in 2022. 

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