The TSLA ETF Ecosystem Gets Rocked

Last month we looked at Research Affiliates' take on quadrant style investing with allocations to equities for economic growth, bonds for income and defensiveness, absolute return for alpha and trend following for tail risk. In that last post we equal weighted a possible portfolio to express their idea. They did risk weighting but risk weighting can be more difficult to pull off with mutual funds and ETFs. And where this is probably permanent portfolio inspired, we'll use equal weighting.

Below, there are three version's of Research Affiliates'. They all have 25% in the S&P 500, 25% in floating rate and 25% in managed futures. The last 25% are all different variations on long short for the alpha sleeve; short biased, long biased and market neutral. In the May post we used Vanguard Market Neutral in two portfolios, had the S&P 500 and managed futures with the differentiation being income and defensiveness portion with AGG and client/personal holding the Merger Fund.

I think this study will be more interesting.

For the period studied, price inflation ran at 2.82%.

The short biased portfolio is interesting. The low volatility with mid single digit max drawdown and a real return of 2.6% is pretty solid. No one's bragging about those results to their friends but they're also not freaking out. The long biased version has a fantastic result but it might be benefitting from some unrepeatable performance. We talked about that the other day. If performance looks too good to be true, spending time to explore its unrepeatability is a good idea. 

If we divide the long/short alpha sleeve equally between the three different funds we used above and kept the rest the same, that portfolio compounded at 6.51% with a volatility of 5.19%, a Sharpe Ratio of 0.91 and a max drawdown of 9.45%. So volatility is pretty low and a real return of about 370 bp, again that is pretty solid but not killing it. 

At some point this year, I started using the term crazy CEO risk where the word crazy modified CEO not risk. There aren't a ton of CEOs to whom this applies but Elon Musk is one of them.

The table leaves out the GraniteShares YieldBOOST TLSA ETF (TSYY) that we've looked at a few times. TSYY sell puts on TSLL which is the first ETF listed in the table. TSYY shows on Yahoo as dropping from $11.15 at Wednesday's close to closing at $10.59 last Thursday. Since its inception, TSYY is down 56% on a price basis as of Friday's close or about $14. The distributions add up to $7.96 leaving TSYY down about $6 on a total return basis or 24% versus a drop of 32% for the common. All this is per Yahoo. 

The YieldBOOST concepts intrigues me and while it is hard to see using them, my interest is more about staying close to how the derivative income space continues to evolve.

And finally;

40/60? Not 60/40? Yes 40/60. Unusual Whales is not good about providing links but I think this is what they are talking about if you want to read a little further. 

Vanguard appears to be making some sort of short term or intermediate term call about stocks versus bonds but it turns out that we can do some interesting things with 40/60.

Stocks are the thing that goes up the most, most of the time so simply inverting the S&P 500 and an aggregate bond fund shouldn't be that interesting. In that instance 40% in equities should lag 60% in equities which is what VBAIX has. Maybe Vanguard will nail this call they're making with bonds but everything else being equal more stocks will have a higher long term growth rate and should have more volatility. 

Things get very interesting though with portfolios 2 and 3 which have much higher and slightly higher growth rates respectively with considerably less volatility and smaller drawdowns. The driver of this result of course is that 2 and 3 avoid the volatility of bonds with duration that funds like AGG and VBAIX will take on.

Knowing what to avoid can be more important than knowing what to include. From March, 2000-March, 2003 the S&P 500 negatively compounded at 13.95%. The S&P 500 excluding tech compounded negatively at 2.42% (taking numbers generated by Copilot and plugging them into testfol.io). Getting that one right was not realistic but it makes the point and I would say getting the decision to avoid bonds with duration this decade was much easier to get right.

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.