Don't Try This At Home

FIRE Funds Tweeted a lot of detail about its Income Target ETF (FIRI) which is a companion to its Wealth Builder ETF (FIRS) which I own a few shares. FIRS is the accumulation phase fund and FIRI is the decumulation phase fund. The context here is for Financial Independence/ Retire Early. 

This from the Tweet caught my eye, "...seeks to provide a 4% target annual income level using a 'barbell strategy' to balance high-yielding income assets with low-volatility cash-like instruments." We talk about barbelling yield and growth regularly here. FIRI portfolio is mostly standard fixed income strategies but slight twists on the larger fixed income ETFs like AGG or MBS with a few crazy high yielders to barbell the yield.

Let's take all that as a prompt to build a portfolio that combines capital efficiency, a short biased long short and a bunch of higher yielders with just a little bit in a crazy high yielder. I built two versions of a very similar portfolio as follows. They are the same except that Portfolio 1 has 10% in YieldMax GDX (GDXY) and 10% in Bank Loans (BKLN) and Portfolio 2 has just 5% in GDXY and 15% in BKLN.

MVPL toggles between owning 1x S&P 500 and 2x S&P 500 so this is where capital efficiency comes in. Client/personal holding BTAL is the short biased hedge, BRW is growthy and yields about 12%, SJNK and BKLN (BKLN is in my ownership universe), high yield and bank loans, both yield in the high sevens, SHRIX owns catastrophe bonds and yields 14% and GDXY is the one crazy high yielder which Yahoo shows as "yielding" 49%. Using GDXY avoids the tech sector and single stock risk. Gold miners have more potential for defensive attributes than the typical tech stock.

I backtested with a large dollar amount like it was something someone would try to live off of for some period, willing to accept some depletion.

The made up portfolios for this post are pretty crazy but the volatility and beta numbers are not insane. The portfolios outperform but very little of the outperformance is from the leverage of MVPL. Apples to apples comparing of MVPL/BTAL and VOO for the same period had the MVPL/BTAL combo ahead by only 71 basis points with a little more volatility but a smaller drawdown.

The fixed income is where the outperformance came from.

The Sharpe Ratios of Portfolios 1 and 2 tell you that the bump up in volatility is well worth it for the extra total return. SJNK, BRW, SHRIX and BKLN were all around in 2022 and had declines ranging from -2.51% to -5.50% compared to -13.03% for AGG.

BRW didn't have a problem on a total return (price only it was down 16%) with rates going up in 2022 but it is an actively managed fund of funds so if it made a good decision in 2022, it could get that decision wrong if rates take another meaningful leg higher. The other three fixed income do have risks associated with them to be sure but interest rate risk isn't one of them. GDXY should be expected to be a depleting asset for the most part but if GDX goes on a prolonged run higher then GDXY might be able to tread water sideways.

This chart captures that point. GDXY went down last year but this year is trading sideways as GDX has gone up a lot.

Where the advantage of MVPL/BTAL is only very slight versus plain vanilla S&P 500, the results would look very similar using SPY or VOO and avoiding the complexity of the leverage/hedge combo. 

The idea with today's exercise was to make kind of a crazy blend to produce a lot of yield that could be offset by the growth component that might all add up to a return after distributions that was a little ahead of inflation. Yes, the period available to backtest is ridiculously short but in the short time we have, the two versions price only were up 5.57% and 6.65% respectively versus 2.32% as shown by testfol.io.

That was a fun exercise, what would you add or change to improve the result?

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