A couple of months ago we gave a quick mention to the new WisdomTree Inflation Plus Fund (WTIP). Two months isn't really enough time to draw a conclusion but I thought it would be fun to circle back for a closer look at the idea even if not the fund yet. WTIP uses leverage to blend together a lot of TIPS, long/short commodities and a little bit in crypto. The allocations I found in June are a little different than what is in there now, they obviously must have some leeway.
The positions show 67% in TIPS, 28% long commodities, 26% short commodities, 7% cash and 4% in crypto. It will always be long gold and silver and right now "precious metals" show long 8.85%. Using the current allocation, I built the following.
STIP is short dated TIPS which is a pure application of the WTIP idea but STIP compounded almost identically to inflation in the period backtested due primarily to a 5% decline in 2022 when inflation was positive by a little over 2%. So STIP provided no real, positive return. If you think you might want to replicate WTIP, just use individual TIPS, not an ETF. I used managed futures because it is long and short commodities but it's not a perfect substitute because the strategy goes long and short other markets too.
The back test only goes back to the beginning of 2018 because before that, Bitcoin had some fast, massive rallies that I don't think can be repeated. I don't know if the result from early 2018 on can be repeated but it's plausible.
The results are interesting. Inflation for the same period compounded at 3.60% so all three had a pretty good positive real return. For a little context, earlier in the year quite a few pundits suggested TIPS as being attractive for offering a real return of 2% above inflation. I'm relaying that third hand, it was not a first hand observation.
All three versions of the WTIP replication pull in some other attributes that we often talk about here. The first one is that the growth is barbelled into the Bitcoin allocation. Bitcoin compounded at 31% in the period tested. Roughly 40-45% of the gains in each of the three replications is attributable to the lift in Bitcoin. Continuing to go up a lot, on a relative basis, might happen but is 31% something that can repeat? Again it's plausible but not a certainty by any stretch.
I also think the overall result is absolute returnish. There's some dispersion year to year but the volatility is quite low. None them should be expected to look like equities, the S&P 500 compounded at 13.67% during the period tested. Although the results look pretty good compared to VBAIX, I don't think that would stand up over a longer timeframe due to having no equity exposure.
If Bitcoin simply meandered along, not going up a lot, it would reduce the various growth rates of the backtests by about 300 basis points. By meander, I mean trade sideways not go down a ton. Even then, the real return versus inflation would still be decent, volatility would compress even further making it an easy ride for someone able to resign themselves to the fact that this will not keep up with equities. Another thought would be to try to find other opportunities for asymmetric returns to swap in for Bitcoin or to diversify the 4% crypto sleeve with Bitcoin.
I think the replications are very interesting even if WisdomTree were to look at them and say bruh, not even close.
I'll wrap up with a quick check in on the RISR/plain vanilla MBS fund pairing we've explored several times. As a reminder, the idea is that 50/50 RISR/one of the MBS funds would offset into an absolute return with very little volatility. Yesterday it worked.
And was working mid-day Tuesday.
I track these daily and I would say it probably works on a daily basis about 70% of the time. The idea is fascinating but it might be too big of a leap of faith.
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