All Weather Update

ETF.com had another good post, diving in on the SPDR Bridgewater All Weather ETF (ALLW). The fund has been successful both in terms of assets raised and I think the performance is probably in line with what they had in mind but not really game changing.

ALLW is quadrant inspired risk parity. In the comparison I built, HFND is hedge fund replication managed by Bob Elliott who worked at Bridgewater, FAPYX is Fidelity's risk parity fund and FIRS is quadrant inspired without risk parity and one that I am test driving in one of my accounts. FIRS has some Bitcoin in it and a fair amount of gold which accounts for a meaningful chunk of the outperformance. 

I doubt they are thrilled doubt the volatility numbers for ALLW, assuming testfol.io has it right. It's a very short sample size but its had the same volatility as VBAIX with 240 basis points less in growth. I wouldn't expect it to necessarily keep up with VBAIX unless commodities ripped and they owned the right ones.

If someone is interested in ALLW, what are they trying to do, what effect are they trying to add? The next question should then be is there a way to get the same effect in a different way? It's too soon to say definitively yes at this point but I suspect there are better ways.

With some overlap, iShares posted a sort of fall outlook with thoughts about asset allocation that I took as being shorter term in nature. The centerpiece was the iShares US Equity Factor Rotation Strategy ETF (DYNF). It's a five star fund but it's not obvious that there's a ton of differentiation. There's been some but I don't think it has netted out to a lot. 

They like the belly of the yield curve at 3-7 years and suggest their fund BINC managed by Rick Rieder. BINC has done much better than AGG, higher returns with much less volatility. Included in their discussion was their Bitcoin ETF and the iShares Advantage Large Cap Income ETF (BALI). BALI is a derivative income fund that has been around for almost two years. 

A little more substantively, they note that the correlations between bonds and stocks has changed calling it "less reliable" which is of course the conversation we've been having here for a long time. This next quote was interesting even if it's about steering the conversation to BALI. 

Investors are diversifying beyond traditional bonds, seeking strategies that blend income, risk management, and long-term growth potential.

I don't think we've articulated derivative income in the context of blending income and risk management. Covered call funds are certainly marketed that way but in it's most basic form, selling calls caps the upside and while the income can soften the blow on the way down, during a real whoosh, expecting a covered call fund to also drop a lot is the mindset I would suggest. Newer variations might cap less of the upside with 0dte options or some that sell puts for income and so on. Yes there are drawbacks to derivative income funds but I wouldn't discount the possibility that tweaks to the strategy could make them better products in the future beyond some of the very narrow theory we've kicked around in previous posts. 

The ReturnStacked guys had a show on YouTube today trying to make the case for managed futures now. Obviously they are big believers in managed futures given the funds they've launched but of course after fantastic returns in 2022 and a resurgence in popularity because of those returns, managed futures has appeared to struggle. 

Making the same point I made many times in the 2010's, managed futures tends to be negatively correlated to equities. If equities are ripping higher, there's a good chance managed futures won't be doing well. They posted the following during the presentation that makes the same point.

Decade to date, it's pretty much been doing exactly what it's supposed to do. It looked like this in the 2010's as well. I posted the same type of chart many times in the 2010's, they looked similar to this and I think makes the point of what a terrible idea 20% into managed futures is. Toward the end of the show, one of the guys said they didn't think 5% in managed futures would do much to help. The push back to that is to diversify your diversifiers. 

No single diversifier should be thought of as infallible. If managed futures "works" nine out of ten times, great, but what about that one time it doesn't? What if equities drop 50% in some bear market event and a 20% allocation to managed futures drops 18% and what if that happens one year before the person plans to retire? Equities are the thing that goes up the most, most of the time which is important to keep in mind when trying to size alternative strategies. 

We'll close out with Larry Swedroe going after buffer funds. He seemed to be going after the ones that offer 100% downside protection. I don't have the 100% buffers dialed in but he lays out how they still lose money in opportunity cost and that what they own are 95% in T-bills and 5% in a call spread which makes the 70 basis point fee expensive. He says that you could "easily construct this strategy yourself for a fraction of the cost." 

That's not necessarily accurate. The chances are that the friction for someone putting on an odd lot sized spread would add up to more than the fee of the fund. Additionally, even if 70 basis points is too much, there is some value in having the fund put the trade on for you. 

A bigger point is that I think he is viewing these as a replacement for equities which as we discussed yesterday, they are not replacements for equities. I'm not a fan of these at all but any critique should focus on the right thing. FWIW, I do believe there are probably easier ways to access portfolio protection without capping the upside.

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