It's Crazy, But It Just Might Work

Simplify ETFs has a paper/marketing piece up about using five of its funds to create a portfolio that pays out a 10% distribution rate. 

Most of them are derivative income one way or another. FOXY pays out about 8% that appears to come from currency carry. None of the funds are simple. I think where the firm's name comes from is that they provide simple access to very complex strategies. Where we are currently in a 3.5%-4% world, a portfolio that generates a 10% distribution is risky. I am not against that risk but anyone diving in without understanding the risk they are taking is likely looking at a bad outcome. 

I would be more in the zone of willing to take the risk for a lot of "yield" from a narrow slice of the portfolio than allocating 40%, in a 60/40 construct, to the above portfolio. Less yield my way but less risk of being hurt if something blows up. Who knows if any of these could ever blow up but this is an easy vulnerability to avoid or more precisely, size prudently in case there is some sort of unanalyzable calamity. 

Ten percent is not in the realm of crazy high yielding numbers from the various single stock covered call ETFs or the YieldBOOST funds that sell put spreads so the NAV erosion may not be so fast. The Simplify 10% yield portfolio only goes back to April 15 due to the inception of SBAR per Testfol.io and net of distributions it is up 3.95% after paying out almost 800 basis points.  The timing was fantastic. 

Looking at just the last six months, taking out the huge April bounce, the 10% portfolio is down 18 basis points on a price only basis. If you're hell bent on yield, I don't think that sort of erosion is really a problem. Any sort of very high yielding portfolio comes down to assessing which is likely to deplete more quickly, just leaving it in cash and taking money out or building some sort of very high yielding mix and taking out the "yield" with the realization that it can't sustain for a very long period. 

Since the inception of YieldMax NVDA ETF (NVDY), it is down on a price basis by just over 1/3 while the common is up 343%. Yahoo has NVDY's trailing "yield" at 88%. A trailing "yield" of 22% should not be expected to sustain let alone 88%. Obviously, most of the stocks in the YieldMax universe are not up as much as NVDA so the erosion of those covered call funds is likely larger. At some point, NVDY will reverse split as a couple of the other YieldMax funds have done. Once all of that is understood, then someone is making an informed decision if they decide to buy and that informed decision either works out or it doesn't. We've looked at something like 5% into one of these things, 95% into a regular portfolio and rebalancing to maintain the 95/5 blend. The growth of the 95 would more than offset the erosion of the 5.

The above rebalances quarterly. Not calamitous but possibly unnecessary which would be a fair criticism.

At the far other end of the spectrum, there are a couple of ETF providers trying to make a go with various types of bond ladder ETFs. Very basically, a ladder owns a sequence of maturities, there is of course interest coming in and as an issue comes due every year it could either be rolled out to the back end of the ladder or in some sort of depletion strategy, the proceeds from the maturing issue could be taken out as cash. 

We've looked at a couple of these type of ETFs including the LifeX 2035 Income Bucket ETF (LDDR). It owns a ladder, it pays out regular dividends and returns capital. From the calculator on the LDDR site. 

It's designed to deplete in 2035. Some sort of personal scenario where someone is trying to delay Social Security or biding their time until they start taking RMDs or some other circumstance like (big ouch) waiting for an inheritance, this sort of concept might make sense. LDDR has only been trading for a year. I've written about LDDR twice. I didn't crap on the fund either time other than to say most investors could build this for themselves.

Blending all of this together, instead of NVDY, I will use NFLY which I've used before for blogging purposes, it tracks Netflix which has struggled lately due in part to its attempt to buy Warner Brothers. 

Working with a $200,000 lump sum with a willingness to let it deplete before taking RMDs in ten years, we can see that $150,000 into LDDR should pay $17,808 per year. Since NFLY's inception on 8/8/2023, a $50,000 95% VOO/5% NFLY combo has paid a total of $6500 which annualizes to $2708 for a total of $20,516 in annual distributions. The $50,000 that went into VOO/NFLY is now worth $73,463 in just two and a half years since NFLY's inception. 

Simply extrapolating out to model this isn't that rigorous but if the equity sleeve compounded at 6% net of distributions for the next ten years, $50,000 today would be worth $89,000 in ten years. There's a pretty good chance this ten year depletion strategy doesn't actually deplete. A CAGR of 6% is far below the CAGR of the S&P 500 over the previous ten years. Then, ten years from now maybe the IRA or whatever has gone up a lot in value and a more normal 4-5% withdrawal rate could be adopted and sustained. 

Putting all $200,000 into LDDR would kick out $23,745, so more income, but the principal would be depleted versus a scenario of getting through the ten year period with close to half of the original principal balance. 

These sorts of idea are always fun. The point isn't necessarily to run out and do this, it's more about each of having our own circumstances and sequence of events that might require some ingenuity. The investment world evolving with more investment products that can accommodate more individual situations. Someone in the world has a ten year plan where they are waiting for something to happen (Social Security, RMD, inheritance) and maybe this is a solution for that person. This one isn't very expensive and 95% of it is pretty simple. 

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.