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.
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.
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4 comments:
Along the lines of building some sort of predictable income...I’m curious what you think of the laddered TIPS funds (ETFs) that have come out from LIFEX and Northern Trust. These are similar to Blackrock’s iShares iBonds ladder ETFs, but these go out to 25 to 30 years instead of iShares' max of 10 years. Examples include Northern Trust’s TIPD (https://www.flexshares.com/us/en/individual/funds/tipd) and LIFEX LIAM (https://www.lifexfunds.com/etfs/liam). Neither has gained much traction, but the potential ETF alternative to building one’s own portfolio of laddered individual TIPS bonds is appealing.
These products seem to be targeted at investors who like the idea of building a, for example, 30 year TIPS ladder using a tool such as tipsladder.com but don't want all the extra complexity and work. However, it is not clear to me, setting aside fund closure risk and some additional fees/costs for purchasing an ETF, whether an investor’s experience (e.g., real yield and distributions over time) would be roughly the same if one purchased one of these funds versus building their own TIPS ladder. I also wonder how fund flows could impact the investor. I wrote Northern Trust weeks ago but did not receive a response yet.
My understanding is that if an individual investor assembles his own TIPS ladder by buying individual bonds and holds each bond to maturity, he can have an expectation of his overall real yield.
Ideally, one would assemble a TIPS ladder when real yields are higher than historical average.
If, on the other hand, the current (weighted?) real yield on a fund like TIPD is around 2% and an investor makes a one time purchase of say $100,000, would that investor, akin to someone who made their own TIPS ladder, also receive that 2% real yield over time or, instead, would they be subject to their real yield fluctuating based on the flows in and out of the fund?
I guess a related question is that if real yield for TIPS goes down (or goes to zero or negative), does the price of TIPS bonds go up such that someone that had purchased shares of the fund TIPD today would see an increase in the value of their TIPD shares?
Anyway, curious if you have done a deep dive into these...
Robert,
Thanks for the comment, a lot of chew on here.
In spooling up for this post, I looked at both the Flexshares and LifeX suites.
IRL, a treasury ladder is probably better done directly with individual treasury issues. TIPS are a little trickier. Individual TIPS in a taxable account are subject to phantom tax (tax on the bump up in the par value) every year. ETFs are not immune to this but they pay directly, as I understand it, so holders don't have to. It's not an issue in an IRA with individual TIPS but if you have TIPS funds in an IRA and the fund pays the tax, then effectively you are paying the tax too.
TIPS funds haven't done very well. It might be that TIPS and TIPS funds can do better now that inflation has gotten off zero but I don't know.
Your question about interest rate sensitivity, LifeX says a holder's yield doesn't change and that has been true so far but can't be certain going forward of course but I would imagine Flexshares (soon to be Northern ETFs) would say the same thing.
Your comment prompted one thought about trying to build the front end of a ladder with simple treasuries and going further out with a TIPS fund of some sort or combo of TIPS funds if it's a taxable account. The idea would hinge on not being concerned about meaningful loss of purchasing power over the next two years or four years or whatever.
Good thoughts. Longer duration TIPS funds struggled in recent years likely because of rising real interest rates. I like the concept of building a TIPS ladder when real yield rates are relatively high (e.g., as of today, tipsladder.com states "At current yields (as of 2025-12-31) a 29 year TIPS ladder can provide a a Safe Withdrawal Rate of 4.8%, and a real yield of 2.4%") but it seems like there could be some tax headaches in a taxable account. I was curious if the Northern Trust and LifeX products provide an "easy button" approach albeit with some added costs. More and more firms, including Vanguard now, have target duration / bond ladder ETFs but few have targeted duration beyond 10 years and in TIPS.
maybe an easier button even if not easy. it makes sense that products will improve in this space. it's a great theory, not so easy to pull off just yet
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