Andrew DeBeer who manages the iMGP DBi Managed Futures Strategy ETF (DBMF) as well as having involvement with the Simplify DBi CTA Managed Futures Index ETF (SDMF) sat for Barry Ritholtz' podcast. There wasn't a lot that was new but one item that I would pass along from it was Andrew's suggestion of allocating about 3% to managed futures. Barry led into that by saying it's not something you backup the truck on.
Yesterday we looked at long biased long/short funds. WTLS is 90/90, 90% S&P 500 and then 90% long biased long/short. HFEQ seeks twice the volatility of regular long biased long/short. Yesterday, both funds were down more than the broad market and today they were both up more than the broad market even if not by that much in the case of WTLS.
At this point, I am not saying they are good funds or not, just that based on a first impression, both days the funds were behaving the way I think they should behave. Plenty of funds don't pass this test and maybe with a longer sample size these wouldn't either but when I talk about a fund doing what they say it will do, this is how to see, very simple but it is very important point. A fund is offering something, does it actually do it?
Don't think of your 401k and then when it becomes your Rollover IRA as a nest egg, think of it as "paycheck for life." That is part of the pitch from Blackrock to provide access to private assets for retirement plans. While I am a no on private assets due to lack of liquidity, high fees and volatility laundering, the idea of annuitizing a portion of assets intrigues me. Not annuities. Annuitizing with brokerage account accessible products that have daily liquidity.
We've played around with this idea in various ways a few times. The way I framed it, a window of like five years where someone wants to retire but not take Social Security right away. Maybe this person has a piece of money in a taxable account, separate from their 401k/IRA that they are willing to deplete over something like four or five years to let their retirement account and Social Security benefit grow.
I sat in on a webinar from NorthernTrust today. They have a suite of funds that sort of do this, annuitize an income stream from funds that deplete in 2030 TIPA/MUNA, 2035 TIPB/MUNB, 2045 TIPC/MUNC and 2055 TIPD/MUND respectively. The symbol starting with T buys TIPS and the symbols starting with M buys muni bonds.
We looked at these briefly when they first listed. Given the intended use, I'm not sure why the suite goes beyond 2035. If you can retire right now at 47, are you going to buy TIPC or MUNC so you can delay SS until age 66? It doesn't make sense to me.
The webinar included a use case of someone 62 today wanting to retire now and use the 2030 product to hold out taking SS until 67. Here's what TIPA owns.
Every October, a tranche matures and get distributed. During the year, the fund pays a "dividend" periodically. I thought they said monthly but that must have been incorrect. Here's what Yahoo shows for distributions.
I spent a lot of time looking to see if there were more distributions and couldn't find any evidence of more and neither could Grok. The fund's webpage doesn't have any info about the distribution history.
The idea is to collect income and principal back to live off of for a finite period expecting to deplete the piece of money just as you start to collect Social Security. The example from the webinar assumed that the guy had $200,000 to commit to the income bridge strategy. I like that name better than depletion strategy I came up with.
The price of the fund is around $100/share for now. The dividends seem lumpy as hell. Next fall, the use case investor would get about $40,000 shortly after the first tranche matures. Let's say the yield from actual dividends is 3% (very little confidence it would be that high) spread sporadically over the year, that would be $6000 and then in the fall you get $40,000. It would take a lot of planning to make that work. You'd essentially need your first year's worth of expenses set aside and not include in the $200,000 purchase of TIPA.
This idea will evolve into more useable funds. There are a couple of others out there, LifeX has a couple of funds that do something similar. If fund companies are creating these, there must be some sort of demand but like a lot of strategies, the first couple of attempts might not be the final solution.
For now, I think with a little research work, people can build this themselves. Sticking with the $200,000 example, I bet we could find 10-15 disparate strategies with varying degrees of kind of high to crazy high yields that take disparate risks. Then set a schedule of taking paychecks that are a mix of accrued distributions and principal. With a five to seven year time horizon would this strategy last longer than just spending it out of a money market yielding 3.5%?
You'd really want to spread the risk around but we've looked at this before, yes this strategy can last a little longer than just straight cash out of a money market. Putting 6 or 7% in a crazy higher yielder or two is less crazy when the expectation is that the account will deplete.
I spent two minutes coming up with 12 holdings. Maybe someone actually applying themselves would come up with something better. (hint, take my list, put into whatever AI you use and ask it to make improvements)
The "yield" annualized out to 12.29% so call it $24,000, take another $16,000 out by selling down positions and one year in, $183,000 with four years left until Social Security. If someone wanted wait ten years, then they'd only take out $20,000 which was less that the "yield" for year one.
For the period studied, just owning VBAIX and selling it would have been better. It's an interesting theory that I think could work but may not always be optimal.
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2 comments:
Interesting post...I thought the LIFEX products (Inflation-Protected Longevity Income) and Northern Trust distributing ladder ETFs, particularly for TIPS, were interesting as an alternative to building one's own TIPS ladder (via tipsladder.com or otherwise). I got the impression that is the general purpose of the funds.
However, I had written Northern Trust and never received any response about questions I had, mainly to compare an investor's potential experience of buying a 30 year TIPS distributing ladder fund like TIPD versus building a 30 year TIPS ladder of bonds.
Obviously, fund fees and potential closure risks related to the fund are an issue. Apart from that though, I was more concerned about whether the long-term expected real return rate would hold in place like what you would get if you buy the individual bonds via a ladder and hold them to maturity.
In other words, I can go to tipsladder.com today and assemble a 30 year ladder of TIPS and as long as I hold the bonds can expect some long term real rate of return of about 2.3%. Can one say the same if they put the same initial lump sum into a fund like TIPD?
Essentially, what I had asked Northern Trust and never got a response to was:
"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 1.88% today and an investor makes a one-time purchase today of say $100,000, would that investor, akin to someone who made their own TIPS ladder, also receive that 1.88% 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?
A perhaps related question is that if the real yield for TIPS goes down (or goes to zero or negative), does the price of TIPS bonds go up such that someone who had purchased shares of the fund TIPD today would see an increase in the value of their TIPD shares (such that their real yield expectation / return would essentially remain in place)?"
As you point out, lots of questions remain, which may explain the low AUM to date...
The LDDR ETF from LifeX terminates in 2035 and I am pretty sure it payout big chunks of principal like the NorthernTrust funds. Trying to capture the TIPS effect in an ETF is pretty hard to do so from that perspective it might not be worth the fee to have them build the ladder for you. But I think that's what it boils down to, wanting to outsource the management of the ladder.
I really do think this idea will evolve to make more sense in an ETF, just not there yet.
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