The Emotional Cost Of Being Different

Let's check in on convertible bonds.

CANQ uses leverage to own a portfolio of fixed income securities with an overlay of equity options that is intended to create the effect of owning convertible bonds. You can see CANQ yields about 5.5%. CHI is a closed end fund that kicks off a lot of yield but the drawdowns in the price only version are brutal. CHI is less a proxy for converts than it is a yield machine. It fell 30% during the taper tantrum and last month it was down twice as much as the S&P 500. In the period studied, the State Street Convertible Bond ETF (CWB) is up 18% with less volatility than the S&P 500. Despite being "bonds," convertibles have a lot of equity beta. This was just a follow up on CANQ, it's done well. A fine return and the drawdowns haven't been catastrophic. 

The other day we had some fun looking at the cost of being different and some work from ReturnStacked. They came up with an allocation that they thought was optimal and actually useable after first discussing an allocation that is optimal but not really useable. 

I simulated Optimal Stack w/NTSX from the above linked post using SPY and AGG to go back just a little further. The red line portfolio is similar to optimal but not useable from the ReturnStacked paper in that no one would actually want to use it. It would be too difficult emotionally for many people.

It is a steady eddy but it lags almost constantly. It has been effective though at chopping off the left tail. Negative, outlying returns are referred to as being left tail on a bell curve, the portfolio we're talking about chops off the left tail because it looks different and the cost of being different is that it lags to the upside. Over the long term, I am quite certain it will provide an adequate long term result but I am also confident it would lag up markets most of the time. 

Simplify tweeted about its SBAR ETF and referred to it as an autocallable. XV which is another high yielding fund from Simplify is also an autocallable strategy. In case I am not the last to know, there you go. CAIE was generally considered the first autocallable ETF, I thought it was anyway, but SBAR and XV are a little older. Copilot said that the funds have always been autocallables but now the category/strategy is more recognizable so Simplify is referring to them as such.

A high yield with no NAV erosion is a good outcome but the market hasn't really been tested since SBAR and XV started trading. There is some sensitivity to declines as seen in March of this year. I threw BALT in there because there is some overlap of risk. I didn't throw in any crazy high yielders which has more risk overlap but as we know from many other posts, there has been plenty of NAV erosion with those products. I'd like to see how these weather a serious decline and then how quickly they can recover but a small allocation, like 5% of the fixed income sleeve, isn't reckless. 

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