A Clear Path To Catastrophe

The new VanEck Wealth Builder ETF (WBMO) looks interesting. It sort of comes from a model portfolio of ETFs that VanEck has been running for a little over two years. It's not a precise description but it appears to be similar. 

• 44.8% Domestic equity
• 7.7% Foreign equity
• 38.2% Fixed income 
• 8.6% Alternatives; gold, bitcoin, inflation, infrastructure, energy

I was able to tease out a backtest from Grok but fair warning, the numbers from Gemini were different. 

CAGR: 15.21%

Annualized volatility: 11.81%

Sharpe ratio: 0.91 (using ~4.5% risk-free rate) / 1.29 (rf = 0)

Total return: +45.71%

Max drawdown: –12.39%

The hypothetical backtest goes back to January 11, 2024 which is not a huge sample size but in that time frame we can make a comparison to SPY, VBAIX, PRPFX and AQRIX.

AQRIX is a multi asset fund and I think that it speaks well for WBMO that it was close to AQRIX. The fund is not a static allocation so the back test of just taking a snapshot today and going back a couple of years isn't that tight but I do tend to think that stats related to volatility can stand up even if the growth rate is off by a little. So that's the positive. The....maybe not negative but to me questionable is some of the largest holdings. 

• SPYM 17.52%
• QQQM 11.72%
• SMH 3.08%

There are some holdings with larger weightings between QQQM and SMH but SPYM and QQQM are the two largest and SMH is also in the top ten. There's a lot of overlap there. I think having the S&P 500 and NASDAQ 100 in the same portfolio is questionable. I asked Gemini about SPYM and QQQM and its initial response was to rationalize it by talking about making an active decision on cyclicality and mega cap tech and that SPYM/QQQM was a cheaper alternative than the only other choice of buying an actively managed fund instead.

Buying a more expensive actively managed fund is not the only alternative, not even close. Gemini backed off of that assertion. I asked if SPYM/QQQM might be an attempt at capital efficiency to increase the equity exposure with volatility and beta and Gemini said yes to that. My last question on this point was with all of that, does the 3% to semiconductors via SMH support the idea of capital efficiency or does it support my skepticism about overlap and questionable portfolio construction?

The 3.01% weight to the VanEck Semiconductor ETF (SMH) is the ultimate piece of evidence supporting your skepticism of overlapping index exposure.

It completely undermines the "clean tracking" or "capital efficiency" narrative and serves as a classic example of unnecessary duplication in portfolio design.

Ok, skepticism doesn't have to mean it's a bad fund but there are ways to get the same beta and volatility, if they are operating at that level, without overlapping like this. I do take a dim view of this sort of portfolio construction but you can check out Meb Faber's thoughts on his Twitter feed, I think he's said even harsher things. 

Now autocallables. One of the Innovator ETF guys was interviewed by ETF.com at Future Proof and part of the conversation was about autocallable ETFs. Innovator has two of them (at least two anyway), ACEI and ACII. The dispersion between the two is a great example to learn from without needing to dig all the way into the complexity of these funds.

ACII targets a 9% distribution and owns a series of autocallables on broad index ETFs. ACEI targets a payout of 13% or so and owns autocallables on individual stocks. 

A useful building block of understanding that we've been working with is that everything else being equal, the higher the yield of an autocallable fund, the more volatility it should have. ACEI and CAIE have very similar yield targets and the volatility is similar but ACEI appears to have really struggled. 

ACEI owns autocallables on individual stocks and CAIE owns autocallables on a more volatile variation of the S&P 500. Because of this, ACEI is more exposed to single stock volatility, it's more sensitive to equity volatility, versus index volatility for ACII and CAIE. 

This is another example where it's easy to get taken in by a mid-teens distribution but a 9% payout with less volatility is a very solid outcome and likely to be far less difficult to hold onto. If you want to step in, just keep the sizing right. A 60/40 portfolio with 40% in a bunch of different lower yielding autocallable funds seems like a clear path to catastrophe. 

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.