Risk Parity That Works?

The Beacon Tactical Alternatives Risk ETF (BTA) just started trading a few weeks ago and it is a variation on risk parity. Instead of  more typical asset classes like stocks, gold/commodities and bonds, the sleeves for BTA are gold, broad commodities, managed futures, digital assets but I don't see any in the fund currently and US dollar exposure which means the USDU ETF and a lot of different short term fixed income.

Part of the pitch for this fund is that it can be a "third independent return system to the classic stock/bonds mix." The fund is actively managed so the above holdings can change but the list above is easy to backtest. To create a longer backtest, I combined all the managed futures funds into KMLMsim on testfol.io and I used DBC which is the older cousin of PDBC.

Looked at as a standalone, the results are uninspiring compounding at 3.82% for almost 13 years. While those results really are meh, the replication does something interesting when paired with equities.

Risk parity has generally been difficult to implement in a mutual fund or ETF, look at how poorly RPAR has done. AQRIX is an AQR fund that used to run a risk parity strategy, it changed a while back but I think of it as still being risk parity adjacent. 

Also in the BTA literature is a mention of 50/30/20 replacing 60/40 where the 20 is alts and I think they are suggesting the 20% go to BTA. But with all that USDU and the short term debt, the fund has about 50% in fixed income or fixed income substitutes so allocating 50% to the BTA replication like we did in Portfolio 4 gets kind of close to 50/30/20. 

Portfolio 4 did better in just about every drawdown in the backtest, both fast and slow, except the tariff panic of 2025. In 14 full and partial years, Portfolio 4 outperformed VBAIX seven times so that's kind of a push but in a couple of the years that it lagged, it lagged VBAIX by a lot. In periods where managed futures and commodities both do poorly, obviously BTA as currently constituted should also be expected to struggle. 

The fund going forward could be different and like I said, it doesn't appear to me that there are any digital assets in there but if BTA uses risk weighting then the allocation to digital should be small enough that a catastrophe in something like Bitcoin wouldn't wreck the fund, it seems like potentially an asymmetric kicker if/when they actually add it. 

For now though, this seems interesting to me. It is only a month old (backtest is long enough to set some expectations) but it makes a good first impression. 

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.

There Was An ETF For That

More tidbits today that I hope will be interesting. 

First, I sat in on another autocallable webinar from ProShares and something clicked. I've talked about feeling like I don't completely understand the risks with these. Kind of a repeat comment but I have a better understanding than I did. Autocallables generate yield from equity risk not risk taken in bond markets. 

That an autocallable yields 18% or 9% tells you that the 18% yielder will be more volatile and probably be riskier than the 9% yielder but the risk relates to equities going down a lot not yields going up a lot. There could be a second or third order effect from interest rates' influence on pricing volatility but the story is equity risk and volatility. The way most of them are structured, down a little isn't really a problem for the funds. At varying points of down a lot for equities, some or all of the distributions can be disrupted if the "barrier" level is breached. Down 35% becomes problematic for ProShares ACSP for example. 

If you use a covered call or put selling fund, you think about equity market risk, funds like JEPI or WTPI create yield from equity volatility and risk. In that way, autocallables do the same thing. Zoom in and you will see there are structural differences and I would say more complexity but as one webinar said, derivative income and autocallables are cousins. 

Some of these funds are very volatile and some not. As a generalization repeated from above, I would expect that the higher the yield, the more volatile but I am still working on these, trying to learn. Certainly ProShares ACSP which targets 18-19% is more volatile than CAIE yielding 14% which are both more volatile than JELM from Janus which targets a 9% yield. 

ACSP is brand new which is why the chart is so short. I said this the other day, a 9% yield is fantastic and for me, it's not worth burning my fingers trying to hold onto ACSP. To be clear, I don't own JELM anywhere, I'd like to see the market go through some adversity before considering JELM or any other less volatile autocallable fund. I will reiterate though that some pay ROC like ACSP and CAIE and some don't--pretty sure JELM will be ordinary income but please leave a comment if you know otherwise.

If we're talking about harnessing volatility (which we are), this chart is interesting. 

ANV is the GraniteShares Nvidia Autocallable ETF, so it is a single stock autocallable. NVDY is the YieldMax NVDA ETF, and then the common stock in yellow. NVDY "yields" 38% versus close to 14% of ordinary income for ANV. Fourteen percent is a fantastic yield. ANV hasn't deteriorated because the stock has gone up a good amount. ANV doesn't capture the common's volatility the way NVDY does.

Things have gone very well for ANV but I am still not sure that single stock autocallables are a good idea, just pointing out that these are not automatically NAV incinerators. The chart is also quite clear that buying ANV is not buying the common stock, there should be no expectation of any sort of significant upcapture, six months of trading tells you there might be zero upcapture. The fund owns a lot of different autocallables on NVDA but in some sort of hideous decline for the common, eventually ANV would start to go down with the common. 

Yesterday we took a look at a paper from AQR about protecting a portfolio against inflation. There was a reference in there to long/short quality equities. AQR has mentioned that a few times and at some point I said there wasn't really a way to access that effect in an ETF or mutual fund and there still isn't as far as I know but there used to be. It closed a few years ago but QMJ was the Direxion Quality Minus Junk ETF. I guess the fund was ahead of its time. 

Corey Hoffstein posted a fun article on Twitter that compared and contrasted adding buffer funds to a portfolio versus managed futures and concluding there is room for both. I took it as a prompt to play around with a few different things related to combining buffers, managed futures as well as PPFIX which is a client holding that sells puts that are very far out of the money such that the fund is a horizontal line that tilts upward. The reason to include PPFIX is that Corey talked about buffers being equities with an option overlay on top. That's probably correct but I don't really think of them that way.

I use BJUL in these backtests because I believe it is the oldest buffer fund so we get the longest backtest. None of these ideas helped much during the various fast declines along the way but did help quite a bit in 2022. 

Buffers and managed futures as presented is an interesting combo that I will try to dig more into in future posts. 

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.

Whatever Keeps You Invested

Quick hits today.

AQR has a paper with some ideas about how to protect against inflation.

They involve leveraging up by 15% as you can see. I replicated the three ideas with URTH for global equities, IEF for bonds, STIP for US TIPS, ARCIX for commodities and DBMFsim for trend following. Portfolio 5 mimics AQR's Portfolio 2 but eliminates the leverage by reducing IEF from 19.2% to 4.2%.

They all outperformed 60/40 but an interesting observation is how little differentiation there has been from year to year with a couple of exceptions including 2022 when inflation first flared up. It's remarkable actually. 

Man Institute wrote about buffer funds. The TLDR is that they do help (work the way they are supposed to) on the way down and still help part of the way up as the market recovers but then gradually fall behind plain vanilla equities. 

The article's conclusion supports their 100% Equities/100% Managed Futures ETF that has symbol MATE.

The results are adjusted for inflation so the CAGR numbers are CPI plus whatever the result. The first three funds are obviously not market cap weighted, they all have a defensive element to their respective strategies and the volatility and beta numbers bear that out versus SPY and the MATE replication in Portfolio 5. Looking back, SPY was CPI plus 10% which is great. Will it be that strong going forward? Who knows but if SPY does half as well over the next eight years, cool, but BJUL, JHEQX and USMV very likely will not do that well. Once that is fully understood and accepted, they are not likely to capture the full gains of the stock market, if the lower volatility profile they offer make it easier to stay invested then go for it. 

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.

Regret Waiting To Happen

In response to yesterday's post about Matt Tuttle's take on the Permanent Portfolio, a reader Tweeted that his preferred version is to allocate 1/3 each to ReturnStacked Global Stocks and US Bonds (RSSB), gold and KMLM which is a managed futures ETF. RSSB is 100/100 so the mix has four quadrants, each at 33 1/3%.

A few days ago we looked at a similar portfolio to what the reader suggested that used PSLDX which is a much older 100/100, domestic equities and long bonds. Then I removed the bonds, just equities and the results were better so that was my first thought today, peel out the bonds and what does that do?

To be clear, Portfolios 1 and 2 are equally weighted between those three funds.

I took PRPFX out to declutter the drawdown chart. In the bigger events, both 1 and 2 went down less but you can see a long stretch of meandering as both gold and managed futures struggled through much the 2010's. There were also a few very difficult individual years in there too. In 2013, Portfolio 1 was down 4.59%, Portfolio 2 was down 0.99% while VBAIX was up just over 18%.

If we shorten up the original backtest to go back to KMLM's actual inception, the results for Portfolio 2 look a little better versus Portfolio 1.

The improvement is likely attributable to managed futures and gold doing much better in this decade versus the previous decade. If we just look at the 2010's, the idea would have been almost impossible to stick with.

After gold peaked in 2011 it trended lower for awhile and became more of an afterthought. Managed futures was not something that too many people even knew about. In fund form back then, managed futures never was, let alone becoming an afterthought. I stumbled into managed futures by accident in 2007 and bought RYMFX, then came AQMIX in what I believe was 2010 and the a few others in 2013/2014. I stuck with RYMFX for quite a while but that was much easier at 3% or so versus 1/3 or 1/4 of a portfolio.

Owning this portfolio would be very difficult the next time gold and managed futures both struggle. It happened in the 2010's so it can happen again. There's a lot to be said for quadrant-like sleeves but going so big is regret waiting to happen.

We haven't isolated it out this way before, looking at just the 2010's. Having some gold and having some managed futures is a good idea for portfolio robustness but at some point it is too much because the risks/vulnerabilities overlap some. The risks/vulnerabilities are not identical, but there is a lot of overlap. 

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.

A New Quadrant Portfolio

Matt Tuttle from Tuttle Capital/T-Rex was profiled talking about a Permanent Portfolio-inspired update to the 60/40 portfolio that Tuttle says is 60-70 years old implying it needs to update to navigate modern realities of a different world and vastly broader fund/strategy choices.

The four, equally weighted quadrants from Matt are stocks, "beyond bonds" which includes pre-merger SPACs and property & casualty insurers, debasement trades like gold and Bitcoin and finally tail risk which Matt defined at managed futures and short term government bonds like T-bills. 

For stocks, I just used SPY, Copilot said merger arb is the best proxy for pre-merger SPACs, Chubb (CB) for P&C, for debasement I put 20% in gold and 5% in silver and for tail risk I put 12.5% in managed futures and 12.5% in T-bills. I did not use Bitcoin for debasement to leave out any potentially unrepeatable result.

The return of the Tuttle Quadrants is close to the Permanent Portfolio (PRPFX) with less volatility and the backtest obviously looks quite a bit better than 60/40.

Matt has written a couple of times about P&C companies in this context, his theory seems like it more relates to the operating business and risk transfer than how the stocks actually behave because using the Invesco KBW Property & Casualty Insurance ETF (KBWP) as a proxy, the space looks nothing like fixed income but you may draw a different conclusion. I also do not know whether pre-merger SPACs actually look like merger arbitrage, Copilot offered that, so grain of salt that idea.

The first lookback allows for a long period of study by using the Merger Fund. This next one swaps out the Merger Fund and adds a SPAC ETF that has symbol SPCK and gives us almost six years. The second look back is reasonably consistent with the first one. 

Anyone so interested can replicate the concept pretty easily but I wouldn't make any forward looking assumptions about returns. As if often the case, I think the volatility numbers can stand up and if bonds with duration continue to do poorly then this mix has a pretty good shot of continuing to outperform. To the extent P&C companies are or are not bonds proxies, both Chubb and KBWP are negatively correlated to IEF and TLT. 

It might not be visible on the chart though but there is a lot of differentiation of returns between the Tuttle Quadrant and the others. In the first back test, Tuttle quadrant was best performer in eight out of 27 full and partial years and 6 times it was the worst with four of those six coming since 2019. The updated version using SPCK fared a little better on that score though.

One takeaway is that like me, I don't think Matt is a fan of bonds with duration which leads us to this.

I would venture to say that the 30 day SEC yield is closer to the yield that investors will get. The portion highlighted by Ben is if all the bonds are held to maturity. I've never owned AGG but I don't think that is what AGG does but please leave a comment if I am wrong about that. 

If you have fixed income, what are you trying to do? Some want to offset equity volatility, some want yield and some want a combo of both. Whatever someone is hoping to get out of AGG or BND for that matter, there are ways to get it with less volatility and more yield. 

BOXX replicates T-bills but pays no interest so it is tax efficient. The price accretes at the rate of whatever T-bills are yielding. ACBAX is the investor class shares of the Pioneer Cat Bond Fund. It's the class A shares but self-directed investors should be able to buy it without the load at Fidelity or Schwab but ask them first. 

The 75/25 combo is structured for total return with a little yield. If the T-bill ETF BIL is swapped in for BOXX then the total return CAGR was 6.36%, the yield was 5.64% versus 3.87% for AGG and the volatility dropped a tick to 1.76%. 

There is no need to take on AGG's volatility and interest rate risk to get 5.XX%.

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.

Always Read The Comments

The Wall Street Journal profiled several people/couples who relocated states seeking to optimize their retirements financially and maybe enhance their quality of life too. These were not profiles of people in financial need. The stories were people who read the Wall Street Journal so they aren't representative of society at large. That's a gift link so you can click through if you're interested.

There are obviously tax differences in many areas. On of the couples profiled moved from Peoria, Illinois to Oro Valley, AZ which is just north of Tucson. Property taxes in Oro Valley are about 1/4 what they are in Peoria. The article says that state income tax in Arizona is half that of Illinois, 2.5% versus 5%. A commenter said that Illinois doesn't tax Roth conversions and the they should have done conversions before they left Illinois.  

It's not for me to say what sort of role lower taxes should have in deciding to change states, I just so happened to land in a low tax state that I enjoy at a young age. It is important to fully assess the tax differences though and be informed before pulling the trigger. Maybe it is low on the priority list so it might just be information gathering and that's ok but take the time to learn. The article made it sound like Florida is not a low tax state despite there being no income tax. I don't know but Gemini says it is a higher tax state for lower earners for generally being regressive. I know that Oregon has generally high taxes despite no sales tax. So there can be tradeoffs, one tax is low or zero while another is relatively high.   

The comments were more interesting than the article but the article itself is worth reading. There were of course comments about red states versus blue states. Having that be a determining factor for any life decision is lost on me. I think Arizona is considered a purple state or at least it has been recently. Prescott is in a very red county and Tucson is a very blue city. If someone can't leave political influences like this out of their lifestyle choices ok, I might be out over my skis on that one but leave politics out of investing, the domestic equity market goes up under both parties. 

There were a lot of comments about poor healthcare versus good healthcare in various places. Prescott has lousy healthcare but it's pretty good in Tucson with Phoenix being better. Being healthy is a very high priority for me and we are two hours from Phoenix so is that close proximity to good healthcare? That depends on who you ask but I think people need to sort this out for their personal priorities but also a have realistic assessment of their health. 

Many comments made staying close to family as the top priority which certainly makes sense. A sentiment I think it related to staying near family, a reader mentioned renting a place in the Caribbean every year for the month of February and someone said something similar about getting a VRBO for a few weeks every winter. Presumably these people live where it is cold so they are able to take a chunk out of the winter for not much money related to buying a house and can be near family the vast majority of the time. I think that is a great idea and for me it relates to moving to another country. I have no desire to leave the US but I love the idea of "living" in another country for a few months. There's a handful of places where I'd want to do that if our life circumstance allowed. For now, fire chief and animal rescue president doesn't really allow for that.

It was amusing to read comments from people who I don't think realize what is going on in Arizona. In expressing negative comments about the summers in Phoenix and other lower desert areas, I don't think people realize that a meaningful portion of the state is at very high elevation, with pine trees, usually cool summer temperatures and meaningful snow accumulation. 

There are several states that have this sort of weather divergence of cooler, high elevations and hotter, lower elevations to create a seasonal arbitrage. Nevada has this effect between Reno and other points north down to the Las Vegas area, California obviously but cost of living is there is rough, and there are a few others that may not be as extreme as Flagstaff versus Yuma. The point of this paragraph is about potentially staying close to family depending on where you live but it probably doesn't help much for Minnesota or Wisconsin. 

Mark Baker on Twitter has a theory that resonates with me that it is important for successful aging to have variation in our lives with weather and changing seasons being a simple example. A little more complex is stress variation that comes with exercising. Too much homogeneity, too much comfort leads to being less adaptable. There's research out there that supports the theory and as I said I believe in it. 

Since we are swimming in these waters a little bit, it is not our intention to pack up from Prescott and stay in Tucson for four months, but check back on that when we're in our 90's. There were several reasons that drove buying the Tucson house, we love the city, it's like Phoenix in the 80's, maybe the 70's. If there was ever a wildfire catastrophe in Walker, we would have a place to go. Less dramatically, Walker has been evacuated twice for fires in the last nine years. I stay of course but the first evacuation my wife took the dogs to her parents house in Phoenix for the week and that sucked for her. The second time she took the took the dogs to United Animal Friends ranch property and stayed in a shed which also sucked. Some hotels allow dogs yes, but five? 

Maybe we will want or need to leave Walker at some point and if that ever happens, it will be much easier to do, we will have a place that will already be paid for. And if that never happens then we'll just have a second place to getaway to, it's a form of optionality. For now we go for about a week every month, including the winters, although I didn't really go down much during our fire season, just three nights in May. 

With articles like the one we're talking about, I usually say read the comments, always read the comments. The idea there is that I believe we can learn from the experiences and observations of people we don't know. There are smart comments we can learn from and some remarkably stupid comments too that can help us figure out what not to do. This is why I share some of our details, maybe readers can pull something or positive from what we're doing and if anyone pulls anything negative, that's ok too. 

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.

Make Sure You Have The Correct Numbers In Your Planning

Investopedia via Yahoo Finance took a look at how much money people need to have saved for a comfortable retirement with your home paid off versus not, being single or married and depending on what state you are in. 

A mortgage-free couple needs between $700,000 and $1.18 million, $870,000 as median number, depending on the state with Arkansas and North Dakota at the low end and New York and New Jersey at the high end. Actually the only still has a mortgage retirement number they included was the $1.46 million estimate from Northwest Mutual that everyone wrote about a couple of months ago when it came out. 

Most of the article was as useless as that last paragraph but there were a couple interesting tidbits. One was that in 1980, only 13% of homeowners 65 and older had a mortgage versus 36% as of 2024. And I thought this graphic was useful.

We've articulated what the table displays many times as has probably every site that explores retirement math. The single/couple columns, ok but whatever your marital situation what are your complete expenses? What are monthly expenses, what are your annual/semi annual expenses like property tax and certain types of insurance? Do you track so granularly to factor in oil changes (not a bad idea but we don't) or maybe haircuts (my $20/mo at Great Clips seems a little unnecessary)? Do you pad in an amount for larger, unexpected items like a veterinary bill or something like tires? Whatever your process, just make sure it's thorough. 

We just looked at Social Security. The SSA wants us to know our numbers. Then decide if you think it is prudent to assume a reduction in your payout and to be thorough, reduce it by what you expect to pay for Medicare Part B.

That process is what is captured in the table. If there is a gap, can you cover it somehow from some sort of planned earned income, rental income or from an investment portfolio? 

At some point in our 50's it probably becomes reasonable to start to frame out what a gap might look like unless someone is hell bent to retire at 50 then they need visibility at a very young age and need to do some math (AI can do this for you) on what their Social Security will look like if they don't get 35 years of earned income in before they stop working. 

The annual Social Security report everyone gets notes that the dollar amount assumes a full career duration, if someone stops at 50 then that won't qualify for full benefits. The 35 highest earnings years will include quite a few zeros or if someone actually has earned income starting at 15, a few very low earning years. I wouldn't try to discourage anyone from retiring early if that is what they want but as per the above table, a reduced SS payout due to a shorter working career means needing more saved. Planning, based on the wrong numbers could be catastrophic. 

As a matter of personal philosophy, I don't want to rely on just two things, SS and my IRA account. The first two ideas I think most people would come up with for additional income streams is some sort of post retirement gig like monetizing a volunteer endeavor or turning a hobby into an income stream and the other one is rental income. All the better if you can come up with others that work for you. 

I actually think of a bridging strategy as being a separate income stream. We've written about this quite a bit lately. This could just be a taxable account that built up over the years or maybe there is some sort of event that funds an account for bridging like maybe the sale of an investment property or some sort of options vesting from an employer. 

The way we have framed this out in recent posts, this is a different strategy than the 60/40 or 70/30 that might be in the typical IRA account. If leaving this sort of windfall (house sale or options vesting or just years of accumulation) in cash would last for eight years, could a higher yielding bridging strategy stretch that for ten years until maybe when RMDs start? That's the equation. Leaving an IRA alone for ten years can reasonably see the IRA invested 60/40 come close to doubling.

It's a little sloppy but I tried to color code rolling ten year periods for most of this century. The ten years numbers show solid growth. The worst time to invest in this century would have been at the start of 2000 and even then, the cumulative growth for ten years would have been 34%.

I understand that this much work won't appeal to everyone but like many aspects of life, the more we put into retirement planning, the more we will get out of it. 

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.

Create Your Own Solution

The Washington Post says that "Republicans say it is time to raise taxes" to try to fix Social Security. By raise taxes, the primary implication is increasing or eliminating the cap, the level of income where people stopping having to pay FICA each year. The article goes on to mention considerations for means testing and various other sorts of ideas like raising ages for eligibility and anything else you've seen mentioned. 

Quite a few years ago, I blogged a few times that I thought people born before a certain year, I guessed 1975, would not have to confront benefit cuts in the context of what is now an expected 22% cut in 2032. That assessment appears to be incorrect. If Congress never tackles/solves the issue then I think we'd all be facing that 22% cut (the exact percentage and year has been a little bit of a moving target). 

What role will/does Social Security play in your financial picture? There's some mental accounting in the different ways people think about that answer. For some clients and plenty of commenters at places like WSJ and Barron's, it is more of an afterthought.

If things go as planned for my wife and me for when we take it (70 and she would be 64) and if it is reduced by 22%, in today's dollars it would be $5213/mo which exceeds our fixed expenses. The mental accounting for us is that the $5213 would be the first dollars we spend. If we still have rental income at that point then that income would contribute to our month to month living. Our accumulated savings would be for fixing things, buying the occasional big thing (my Tundra is 20 years old and will need to be replaced at some point), traveling and any other one-off unbudgetable expenses that come up.

I also brought up the idea of means testing a long time ago which as I mentioned is in the article. Who knows what that would look like, my comments on that were if means testing happens, it would come down to much lower levels of income and wealth than we might think or at least we should prepare for that. 

Our unreduced amount at 70/64 would be $6604 in today's dollars. We are not loaded but we are plenty comfortable. As a very aggressive means testing scenario that came down to our level of income/wealth, what would happen if $6604 was instead $3302? Yeah, that's aggressive but what if it shakes out that way? It's easy to quantify and then assess. Actually managing something like that might be more difficult of course but the dollar and cents assessment, just open a spreadsheet. $3304 would still be a meaningful contributor to our month to month expenses but we would need to rely on our savings more, not a catastrophe.

If the country is as unprepared for retirement as the media portrays, then solutions need to be found, people need to find their own solutions. The Wall Street Journal wrote that Boomers Are Moving Into Retirement Communities Alongside Their Parents. Some of the profiles in the article are people moving into the same community but some others are actually living with a parent as roommates, splitting expenses. From the standpoint of a financially challenged retirement, splitting expense with a family manner is a solution even if it's not Plan A for too many people. Five or ten years of spending less (half?) seems financially productive. 

Another solution that we haven't talked about in a while is tiny houses.

You can see the one above costs $72,000 and the one below is $36,000. 

They are more like much nicer manufactured homes than what most people think of for manufactured housing. You can go find modular_houses on Instragram to see the more, they are very nice and also a huge upgrade to what most tiny houses looked like ten years ago. The typical scenario for these is usually leasing a spot in a community or putting one of these on your own parcel. If you know otherwise, please leave a comment and I don't know about permitting one of these onto parcels, that's probably different across jurisdictions. 

Again, this may not be Plan A for too many people but in the context of serious financial challenges for retirement, a clean, new house that is paid for where everything inside works because it is new is a pretty good outcome.

All of this is about preparing in case whatever you have in mind for your retirement, your Plan A, does not work out as expected. Expecting fair outcomes (from the government) is bound to end up in disappointment. We are all here now, living our lives while the problem continues to go unfixed. Maybe they will fix it, logic says that one way or another they will but what if they don't or what if you are ground zero for everything that is unfair about what they come up? 

Ditto our busted healthcare system.

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.

(Traditional) Bonds Still Stink Part XXXVII

Meb's point about individual bonds is one we've made many times. Yes, you get your money back at maturity but think about someone who bought a 15 year Citibank bond in 2020 yielding 2% or so. They have nine more years taking in a yield that is way below prevailing market rates. That 2% has been way below market rates for four and half years already. They are carrying the position way below their price so if they sell they locking in a big loss. 

One of the comments nesting under there somewhere, someone said they were 60% alts and 40% cash with no other details. There are enough different kinds of alts now that someone could diversify idiosyncratic risk and avoid loading up on the same provider but backtesting probably wouldn't help, a lot of the funds are too new. Your AI of choice could probably help you poke holes in various ideas to avoid certain types of mistakes like unintentionally loading up on credit risk. 

If put together correctly, a 60/40 alts/cash mix could probably deliver a solid real return but I would not expect that to return anything close to equities and the differentiation versus more traditional 60/40 like with VBAIX will be difficult to endure every so often. A lost decade for equities would be a different story provided there isn't too much unintended equity beta in there, again AI can help with that.

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.

More Awesomer?

Jared Dillian has a new book out called The Awesome Portfolio. Here's a podcast with Matt Zeigler to learn more. 

In our parlance, the Awesome Portfolio is quadrant inspired with five equally weighted sleeves. Dillian said he was not aware of the Permanent Portfolio when he came up with the idea but described his portfolio as a slight modification resulting in a huge improvement. It's similar to the cockroach portfolio from Jason Buck but it's cheaper.

• Equities
• Bonds
• Real Estate
• Gold 
• Cash

For most part, it's Vanguard ETF; VTI, BND, VNQ, GLD.

The underlying premise is focus on managing volatility. No stress and sleeping well are priorities. A Gemini search says that Jared backtested it to 1971 and in that time the portfolio has returned about 9% annualized versus 10% for the S&P 500 with half the volatility and smaller drawdowns. 

Using testfol.io, there's no way to recreate the results going back to 1971 because there isn't a proxy for real estate (REITs) that goes back that far. But when you see 1971 what do you think of in terms of capital markets and the like? The US went off the gold standard that year and over the course of the next decade +/-, gold went from $35 to about $800. 

I asked Gemini if that created an unrepeatable, favorable skew? Gemini noted that there was a long slow decline in gold after that massive rally but that the impact of the gain in the 70's had more influence than the subsequent long decline. Gemini found something from Bogleheads that figured the Awesome Portfolio's CAGR was closer to 6.5% if you strip out the massive run in gold from the 1970's. 

Using ETFs, we can backtest back to late 2004 and in that run, it compounded at 7.37% versus 10.97% for SPY and since the idea seems quadrant inspired, the Permanent Portfolio Mutual Fund (PRPFX) compounded at 8.14%. The Awesome Portfolio was less volatile than SPY or PRPFX but not half as volatile.

I don't think REITs are a very reliable diversifier. Managed futures do a much better job, when we take out VNQ and add managed futures instead, we get about the same result as the Awesome Portfolio with much less volatility, much smaller drawdowns, half the beta and no huge, unrepeatable skew from gold.

Using managed futures instead of VNQ resulted consistently smaller drawdowns than in the Awesome Portfolio.

The only way I know to go back that far on testfol.io with managed futures is simulated DBMF. For anyone actually interested in putting 20% into managed futures, I'd suggest splitting that up across several funds. It's not as simple as just five funds total but we've seen enough performance dispersion across managed futures funds that such a huge allocation to one fund could create the sort of stress Dillian is trying to avoid. 

With the updated version that splits the managed futures between simulated DBMF, AQMIX and ABYIX and removes BND in favor of FLOT to take out duration, it still looks competitive with the shorter time period. Dillian said that "the one vulnerability of the Awesome Portfolio is rapid rising rates." He noted that bonds, stocks and gold would probably get "killed." He said real estate would be ok but VNQ was down 26% in 2022. I've been saying for 20 years that REITs are not good protection against declines.  

The much smaller drawdowns also hold up in this second study.

I used FLOT as I said but there are now many more choices to split the FLOT slice and add a few more basis points of yield to the portfolio. 

Can this continue into the future? There's no way to know but if this is quadrant inspired then the expectation is that properly diversified, managed futures has been better than VNQ for mitigating downside volatility. There should always be at least one thing working in the Permanent Portfolio, that's the big idea, and I would suspect at least two things could always be working in the More Awesomer Portfolio. A caveat is that I don't think there's anyway this concept keeps up with equities other than if we have another lost decade that skews the results for a while.

A quick follow up, it looks like the FirstTrust BuyWrite Income ETF (FTHI) also pays out about 93-94% ROC as we've been looking over the last few days. Also that fund is quite a bit older than most of the other ETFs in the space, it goes back to 2014 and has $2.5 billion in it. In it's early years it distributed about 5% but for the last few years more like 10% as interest rates as moved moved up. Side note, if you are going to dabble in derivative income funds I would strongly encourage learning the role that interest rates play in options pricing. 

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.

NAV Incinerator

Amy Arnott from Morningstar took a hatchet to the YieldMax Ultra Option Income Strategy ETF (ULTY). If you click through to the fund's website, this is waiting for you;

The fund blends stocks of varying volatility profiles and then sells call spreads to generate a whopper of an "income." A derivative income fund that yields 20% should not be expected to keep up with its distributions so at 60%;

The other day, I talked about crazy high yielders incinerating NAV, 60% would do it. When we dig into depletion/bridging strategy theory, part of what we are trying to assess is whether some sort of higher yielding portfolio would last longer than just leaving the money in a savings account and spending as needed. 

As a simplified example, someone has $120,000 and wants to spend $2000/mo for 60 months until they start taking Social Security at their preferred age of 67, all the while letting the IRA account grow. They could leave it in cash and then start Social Security in the 61st month after the $120,000 is depleted. 

If five years ago, this person put the $120,000 into 50% cat bonds and 50% T-bills willing to be at zero in the account after 60 months, they are a little better than that, they still have nine months of their desired withdrawal amount which gives them optionality to delay Social Security a few months or do something else with the remaining $19,000. Is that worth it? I think so but to each his own.

If instead of SHRIX/T-bills, the $120,000 was split between SHRIX and covered call fund SPXX, they would have had the optionality to extend two years beyond the original five period where they were willing to have the smaller account zero out and start Social Security.

In the context of a bridge strategy, these two examples aren't very aggressive and there is a basis to believe the above could work. Not so with ULTY.

If someone owns ULTY and reinvesting the distributions, why would anyone endure that kind of volatility for a total return of 2%, it doesn't make sense. If they are taking the distributions, the starting dollar value from when the fund first started has gone from $10,000 to $4635 at the start of 2025. So in 2024 they got $5365 in "income," then in the second year they got close to 60% again from the greatly reduced value, $2704 of income in 2025. So far in 2026, the "income" taken in is $562 and the current value of the position is $1357. The fund has already had one reverse split and it has a lot of assets so the fund can probably endure. While a small slice, 5% or less, could fit into an aggressive high "income" bridge strategy, we've looked at several examples lately where this can be done without an NAV incinerator. 

Another ROC-centric fund popped up on my radar, the Goldman Sachs S&P 500 Premium Income ETF (GPIX). It's just shy of three years old but it looks like about 90% of its distributions have been ROC. So far it is performed noticeably better than Neos S&P 500 High Yield Income (SPYI). With the upcoming merger, I'm not sure what will happen with these two but they are both huge, $5 billion for GPIX and $11 billion for SPYI.

Whether GPIX is a good fund, bad or meh, it is not an NAV incinerator. 

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.

ROC Palooza

Just a quick post to close out our conversation of distributions that return capital (ROC). At the end of yesterday's post I said that if there wasn't already, there soon would be a way to build a portfolio that pays almost entirely ROC and that diffuses issuer risk for the few circumstances where a lot of ROC is preferable. 

Derivative income funds are not insanely complex other than autocallable funds if you count those but there are some moving parts and while the odds of a malfunction seem extremely low, it's not the same thing as buying SPY or VOO. Looking closer, there are enough funds to diffuse issuer risk.

We've talked about ROCY, it is slightly less volatile than the other broad based domestic ETFs listed. XDTE is borderline crazy high "yielding" at 20% and its distributions have been 100% ROC. BIGY is a YieldMax product that sells call spreads against the 50 largest US stocks and it's distributions almost always more than 95% ROC but there have been several exceptions. NIHI is from Neos and gives some foreign exposure, Neos does a good job paying ROC. We've mentioned MDST a few times, it has been paying 100% ROC thus far. CAIE is an autocallable ETF that pays ROC. We mentioned ACSP as being a more volatile autocallable that says it will also pay ROC. MPIM is another new autocallable fund that says it intends to pay ROC, we'll see. KGLD yields 14%, references gold and been running 86% of its distributions as ROC. BOXX and BALT are fixed income proxies that don't pay anything which is good in this context. 

It's kind of a complete portfolio....kind of, domestic equities, foreign equities, some natural resource exposure and fixed income (substitutes). To be clear about ROCY, XDTE and BIGY, those funds diversify issuer risk there's really no meaningful diversification looking through to the holdings. The large cap domestic equity sleeve of this portfolio is 45%. If we just wanted that 45% in simple market cap weighted then one fund would do. This is an aggressive strategy so we are diversifying the issuer risk. It would probably be ok to put all 45% in ROCY but that seems unnecessary in case there something crazy that comes along, crazier than the craziest black swan. 

The backtest is useless in terms of assessing growth rates, it's only six months. I think there could be some information in the volatility numbers though.

The ROC Palooza portfolio also has a slightly lower standard deviation.

I asked Claude if it was reasonable to expect that the volatility characteristics could endure and it said mostly yes but it was worried about volatility shocks. I pushed back, asking about the Volmageddon event of early 2018. It told me to get the info from testfol.io, there it is below. They did a little better. Claude thought the fast decline at the end of 2018 could also be thought of as a volatility shock and the funds derivative income funds did a little better. 

It's not the end of the world if ROC Palooza looks like VBAIX on a total return basis. KGLD could go up a little if stocks go down I suppose but to the extent gold tends to go up when stocks struggle, maybe KGLD could avoid going down. We'd need to add BTAL or managed futures if we wanted more reliable negative convexity in the portfolio. 

This is an aggressive idea as I have been saying but it could be plausible and although there aren't a lot of fund choices yet we did cover a lot of bases in today's first iteration. Someone really wanting to add more defense could swap BTAL in for either BOXX or BALT.

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.

Highway To The IRMAA Zone

IRMAA recently came up in passing in a conversation. This has been coming up a little more recently. IRMAA stands for Income Related Monthly Adjustment Amount. 

The context is Medicare. If you make above those dollar amounts you can pay more for Medicare. If a couple is between $218,000 and $2740,000 the surcharge is $81.20 above and beyond the $202.90.

Someone of Medicare age, still enjoying their work and earning enough to trigger IRMAA probably wouldn't stop working for that sole reason but the idea of trying to manage income to avoid IRMAA if possible is worth studying for anyone who might be affected. The IRMAA income calculation is different than earned income for income tax purposes. Interest from municipal bonds counts toward IRMAA. Gemini says Roth IRA distributions do not count toward IRMAA but Roth Conversions can move the needle. Withdrawals from HSAs for qualified medical expenses do not count but HSA withdrawals for non-qualified medical expenses do count. 

It's tricky. I am not a tax expert by any means, my understanding could be best thought of as usually knowing the right question to ask someone who is an expert. 

This is an area where ROC, return of capital strategies can help. The portion of fund distributions deemed as ROC is excluded from the IRMAA calculation. If a person/couple's circumstance is such where eliminating IRMAA-able (a play on the word taxable) income from a taxable account would keep someone out of the IRMAA zone, there are a few ways to do that. 

The simplest and least volatile way would be to leave cash in the default "money market" option at Schwab or Fidelity. In taxable accounts, not IRAs, the default cash option pays effectively no interest, just a handful of basis point. I'm not sure how that is ok but these are non-competitive, non-market rates. You have to buy a money market like SWVXX at Schwab or SPAXX at Fidelity to get a competitive yield. Of course this strategy will have no chance of keeping up with purchasing power. In ten years, $100,000 might grow to $101,050.

Putting it all in box spread ETFs provides a similar effect to owning T-bills in terms of gross return. A box spread is an option combo that neutralizes out equity market risk to the point of a very steady T-bill sort of return.

BOXX has no distributions to speak of, the price just accretes. Someone in the 24% tax bracket who bought BIL has had an after tax CAGR of 3.45%. Buying BOXX and not selling has owed no tax. BOXX did have to pay $0.29 in 2024 but the NAV was over $100, effectively no distributions but technically the one. There are at least three other box spread ETFs; CBOX, XCSH and LBOX but BOXX is the first one and is huge with $14 billion. BOXX is a client holding.

The drawback is not being able to sell in the IRMAA context because sales are subject to capital gains taxes and cap gains count toward IRMAA. So there's some growth in the money but no utility if staying out of the IRMAA zone if the problem trying to be solved. 

This is where products that return capital in their distributions can help. ROC frequently takes a bad rap but there are uses and advantages and tax deferred income is one of them. The basic building block of understanding is that ROCs reduce cost basis. If the ROCs actually take cost basis down to zero, then after that, distributions are taxed as long term capital gains. Gemini thinks that YieldMax TSLA went to zero cost basis in early 2024 for original holders who never sold. If correct they've been paying long term gains on the ROC portion of their distributions ever since. It's probably worth running the numbers for selling once the cost basis gets to zero. There may be nuance to that beyond my understanding so ask a CPA or the like. 

We recently looked at JP Morgan Equity Premium ETF (ROCY), not to be confused with JEPI, that seems to have all of its distributions paid as ROC. The fund is only six months old. So far so good with ROCY but still, it's just six months. SPYI from NEOS has been pretty good about paying 95% of its distributions as ROC.

Some autocallable funds pay ROC too but some do not. CAIE does as well as the brand new ProShares ACSP.

ACSP seeks to pay 18-19%, versus 14% for CAIE, and the volatility seems sky high for ACSP. 

In the context of the $450,000 bridging strategy we've looked at a few times lately where a smaller, probably taxable account is willing to deplete to get the investor to the next milestone like Social Security or RMDs, it is possible to have much of the income be tax deferred. 

In six months, ROCY has paid about 4% which implies 8% annualized. SPYI has a much longer track record and yields 12% (95% of which has historically been ROC), CAIE pays about 14% of which 85% or so has been ROC. We've looked at the Westwood Enhanced Midstream Income ETF (MDST) pays out 9-10% and the fund's website notes 100% ROC from its previous distributions. Some of the lower yielding funds from the crazy high yielding firms have funds that return a lot of capital for distributions to sift through. BIGY from YieldMAX targets a 12% payout but there has been variability in the percent of distributions that has been ROC.

Loading up on SPYI (or ROCY), CAIE and BOXX is not something I would consider but if there isn't a way yet to cobble together a portfolio that diffuses issuer risk, there soon will be. A scenario where $40,000-$50,000 of tax deferred income keeps someone out of the IRMAA zone is fascinating. Check with your tax advisor (repeated for emphasis). 

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.

30/30/70?

The Sovereign Wealth Fund of Norway is looking to reduce its exposure to US treasuries. Kenneth Crompton from National Australia Ban is quoted in that article as saying "they’re arguing that they already own enough government bonds to satisfy liquidity needs, and that a long-horizon investor should harvest a broader set of fixed income risk premia.” I like that quote, trying to harvest a broader set describes what we're trying to do here.  

Pivot over to Barron's and this doozy of headline; The Death of the Safe Haven: How to Fix Your Bond Strategy as Yields Rise. Death is a strong word. The second sentence is unintentionally funny; "as interest rates rise, bonds are becoming a drag on investment portfolios." Becoming? A little later on, "a sizable allocation to a popular exchange-traded fund such as iShares Core U.S. Aggregate Bond (ticker: AGG) or iShares 20+ Year Treasury Bond (TLT) may not do much to bolster a portfolio." Then it noted AGG being flat on the year and TLT down 2.36%.

Michael Cuggino who manages the Permanent Portfolio Mutual Fund (PRPFX) was cited in the article raising the point we've making here for a while about whether yields further out the curve provide adequate compensation for the risk and the volatility associated with duration. John Montgomery from Bridgeway Capital notes that investors think bonds are safe but they are not. 

Andy Briggs from Plaza Advisory said he's taken 70/30 to 60% equities/22% fixed income/13% alts. He likes liquid alts, especially market neutral and macro strategies. 

Something about that passage made me think about 30/30/40 where the 40 refers to alt exposure. 

The first three are fixed income or fixed income substitutes, the next two split the equities evenly between foreign and domestic and then four alts that don't have overlapping risks. NLY is cheating a little bit but the number of times it does its own thing versus the rest of the world, it's arguably altish. Very volatile, the most volatile holding in the mix, but I think calling it alt-like is defensible. The portfolio has a trailing yield of 4.98%.

I was able to weave together funds with a decently long track record. Newer funds backtested with better results but I didn't feel confident about a 3 or 4 year look back being as reliable. Portfolio 3 is levered up. I swapped out the three fixed income funds and two equity funds for a 30% weight in PSLDX which is a PIMCO fund that owns 100% equities and 100% long bonds. I then put 17.5% each into the four alt funds. 

Despite the misery of long bonds, the 30% weighting to long bonds in Portfolio 3 wasn't problematic which is very interesting. Another point to consider is that looking back a portfolio would have generally been better off with domestic equities only. In Portfolio 1, only has half its equity sleeve in domestic and it has a lot less equity than VBAIX. IMTM lagged SPY by 500 basis points compounded and SCHD lagged SPY by 230 basis points compounded. PSLDX' 30% weight to SPY is a lot of basis points that Portfolio 1 didn't get, looking back.

A quick word about PSLDX. It is a very old mutual fund. In the period we studied back to late 2017, the total return of that fund compounded at 12.42%. The price only growth rate was negative 3.94%. If you look at the dividend payout history on Yahoo Finance you will see that some of the distributions have been enormous. You can dig into that if you're interested but I am thinking it might be paying out some very old capital gains but I don't know. In an IRA or Roth those distributions can just be reinvested and that's the end of it but for taxable accounts, tax will be owed whether the distributions are reinvested or not. 

For anyone actually considering this, RSSB from ReturnStacked does something similar but the duration is a little shorter. 

Coincidental to what we just looked at, Jason Zweig wrote about levered ETFs. Corey Hoffstein from ReturnStacked retweeted it noting that there is a difference between leverage for magnifying returns versus leverage for adding diversification and then Cliff Asness retweeted Corey agreeing that the magnification versus diversification is an important distinction. Portfolios 1 and 3 are attempts to diversify not magnify.

Many of the capital efficient ideas we try to build don't really add much but the one today arguably does. It adds 160 basis points to the CAGR but it does have the exact same Sharpe Ratio as the unlevered version. The leveraged version went down less than VBAIX in all of the meaningful declines in the test period except the Covid Crash but the unlevered version in Portfolio 1 was far more robust across the board during the various declines and panics. 

This was interesting. 

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.