Structure Fire!

Tuesday night, Walker Fire was called out to a structure fire around 10pm. Part of the process for responding to any incident is an evaluation of what is actually happening which can sometimes differ what what the person calling 911 might think they're seeing. For a fire, we tell dispatch that there is a "working fire" when there's actually fire.

Sometimes it may come in as a fire but not actually be one but this was. One of our firefighters lives very close to the scene and let us know on our tactical channel that it was a fire and I in turn relayed to our dispatch. My telling dispatch "working fire" signals to any other departments coming to assist (this is known as mutual aid) that there is really a fire too. 

The fire occurred about a minute or two away from a substation we have that has one engine that is four miles from our main station. We have six firefighters that live up in the area I am talking about so they were able to grab that engine get to the scene quickly and start the process of trying to prevent things from getting worse. In this instance, getting worse would have meant embers blowing onto other houses, there were quite a few very close by including one that might have only been 50 feet away. Another potential bad outcome could have been ripping as a ground fire and then taking out other houses.

We came from where the arrows are, driving uphill to what I called lower road. The reporting party or RP called from that one house at the bottom of the drawing marked RP so we were called to that address. The fire though was actually on Upper road. It was all very bunched up and the fire was easily reached with hose from Lower road. Both Upper and Lower roads dead end.

Engine 85 is the truck stationed in the area and was on scene first. I drove Engine 86 with two other firefighters and I assumed IC (incident command) when we arrived and also functioned as the engine operator (engineer) of 86 for most of the incident. Having two roles on an incident this complex is not ideal but it just played out that way. 85 pulled hose straight up from their truck toward the back of the house and 86 pulled hose up toward the front of the house. 

Shortly thereafter, mutual aid arrived at what seemed like the same time, one engine from two different departments. They checked in with me when they arrived and asked "where do you need us?" Fortunately, I knew they layout of the area also I did not want to turn Lower road into more of a parking lot than it already was so I asked them to go in on Upper road and work from up there. For anyone who has been a firefighter my thinking was that engines 1 and 2 (not their real numbers) could get the A and B sides while we worked the C and D sides. 

The larger red box is the house and the smaller was a wood pile that went up that some of our personnel worked on. WT stands for water tender which is a water truck. Ours hold 2000 gallons, far more than what engines carry. They'd fill the engines, run dry eventually, then go refill and come back.

We were able to knock down the fire pretty quickly which greatly reduces the threat of the fire spreading. Shortly after this point I released the two mutual aid engines. 

From there it went from drama and high leverage to the drudgery of trying to actually extinguish the fire. There was what was essentially deep rubble inside footprint of the house. The rubble was deep like quicksand so there was no way to get in there with hose and effectively, fully put it out, this would have been unsafe in my opinion. 

At this point we started to use foam to try to smother the heat. We used a lot and got to the point where there was just one area that was still obviously retaining heat. There could have been other areas holding heat, we couldn't be certain but there was the one area where after foaming it up pretty good, smoke would start coming up again 10-20 minutes later. 

All in it was about 12 hours and one of those calls that we'll always remember.

WSJ Joins The Party

The WSJ wrote about three alternatives to the typical 60/40 portfolio allocation, all three of which we've looked at here before. I added a fifth.

The results

Our backtest goes to Aug 30, 2000 because that was the timeframe WSJ cited. Portfolio 5 simulates 67% in NSTX which leverages up in such a way that 67% to that fund equals 100% in VBAIX. 

Was the leverage in Portfolio 5 worth it? Based on growth rate it seems like it was. Because of the volatility, the Sharpe Ratio wasn't impressed just being right in the middle of the pack and there hasn't been reliable crisis alpha.

If you're interested in very simple 30/70, iShares has an ETF for that with symbol AOK which has $630 million in AUM. For what it's worth, I think 70% in bonds in the AGG/intermediate or longer treasuries sense is a dreadful idea. 

I've been writing about most of these alts for a very long term and certainly the idea of avoiding duration for much longer than that and I am convinced it works. MERIX/PPFIX are client and personal holdings.

VBAIX' return with AOK's volatility. IRL, I might want smaller weightings to more alts though or maybe a larger allocation to something like TFLO or add in T-Bills.

We just got back from a quick trip, so just a short, fun post. 

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.

I Made A Bored Ape!

Remember NFTs, bored apes and pudgy penguins?

"Ryder Ripps" shared his story on Twitter about buying the following bored ape a few years ago for $425,000 and just now selling it for $37,000. 

I would be willing to let this go for just $25,000.

Don't even think about right clicking on it.

This is a part of the crypto mania I never understood when it was at its height and still don't understand it now. I said pretty much the same thing several times regarding my interest which was they are fun to look at for a moment before moving on. I don't understand they're having any monetary value.

Ripps got a lot of comments about right clicking and so on and he kept talking about the sense of community with these, "You cannot access the Culture through Right Click Save" he said. The loss though left a "hole in my chest."

The whole thing from Ripps might be satirical but if you were following this you know the dollars involved were this big. I still see some of this now, people posting these so it's not dead but the decline has been staggering for anyone who paid up. DappRadar says the decline has been 93% from the peak which is consistent with Ripps' story. 

I have this card of Darnell Hillman that I doubt was even $5. If you're any kind of basketball fan and don't know about Hillman or the ABA, it would be a very fun rabbit hole to go down. Get the book Loose Balls by Terry Pluto. The book is fun and so is having the card.

See the forest for the trees on these things and make good decisions. Is a bored ape akin to a baseball or basketball card? That seems plausible from the outside looking in or maybe Garbage Pail Kids? NFTers would tell me to fuck off with that comparison but maybe one you really like is worth $10-$20. Not $10,000, a plain $10, a fun little thing.

But I will still let Ape With SCBA go for $25,000. No takers? How about if I reduce it slightly to $100? 

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.

Making It Work

Let's follow up on Saturday's post about a portion of a a newly retired 65 year old's portfolio that is in a taxable account. The idea is he is willing to drawdown or even deplete this piece of money while waiting until 70 to take Social Security and/or take IRA distributions. 

Here's a version of what we talked about in that post. 

Yes, I took a shortcut putting all 10% into NFLY. BKLN and EMPIX are both in my ownership universe. WTPI is the old PUTW ETF. WisdomTree tweaked the strategy but it still sells put options. It has a trailing yield of about 11% with quite a bit of equity beta.

The first result starts with $300,000 and assumes $30,000 comes out each year.

As I mentioned on Saturday, I thought a normalish allocation to plain vanilla equities has a decent chance of outgrowing the erosion of the YieldMax allocation. The "yield' of the portfolio was around 10%. 

The second version assumes taking $60,000 per year. Part of the idea if I wasn't clear is the willingness for some depletion of the starting balance of $300,000. The bigger goal is that the money lasts for what he needs, the five years from 65 to 70 even if most of it is exhausted at 70 years old. Anything leftover could be thought of as found money. After two years with a 20% withdrawal rate he still has $278,000.

The portfolio lacks any sort of crisis alpha or defense. If one of the five years in question sees a huge market decline, this portfolio probably will go down in a similar fashion. If the market does have a hideous decline in year three which is where we are in relation to the backtest, being able to still pull out $60,000 until 70 seems plausible. 

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.

Bloomberg Dives In On Crazy High Yielders

Bloomberg had a doozy of an article about how Gen-Z investors are seeking out yield in pursuit of FIRE (financial independence/retire early) instead of YOLO asymmetry. Intended or not, the article is a fantastic behavioral palooza. I remembered the gift link!

Just working from top to bottom, the first paragraph labels the idea of a long career with a short retirement before dying as being a ripoff. In those terms, sure, that does not sound like a recipe for a great path through life. The implications are that work sucks, retirement is short and very limiting and then it's over. I think the sentiment really is about capturing a skeptical sentiment held by some portion of younger people. Who knows how many people view things that way but it tracks that plenty do. 

It is up to each of us individually to solve this for ourselves. If someone is self aware enough to observe this potentially grim life path, then maybe they are self aware enough to do something about it like trying to find work they actually enjoy and that they find purposeful or add in outside activities that can make life more purposeful. 

There was a short bio of a 26 year old who has been influenced by his grandfather having worked in a factory his whole life in more of a traditional work then retire arc. The 26 year old said he didn't want lock away his capital until he's 65. He stopped contributing to retirement accounts to instead build a dividend portfolio to live off the income. He also has a huge YouTube channel so presumably that generates income but the article never mentioned any income. 

One component of the FIRE movement is it really is a movement with plenty of Socials (Facebook groups, reddits and other YouTube channels not to mention blogs) that create genuine community support for people at all commitment levels of FIRE.

Bloomberg asserts that "dividends and chill" is much closer to what FIRE is really about than YOLO asymmetry.

The there was a discussion of investors falling for a dividend fallacy that dividends improve returns, the article asserted they don't. In the 15 years since the Schwab Dividend ETF (SCHD) has been trading it has outperformed the S&P 500 on a total return basis five different years. The cumulative total return for  SCHD was 411% versus 582%. The Vanguard Dividend Appreciation Fund (VIG) has outperformed the S&P 500 on total return basis six out of 20 years and lagged far behind cumulatively. 

Additionally, dividends aren't necessarily tax efficient either. There are of course circumstances where tax efficiency may not be too important, obviously there is no tax implication in qualified accounts and speaking personally, if I was living off a dividend portfolio with a very low effective tax rate I wouldn't be too concerned about the taxes. 

If that search result is correct, then on $100,000 in qualified dividend income, 15% tax would be due on $5950 which is $892, an effective tax rate of less than 1%. We are all entitled to our beliefs, and this sort of effective tax rate wouldn't bother me. 

A diversified portfolio should probably include traditional dividend payers like staples stocks, certain healthcare and so on. But I have never been a fan of dividend-only portfolios as preached by a lot of Seeking Alphans way back when (I've long ago lost all contact with SA and have no idea what the vibe there is anymore).

You knew it was coming, YieldMax! Parts of the cohort are big on the YieldMax funds as well as the other crazy high yielders. 

Looking at MicroStrategy and its corresponding YieldMax. The $463,000 figure is buying the common stock when MSTY listed. The $343,000 number is buying MSTY and reinvesting the distributions. The $72,000 is buying MSTY and taking out the distributions to live on.

The $270,000 was described as above.

I follow YieldMax on Twitter and they post regularly. The comments have turned on them. People are upset about the NAV erosion. The opportunity cost of going heavy into a YieldMax product versus a common stock that does even just decently tends to be enormous. That's clearly the case with MicroStrategy and MSTY. 

Mike Venuto (disclosure, I know Mike) from Tidal which is the white label provider for YieldMax was quoted as saying “If you want to just own the underlying stock, own the underlying stock. We’re not trying to beat the underlying — we’re trying to turn the volatility of the stock into income. People who are only trying to get the upside should not buy YieldMax products.” Or as we have said here, they are not proxies for the common stock. YieldMax products and the other crazy high yielders combine the stock with selling the volatility of the stock and that is a different thing. 

MSTY has been trading for 18 months and the NAV erosion as been 26% while the common is up 370% (per testfol.io). Contrasting with a stock and corresponding YieldMax that is less volatile and avoids crazy CEO risk, since the inception of the YieldMax Netflix (NFLY) just over two years ago, NFLY has eroded by 13% while the common has gone up 183%. 

Copilot says that MSTY's distributions total $45.41 since inception versus a starting price around $20 and now it trades around $15. We've talked a little about a scenario where someone is maybe 65 and retired but wants to wait to take SS and wait to take IRA distributions. If this person has a good sized taxable account they might be able to construct a portfolio that includes some exposure to very high yielders with the willingness to draw the balance down. 

As crazy as MSTY is, the erosion has only been 23% in the face of providing a lot of "income" in just a year and half. My example of the 65 year old looking to stretch a portfolio for just five years from MSTY's inception, he's already 18 months in and still has 75% of his MSTY balance left. 

The other day we looked at putting 10% of a portfolio into a bunch of different crazy high yielders to minimize idiosyncratic risk while putting the other 90% into a broad index fund. Looking to stretch out a little more income for this 65 year old, there are plenty higher yielding income sectors to also include without going further into crazy high yielders. There's a decent chance that the growth of a 60% allocation to plain vanilla equities can outgrow the erosion of 1% each into ten different crazy high yielders.

The idea is trying to let the balance last longer than taking 10% of mostly principal to cover the five year gap we're working with in this post. 

So imagine 60% in plain vanilla equities, 30% in higher yielding fixed income like catastrophe bonds, bank loans and so on with 10% in crazy high yielders as noted above. The question is, would our 65 year old investor be better off just going plain vanilla 60/40. Looking back, the answer is probably yes, that's pretty clear. However looking forward, in a lower return environment, a portfolio with a small allocation to selling volatility might have a better result. It's an additional source of return. Remember, most of the YieldMax products have a positive total return. That positive total return may not come close to the common but they are not the common stock, they combine the common with selling the volatility of the common.  

I don't think the YieldMax structure can fail. At a low enough price, the funds will reverse split and carry on. If the company disappeared then yes, the individual YieldMax would fail so to speak. I'm not worried about Netflix any time soon in this context but MicroStrategy might be a different story. 

Can't fail? Ok but look at the YieldMax ULTY.

Hedge fund in an ETF? Maybe, but ouch.

The image quoting Venuto was pulled from a Tweet and the comments are brutal.

And the characterization of the distributions for tax purposes. Others have reported real problems on this front. Sometimes they are returns of capital and other times they are ordinary income. Ok, but the reported problem is the recharacterization of the distributions which really is a problem.

Back to Bloomberg and this passage about another personal anecdote.

So far, Arteaga has invested some of the proceeds from the sale of his house and two cars, and about $30,000 in margin loans, taking his portfolio to $160,000. He hopes this nest egg will generate $9,000 of income a month, though that figure doesn’t factor in the payments he’s making on his margin loans or the tax bills he is likely to face.

So $108,000 for the year out of a $160,000 account? Ooof, my guy, no. My example above, I'm thinking maybe 8-10%/yr, maybe taking some principal out to to achieve that level. It could work but would not be riskless but this guy thinks he's going to get more than 50% out. He can take (more than) half out but the account isn't going to last very long. 

Another anecdote.

VanWagenen says he cashed out his wife’s retirement account and invested the money in various YieldMax ETFs and other high-yield products (he kept a 401(k) from his employer). He still has a day job as an accountant, but he uses his investment income to pay his mortgage, gas and internet bills and to make the monthly payment on his Plymouth minivan.

Oh boy. Don't do this. What we laid out above is fun theory and I think could work but going all in on YieldMax as implied is a catastrophe waiting to happen. Cashed out his wife's retirement? If you're VanWagenen and wanted to go all in on YieldMax, why would you make it worse paying the tax and the penalty on the 401k? Why wouldn't you do it from a rollover IRA? Honey, how can we make a terrible decision even worse? Wait, I know how we can do it!

One thing I picked up on is that these people in their 20's and 30's don't understand what it is to be in your 50's and 60's. At 25, I certainly did not understand 50. At 50 or 60 you might be old or with a few good habits you might be biologically young. I used to say this more frequently here but being 50, now 59 ahem, with a little money in the bank and still able to get it done physically is a great spot to be in and I don't think the people profiled can see this. 

The best thing I can tell someone that age is keep investing simple, pay your dues, live below your means and take care of yourself (diet and exercise). Forty will be here before you know it and following that path, you'll have plenty of optionality when you get there.

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.

Why Does Anyone Need This?

Thursday I mentioned a backtest that the ReturnStacked guys put up on YouTube showing the negative correlation between equities and managed futures. A little later I noticed how much the ReturnStacked Bonds & Managed Futures (RSBT) is down. With RSBT "for every $1 invested, the RSBT aims to provide $1 of exposure to U.S. bonds and $1 of exposure to a managed futures strategy."

Using the same four managed futures mutual funds they used on YouTube, I built out the following. 

Portfolio 2 should replicate RSBT and being short CASHX to build that one should at least partially address the financing cost. Portfolio 3 is an unleveraged version. 

To be clear, no one suggests putting 100% of a portfolio into RSBT and I wouldn't tell anyone to put 100% into the unleveraged version, they're just for what I believe is apples to apples context. Looking at the numbers, I don't know why anyone needs this and I don't think it solves any problems. 

Changing things up a little to a more modest allocation to managed futures with bonds without any leverage.

Simple isn't always the better choice but it often is the better choice. 

Barron's wrote about how to use AI in an investing context. I've said this before, I think AI can help when used correctly with the right expectations but we need to spend time learning how to use it. All the more so if you're an advisor. For now, my engagement has mostly been asking it to find things, compare funds/strategies and ask it why I might be wrong about something. 

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.

All Weather Update

ETF.com had another good post, diving in on the SPDR Bridgewater All Weather ETF (ALLW). The fund has been successful both in terms of assets raised and I think the performance is probably in line with what they had in mind but not really game changing.

ALLW is quadrant inspired risk parity. In the comparison I built, HFND is hedge fund replication managed by Bob Elliott who worked at Bridgewater, FAPYX is Fidelity's risk parity fund and FIRS is quadrant inspired without risk parity and one that I am test driving in one of my accounts. FIRS has some Bitcoin in it and a fair amount of gold which accounts for a meaningful chunk of the outperformance. 

I doubt they are thrilled doubt the volatility numbers for ALLW, assuming testfol.io has it right. It's a very short sample size but its had the same volatility as VBAIX with 240 basis points less in growth. I wouldn't expect it to necessarily keep up with VBAIX unless commodities ripped and they owned the right ones.

If someone is interested in ALLW, what are they trying to do, what effect are they trying to add? The next question should then be is there a way to get the same effect in a different way? It's too soon to say definitively yes at this point but I suspect there are better ways.

With some overlap, iShares posted a sort of fall outlook with thoughts about asset allocation that I took as being shorter term in nature. The centerpiece was the iShares US Equity Factor Rotation Strategy ETF (DYNF). It's a five star fund but it's not obvious that there's a ton of differentiation. There's been some but I don't think it has netted out to a lot. 

They like the belly of the yield curve at 3-7 years and suggest their fund BINC managed by Rick Rieder. BINC has done much better than AGG, higher returns with much less volatility. Included in their discussion was their Bitcoin ETF and the iShares Advantage Large Cap Income ETF (BALI). BALI is a derivative income fund that has been around for almost two years. 

A little more substantively, they note that the correlations between bonds and stocks has changed calling it "less reliable" which is of course the conversation we've been having here for a long time. This next quote was interesting even if it's about steering the conversation to BALI. 

Investors are diversifying beyond traditional bonds, seeking strategies that blend income, risk management, and long-term growth potential.

I don't think we've articulated derivative income in the context of blending income and risk management. Covered call funds are certainly marketed that way but in it's most basic form, selling calls caps the upside and while the income can soften the blow on the way down, during a real whoosh, expecting a covered call fund to also drop a lot is the mindset I would suggest. Newer variations might cap less of the upside with 0dte options or some that sell puts for income and so on. Yes there are drawbacks to derivative income funds but I wouldn't discount the possibility that tweaks to the strategy could make them better products in the future beyond some of the very narrow theory we've kicked around in previous posts. 

The ReturnStacked guys had a show on YouTube today trying to make the case for managed futures now. Obviously they are big believers in managed futures given the funds they've launched but of course after fantastic returns in 2022 and a resurgence in popularity because of those returns, managed futures has appeared to struggle. 

Making the same point I made many times in the 2010's, managed futures tends to be negatively correlated to equities. If equities are ripping higher, there's a good chance managed futures won't be doing well. They posted the following during the presentation that makes the same point.

Decade to date, it's pretty much been doing exactly what it's supposed to do. It looked like this in the 2010's as well. I posted the same type of chart many times in the 2010's, they looked similar to this and I think makes the point of what a terrible idea 20% into managed futures is. Toward the end of the show, one of the guys said they didn't think 5% in managed futures would do much to help. The push back to that is to diversify your diversifiers. 

No single diversifier should be thought of as infallible. If managed futures "works" nine out of ten times, great, but what about that one time it doesn't? What if equities drop 50% in some bear market event and a 20% allocation to managed futures drops 18% and what if that happens one year before the person plans to retire? Equities are the thing that goes up the most, most of the time which is important to keep in mind when trying to size alternative strategies. 

We'll close out with Larry Swedroe going after buffer funds. He seemed to be going after the ones that offer 100% downside protection. I don't have the 100% buffers dialed in but he lays out how they still lose money in opportunity cost and that what they own are 95% in T-bills and 5% in a call spread which makes the 70 basis point fee expensive. He says that you could "easily construct this strategy yourself for a fraction of the cost." 

That's not necessarily accurate. The chances are that the friction for someone putting on an odd lot sized spread would add up to more than the fee of the fund. Additionally, even if 70 basis points is too much, there is some value in having the fund put the trade on for you. 

A bigger point is that I think he is viewing these as a replacement for equities which as we discussed yesterday, they are not replacements for equities. I'm not a fan of these at all but any critique should focus on the right thing. FWIW, I do believe there are probably easier ways to access portfolio protection without capping the upside.

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.

Time To Rethink Everything About Asset Allocation?

William Bengen, deriver of the 4% rule for sustainable retirement withdrawals, was on the wire this week again making the case that 4% is now too conservative, likely allowing people to get to the end with still too much money unspent.

The way the article reads, Bengen treats the optimal withdrawal rate target as constantly moving. Four percent might be too low for the reason Bengen cites. Backtesting 60% simulated S&P 500/40% simulated 3-7 year treasuries on testfol.io goes back to 1962 and has compounded at 8.8%. That 8.8% includes an unrepeatable 40 year run ending in 2021 where the 3-7 year treasury compounded at 6.79%.

One idea about the sustainability of 4% that I don't think I've seen addressed elsewhere is that it's not just about taking 4% every year, it is about being able to sustain in the face of the occasional, very expensive one-off that has to be paid for. Who budgets for their next roof replacement? We replaced our roof in 2018 or maybe 2019. Maybe that means we have to do so again in the late 2030's or early 2040's. Where one offs play a role, I think a moving target for a withdrawal rate is a bad idea. 

You know what you are spending now. Hopefully if you're not retired yet, you have at least some sort of rough outline of what your retirement spending will be. If Social Security (should you use a reduced SS amount?) plus 5% of your portfolio will provide enough money for what you have in mind, great but what is your vulnerability to something like a new roof or any other not enormous surprises? To me, 4% is about expenses and one-offs not just expenses. 

Humble Dollar also picked up on the Bengen interview, talking a little more about asset allocation. Bengen assumed a 50/50 mix of stocks and bonds for his study. Humble Dollar talked about a normal (my word not theirs) range for equities between 45% and 75%. A retirement plan with a huge margin for error, like maybe a good sized account with the intention of continuing to work probably doesn't need 75% in equities. A retirement plan where maybe the account is large but the person doesn't want to work or no longer can work probably needs more than 45%. 

An allocation mix could come down to some combination of growth and real positive return. Real positive return could mean TIPS of course but if TIPS interest you, buy individual issues, not the funds. I think a lot of the alts we look at here could sub in for TIPS in terms of similar volatility profiles and max drawdowns but with slightly higher growth rates.

For the same period, the Vanguard Short Term TIPS ETF (VTIP) compounded at 3.58% with a volatility of 2.98%. TIP got hit very hard in 2022. Remember from yesterday, BALT is not equities. You might make fun of it as a substitute for TIPS funds, but it is not equities. If not equities, what can it be used for? Some sort of real return, low volatility vehicle? Maybe. 

Before digging in, note the green highlight. Testfol.io added Calmar Ratio which divides the growth rate by the max drawdown such that the higher the number the better. 

These are all extreme portfolios but sort of inline with being quadrant inspired. If you take out BALT and run similar tests, you can go back to 2017 and back that far, the CAGR is the same as VBAIX but with a lot less volatility. If you just use client holding BKLN, you can go back to early 2011 and in that period, it lagged VBAIX by 210 basis points, 7.08% annually versus 9.18%, but again, much less volatility. And from early 2011, inflation compounded at 2.64% so irrespective of what the benchmark did, the real return and volatility tradeoffs were pretty good.

I've said many times that 25% in gold is too much for me as is mid-teens in alternative strategies but where bonds aren't reliable anymore, it seems better to balance growth (equities) against a combo of holdings that offer low vol/positive real return. I would go a little more diverse than just five funds though. 

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.

It's Not Equities

Apparently, Goldman Sachs put out a paper "making the case for buffer ETFs" and Cliff Asness made fun of them and linked to AQR's work that draws negative conclusions about buffers.  

One thing we try to do here is look at things that most people hate and see if there is a way to use them, maybe there's a contrarian angle? The crazy high yielding ETFs are an example of that.

One of the five above is the Innovator Defined Wealth Shield ETF (BALT). The other four are various alternative funds that lean market neutral/absolute return. BALT is not the purple line. Whichever one is BALT clearly is not a proxy for equities. On ETF IQ one time, someone from Innovator said that the symbol was a play on words for Bond ALTernative, BALT. So not equities. Don't look at it as equities. It's not equities. 

Is the return stream or volatility or real return useful in your mix? It doesn't have to be, I am not going to buy BALT anytime soon but I have several alts in my ownership universe that look like BALT.

Yes, this would turn out badly for the vast majority of people and yes, Tenev is talking his book but if it really is true that AI is crowding out entry level jobs then it is a decent bet that later stage jobs that people eventually get promoted into might also get crowded out. If all that happens then people will need to figure out how to make their way. This is all a path toward UBI and it's hard to see how UBI would be anything more than simply sustaining. People would need to figure something out, probably involving the internet even if that something is not trading for a living. 

Short one tonight.

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 Realistic Way To Replicate College Endowments

Man Institute did a deep dive on capital market assumptions with a favorable bias toward risk parity. Risk parity weights different asset classes by their risk in such a way that each asset class contributes the same amount of risk to the portfolio so the strategy would own more in bonds typically, often with leverage, to equal the risk exposure of equities. 

Similar to the crazy high yielder ETFs we looked at on Sunday, I am not a huge fan of risk parity but the strategy is still fascinating and I think there is something to learn by studying risk weighting. 

A lot to unpack here. Portfolio 2 is not something that can replicated in a brokerage account but the leverage used creates useful context for what risk parity might look like with funds that we regularly use for blogging purposes. BSJR is a client holding. 

Portfolio 3 offers one way to build a leveraged portfolio thanks to NTSX' capital efficiency. NTSX leverages up such that a 67% weighting to it equals 100% into VBAIX so a 64% weighting to that fund gives Portfolio 3 a 57.3% weighting to equities and 74% in fixed income/fixed income substitutes. AQRIX used to be the AQR Risk Parity Fund and while the fund changed its name a while back it still incorporates much of the risk parity strategy. Portfolio 5 is a lot of risk parity with ROM to add a little more equity exposure in a capital efficient manner.

AQRIX as an exception here, but there hasn't been much in the way of crisis alpha with this idea. Portfolio 5 did go down less in 2022 but just a little less. I tried to equal out the volatility which is a little different than the risk. 

The way we've constructed risk parity, I'm not sure there's much value in trying to replicate it. There's nothing catastrophic here but not very additive either. 90% or 100% in any alt fund is really a bad idea. Ruling something out can be just as useful as ruling something in.

With the slightly longer timeframe of this one, the AQRIX/ROM combo is a little more compelling but still no element of crisis alpha. 

The Wall Street Journal took another look at college endowment portfolios including this chart.

You can hover over it to get exact numbers and yes, not all of them add up to 100. The averages are 57.7% to equity (public and private combined), 21.1% in hedge funds, 11.2% in real assets, 5.6% in bonds and 3.3% in cash. The averages add up to just shy of 100% for obvious reasons. Combining private and public equity makes this something a little easier to replicate and for the most part, the combined equity allocations are pretty close to a "normal" allocation that an individual might have. There are plenty of mutual funds that are hedge fund-ish with quite a few different strategies that offer differentiated return streams versus equities and bonds. 

There is an infinite number of ways to go with this. Where it could be useful and/or realistic is that most of these are heaviest in plain vanilla equities, I constructed them to not take interest rate risk, I split the hedge fund proxies into to two disparate strategies and EIPCX is new to the blog, it is a commodity fund that utilizes a futures curve strategy to minimize the detrimental effect of contango where possible and benefit from backwardation where possible. This means it should do better than something like DBC. The first few years that EIPCX traded, that wasn't really the outcome but lately it has had more success in this regard.  

Domestic equities have done much better than foreign for quite a while until this year, unless this year turns out to be an anomaly in a longer trend. Obviously if domestic does better going forward then Portfolio 1 would outperform the other two and if foreign outperforms, Portfolio 1 would lag. 

Portfolios 1, 2 and 3 offered real crisis alpha in 2022 but fared worse in both the 2020 Pandemic Crash and this year's Liberation Day Panic. I threw in 90% AQRIX/10% ROM from above for a little more context.

I think I'd describe 1, 2 and 3 as being valid, I think they could get the job done but not unusually robust along the lines of some other ideas we've played around with. 

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.

How To Use Crazy High Yielding ETFs

Sumit Roy at ETF.com wrote about what he referred to as ETF slop focusing mostly, but not entirely, on single stock covered call funds. Anymore, so little of the ETF.com content adds any value, this one is worth one of your free articles. It was a good article but I look at this niche with a different lens. 

...these option-selling “income” funds almost always underperform.

Underperform what? I think most of the pundits look at these the wrong way. The crazy high yielders have plenty of drawbacks, plenty, but I think it is still important to look at them, or anything, correctly in order to draw an informed conclusion.

He is obviously comparing a YieldMax product to its underlying reference security. In the article he cited Tesla (TSLA) and YieldMax Tesla (TSLY) and yes, TSLY has a much lower CAGR than the common stock but TSLY is not the common stock. As we've looked at quite a few times, TSLY and the other crazy yielders bundle the common stock and selling the volatility of the common stock. I mentioned this point on Twitter recently and someone prominent in the ETF industry said they liked my framing but that they believe the suite is still wildly flawed. That's fair. There are issues including what has been reported in quite a few places as distribution recharacterization between ordinary income and return of capital. Depending on the characterization, that would play into another issue raised by Roy about tax inefficiency.

The price of the crazy high yielders are extremely unlikely to keep up with their distributions. A few weeks ago we cited ULTY from YieldMax which had ripped higher on a total return basis which allowed the fund on a price basis to trade almost perfectly sideways. On a price basis, TSLY is down 80% since inception and has done one reverse split so far which is a pretty good expectation to have, down a lot and then a reverse split. We've seen that with a couple of crazy high yielders from other providers too. 

I've alluded to the following idea with crazy high yielders but haven't backtested it so here we go.

Trying to paint as unfavorable a light as I can I assume no rebalancing so the portfolios capture whatever erosion there was and I did not have dividends reinvest to show the distributions being taken out. Portfolio 1 is 90% plain vanilla, Portfolio 2 uses a couple of fixed income substitutes that we use regularly for blogging purposes and Portfolio 3 is AOR which I used instead of VBAIX because VBAIX has paid out a couple of larger capital gains which muddies the water for how I think we should look at this. 

Looking at the one full year in the backtest, Portfolio 1 yielded 7.72%, Portfolio 2 yielded 9.59% and AOR yielded 1.52%. The various volatility measures are right in line with just putting it all in AOR which makes sense, the other two portfolios have 90% in AOR.

The only thought I put into selecting which crazy high yielders to use was funds that are relatively older, don't have crazy CEO risk (Tesla and Strategy) and business that are unlikely to fail. Google and Meta stocks may do well or do terribly but going under anytime soon doesn't seem like a reasonable probability. The very small weightings I use for them also mitigates issuer risk. 

If this makes sense for anyone, I think it could be for the person we've looked at many times, mid-50's to early 60's who has their hand forced at work and is borderline ready financially to retire. $9500 of "income" per $100,000 invested with 90% in a very simple portfolio seems very sustainable (the portfolio even if not the income) while trying to wait to take Social Security per whatever their original plan was. If the 10% allocation to crazy higher yielders erode 80% on a price basis in three years like TSLY, the plain vanilla 90% has a good chance of more than offsetting the erosion. I'll add my belief that an 80% price decline in just three years is more of an outlier. OARK which tracks ARKK has been around just as long as TSLY and is only down 56% on price basis. FTR, OARK's total return has compounded at 12% while the ARKK ETF has compounded at 30%.

You might read that last section and think, why not just have a large allocation to ARKK and the other stocks underlying the crazy high yielders instead? For some people that could be a better solution but the volatility of going heavy into the referenced underlyings would be brutal. ARKK was down 67% in 2022 and lagged the plain vanilla portion of the portfolio by 38% in 2021. Some volatility for the 61 year old forced to retire earlier than they wanted probably goes with the territory but the upper limit for how much volatility in that circumstance is probably going to be low. 

It is pretty clear that these fascinate me but I don't use any of the crazy high yielders and don't know that I ever will but that doesn't mean there isn't a real use case. We'll revisit these portfolio in the future to see how they holds up. 

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.

You Don't Need To Concentrate Risk

A few different things today.

First up is retirement related. Sherwood News wrote that older workers, which it counts as 55 and older, have been self-selecting out of the workforce since Covid. If correct, it contradicts the retirement crisis that we all read about so frequently. Of course both can coexist. Some portion of the population might be able to retire at 50 or 55 while some other portion could be facing retirement without any meaningful savings.

Being smack in the middle, age-wise, of this entire conversation about being crowded out of the workforce and retirement readiness is fascinating on some level, I think I want to see how my age cohort figures it all out. That's a key phrase because it is up to us to figure it out. Figuring it out includes isolating whatever it is we might be vulnerable to and then how to mitigate that vulnerability one way or another. 

For example, what are the odds that you could be replaced by some sort of AI function? Do you have a job that would allow you to keep working alongside AI? If that answer to that second question is yes then you need to figure out how to do that. 

If you read the comments in the various retirement articles at Yahoo, in response to the idea of working longer, commenters will say that tradespeople can't necessarily do that. Masonry work tends to be lucrative but it is grinding. A 53 year old mason with a Plan A of retiring at 67 probably needs a backup plan. Does some version of that example apply to you? If so, have you started to work on some sort of Plan B?

Speaking of articles at Yahoo, this one claims that "half of retirees are terrified about the impact of tariffs on their retirement income" with context being an understated COLA. I certainly have no idea whether the upcoming COLA will adequately reflect whatever the reality with price inflation might be but if someone is worried about COLA, that's valid, that is their concern and they are entitled to it. I would lump this in more broadly with problems with Social Security.

Ok, the COLA question, even bigger than that would be a reduction in payouts starting in the middle of the 2030's (the exact timing has been a moving target). How vulnerable are you to problems with Social Security? What can you do to try to mitigate any vulnerability you have along these lines? 

This is of course a repeat message. It is up to us to figure out how to have the retirement we want without overly relying on someone else (the government) to figure it out for us. 

Barron's interviewed the CEO of mutual fund firm MFS. He defended the shield for mutual funds versus ETFs including this quote;

He acknowledged that a mutual fund isn’t the most tax-efficient investment vehicle. “It has its imperfections,” Maloney said. “But we think it served the investment community extraordinarily.”

Again, defending the shield somewhat but I will say that here in 2025, I am surprised by how many traditional mutual funds I sprinkle into client accounts. I've long said that I am wrapper agnostic, I'll use whatever vehicle I think best captures the effect but still, more mutual funds than I would have guessed 15 years ago. Not everything packages into an ETF very well.  

Lastly, another one from Barron's trying to gameplan markets for the rest of the year. There were a couple of interesting comments about treasuries. One analyst likes 7-10 years and another 3-7 years, yields in the fours are attractive they both say.

The ten year treasury yield is currently 4.22%. Is that enough compensation for ten years? What about 3.69% for five years? For me, no. I would take those yields for a year or two and if the FOMC cuts in September the very front end might get closer to that 3.69% where the five year is currently. 

A diversified fixed income portfolio sleeve (including any fixed income substitutes) probably should have some exposure to treasuries but that doesn't have mean intermediate or longer term treasuries. As we explore all the time, there are countless ways to get the fixed income effect without taking on the volatility of something like a ten year treasury. 

UFIV is an ETF that owns five year treasuries. The others are funds we've talked about here many times. Yahoo has the trailing yield for UFIV at 3.87%. Portfolios 2, 3 and 4 have trailing yields ranging from 11.5%-6.56%. ARBIX has a small yield but the strategy is more about a low vol absolute return than yield. So two of the alternatives have the same volatility as UFIV but compound at close to three times higher rate and the other two have much less volatility than UFIV and compound at vastly superior rates. 

USVN which tracks seven year ETFs, is more volatile than UFIV and compounded at 2.84% with a volatility of 6.23%. UTEN compounded negatively with volatility at 8.64%. Going forward, returns for intermediate and longer term treasuries could be fantastic but that is a bet on capital gains from bonds. Is that a bet you want to make? That is not my trade, relying on being correct about interest rates is a tough way to make a living. It's a pretty good bet that stocks will be higher five years from now. It is a very good bet that stocks will be higher ten years from now. Not so with bonds. 

If any treasury market exposure interests you, I would suggest individual issues not ETFs unless you really are trying to game capital gains, ETFs might be better for that but I am not sure. If you want some treasury exposure (shorter term for me) and want to blend in alts as we discussed above, make sure you understand the risks. Three of the random examples we used to today take different types of credit risk. That could be mitigated by either adding in a couple of other alts that don't take credit risk or by removing one or maybe two of the funds that take credit risk and replacing with funds that take a different kind of risk. 

Portfolio 5 below blends all four alts together with a 50% weighting to UTWO.

The fixed income effect can be created without a lot of duration and without concentrating risk into a narrow slice of the market.

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.

Blaster ETFs?

There was a good bit of chatter during the week as the number of ETFs now exceeds the number of individual stocks and here is a list of filings of crypto ETFs that the Bloomberg guys have been talking about which is a path to far more ETFs than stocks.

It really isn't a big deal that there are more ETFs than individual stocks. According to Copilot, in 2000 there were over 8000 mutual funds which far exceeded the number of stocks so this isn't new. All the companies falling over each other to offer 2x, inverse 1x, inverse 2x, covered call and so on sort of inflates the head count. The image of filings looks like the same 2x, inverse 1x, inverse 2x, covered call and so on for the 20-30 largest cryptocurrencies which is a path to many more ETFs than individual stocks. 

We obviously have a lot of fun here looking at these types of funds. The ideas are interesting and while I can't see using any of the crazy high yielding funds in a substantial way I do think there is some merit to barbelling yield from a small slice in some sort drawdown portfolio. 

I am convinced there is a way to bundle higher income without the serious flaws that the current roster of funds have. Tuttle's latest filing does something sort of different. We've talked several times before about the Overlay Shares Large Cap ETF (OVL). It owns an S&P 500 ETF and sells put spreads for income. It is not a crazy high yielder, yielding just over 3% versus 1.2% for the the S&P 500. 

On a total return basis, OVL has consistently outperformed but the drawdowns have been larger too. Selling put spreads is a bullish strategy so there is a leverage component here but that leverage hasn't caused any catastrophic declines versus the plain vanilla S&P 500.

Tuttle's filing is for a lot of funds under the name Income Blaster which will go synthetically long (long call and short put) individual stocks or very narrow themes and then sell put spreads on those individual stocks/narrow themes. For example, there's one in the filing for Coinbase and one that tracks a robotics ETF. The intended outcome is that they generate income without capping the upside the way funds that derive income by selling calls do. 

I have no idea if these are the answer but we will follow them here if they ever make it to the market. 

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.

Chopping Off The Tail

Ryan Kirlin had a fantastic one-liner to describe the use of liquid alternatives.

I think it's a different way of saying what we say here about constructing a portfolio with a lot of simplicity and hedging with a little complexity. Alts like merger arbitrage or catastrophe bonds are not "return getters." In a portfolio that goes narrower than broad index funds, even some of the equity holdings will not really be return getters. 

Most clients own Johnson & Johnson (JNJ). I've owned it for clients for just over 20 years. 

I would not call JNJ a return getter. It tracked sort of close for most of the chart but the boxed areas show it going down quite a bit less than the index during declines. I should also note it was down much less than the index in the 2020 Pandemic Crash. That's generally the expectation/hope for what the stock will do. This year is sort of an outlier, testfo.io has JNJ up 25% this year versus 10% for the index. That sort of outperformance in an up market hasn't happened too many times and not what I would expect going forward.

We've talked about tech, as a narrower holding, being a source of return, or in Ryan's parlance, a return getter. Far more often than not, tech tends to outperform in up markets with the tradeoff being it will go down more in down markets. 

Something like client/personal holding BTAL or an inverse fund, maybe one of the tail risk funds depending on the environment are tools to "chop off" or at least mitigate some of the left tail. Left tail is a fancy term for extreme and typically negative events like the 2020 Pandemic Crash. We've also talked many times about client/personal holding CBOE in this context which has tended to trade as a proxy for the VIX Index during the last few left tail market events. 

Circling back to Kirlin, that Tweet is part of a thread where he linked to a paper that his firm published in 2016 about why it is not a fan of merger arbitrage. And here is Bloomberg's favorable coverage about why merger arb has gotten more attention from institutional shops lately. Long time readers might recall that I have owned the Merger Fund (MERFX/MERIX) for clients for a very long time. I am a believer in it as a very low beta diversifier. This century, it has only had one down year that was more than 100 basis points. 

Earlier in its existence though, it had a few large drawdowns. I would attribute larger drawdowns from 25-35 years ago to much higher interest rates. Financing something at 8% is a much larger headwind than financing something at 4%. There are also complexities related to spreads on deals with higher interest rates that can also make the strategy more volatile. The entire time I've been in the position, interest rates have been very low. Four-5% rates don't seem to be a problem but this might be a prompt to exit if rates take another meaningful leg higher. 

Speaking of low interest rates, for some odd reason I got a news alert about an article I wrote for TheStreet.com during the 2013 Taper Tantrum about avoiding bond funds with duration. It's pretty much the same conversation we've been having on this latest iteration of the blog for the last four years or so. The original blog where I wrote was called Random Roger's Big Picture (I hadn't heard of Barry Ritholtz yet). This anecdote about intermediate and longer rates not being high enough compensation at 3-5% all those years ago, longer actually, is a very big picture, long term theme and portfolios built with a lot of simplicity hedged with a little complexity is a very big picture, long term investing concept.

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.