A Drone From Sector 7-G

Lately my timeline on Threads has had a lot of posts from people who are 59 or 60 and completely lost in terms of figuring out what life is all about, what comes next, what to do about retirement or if they even can retire. Yes, they could all be bots or otherwise fake accounts but what if the sentiment is real? 

I'm sure I am seeing these because Threads must know from my Facebook profile that I am about that age although my birthyear is not on my profile. If you're anywhere close to that age, do you feel lost in this manner or maybe more constructively, do you know anyone close to that age who is similarly lost?

We've addressed this here and there over the years. To me this is all about having sense of purpose or maybe more correctly finding a sense of purpose. 

I appreciate that anyone who thinks they are a drone from Sector 7-G may find it difficult to develop a sense of purpose at work but it is up to us to figure this out for ourselves. My tagline for this sort of thing has been to paraphrase Joe Moglia by saying that no one will care more about your outcome than you.

A drone from Sector 7-G can find purpose in pursuing the next thing. I figured out in my nid-20's that I wanted to manage money from home, it took a couple of stops along the way and almost ten years to get there but there was purpose getting to that point. Time spent planning and learning for their next thing is very purposeful and provides hope for someone who is really unhappy at work.

Part of this has to be figuring out how to be happy at home. That's going to be different for everyone I imagine and maybe it takes work but it is a crucial building block to this conversation.  

I am always going to talk about the importance of health and fitness which if nothing else, can simply be one less thing to worry about for the older Gen-X or younger Boomer trying to figure it out. Feeling crappy all the time or being unable to do enjoyable things or perform tasks that have to be done will make it much harder to live a full life. Any day that you exercise is always a little better.

Living below your means should result in not having too much financial stress. Pulling that off makes every other aspect of life easier. 

It is important to have a positive attitude in life and be grateful but everyone says that. The only thing I can add there, but I think it matters a lot, is that it has to be genuine and that probably takes some self-training to make happen if those aren't already personality traits. Or maybe a lot of self-training.  

Any article you read along these lines will talk about the importance of having social connections. I think this is widely accepted as accurate but that is difficult for a lot of people. It certainly is for me. I am terrible at making and enjoying idle chit chat. When there's something to talk about, some purpose, there's no hang up.

If it weren't for the fire department, this is probably what I would look like. 

Actively volunteering can check a lot of these boxes. It is very purposeful and likely to involve a lot of social engagement. Volunteering as a firefighter creates an obvious need for some level of fitness as do many volunteer endeavors. My older brother volunteers at a food bank which involves a lot of lifting and moving of food. My wife does a lot with dogs and other tasks at the animal rescue that require being fit. 

I am sorry for anyone struggling for answers, all the more so if the posts I see on Threads capture the actual sentiment of people but as is the case with everything, the more we put in to solving it, whatever it is, the more we will get out. 

I'll close with a quote I used to cite very frequently from our friend Bill here in Walker, "you can figure it out now or you can figure it out later but you'll be much happier if you figure it out now."

At What Point Are Yields Crazy?

First, I'll answer the question in the title. A 20% yield is crazy in terms of not having a realistic shot of being sustainable. Maybe the crazy threshold should be a little lower but twenty for sure. 

We've spent some time on developing a bridging strategy to make a smaller piece of money, smaller in relation to a rollover IRA, last for some number of years until the next financial milestone like starting Social Security or taking RMDs. Sticking with the ten year example we've worked before, we'd be willing to spend 1/10th of the original balance each year, depleting to zero after ten years. With that in mind can we take that big distribution and have something left over at the ten year mark or make that pot of money last longer. 

I've said this research is probably aimed at our (my wife and me) financial situation at some point down the road. We've looked at some crazy combinations that I probably wouldn't want to pursue but I think by adding one of those distributing ladder ETF, we can dial the crazy way down.

Here's the latest version, TIPB matures in 2035 which does not fit in with my timeline for any of this but will do for long term research/following.

The highest yielder is CAIE at 14% so we're nowhere near crazy if we're sticking with 20%. There's not much equity beta but there is some. The backtest can only go back a year so there's not a lot of useful information but here it is.

The yield is 8.25% which is pretty high considering how much is in TIPB and JAAA. TIPB though has a sneaky high yield and the first tranche of TIPS in the fund will mature next month which will kick the "yield" up considerably when it returns principal as it is designed to do. 

If we implemented this with $450,000 and took out $11,250 per calendar quarter in a ten year period that was identical to 01/01/2000-12/31/2009, Copilot says there would be $330,000 left over. The next stress test was a ten year period where the yield on the ten year US treasury went from 1.5% to 7% over a ten year period. In that scenario, everything else being the same, Copilot says $106,000 would be left over. Rates can't start at 1.5% because were at five and change but the point is something terrible happening in the bond market.

I would imagine the product landscape continues to improve, maybe in six-eight years when I might need to consider this, it can be a little more robust.

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.

Retirement Planning Stream Of Consciousness

Yesterday, I mentioned the webinar for distributing ladder ETFs from Northern Trust. At one point the conversation talked about go-go retirement (early years), slow-go (middle years) and no-go (the period in which someone is old).

This creates what is referred to as the retirement smile, spending a lot early on for travel maybe or other activities. Then at some point retirees slow down but are still relatively healthy and able bodied, hopefully. The final tranche in this metaphor is possibly needing some sort of outside care. 

Does that resonate with you? I turned 60 this year and I'm starting to look ahead with more specificity than when I was younger. My focus was simply accumulate what I can so that I have optionality. 

If that does resonate, does it look like you will have the go-go years that you want both financially and physically? That could be a difficult conversation for people to have with themselves. Doing things is expensive and it would unfortunate to spend many years looking forward to taking a bunch of trips or whatever go-go means but being physically unable to do so. 

For the last few months, I've been thinking in terms of blocks of time loosely connected to financial milestones. I made a joke to my wife that I am spending my first decade of retirement, my 60's, by working. We've talked about this, there is visibility at some point for income from my practice to start to decrease. I expect it to be a significant contributor relative to our financial needs for quite a while even if it doesn't remain lucrative for that much longer. 

I am no longer with Del E Webb Foundation, I resigned earlier this summer so that income stream is gone. There haven't been too many instances in my life where I didn't fit in with a group but that was the case here. I never understood their decision process for running the org, not talking about how grants are awarded, but how they operated. That's not a knock on them, I did not fit in with them. I said I would get around to explaining what happened and this seemed like a good spot. Where people tend to want to do less as they get older, I'm glad to have it off my plate. I did not expect to have that reaction. 

For now, there's no visibility on ever preferring to take Social Security before 70. If I hold out beyond 69, I will think of that as having stayed on plan with that. Taking it as 70 has been my intention since I first thought about it. 

We've looked at all sorts of ideas for bridging to the next financial milestone with a smaller piece of money. I really like this idea but that might be because our situation appears to be heading in that direction if we sell our vacation rental in maybe ten years or so. We might live in it to avoid the capital gains, if you live in what was an investment property for two out of five years, that relieves the capital gains burden, not the depreciation recapture but ask your tax advisor. 

When I first started blogging in 2004, one of the things I wanted to do was chronicle how my thoughts on my own retirement would evolve. I think this is a useful exercise for people. The more we put into our retirement planning including thinking and evolving strategy, the more we will get out of it. 

Solving Actual Problems

We're in Tucson this week and on Wednesday afternoon I went to go pickup some garden tools that my wife found on Facebook marketplace, $20 for more that we needed, not too shabby.

The seller lives in a 55 and older mobile home park closer to the middle of town from where we live. The place was immaculate, it looked to be about half occupied, not sure if that is because it's still warm here or some other reason. Naturally I got curious about the actual dollars and cents.

As is common, residents own the house but lease the lot.

That price is toward the lower end, the upper end was $160,000-$180,000 and there were a handful closer to just $40,000. Gemini said the rent for lot ranged from $658-$717 which must be a dated number versus the $825 in the picture. All in utilities range from about $150 in the less hot months to about $350 in summer months. Insurance runs about $1000/yr and taxes (for the house, not the lot) are about $200/yr. So all in, after buying the house, it might be about $13500/yr or $1125/mo. 

Regardless of who may or may not be interested in this situation, it is relatively affordable. For anyone unable to accumulate a meaningful retirement but who bought a house could downsize into something like this and have a useable piece of money left over after selling and buying into the property I visited. As a primary residence it is not a lavish circumstance but it is workable outcome.

It is also an inexpensive way to snowbird. Someone in South Dakota might want to take a chunk out of their winters without actually moving away. There are plenty of ways to snowbird of course, in a recent blog post we cited someone who got an Airbnb for an entire month which is probably less expensive than buying one of the mobile homes we're talking about which is cheaper than buying a regular house in a neighborhood.

My wife and I probably have our retirement sorted out which I am grateful for but plenty of people will have to figure it out and make some difficult choices. Mobile home communities like the one I visited can solve problems. 

Speaking of solving problems, I sat in on a webinar for the Northern Trust distributing ladder ETFs. We've looked at them before. There are two versions, one that pays tax free income by owning muni bonds and the other protects against inflation with TIPS. The way these work, if you buy one that matures in 2036, so ten years from now, it pays out 1/10th of the NAV every year plus a little interest. In the final year, the fund pays out it's final 1/10th of the original investment and then closes. 

We've looked these in the context of a bridging strategy. Someone who is today 65 might use one of these as a way to hold off taking money from their IRA until RMDs start in 2036 when they are 75.

We've looked at putting together a bunch of very high yield products with different types of risks to do something similar but hopefully end up with some money leftover. Going all in on the 2036 TIPS Distributing Ladder (TIPF) means you have nothing leftover in ten years. Owning ten or 12 very high yielding with disparate risks has a reasonable chance of not completely depleting but that is aggressive. A strategy of half in TIPF and half in a very yieldy portfolio would be safer. 

None of that is new though from our previous conversations about these funds. The one new thing I pulled from the webinar was pretty much a throwaway line that wasn't followed up on. Yes, bridging seems to be the primary use for these but Chris Huemmer from Northern Trust made a comment about using the 2056 TIPS version for something like property tax. The symbol for that fund is TIPH and it matures in 2056. Each year it will pay out 1/30 of the original investment amount plus a little interest.  

Our property tax in Walker is around $2000/yr. In theory, $60.000 invested in TIPH would cover our property taxes until I am 90. Property tax is one the higher dollar items people have to deal with but it does not inflate the way health insurance premiums do or over the last few years the way home insurance premiums inflate. We probably need equity exposure to keep up with healthcare costs and now homeowners insurance but this angle on property tax is interesting and new to me even if I am the last to know. 

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.

Closed End Crazy

Dan Ives is throwing his hat into the closed end fund (CEF) ring with the upcoming Ives Ultra AI Opportunity Fund (IVAI). That article mentioned a couple of other recent closed end funds in the AI and private tech realm. It hasn't gone well.

PWRL just owns private companies and it appears as though the market price is trying to price the underlying illiquid portfolio that does price everyday.

Someone bought up in the $300's, yikes. These types of funds are real hot dot stuff that tries to appeal to people's greed. You can reach whatever goal you might have without it. 

Another day, another autocallable ETF. The VegaShares US Equity Autocallable Income ETF (VAIE) targets about a 16% yield so my guess it it will be a little more volatile than CAIE, see what VegaShares did there with the symbol, which is closer to a 14% yield. 

The autocallable space in the ETF market is just getting started and I think that unlike the closed end funds above, the lower yielding, less volatile funds will help contribute to solving people's need for income without nauseating volatility. Matt Kaufman from Calamos was on ETF IQ this week with a helpful explanation of how they work. The conversation around these from fund providers is evolving in response, I believe, to questions not addressed when they first started trading a year and half ago. 

This is a good contrast in yields/volatility that we probably looked at once before. ACSP targets twice the yield and the price is all over the place, no distributions yet per Yahoo Finance so that is all price. JELM is the lowest yielding autocallable ETF that I am aware of. To each his own but if I ever allocate to one of these for clients it will not ACSP. If anything, it will be a small slice to a lower volatility version. 

Next, a follow up on the WisdomTree Efficient Long/Short Equity Fund (WTLS). They hosted a webinar to explain the fund and recap its results. So far it has been lights out. It leverages up 90% beta with the S&P 500 and 90% alpha with a long/short overlay that seeks a volatility level around 7%.

Portfolios 2 and 3 leverage up the long/short symbol with SPY in the same manner that WTLS leverages up and you can see WTLS has favorable results. Portfolio 1 is QLFIX which has a similar leveraged strategy. The fifth portfolio isolates just the long/short strategy by shorting SPY out of it and although the timeframe is short, the result has been very steady but a little higher vol than 7.

When I first looked at WTLS, I just made a couple of casual comments that it was doing what it should for the most part, noting it was way too early to draw any conclusions and I also warned about using leverage to stack betas. WisdomTree talks about WTLS as being beta and alpha but arguably, a long biased long/short strategy could be thought of as a beta exposure. 

That frames the risk, it might turn out actually be two betas if something nasty happens with the stock market. That was not the case in the quick drawdown when we attacked Iran. It wasn't a problem for QLFIX either which is a fund we haven't looked at before today. 

A use case for WTLS in the context we've talked about lately could be in a portfolio that barbells a high volatility equity fund to be a small slice of the overall portfolio as the growth engine in a portfolio that is overall intended to be very low volatility or have a high distribution rate or both. In that circumstance there still needs to be a little growth. A 10% weight to WTLS is 18% of equity exposure and if that is the vast majority of the equity exposure then yes the portfolio is using leverage but in this context I think it is closer to leveraging down than leveraging up. 

Last one. We've talked a lot over the last few months about combining value, quality and momentum for domestic equity exposure. It turns out that iShares has three funds that do different versions of that factor combo for foreign equity exposure with INTF, IDYN and CORO. INTF is a relatively simple index fund that includes these factors and IDYN is similar to DYNF trying to rotate factors to try to outperform the index. CORO has been the best performer. It owns mostly country funds with a few individual stocks thrown in. The largest holdings currently, and this has been the case for a bit, are Japan EWJ, Canada EWC and Switzerland EWL. It also currently owns Taiwan Semi and SK Hynix.

The fund reports its holdings in an interesting way. It includes a look thru to the sectors.

This was always part of the template I used for writing about country funds for theStreet.com many years ago and while I do less with country funds these days, looking through to the sectors is very important. If you want to own Taiwan, cool, go for it but EWT is 73% technology. Owning a lot of QQQ with EWT on top of that is going to be very painful if there is ever any consequence for the excesses currently in the tech sector. Another example, iShares Singapore (EWS) has always been heavy in financials and sure enough, during the financial crisis it fell 60%.

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 A Meltdown"

That was the subject of the daily afternoon email from Bloomberg referring to what is happening in the treasury market as yields continue to work higher, sending prices lower.

I pulled up the following, halfway through the trading day thinking more like the pain continues for holders of long bonds more than thinking it was a meltdown.

Bespoke Tweeted out that since inception, TLT is down slightly on a price basis and that on a total return basis it is down going back to 2012. There's been a flood of pundits weighing in across the webs about why longer bonds are now attractive but the same or similar arguments were made at lower yields on the way up to the now current 5.11% on the ten year treasury. 

I'm sure the textbook logic expressed in those opinions is correct but yields still keep going up. It is correct that losses from 4% going up to 5% are different than losses from 1% up to 2% were because as the price does its thing, investors are collecting 4% versus collecting 1% or less five years ago. That does nothing for the volatility or the risk that rates go higher from here. It is difficult to see the price inflation problem subsiding soon and that certainly is relevant. 

The way we have been framing this has been as a matter of adequate compensation. Forget all the textbook logic, what return do you find to be adequate compensation for the volatility of owning intermediate and longer dated debt? For me, low fives doesn't do it. Maybe at 6% if it ever happens, not sure but at 7% probably a little. 

I've been repeating the above sentiment about 6 and 7%....if it ever happens for quite a while. I have no idea if it will ever happen but I do know that 5+% is not adequate compensation. 

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.

Incinerator Ridge Road

My wife and I went on a quick hike at the top of Mount Lemmon near Tucson. A few miles from the trailhead we drove by this road.

I think TSLY's NAV is down Incinerator Ridge Road. I did a poor job explaining to my wife why this was so funny. It fits right in with our recent looks at various forms of NAV incineration versus products/strategies that might be aggressive without necessarily incinerating NAV.

Here is a quick look at several new funds that have popped up on my radar. First, there is a new putwrite fund from Innovator, Innovator Equity Premium Income Daily Putwrite Fund (SPUT). It yields less than WTPI from WisdomTree with less volatility.

VistaShares has a diverse mix of ETFs with some thematic and derivative income funds and now they are getting into the buffer part of the market with what I believe is a differentiated concept. VOOB references the S&P 500 and QQQB references the NASDAQ 100. The big idea is that the first 8% down should completely insulated from market declines and then the funds are only exposed half of any decline beyond the first 8%. The upside does not have a hard cap, paraphrasing the literature, but the upside will be limited depending on the particulars of the option combo put on to effect the downside protection. 

First Trust has thrown its hat in the autocallable ring with ACYQ that seeks a 21% and ACYN that seeks a 9-10% yield. ACYN listed in March and ACYQ started trading in June. With the higher yield, ACYQ should be more volatile, the Q in the symbol tells you it references NASDAQ stocks, and it has been thus far.

This afternoon I went down a research rabbit hole on the Strive Series A Perpetual Preferred Stock (SATA). Strive (ASST) common stock is a bitcoin treasury stock that when I talk about some funds/stocks being like fire crackers, ASST is like holding on to molten lava or a McDonalds apple pie in the 1970's. ASST is much more volatile than Strategy (MSTR). Oddly, because of the corporate structure and how the preferred stocks are underwritten, it appears that SATA is less risky than the Strategy preferred issues and it has been outperforming the Strategy preferreds. 

The chart has just two of what I believe are three different preferred issues from Strategy, YBTC is a covered call fund that references Bitcoin and "yields" about 25%. 

In terms of attempting to understand and quantify the risks, the key word being attempt, the Strategy ecosystem runs into trouble at a couple of points. It's average cost is close to $75,000. It's cash buffer starts to deplete at Bitcoin $61,000. SATA is far more protected. ASST would be wiped out at Bitcoin $39,500 but SATA can function until Bitcoin drops to $30,000 and stays there for a year and half. At that point, everything else being equal, the company would run out of cash and be unable to make payments. 

In addition to being a Bitcoin treasury firm, Strive is also an asset manager providing research and there is a suite of mostly basic ETFs that has $2.9 billion in AUM so there is a business there. Here's its dividend fund against SCHD. Nothing wrong there. 

The ETF business is real and it generates cash flow but only covers about 1/8 of the expense of servicing SATA. Servicing SATA is apparently not problematic as Bitcoin moves up or hovers at a not low price for a while. Only a while though, as it buys more Bitcoin, eventually it would need Bitcoin to keep going up but the current level is not trouble for now. 

SATA will offer new shares whenever the the price gets to the $100 par value and then the proceeds will go toward buying more Bitcoin. In so doing, the $30,000 number I cited above can actually go up (not a good thing). At some point, maybe instead of being able to pay for 18 months at $30,000, maybe the can pay for 18 months at $35,000 or $40,000 or fewer months at the $30,000 level. 

For all this complexity, SATA yields 13% and is not incinerating NAV like YBTC has done. SATA pays its distributions daily....five cents +/- every day and the distributions are ROC so no taxes until the cost basis goes to zero or the shares are sold. Both of these help shareholders.

I just found out about SATA today off a Tweet about a new ETF coming from Strive that will sell puts on Bitcoin treasury preferred stocks and will have symbol DCAP. Someone will figure out how to harvest Bitcoin volatility without incinerating NAV. Maybe SATA does that, maybe it doesn't I just found it today. 

Whatever the risk of SATA is (I have some idea I think), it differentiates from the risks of the lower yielding autocallable ETFs which both differentiate from catastrophe bonds. Something that yields 10-13% in a 4.5% world is risky, there's no changing that which is a crucial point of understanding but putting something like 2% each into four or five of these that do truly differentiate the risk from each other creates a serious yield engine inside a portfolio and as we're seeing, quite a few of them have the tax advantage of ROC. No taxes for seven, eight or nine years is worth exploring. 

If this whole realm is more complexity than you'd ever want to take on, cool, leave it alone but it is fun to dig in and learn.

All of these things we looked at today are evidence of how funds are evolving to create more tailored outcomes up to a point. It is easier to build a portfolio that has one very yieldy sleeve, a modest CPI plus maybe 3% sleeve that causes little to no stress and then some plain, unconstrained equity beta. 

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.

The Options Market Does Not Give Money Away

There was a line in this week's Striking Price column in Barron's that really stood out.

"A conservative options-selling program can add 6% to 8% to your annual returns."

Maybe columnist Steve Sears is having a conversation I cannot hear, a reference to one of my favorite quotes from the show Deadwood, Hearst says "I am having a conversation you cannot hear" to Bullock. My initial response is simply that the options market does not give money away.

The column in question was a post mortem on a Walmart options trade that did not work. A few months ago, the column suggested buying a call and selling a put on Walmart. The stock went down, the call expired worthless and the puts were assigned. 

Someone who trades options frequently will have some number of trades that work out well and some that will not. There is no getting away from some losing trades so the idea becomes having more winning trades than losing trades or somehow have the dollars netted on the winning trades exceed the dollars lost on the losing trades. 

I am sure a few market participants can do what is asserted in the quote, adding 600-800 basis points to returns but taken as a blanket statement, no I would not bet my money on that.

Perhaps a more accessible outcome could be thought of as redistributing the composition of your return.

One of those lines is a common stock and the other line is the corresponding YieldMax. The stock is not as volatile as MicroStrategy or Tesla so the total returns of the two are identical. One is just price appreciation (there is a little bit of a dividend) and the other is all "yield" as the price only return is down considerably. 

A little less dramatically but not as tight as above, ISPY which is a tax efficient derivative income fund versus SPY.

ISPY's return has not kept up with SPY and it probably won't when markets are going up. In a couple of the drawdowns, ISPY has gone down less which can happen some of the time but won't happen all of the time. ISPY's return has been about 9.5% distributions with the rest in price appreciation. The returns are split into a couple of different sources versus really just one of any consequence from SPY. 

The options market does not give money away. The way ISPY redistributes the return will appeal to plenty of investors, derivative income funds have $175 billion in assets, clearly, people want this sort of appreciation/"yield" combo even if they don't articulate it that way but they are not getting free money. 

Pretend for a second that ISPY can compound at the same 7% on a price only basis, kicking out 9-10% in ROC (that's the tax efficiency), that is a plenty useful outcome for some people in the benchmark free context we talked about yesterday, some wants yield without eroding NAV. The tradeoffs of funds like ISPY or SPYI or GPIX might not be for you, you might think they are terrible but there is a reasonable use case in terms of results and investor tolerances without being NAV incinerators like the mystery stock in the first chart.

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.

Tracking Error Palooza

Some fun stuff today with a look at GMO's Benchmark Free Allocation Fund/Strategy and Meketa's thoughts on risk parity. 

GMO's paper talks about a "total portfolio mindset;"

Because Benchmark-Free focuses on generating real returns instead of beating a particular benchmark, it naturally has a different view of risk than most traditional portfolios.

The paper chronicles the various changes under the hood of the fund/strategy and the result of the fund seems to walk the walk it has looked much different quite frequently, painfully different to be blunt about it.

It did well early on thanks to getting the internet bubble right. Since inception the fund has compounded at 7.67% versus 8.30% for VBAIX with significantly lower volatility. 

That is a very rough 13 years in the middle of the fund's existence. The paper makes many references to real returns. Adjusting for inflation, the 4.18% comes down to 1.62% in the period charted. There's a balance between building a portfolio targeted to the outcome you need irrespective of what the broad market is doing but still giving yourself a reasonable shot at a decent growth rate. 

A similar sentiment from Meketa regarding risk parity;

...since these strategies are not widely implemented, institutional investors that adopt this allocation methodology need to be comfortable being “different” from peers, that is, having high tracking error relative to broad peer portfolios.

A big pillar to what the ReturnStacked guys offer with their funds is ability to add alternatives without introducing tracking error into the portfolio. It is ok to have tracking error. Certainly for you, managing your own portfolio, who cares? Again, are you giving yourself a reasonable shot at a decent growth rate if that is what you need? 

We have a lot of fun here with all sorts of crazy allocation ideas but if you need something beyond a T-bill rate or CPI plus 2%, then you probably need some sort of close to normal allocation to equities. Even just 35-40% can serve as a reasonable growth engine inside a portfolio for people who do not want the ups and downs of having 60-70% in equities. 

Yes some sophisticated combo of different asset classes with very light exposure to equities could get it done but anyone pursuing that kind strategy will probably have to work a lot harder for their return versus just having a close to normal allocation to equities. 

Finominal has a portfolio optimizer tool that we've used before. It can optimize for several things including risk parity. Depending on what inputs are used, the result might be interesting or not very helpful. If you include a T-bill or short term bond fund, the output will be to have a huge weighting to the T-bill or short term bond fund. A 15/85 portfolio won't be the answer for too many people. 

The following study starts with 35% in SCHD, 30% in IMTM, 15% in KMLMsim and the rest in SHRIX for Portfolio 1. Portfolio 2 allocates those four at 19%, 16%, 19% and 44% respectively (rounded off) inline with Finominal's risk parity optimization.

Portfolio 1 at 65% in equities is pretty typical while the managed futures and cat bonds could cause tracking error which is fine with me, I probably want that, you probably know whether that is ok for whatever money you are managing (just your own or for clients). Portfolio 2 is a tracking error palooza. The 35% in equities is at the lower end of what we talked about above as being a reasonable growth engine inside of lower volatility portfolio. It obviously has not kept up with VBAIX but nine years is a reasonably long time and it's not that far behind but with much less volatility and much shallower drawdowns.

If someone was interested in something close to this version of risk parity but wanted more traditional bond exposure, instead of building that into the Finominal portfolio optimizer, it would make more sense to figure out how much they want in more traditional bonds like 20% or 25%, whatever, then plug the rest of what they want for the portfolio into an optimizer (Finominal or someone else), get those weightings, reduce accordingly to account for the allocation to more traditional bonds. 

Long time readers probably know, there is no scenario where I am putting 44% into a cat bond fund. More realistically, I would split that 44% sleeve between five or six disparate strategies to avoid loading up on the same risks. Those five or six different strategies could themselves be risk weighted and then slotted into the more diversified version of Portfolio 2. Nineteen percent in managed futures is probably more than I'd ever want too but at a minimum, I would split that large of a percentage across two or three funds, not just one. 

I think the underlying premise of Portfolio 2 is valid, gives a reasonable chance of a decent growth rate while still differentiating effectively versus VBAIX's volatility. 

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.

HSA Optionality

Barron's had a short writeup on health savings accounts (HSA). If you are familiar with HSAs there probably wasn't anything new but it did prompt me to think about a use for HSA money that I hadn't thought about before for how my wife and I could or would use our HSA. Hopefully this is useful for anyone else in a similar circumstance of having an HSA and starting to look around a couple of corners at how Medicare works. 

The cost of Medicare Part B is deducted from your monthly SS check. Part D for prescriptions is usually paid directly by the individual. Both expenses are considered qualified for HSA withdrawals, meaning you can reimburse yourself out of your HSA account. This year, Part B is $202.90 (more for people paying an IRMAA surcharge).

This creates some optionality for people who have HSA accounts. In addition to Parts A, B and D, it is common to get some sort of Medigap coverage which has costs and coverage above and beyond A, B and D. According to Copilot, Plan G which is one of the more robust Medigaps averages around $250/mo in Arizona (that is a general number). The $250, or whatever dollar figure you find, Medigap cost is not a qualified expense in HSA terms. 

Part B is qualified, Medigap is not. A little bit of mental accounting here but money taken out of an HSA as reimbursement for Part B goes into your checking account to be spent on whatever you like. The Part B reimbursement is what lets you withdraw tax free from the HSA. From there, that $202 can be spent on anything repeated for emphasis including Medigap coverage. Like I said, mental accounting but nice little hack. 

Someone who is paying IRMAA can pull more out of their HSA if they want for their reimbursement. If they are paying $281 in 2026 dollars for Part B then they have access to $281 which more than covers the $250 Plan G figure we are using as an example. 

I expect to still have a decent earned income for the first few years of Medicare eligibility (self-employed there's no employer plan for me to stay on) so I doubt I would pull from my HSA for a while in this context, maybe at 70 or a little later?

Maybe I am the last person to have thought of this but either way, it adds a little optionality to the Medicare process. The more optionality we can find, the better.

Another new thing for me is that Plan N might make more sense and be cheaper for people who are not managing chronic maladies and going to the doctor frequently for their chronic maladies. Copilot and Claude conflicted a little on how much cheaper Plan N is versus Plan G. Copilot thought $1000/yr cheaper for a couple versus $1200 from Claude.

For now, it is useful for me to be aware that Plan N is an option if our good luck with health continues. Is saving $1000-$1200 worth it? That is up to the end user and we'll see where we are when the time comes.

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.

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.