Good, Not Riskless

Abnormal Returns included this link about managed futures in its post today. It doesn't offer anything new but I thought of a way to look at them versus what we've done before. I mentioned once before that Testfol.io can go back to 1987 with simulated KMLM.

The chart does a good job of explaining the potential benefit of managed futures. You need to look closely in some instances but KMLMsim diverges from the S&P 500 and 60/40 at almost every negative turn. 

Since then, it's been less reliable. 

From Jan 1 2008 to now, KMLMsim has compounded at 3.42% versus 11.30% for SPY and 8.43% for 60/40. A long time ago at other URLs for my blog I theorized that T-bill rates at zero or close to it hurts managed futures. Managed futures funds hold a lot of T-bills so for much of the period in the bar chart when rates were very low, there was 300-400 basis points of T-bill interest those funds weren't getting. When I was side-gigging with AdvisorShares I had opportunities to ask people about my theory and was routinely told it wasn't a factor. It was a factor. 

T-bills now have yield. Of course T-bills had yield in 2023, 2024 and 2025. Obviously yield is not the only factor driving returns, if it was, there'd be no argument to own managed futures. Holding managed futures in that recent three year period meant riding out a combo of whipsaws and choppiness which are both obstacles for the strategy. If that's too many excuses then you probably aren't interest in managed futures. 

The other thing today is that I wanted to dig in a little on the Innovator Equity Managed Floor ETF (SFLR). It's in the neighborhood of being a buffer fund but it's also the opposite of a buffer fund. Instead of protecting against the first 9% maybe or 15% down, exposing holders the the decline beyond that first 9%, 15% or whatever the objective is, SFLR offers no protection against the first 10% down, the floor so to speak, but then offers protection against for the rest of the way down after the first 10%. 

Except when it doesn't. 

The fund puts on an option combo. This is from the most recent fact sheet. Obviously it is stale but you can see that it sells calls to pay for a ladder of puts.

SFLR has a beta of 0.61 and is unlikely to keep up with SPY. That's not a negative, it is important to understand going in. If the market is up a little, then yeah, it will probably be pretty close but up a lot and the calls will cap the upside. 

The fund is at risk of "not working" in a long drawn out decline like 2000-2002. Gemini worked through an example where it thought SFLR would have been down 30-35% versus 50% for the S&P 500. The reason has to do with how the market kept going down and the new puts that were purchased along the way were at lower strike prices giving more room to the downside. The 10% floor would have kept getting set lower. 

The other type of scenario flagged was a very fast decline and snapback. Depending on when that happens in relation to when the calls expired, the fund could miss out on the snapback. None of that has happened so far though.

Once you realize that this will not keep up with the S&P 500 when the S&P 500 is up a lot, it becomes easier to accept SFLR has had a very good result.

Generally speaking, including a fund that could have decent upside, not full but decent, while helping to bring down the portfolio's volatility is a valid approach stressing having the correct expectations. It will not have full upcapture.

Going full floor or full buffer is probably a bad idea. In the 2000-2002 scenario, it would be easy to think the fund wasn't working correctly and give up at the bottom. Having the correct expectations includes understanding these funds relying on options combos to deliver some sort of managed result are not infallible. SFLR might be a good fund but it's not a riskless fund. 

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 Clear Source Of Volatility

We've taken a couple of looks at the Northern Trust 2055 Inflation Linked Distributing Ladder ETF (TIPD). The example we came up with for a use case was to cover property tax for most or all of retirement. Our property tax in Walker is about $2000 so $60,000 in TIPD should cover it. The inflation rate for things like Medicare or homeowners insurance typically exceeds the inflation rate used to adjust TIPS.

The chart compares TIPD with UTHY which tracks 30 year treasury bonds. TIPD bottomed out with a 12.5% drawdown on a price basis and is currently down 9.5%. It has a holding maturing in December which will be the big payout for the year. The duration of the fund will slowly go down as we move closer to 2055 but it will be sensitive to interest rates for many more years. For a little context, TIPA which is the Northern Trust fund maturing in 2030 is down a little less than 2%.

Everything is working as it should but when we work on some of these ideas (theories), they are always interesting but it is important to check in on what actually owning, in this case TIPD to cover 30 years of property tax is really like. 

If someone can devote $60,000 or maybe a higher amount for a more expensive county to such a narrow purpose then maybe it makes sense but it will be volatile. I would not devote 10% of my nest egg for long term property tax coverage but 5% might be reasonable.

Clearly TIPD would be a source of volatility, repeated for emphasis.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

My Experience With Amazon One Medical

A recurring theme here is the extent to which everything about the healthcare system is broken. We generally have long wait times, insurance is absurdly expensive and we are collectively very unhealthy. Most people take a lot of medication, not only for whatever issue they have but also medication to manage the side effects of the medication they take to treat whatever issue they have. 

Neal Templin's latest article for Barron's looks at how he uses AI to help with health stuff. One example he gave was about whether to use creatine or not. One way he would not use it was to get an opinion about getting a heart ablation. He said he saw his doctor and then got a second opinion from another doctor. AI could have played a role in his ablation though. In that instance, AI could have helped him come up with better questions to ask his doctor and his second opinion visit. Better questions, not conclusions. 

A couple of weeks ago I said that I had signed up for Amazon One Medical (AOM). I hadn't had a physical in a while and needed a new doctor. I tried going the conventional route with Banner in Tucson and they couldn't get me in until March. 

On October 7th I enrolled in AOM, had a video consult with a doctor on October 9, got blood drawn on October 16th and had the follow up to go over the bloodwork on October 23 (all good!). AOM is a few things. It can match you up with a doctor which is what I did and it takes my admittedly crappy health insurance which is another form of optionality, cheaper insurance. Through the AOM system, the doctor sent orders through to Sonora Quest which didn't go too smoothly. I went to the one in Prescott Valley and they didn't know what to do. I called in to AOM customer service and they are very good, the rep sent me the orders through the portal which I printed and took in with me to a Sonora Quest in Tucson. 

In addition to matching me with a doctor and the customer service number, there is a concierge type of service for simple medical things, like refilling prescriptions or getting a new prescription for something like a urinary tract infection (their examples). That sort of consult is pretty much available immediately. Concierge is my word, if you think there is a better or more accurate description, please leave a comment. 

There was a little bit of a learning curve for me and I probably still don't have it all dialed in. I couldn't figure out how to find the orders for my bloodwork. It wasn't an issue for AOM to send it as I described but still. I also had trouble figuring out how to circle back to the same doctor for a follow up. On a different call to AOM customer service the rep said to think of it more as a clinic which made sense but I was able to find the same doc and follow up with him.

A fair point here is to wonder, well is the doctor any good. I have no real basis to know. I found him on LinkedIn and he's been practicing since 2002. He seemed to know things and he was personable. 

If you've been reading my blog for a while you might know that I am a health enthusiast, I get teased in the fire department about being a health nut which is fair. When I had the follow up with the doctor he said something to the effect of "you weren't kidding about exercising," he could see that in my numbers. I also got a couple of "wow...for your age" comments which I take as supporting the idea that a couple of simple habits (lift weights, low carb diet) can slow down the aging process on cellular and metabolic levels.  

Good health and fitness is optionality, I've made that comment 100 times. If you're skeptical about AOM or any other telehealth and think the quality of care might not be great, you might be correct for someone who needs more care and more interventions. The optionality in this context is being able to get away with substandard care for now because I just need bloodwork every so often, if something pops up, hopefully I'd be catching early. 

I am acutely aware how fortunate I am to not need any clever doctoring or need to manage any sort of chronic malady. I believe lifting weights and greatly reducing carbohydrate consumption is how to avoid chronic conditions that require medication and then more medication to treat the side effects of the first medication. I realize I said that above. 

Amazon One Medical solves a problem for me which is why I am sharing this, maybe it solves a problem or two for other people too. 

Options, Options, Options!

We'll start with a Barron's article that took quick looks at several categories of options oriented ETFs, mostly buffer funds and covered call funds. There wasn't anything new but there were some good points to reiterate. The space is growing dramatically of course and there are bound to be gaps between expectations and reality. 

Keeping it high level, buffer funds typically don't protect against losses beyond a certain point. Nine percent and 15% are common points where there is no further protection. They also cap the upside. The S&P 500 is up 23% in some random year? Great! That's not what you're getting with your buffer fund. Not even close. Getting 9% when the S&P 500 is up 23% isn't automatically terrible. Building a portfolio that can get a long term real return of 4, 5 or 6% irrespective of broad market outcomes with less volatility solves problems for a lot of people. Or building a portfolio where part of it has the opportunity to capture the full market gain, while another portion gets an adequate real return with less volatility also solves problems for people. 

The above about buffer numbers and how they work are basic building blocks, there's been a lot of innovation and product development in the last couple of years. 

We've spent a lot of time on covered call funds. JEPI's great success early on might have been the catalyst for setting off the huge renaissance in these funds. Twenty years ago there were a lot of closed end funds that sold calls and now there are a couple hundred ETFs from various providers. We've looked at how to use them effectively because they also should be expected to cap the upside. Again, not a problem for people who realize this going. Having the correct expectation for something and having it meet that expectation is a great outcome. We have fun playing around with funds that are NAV incinerators but in real life, I would say they should be avoided. 

The last category from Barron's was autocallable funds. There was no real attempt made to get into how complex these funds really are. Most of them are not NAV incinerators so there's that. Part of the appeal of covered calls funds is that they have the opportunity to be less volatile than the index but I wouldn't expect that from too many autocallable funds. Not every covered call fund will fit that bill either but JEPI does for example and with autocallables, CAIE is one of the biggest and it's volatility has been very close to the S&P 500. We've highlighted JELM from Janus as likely to be the least volatile but the trade off is that it is very low yielding compared to other autocallable funds. ACSP from ProShares has a very high targeted yield at 18-19% and it's day to day volatility is very high. It is unlikely that autocallable funds will malfunction or otherwise break but if it happens, it won't be easy to understand why. 

Today I learned from Upworthy that there are Bitcoin buffer funds. iShares will be listing one soon with symbol PBT but there are a couple of others including QBF from Innovator and FirstTrust has a series of them too. For this post will look at BFAP from FirstTrust. 

Uh oh, what's up with QBF? Gemini thinks that the quarterly reset is a mismatch with Bitcoin's volatility and reports that the fund will be liquidating in January. BFAP appears to be working. It's an annual reset (actually 53 weeks?). It will provide up to 26% upside and will protect any downside beyond 15%. If Bitcoin falls 10%, no protection. If Bitcoin falls 30% then BFAP should only fall 15% of course there is no guarantee from First Trust on that. A crucial point of understanding though is that the protection against the downside is intended to come from holding the fund to the reset date. If Bitcoin cut in half between June and October, BFAP would drop a lot in price too. Probably not that full 50% but either way the protection is designed around the reset date. 

You're going to laugh at me but that one is very easy for me to follow. 

Here's an interview from ETF.com with JD Gardner from Aptus ETFs. They have several options oriented ETFs. He talked about building a portfolio that is 75% equities and 25% options oriented ETFs to get a result that is similar to 60/40 but without bonds, he is not a fan of bonds. He says done the right way, 75/25 allows for more equity exposure  without larger drawdowns. 

The best Aptus funds to test the theory are too new to draw any conclusions. Gemini says their buffer fund of funds with symbol ABUF would be their best fund to use so we'll use BUFR from FirstTrust instead because it has a much longer track record.

Using BUFR, the theory stands up. The drawdowns were not bigger, the worst one was the same but BUFR doesn't go back far enough to take in the Covid Crash of 2020. If we swap BJUL in for BUFR which may not be apples to apples, we can capture the Covid Crash and 75% SPY/25% BJUL was down 30% versus 20% for VBAIX. I don't take that as a Karl Popper situation, more like there are some market events where there are very few places to hide and the Covid Crash was one of them. BTAL worked because it is essentially an inverse fund and although managed futures worked during that event, I attribute that more to luck than anything else. 

Speaking of options, Matthew Tuttle was interviewed at TheStreet.com. Here's a snippet where he talks about the breakdown of his updated permanent portfolio idea that we looked at a few weeks ago. Here's the breakdown which includes option strategies. 

• 25% Equities (he talked about higher volatility equity exposures)
• 25% "Beyond bonds" which he defines as property and casualty insurers and pre-merger SPACs
• 25% Hard money like gold, Bitcoin and digital credit like the Strategy preferreds
• 25% Tail risk which includes managed futures, options and T-bills

His theory about P&C insurers is lost on me. In terms of helping with equity market volatility the way bonds used to, the track record is mixed using the KWBP ETF as a proxy.

He said pre-merger SPACs mostly own T-bills and pay T-bill-like interest. So why own it if it is like T-bills?

He's onto something here. There is opportunity for mergers to increase the price of holdings in the fund and there is essentially a put option at $10 per share with SPACS, $10 is the price they get issued at. To the extent companies post SPAC merger might be crappy, the latest the fund sells is when the deal closes, sometimes it sells on the announcement but it does not stick around to find out whether it's a good company post merger or a piece of crap. Also, it would be reasonable to think that if SPAQ had existed in 2022, it would not have gone down anywhere near as much as the popular bond ETFs with duration. SPAQ mostly owns T-bills.

Let's take another run at replicating Tuttle Permanent Portfolio Update

You see zero allocated to STRC because the track record is too short but that is what he means by digital credit. We looked at SATA recently which is from a different company as another example. NOVIX is fund we have never mentioned, the Glenmede Global Secured Options Fund. It owns a mix of ETFs and option combos seeking capital appreciation while tamping down the volatility and declines. The track record on the second objective has been spotty but it has done well enough in its category to be a 5 star fund by Morningstar. 

I didn't add more T-bills. SPAQ is in there for the theory that it is a better proxy for T-bills and managed futures is mostly T-bills under the hood. 

Tuttle's idea certainly worked in the period available to study in terms of growth rate. We need to go to Portfoliovisualizer for the drawdown chart. There's some sort of distortion with NOVIX that I don't think changes the CAGR but does skew the drawdown.

Updated Tuttle has a decent record for going down less but it's not infallible. The volatility of Updated Tuttle is not much lower which makes sense, NOVIX and Bitcoin are pretty volatile. 

This was a long post but productive and covering pre-merger SPACS is new for us. 

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.

High Commodity=High Volatility

ETF Hearsay Tweeted out about an ETF filing from Grant Park. They are probably most known for their Grant Park Multi Alternative Strategy Fund (GPAIX). It's a four star fund and has been around quite a while. We've looked at it a couple of times for blogging purposes but not too often. The new fund will be an income fund but the description reads like it will be similar to GPAIX.

There's another fund, the Grant Park Dynamic Allocation Fund (GPKIX). It's coming up on two years of trading so it is still new. The literature compares it to the S&P 500.

The fund has done well. It's been pretty close to the S&P 500 with somewhat lower volatility and a much lower beta. I threw VBAIX in there because based on the asset allocation, it seems like it is more of total portfolio solution than an equity fund.

Here's the current allocation.

It is an actively managed fund but from what I can find, this mix shouldn't change much, it hasn't changed much so far. If you know different about that, please leave a comment. The fund owns a combination of ETFs and futures contracts to run its strategy. The fund is leveraged and while the amount of leverage is not fixed, Gemini pegged a range of 200-350% of notional exposure. That doesn't mean it is leveraged up, the leverage includes selling short. 

I took a stab at replicating it as you can see. PDBC is held in the fund but I don't believe any of the others are. 

The replication might be selling the fund short a little bit in terms of what they might have done over a longer period but the replication looks far more like VBAIX, and PRPFX too but not really much like the S&P 500. The volatility of the replication is also similar to the vol of the actual fund. I wouldn't expect a fund with a thirty something percent weighting to commodities to have a reduced volatility compared to VBAIX but obviously has a lower vol than SPY. Lower vol is a the wrong expectation. 

The bar chart shows quite a bit of year by year differentiation and reiterating a point we make frequently, being different is not always easy to endure. If we think about it as an alt, pairing it with VBAIX, the result is mixed. Better growth rate and Sharpe Ratio but no place to hide in the couple of drawdowns since it started.

As new as the fund is, it's too early to draw any conclusions but I do think Grant Park knows what they're doing and the fund is interesting so I'll keep tabs and we can revisit in the future.

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.

Cracking The Cockroach Again! Maybe!

A couple of years ago I proclaimed that I Cracked The Cockroach! Maybe! Finominal took a run at dissecting the Cockroach Portfolio this week. It came via email, I don't have a link. As a quick reminder, the Cockroach comes from Jason Buck and Mutiny Funds and is allocated as follows.

Here's how Finominal replicated it versus my post from November, 2024.

Finominal's version is obviously much simpler but I think my version is truer to the complete allocation as laid out in the circular chart. The way Finominal modeled it, they have most of the outperformance being attributed to massive outperformance in 2022 and that it was pretty close to 40% ACWI/60% LQD that they used to benchmark against the rest of the time. They didn't actually specify LQD, they described the fixed income sleeve as US Investment Grade Bonds.

There's been some differentiation along the way but you can see that the outperformance in 2022 is a big part of the story. That's not a knock. Looking like a benchmark except when the benchmark tanks is a pretty good outcome. 

The backtest goes back to when testfol.io first has data for EBSIX which is a fund we used to use more frequently for blogging purposes. I included the 40/60 benchmark but I also threw in a more typical 60/40 too. My thought on benchmarking might be a little unusual but in this context, the exercise is about trying to get close to the return of 60/40 where 60% is in equities but with less volatility, hopefully a lot less or maybe smaller drawdowns or some measure of all-weather/crisis alpha.

This next table cuts off to when I wrote the blog post on 11/27/2024. The volatility numbers stand up about the same which makes sense and you see the CAGR pretty close to the 60/40 we're working with today.

My version probably violates the idea of a lot of simplicity hedged with a lot of complexity. There's probably a lot of complexity 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.

Build Your Own Glidepath

I had a crazy idea about creating your own glidepath. I'm not the first person to come up with this per an interaction with Gemini but it's an interesting idea that might come in handy.

The idea ties in somewhat with the bridging concept we have been working with lately. As a quick reminder, the bridge we've been talking about is taking a smaller piece of money to live on for several years until the next financial milestone like taking Social Security or taking RMDs. The idea would be that this piece of money wouldn't need to last for more than ten years, that it would be expected to deplete or maybe get to the end of intended bridge duration with a small emergency fund amount left over. 

More correctly this could be a path to a different type of bridge versus the very yield concept we have been working with. So the example we'll work with starts putting $200,000 into a high yielding derivative income fund, SPXX for this post because it has a long track record. It's high yielding alright but not an NAV incinerator. It's ten year price only CAGR has been 3.29% so the yield has averaged out to 7.59% but in real life it has been lumpier than that. 

Starting out with 100% of a bridge account in equities might be difficult but we can mitigate that quickly. The idea is to take all of the yield from SPXX and put that into Stone Ridge Reinsurance (SHRIX) which is a catastrophe bond fund and reinvest SHRIX's distributions to buy more shares. Each year that goes by, again we are working with a ten year window, the equity percentage goes down as we move closer to retirement. 

Testfol.io says that $200,000 in SPXX ten years ago would now be worth $276,444 (price only gain). Gemini says that the total value of the account, SPXX price only plus the purchases/reinvestment of SHRIX would now be worth $516,000 which is slightly ahead of putting the $200,000 into VBAIX ten years ago instead. Starting with just SPXX would have been far more volatile than VBAIX but the volatility would have steadily decreased as the SHRIX position grew relative to the account. What started as 100% SPXX would now be 53% SPXX and 47% SHRIX. Missing the carnage caused by higher interest rates was a big contributing factor to the long term outperformance. 

I chose SPXX and SHRIX so we could get a decently long time to look back although SHRIX doesn't quite go back ten years but the reality is that with these two funds, this is very inefficient/unfriendly from a tax perspective. The world has evolved plenty since 2016. SPYI pays returns of capital not ordinary income for example. ROC distributions defer the tax, there's no tax owed on the distributions until ROC takes the cost basis below zero then the distributions are taxable at the long term gains rate. Testfol.io has SPYI yielding almost 13% so if that rate persists it would take seven and half years for the cost basis to hit zero. Reiterating, the cost basis would be going down with each distribution. 

There are also funds that could replace SHRIX in that sleeve that are more tax efficient. A mix of some yieldy holdings and some alts like managed futures, some of the macro funds we look at and also long/short strategies could have a similar total return outcome as SHRIX but with far less tax owed. 

Moving from all equity exposure to less and less equity exposure is what glidepaths do. By definition this reduces the threat from an adverse sequence of market returns. Someone who started this in 1998, planning to retire on December 31, 2007 would have had half of this piece of money out of equities when things started to rollover into the financial crisis. 

Even you think this idea stinks, one thing it has going for it is that the process to manage sequence of return risk is systematic. There's nothing close to guessing or predicting anything. It harvests the volatility from the derivative income sleeve to start and then build up a defensive sleeve as someone moves closer to needing their money. Obviously doing something like this in an IRA account of some sort would mean being able to avoid the tax gymnastics. 

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 Diversification Is Supposed To Work

Let's start with this.

If inflation continues to run at about 3.5% then that implies a real return of 3.5% versus 4.56% real return for Vanguard Balanced Index Fund (VBAIX) since inception or 5.97% real return for the last ten years. The real return coming down to 3.5% might be disappointing but it's not catastrophic. Getting an extra 50 basis points with alts would be helpful if the other assumptions turn out to be correct. 

Coincidentally, Finominal's Monday research looked at diversifying with gold, managed futures and bonds.

The first thing I wondered is why not run the same test with all three in one portfolio?

The first four portfolios allocate 60% to the S&P 500. Splitting the 40 between gold, managed futures and bonds does what it should. Volatility and the max drawdown both drop some and the CAGR is neither the best of the lot nor the worst. This is simply the building block of understanding that there's no reliable way to guess which diversifier will work the best and that by diversifying your diversifiers you should get exactly what we got with this exercise. 

On a related note, Matthew Bartolini from StateStreet was on ETF IQ and he had some interesting things to say about portfolio construction. Eric Balchunas said that bond funds like AGG are not providing the type of diversification that they used to. Bartolini had some stats to validate Eric's point but nonetheless, bonds don't do it anymore, so what does StateStreet suggest?

He talked about replacing AGG-like exposure with derivative income funds, high yield and bank loans. 

This last backtest only covers five years, going back to when bonds became unreliable. The yield didn't adequately compensate for the risk and volatility long before five years ago but five years ago is when it started to matter. 

Kudos to Bartolini for thinking outside the box. 

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 Alt Less Traveled

We talk all the time about alternative strategies. I've cited my awareness/interest in the idea back to an article about Jack Meyer who used to run the Harvard Management Company, the endowment for the school. I think this might be the article, it talks some about Meyer's interest and belief in timberland as a diversifier. He talks about the opportunity to get a 7.5%-8% real return from timberland, there is the implication of getting that return but with a low correlation to domestic equities. 

The prompt for today's post is an in depth look at timber investing by Meketa. The Meketa paper is thorough in terms of providing education but there wasn't too much in the way of how to access timberland. Many years ago, I owned Plum Creek Timber (PCL) for clients. It was a fine hold but I'm not sure it really captured the effect. A stock (or REIT in this case) that trades in the market will have a tougher time delivering a differentiated return stream. Weyerhaeuser took over PCL in 2016. I sold it long before then, I may have sold it to make room for RYMFX in late 2007 but I am not sure. For the last ten years, WY has compounded slightly negatively which isn't necessarily a catastrophe for a diversifier except that it was down more than the S&P 500 in 2022. 

Neither Grok nor Gemini could find a dedicated timberland interval fund. That wrapper would work for timberland, that would be something worth learning about but I can't see using an interval fund for clients but I do spend a little time studying the space. Gemini pointed to the Harrison Street Real Assets Fund (VCCRX) which is an interval fund, despite having a symbol, it is not a mutual fund. The allocation is interesting;

Included in VCRRX is Harrison's own infrastructure ETF. To Harrison's credit, the ETF is differentiated from the S&P 500 but looks very similar to some of the other infrastructure funds.

Here's a long term look at VCRRX, the parent fund so to speak.

It's a horizontal line that tilts upward. From the literature, the fund consistently lags behind its benchmark for growth rate but with a fraction of the volatility. The result is very similar to client holding Merger Fund (MERIX) so I am not opposed to that but I'm not sure it makes sense to to endure the limited liquidity and the 2.2% expense ratio for that result. The fund is intended to be absolute return so it is pretty much doing what they have in mind but 50% MERIX/50% BOXX would have the same result for 1/3 the cost and with the advantage of daily liquidity. 

A different path to MERIX' result interests me, we can revisit this if they ever put this into a vehicle with daily liquidity. 

Closing out with a chart from Barry Ritholtz.

We've looked at these several times in the past for blogging purposes. The way we framed it, I think these stocks do a great job of being proxies for investing in private equity and private debt without the expense or limited liquidity. We looked at them when times were good, they mostly go up more than the broad market with more volatility and now things are going poorly and they are down more than the broad market with more volatility. I realize the broad market isn't actually down in any sort of meaningful way currently. 

At some point these will bottom and I'm sure go back up again but based on the volatility, owning any of them seems like it would be very difficult. A quick editorial note is that I don't know anything about Hamilton Lane, really nothing, and from what I've read about Blue Owl, that one might be in a more serious situation than the others. BX is the one we've looked at the most for blogging purposes. It is currently at $109, down from $199 in late 2024. I imagine it will get to $199 again at some point but the path back to $199 might go through some much lower number first. 

Like I said, these are difficult to own.

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.

RMD Hack

That is the Vixen 21 TD, "the sports car of motorhomes."

It looks like a cross between an EM 50 Urban Assault Vehicle (Stripes reference) and a DeLorean. No joke, one of the designers of the DeLorean was involved with the Vixen. It was fast for its time in the 80's. It was also designed to fit inside the typical garage at only 6'4" tall and 21 feet long. 

We talk frequently about optionality here. It is high up on my priority list and while a sporty number like the Vixen 21 TD having room for all your stuff and the kids might be a tortured analogy, I've had this search result open in a tab all week waiting for me to figure out how to work it into a blog post. 

The optionality we are talking about relates to RMDs. Anyone who is still working at their employer past RMD age does not have to take an RMD out of their 401k. If they are in that situation and have an IRA outside of their 401k, they do need to take the RMD. The 401k issue more complicated if you own more that 5% of the company so talk to an accountant. 

Even though the an employee is taking their RMD, they can still contribute to their 401k thus effectively offsetting their RMD up to the amount they can contribute. If someone's RMD is $38,000 and they contribute $20,000 to their 401k, then their "net" RMD would only be $18,000. They still need to make the full contribution and in a separate transaction take their RMD but the net effect is the same.

This can also apply to people who are self employed with a Solo 401k and have earned income. I've been thinking about this for my own circumstance. Some advisors never retire which is how I have been leaning. At this point, I don't know if I will have earned income during my first few RMD years but I might. 

If my early RMDs are somewhere between $30,000 and $60,000 and lets say I have $50,000 of earned income still, Gemini thinks I could contribute $41,000 to my solo 401k, offsetting some or all of my RMD. Again, these would have to be separate transactions, make the contribution and take the RMD. 

The tie in for optionality is relieving some of the burden from portfolio. This is what bridging as we've discussed it, does. The primary account, presumably a rollover IRA doesn't have to start generating an income at 65 or whatever age so instead of needing to do so for 30 years, maybe the bridge shortens it to 20 years when starting at 75 instead of 65. And maybe this lower or part time earned income for a couple of more years can shave two more years off that 20 year window which to my way of thinking preserves optionality for needing to maybe spend more on in home health or some sort of expensive medical treatment that insurance won't cover. 

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.

Good News For HSAs?

We'll get to HSAs in a minute but I wanted to start with Bloomberg saying that retirees are afraid to spend money on fun for fear of running out before they die. These articles are all over the place as far as no one can retire, people have too much money and everything in between. 

Shifting from accumulation to decumulation is difficult for plenty of people. It really is a psychological shift, of course some folks will have no trouble but for others it will be difficult. I assume I will tend toward the latter camp.

The article makes a quick reference to spending in buckets. My thought process has drifted in that direction for how my own older age finances might play out. The way the conversation on this has evolved here, my take on buckets is probably a little out of consensus, I think three buckets can suffice and maybe only two.

I think a sequence of return protection bucket that is cash with about two years of expenses is pretty important. Two years of expected expenses is about bear market resilience and not having to sell stocks after a large decline. Before the last few years, bear markets tended to last 18-30 months but it's been a while since one lasted that long. 

We've spent a lot of time on an intermediate term bridging or depletion bucket. The context for this idea is as a bridge to the next financial milestone like starting Social Security or taking IRA withdrawals, whether they are required or not yet required. In that light, maybe we're talking about an eight-ten year window. We've looked at building very yieldy portfolios designed to be spent down at a rate that would not be sustainable for a typically long retirement but with a reasonable shot of getting to the end of the eight-ten year bridge objective with a little left over. Starting with $400,000 for example, taking out $40,000-$45.000/yr for ten years and having $50,000-$60,000 leftover after ten years would be a big success with this.

Going into this idea thinking, "I know this piece of money will only last ten years" is psychologically far more palatable. There's no open end objective that goes with not knowing when retirement ends. Maybe this starts at 65, lasts for ten years to starting RMDs and if things go well, maybe there's another year or two's worth money still in the account. The RMDs would really be the start of decumulation, that first ten years might be decumulation with training wheels to get used to the idea. 

Quick pivot to another Bloomberg article about Dividend Nomads. These folks are branch of FIRE living on distributions from various types of funds. One of the people profiled is living off of distributions from $130,000 that was invested across several YieldMax funds including CONY which references Coinbase and went down a lot. Another profile focused on funds like JEPI which are certainly high yielding without being NAV incinerators like many of the YieldMax funds. A fund like JEPI yielding 8-10% would be a reasonable fit in the bridging strategy we talk about above. The third people profiled sort of didn't really belong in the article, they accumulated a lot of money and own a few 3% yielders which is a sound strategy but not terribly interesting. 

As I read the first two profiles, these people don't have a lot of money but they are making it work. This is a point I've been making back to the earliest days of the original blog site, I saw this often here in Walker. Neighbors without a lot of money were making their retirement work because they had to. 

Ok, HSA accounts. The WSJ had an article that was a refresher on how they work. Toward the end was this passage;

Expansions benefiting ACA users

In 2026, new provisions took effect that benefit individuals with ACA coverage. They enable HSAs to be paired with Bronze and Catastrophic plans, which have the highest deductibles.

This change is good news for several groups. One is self-employed workers. Another is early retirees who use ACA coverage and aren’t yet eligible for Medicare. Still another is the fairly small group who opt only for the ACA’s catastrophic coverage.

HSA eligible plans that make financial sense have been tough to find through the market place for several years. Gemini, does this this mean it should be more accessible? 

Yes, this rule change makes HSAs significantly more accessible if you are self-employed. Under the One Big Beautiful Bill Act (OBBBA) which took effect on January 1, 2026, federal guidelines fundamentally changed how marketplace insurance plans interact with Health Savings Accounts.

Hopefully Gemini is correct, we'll know next month. I think we've had an HSA eligible plan just one time in the last six or seven years. It would be nice to get four more years of contributions in before I hit Medicare in 2031.....actually we could get ten more years of HSA contributions. Assuming it ever makes sense again through the market place, we could have a family plan for four more years putting $10,000 into the HSA then for the six years my wife is not yet on Medicare after I start, she could have an individual plan, putting in $5400/yr for six years. 

The last couple of years we've had really crappy insurance and I am wondering if that might not be such a great idea now that I'm 60. We had help from an insurance broker for the last couple of years so maybe he can help us find and HSA, I'll report back next month. 

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.

Is Low Dividend Yield A Harbinger Of Doom?

Barron's looked at the close to all-time low yield of the S&P 500 at just over 1%. The last time it was that low was September, 2000. This sort of valuation measure matters for understanding the landscape but isn't very helpful for timing. When the next bear market starts, chances are the dividend yield for the index will be similarly low to what it is now and will be a great hindsight tool for people who will say they correctly called the bear market. 

In reality, maybe the next bear market already started or maybe it won't start for months or even several years. I obviously have no idea which is why I try to position a little bit of the portfolio to have some anti-fragile traits even while stocks are going up. BTAL tends to benefit from stock market disorder (using disorder as a synonym for panic-inducing decline) and there are some others of course. 

If the question is does an all time low in SPX dividend yield mean a bear market is coming but there's no way to know beyond a guess when it will start, our answer here drifts to having exposures to things that can benefit as I just mentioned as well as things that just go about their business no matter what is going on, I think catastrophe bonds are one example of that category, various forms of arbitrage and long/short too. 

It's a mistake though to completely bail out of equities. If you just dial it down and that turns out to be a tactical mistake, you still get some equity growth as opposed to none. To Barron's point, I do think yield or "yield" as the case may be is important. If an equity sleeve, whether a percentage close to normal or not, can provide growth, peeling out an income stream that is independent of the growth can help offset equity declines and volatility. 

Of course that last sentence is the argument for owning bonds in the traditional sense but as we talk about ad nauseum, traditional bonds don't reliably get it done anymore. 

Part of the solution could be a small slice of a levered equity fund which is an idea we play around with sometimes but those funds have their obstacles and risks. We just looked at the Calamos Autocallable Growth ETFs (CAGE). The issue there is the need to constantly change how much leverage there is to maintain the volatility target. Something like ProShares 2X S&P 500 (SSO) can track twice the S&P 500....except when it doesn't....but also if the S&P 500 500 drops 40% causing about an 80% drop in SSO could have a path problem digging out of the 80% hole depending on the nature of the recovery. We also recently looked at WTLS from WisdomTree which is 90% simple beta and 90% equity long/short. It's been a while since we checked in on the Miller Value Partners Leveraged ETF (MVPL) but that could be a way to capture this effect, it toggles between simple S&P 500 exposure and 2X exposure based on technical indicators. It will be in the 2X fund most of the time because the equity market goes up most of the time. 

Since inception MVPL has compounded at 28.15% versus 29.94% for SSO and 18.85% for SPY. A lot of the gap to SSO is the fee but you can see from the drawdown chart that it probably had unlevered exposure for at least some of the Tariff Panic. I think there will eventually be a way leverage up with fewer structural risks than the current crop of funds but we'll see. 

We've had better luck sorting through the fixed income substitute and alternative spaces. A new fund for us from the RCM report I referenced yesterday is the Victory Pioneer Multi Asset Income Fund (PMFYX). It really is multi-asset.

It says equities but really it's dividend equities. "Equity-linked notes" is interesting, that's pretty close to being an autocallable sleeve. It may be structured notes which are very similar, an easy way to think of it is that autocallable funds give daily liquidity to the structured note world. 

It's not all sunshine and roses for PMFYX but you can see the yield has been pretty high in most years. Gemini said it is mostly economic yield as opposed to capital gains and Yahoo Finance seems to corroborate that.

There's not much CAGR left over after taking the distributions out which is why I don't think you should bail on equities. Let that give the portfolio growth when it can, PMFYX isn't going to do that. 

So putting this together without the leverage component;

The following starts with $800,000 and takes out $12,500 per quarter which is obviously quite high.

The return of Portfolio 1 absolutely lagged behind 60/40 but the ride was much smoother and part of this project is to address whether the record low in equity dividend yields is a harbinger of a bear market. Portfolio 1's total return was pretty close to 60/40 despite having less than half the equity exposure, Portfolio 1's beta was 0.31. If a bear market does start and equities get killed, Portfolio 1 has a decent shot of going down less. 

This is a very differentiated portfolio and as we've looked at countless times with countless versions of this same idea, actually living with differentiation can be very difficult. 

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.

Did Your Alt Make The List?

John Authors had a little fun riffing on The Who saying he hopes he dies before the ten year treasury hits 7%. Plenty of pundits have been saying that treasuries with duration are now more attractive with yields in the fives. 

JELH is a lower yielding autocallable ETF, BKLN is a bank loan (floating rate) fund and UTEN tracks ten year treasuries. The negative return of UTEN is not thing to focus on. If you want to buy ten year treasuries here you must think they won't implode from here so the decline looking back is meaningless but the volatility characteristics probably will endure. 

If you think 5.2% is adequate compensation for ten years and buy UTEN (in real life buy a treasury not a treasury fund) then I would think of it as one small slice of the non-equity allocation. Treat it like any other alternative. Clients own BKLN which has its own risks but it is a narrow slice. Clients own merger arb as a fixed income substitute which has its own risks but it is a narrow slice. If you want to own duration here (I do not), keep it as a small slice in case buying at 5.20% turns out to be a terrible entry point. That's not a prediction, it's a matter of risk management. 

Speaking of the non-equity allocation, RCM has a whitepaper out that screened 12,000 funds looking for funds that beat the S&P 500 with lower volatility and a beta of less than 0.5. Only 22 funds fit that bill. It's probably not ok to list all the funds but several funds that we talk about regularly made the cut and I think it's ok to mention those. Obviously you can click the link, give RCM your info and get the paper. 

There are some narrow funds like Invesco Agriculture (DBA), several AQR funds including managed futures and QSPIX, BLNDX, Vanguard Market Neutral (VMNIX) and one we just looked at for the first time, the Federated Hermes MDT Market Neutral Fund (QQMNX). Kind of surprising was that a couple of buffer funds made the list too. 

There are several funds I am unfamiliar with on the list so we can dig into a couple of those in subsequent posts. 

A last point on this, I had a call with one of the funds I own for clients today and the company is working on a new alternative fund that will start trading at the end of the year or early 2027. It will be easy to understand versus some other things that we look at and this anecdote speaks to the idea of more interesting funds coming. I am not aware of another fund that does what this fund will do. Obviously, I am keeping the details confidential for now. We can circle back when/if it hits.

And one last item that is completely unrelated, the latest Social Security COLA was announced today at 3.6%. I think it is useful to keep tabs on this and get your annual statement if you are not taking SS yet and obviously if you are, you can do the math on your new payment in order to understand how close the COLA actually helps with your personal inflation index. Where COLA tracks a version of CPI, whatever is going on with healthcare costs is probably not reflected in the SS COLA, ditto with homeowners insurance.

I opened my current SS statement and applied the 3.6% bump to my age 67 and age 70 just to get a sense of the new numbers and on there of course was my age 62 number which before the COLA was $2725 and I had a thought that probably isn't rational which is ok, but I thought, "man, that really isn't much money." Maybe it's the two handle or I don't know what but I feel like I would be selling myself short settling for that amount if my career was ending. I realize more people lean toward taking it early, I'm not trying to convince anyone to wait, just sharing an observation. If there is some hideous benefit cut in 2032 that is far worse than any of the current working assumptions, of course that will just be something I have to live with but choosing that, man, I can't do 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.

Still Just An ETF In A CAGE

On Monday, I sat in on a webinar for the Calamos Autocallable Income Fund (CAIE). We've spent some time here trying to understand the risks to the fund. We had a small breakthrough recently, the fund is exposed to equity risk not the typical risks associated with fixed income like credit or interest rate risk. 

One of the things we've been trying to figure out is what should be the expectation if the market goes down sort of a lot but doesn't come close to the barrier (the point at which distributions are suspended). I asked in webinar, I asked about a 20-25% drop in the reference index. To the webinar's credit, the answer was very direct. If the reference index fell that much, we should expect the fund to fall by the same or similar amount. The distributions should still flow but the price would drop. 

With covered call funds there is often talk that they will go down less than the market cap weighted equivalent and that happens sometimes.....not always, maybe not even half the time but it can happen. CAIE appears to have less chance of going down less. 

This is probably the only example to look at since CAIE listed in June of last year. 

Another fund in the Calamos Autocallable suite came up that I've heard of but we've never looked at. You can tell from the name that the Calamos Autocallable Growth ETF (CAGE) is different than CAIE, it is growth, not income. A simplistic explanation is that it reinvests the coupon payments back into the NAV instead of distributing them as income. 

It is leveraged exposure, CAIE is actually leveraged exposure too. CAGE appears to be doing what it is supposed to do. There are some serious complexities to this that I don't yet have dialed in. If the reference index drops a lot, I would expect CAGE to drop more. 

Below are the questions I came up with that I fed into Gemini to start learning about the fund. The answers are long winded of course so I shortened them up make for an easier blog post to read.

Roger: Does CAGE solve the issue of volatility drag versus a fund like SSO? I realize the leverage is different.

Gemini: Yes but it imposes a 6% annual "decrement drag," a hurdle that must be cleared before the fund starts to go up.

In the conversation, Gemini asked if I wanted to see a 20 year simulation. Here's that output. 

Simulation Highlights & Trigger Frequency

Data from the historical simulations shows exactly how frequently the internal ~29%–30% compounding coupons trigger: [1, 2]

• Coupon Trigger Rate: Out of 2,537 simulated weeks, the index successfully triggered an early autocall or coupon capture 1,984 times. [1]
• Probability of Capture: This yields a 78.2% historical probability that a note within the fund hit its positive performance target on an annual observation date. [1]
• Annualized Performance: Over a rolling 10-year simulation window, the underlying index achieved a 23.75% annualized return, noticeably outpacing the standard S&P 500 total return index over the same backtested period. [1, 2]
• Capture Ratios vs SPY: The index recorded an upside capture ratio of 1.06 and a downside capture ratio of 0.86. It captured more market upside while blunting a portion of major drops. [1]

This color was important;

Summary of the Catch

The 23.75% simulated return looks highly attractive, but it is a byproduct of a 35% constant volatility target. During quiet, flat, or slowly grinding bull markets, the index uses internal swap leverage (up to 500% gross exposure to S&P 500 futures) to manufacture that 35% volatility. This synthetic leverage is what allows it to generate massive 30% coupons even when the actual S&P 500 is only up 2% or 3%. [1, 2, 3, 4, 5]

The risk is that in an extended, multi-year flat market, the 6% annual decrement drag will continually erode the index baseline, making it progressively harder for the oldest notes in the ladder to trigger. [1]

Roger: In a repeat of 2000-2009 inclusive, should the fund be expected to do worse than simple market cap weighted S&P 500?

Gemini: Yes, CAGE would be expected to perform significantly worse than a simple market-cap-weighted S&P 500 during a repeat of the 2000–2009 "Lost Decade."

Roger: Is the 6% hurdle how JP Morgan gets paid?

Gemini: Not exactly, more like how it can pay out the huge "coupons" that get reinvested (simplistic term for the circumstance).

Roger: Would it make sense to buy the fund after a large decline in markets and all those problems start happening?

Gemini: Yes.

Roger: SSO tends to track 2x the S&P 500 closely over longer periods. Again, just a tendency. CAGE seems like it would have greater variation in how it tracks the S&P 500. Is that correct?

Gemini: Yes

This next point is very important.

The Dynamic Leverage Shifts (35% Vol Target)

• SSO maintains a rigid 200% exposure to the S&P 500 every single day, regardless of whether the market is calm or chaotic.
• CAGE dynamically adjusts its leverage to maintain a constant 35% implied volatility target.
  • In a quiet market (low VIX): CAGE must heavily lever up (sometimes up to 400% or 500% gross exposure) to manufacture that 35% volatility.
  • In a wild market (high VIX): CAGE must drastically de-lever to keep its internal volatility from spiking past 35%.
    This means CAGE's effective beta is constantly morphing based on market fear, causing huge tracking variations over time.

Not because it is easy to understand, it isn't, but it speaks to the complexity of the fund. I later asked if it is constantly adjusting the leverage and the answer was yes. That also applies to CAIE, it is constantly managing the leverage to dial in the correct volatility target. This could lead to a whipsaw of sorts although that hasn't happened up to this point. 

Roger: Could CAGE be thought of a way to allocate to asymmetry but without diversifying the risk away from market cap weighting?

Gemini: Yes (it liked that framing).

Hoo boy, that is a doozy of an introduction. I tried to make this a simplistic introduction not technical paper. Please leave a comment if you dig in and find things I missed in this first look. 

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.