Need Opinion

[Bobpa]

Any opinions on the following ETF's fow downaizing risk?

DIAL DIVO BTAL TAIL FIXD SWAN DRSk

[Norbert]

I looked at your ETFs over coffee this morning.

DIAL and FIXD are multi-sector bond funds, not different from the many funds of this category often discussed here. No further comment.

DIVO is a dividend growth fund that uses covered calls to enhance returns. So, risk is actually being increased, not decreased.

TAIL is a hedge that zags when the market zigs. Holding it will certainly reduce the volatility of an equity portfolio, but it will significantly reduce returns during a bull market. Like other hedges, it loses money in the long term. I'd stick with bonds or cash on this front, unless you're very confident that a crash is imminent. Still, if that's the case, why not just reduce exposure to risky assets?

SWAN and DRSK both hold high grade bonds, using a small percentage of the portfolio to take exposure to the S&P 500 (SWAN) or to selected stocks (DRSK). Both have nearly matched the performance of the S&P 500 with far less volatility since their recent inception.



(Blue = SPY, Red = SWAN, Yellow = DRSK)

These last two ETFs deserve further discussion. Look at their minimal drawdown during the Spring Covid-19 panic!

However, their hybrid strategy depends on the historical inverse correlation between equities and high-grade bonds. Thanks to QE, both asset classes have enjoyed positive returns during recent times. Beware any situation when / if stocks and investment grade bonds / Treasuries decline simultaneously, as these ETFs will fail!

These two hybrid funds are also attractive because limited capital is employed to gain equity exposure; the majority sits in bonds and earns interest. On the other hand, the derivatives carry transaction fees.

Bottom line: there's no silver bullet in the stock market and there's no free lunch.

FWIW
N.

[Bobpa]

Thank you for taking time for the indepth reply. Any opinion on IVOL?

[Norbert]

IVOL will do well / not do well under the following conditions:



Since inception it's tracked the TIP ETF very closely.

Too esoteric for my taste!

[jcserc]

I was recently studying some of these funds as well. I even considered using a combination of DRSK and SWAN (50/50) as the blend reduces the volatility quite a bit and hedges the inherent risk of these instruments. In the end, I decided not to invest in them. As Norbert implied, there are plenty of unknowns and they have not been tested on a different set of conditions, and my experience tells me that eventually, they will probably stop working. All these strategies tend to fail in due course...IMO. More often than not, keeping it simple with a well-diversified portfolio will work better long-term.

I was also considered DIVO. It seems to be a decent "value" fund, but also ultimately decided against it as I settled for the good old SCHD with a much smaller expense rate and longer track record.

Note: you could potentially sell calls against SCHD to somewhat replicate what DIVO does without having to pay the added expense rate of DIVO...However, this is something I wouldn't necessarily do as the options volume on SCHD is low, the spreads are high, and there is not much premium there. Maybe with another value fund with better options volume. Also, in theory, DIVO does the call selling at the security level, not the index. But, as I said, I kept it simple and just bought SCHD.

Best,

JC

[anitya]

Dec 29, 2020 6:47:45 GMT Norbert said:

I looked at your ETFs over coffee this morning.

DIAL and FIXD are multi-sector bond funds, not different from the many funds of this category often discussed here. No further comment.

DIVO is a dividend growth fund that uses covered calls to enhance returns. So, risk is actually being increased, not decreased.

TAIL is a hedge that zags when the market zigs. Holding it will certainly reduce the volatility of an equity portfolio, but it will significantly reduce returns during a bull market. Like other hedges, it loses money in the long term. I'd stick with bonds or cash on this front, unless you're very confident that a crash is imminent. Still, if that's the case, why not just reduce exposure to risky assets?

SWAN and DRSK both hold high grade bonds, using a small percentage of the portfolio to take exposure to the S&P 500 (SWAN) or to selected stocks (DRSK). Both have nearly matched the performance of the S&P 500 with far less volatility since their recent inception.

View Attachment

(Blue = SPY, Red = SWAN, Yellow = DRSK)

These last two ETFs deserve further discussion. Look at their minimal drawdown during the Spring Covid-19 panic!

However, their hybrid strategy depends on the historical inverse correlation between equities and high-grade bonds. Thanks to QE, both asset classes have enjoyed positive returns during recent times. Beware any situation when / if stocks and investment grade bonds / Treasuries decline simultaneously, as these ETFs will fail!

These two hybrid funds are also attractive because limited capital is employed to gain equity exposure; the majority sits in bonds and earns interest. On the other hand, the derivatives carry transaction fees.

Bottom line: there's no silver bullet in the stock market and there's no free lunch.

FWIW
N.

Norbert, 

Excellent commentary!

“Beware any situation when / if stocks and investment grade bonds / Treasuries decline simultaneously, as these ETFs will fail!”

Assuming these situations are knowable, and not one off like Covid, what are these possible situations?  Sudden rise in interest rates?  What else?  Not looking for crystal ball but food for thought.

SWAN is very attractive.  More attractive than pre-Covid USMV.  But with Covid, USMV failed and also caused opportunity cost for the past nine months.  So, I hear you.

A

[helmut]

Dec 29, 2020 6:47:45 GMT Norbert said:

I looked at your ETFs over coffee this morning.

DIAL and FIXD are multi-sector bond funds, not different from the many funds of this category often discussed here. No further comment.

DIVO is a dividend growth fund that uses covered calls to enhance returns. So, risk is actually being increased, not decreased.

TAIL is a hedge that zags when the market zigs. Holding it will certainly reduce the volatility of an equity portfolio, but it will significantly reduce returns during a bull market. Like other hedges, it loses money in the long term. I'd stick with bonds or cash on this front, unless you're very confident that a crash is imminent. Still, if that's the case, why not just reduce exposure to risky assets?

SWAN and DRSK both hold high grade bonds, using a small percentage of the portfolio to take exposure to the S&P 500 (SWAN) or to selected stocks (DRSK). Both have nearly matched the performance of the S&P 500 with far less volatility since their recent inception.

View Attachment

(Blue = SPY, Red = SWAN, Yellow = DRSK)

These last two ETFs deserve further discussion. Look at their minimal drawdown during the Spring Covid-19 panic!

However, their hybrid strategy depends on the historical inverse correlation between equities and high-grade bonds. Thanks to QE, both asset classes have enjoyed positive returns during recent times. Beware any situation when / if stocks and investment grade bonds / Treasuries decline simultaneously, as these ETFs will fail!

These two hybrid funds are also attractive because limited capital is employed to gain equity exposure; the majority sits in bonds and earns interest. On the other hand, the derivatives carry transaction fees.

Bottom line: there's no silver bullet in the stock market and there's no free lunch.

FWIW
N.

Norbert,

Maybe I'm naive but I feel like we are still trying to decide the best shape for the wheel.  Portfolio three in my link below seems less complicated.  
LINK 

helmut





 

[FD1000]

Dec 28, 2020 13:33:16 GMT Bobpa said:

Any opinions on the following ETF's fow downaizing risk?

DIAL DIVO BTAL TAIL FIXD SWAN DRSk

Unfortunately none is a perfect solution for a long term.  Every time we had a big drop investors have been looking for an index/fund/manager that have the answer and there isn't anything easy.  If there was the whole world would use it.
Over the years I looked PAUIX(Arnott failed miserably), Alternatives(long/short, risk parity, market natural, others) all failed + AQR funds failed too.

If a fund did fantastic during a meltdown then it would have a hard timing being above average on the upside.

So what to do? Several options:
1) Do nothing and/or rebalance.  Easy and recommended
2) If you think something is overvalue/undervalue increase/decrease.  That turned to be not a good idea, even the "experts" were wrong.
3) Find a manager that will do it for you.  Number one on my list is PRWCX.
4) Do your own timing.  I would not recommend if for most. Don't do it in accumulation phase, try is at retirement if you have more than enough.  This is what I do, and I have been looking for years for the easy magic fund.
5) Stocks + TLT/EDV worked pretty well over the years (Helmut is correct)

I attached several years' performance of all funds + VFIAX=SP500 + QQQ.  I had to start from the fund with the shortest history.

Attachments:

[FD1000]

Norbert: Bottom line: there's no silver bullet in the stock market and there's no free lunch.

FD: yes there is. When your fund or portfolio risk-adjusted performance is better, it is a FREE LUNCH.  The best ones have better performance + risk attributes (SD, Sharpe, Sortino,more) 
Examples:
PIMIX vs VBINX PV(link) PIMIX had better performance with about half the volatility
PRWCX vs VFINX since 2000 PV(link) PRWCX had better performance with lower volatility

[Norbert]

FD1000

You used the word "HAD" for both of your Free Lunch examples. That's a problem unless you own a time machine.



Over the past five years the examples don't work; and God knows about the next five years. With hindsight I can be a genius trader too. Or not marry my first wife.

That's the issue with SWAN and DRSK. Their trailing returns make the Bonds + equity Call writing strategy look like a Free Lunch. They didn't falter during the Covid-19 panic and have terrific Sharpe & Sitting ratios. But, is it really true?

[FD1000]

Dec 30, 2020 3:44:56 GMT Norbert said:

FD1000

You used the word "HAD" for both of your Free Lunch examples. That's a problem unless you own a time machine.

View Attachment

Over the past five years the examples don't work; and God knows about the next five years. With hindsight I can be a genius trader too. Or not marry my first wife.

Interesting, I owned PIMIX from 2011 to 2018, well documented over the years.

Or, maybe you like to know my portfolio 3 year ACTUAL performance + SD. How long are you going to play this song? 
I promise to post it at the end of the year.  It will use a snipping tool that shows 1+3 year performance+SD from Schwab which will show a huge free lunch.
Or maybe you forgot (this).

[Norbert]

FD,

I suggest staying on topic. This thread is about the use of certain ETFs for risk reduction. It's not about your investment record. Why not start a new thread about yourself?

[FD1000]

Dec 30, 2020 5:02:13 GMT Norbert said:

FD,

I suggest staying on topic. This thread is about the use of certain ETFs for risk reduction. It's not about your investment record. Why not start a new thread about yourself?

Hey Norbert, you are the one who started by saying "With hindsight I can be a genius trader too".
I was on topic as usual and didn't post anything about my style.  I did mention PRWCX+PIMIX as 2 good example of great risk/reward funds and nothing about me until you posted your above remark. 

And part of downsizing risk(from the OP) could be timing if you know how to do it, and I'm not the only one on this board who has been doing it.

[Norbert]

We've both made some great trades, but that doesn't prove that there's a proverbial Free Lunch.

I bought some ICLN this Spring and am up over 100%. But, I would never post about this incredibly smart trade publicly. This is just for your private information. However, it does suggest that I'm a helluva trader and deserve a good deal of public admiration; I played the Biden "Green New Deal" narrative to perfection. Am I good or what? Brilliant, but also very modest.

I think I might be a God.

The recent performance of SWAN and DRSK is as good as the S&P 500 with far lower volatility. It's impressive. So, is there a snag, or not? Should we load up? The OP asked for opinions and I explained what has to go right for these ETFs to succeed going forward.

[FD1000]

Dec 30, 2020 7:21:18 GMT Norbert said:

We've both made some great trades, but that doesn't make us genius traders or prove that there's a proverbial Free Lunch.

I bought some ICLN this Spring and am up over 100%. But, I would never post about this incredibly smart trade publicly. This is just for your private information. However, it does suggest that I'm a helluva trader and deserve a good deal of public admiration; I played the Biden "Green New Deal" narrative to perfection. Am I good or what? Brilliant, but also very modest.

I think I might be a God.

The recent performance of SWAN and DRSK is as good as the S&P 500 with far lower volatility. It's impressive. So, is there a snag, or not? Should we load up? The OP asked for opinions and I explained what has to go right for these ETFs to succeed going forward.

The term FREE LUNCH is overused and IMO is not correct as I explained it already.  BTW, I have posting about VWIAX as my best idea for conservative allocation for more than 10 years and PRWCX+PIMIX since 2011.  I have used OAKBX,FAIRX and SGIIX most years in 2000-2010.  These are the kind of funds that match my style since 2000.  For me it's not about one trade but total portfolio risk-adjusted performance and mainly about meeting+exceeding goals.  Even SPY vs QQQ shows that QQQ had a free lunch in the last 3 years(link) and I mentioned QQQ many times in the last several years as a good option for part of someone portfolio and instead of SP500.

To the question of SWAN and DRSK? after looking at both I prefer DRSK a bit more based on PV(link) because it gives you more down protection with better Max Draw + Sortino.  

[Chahta]

Dec 30, 2020 7:21:18 GMT Norbert said:

We've both made some great trades, but that doesn't prove that there's a proverbial Free Lunch.

I bought some ICLN this Spring and am up over 100%. But, I would never post about this incredibly smart trade publicly. This is just for your private information. However, it does suggest that I'm a helluva trader and deserve a good deal of public admiration; I played the Biden "Green New Deal" narrative to perfection. Am I good or what? Brilliant, but also very modest.

I think I might be a God.

The recent performance of SWAN and DRSK is as good as the S&P 500 with far lower volatility. It's impressive. So, is there a snag, or not? Should we load up? The OP asked for opinions and I explained what has to go right for these ETFs to succeed going forward.

How dare you hold out on us? No wonder you quit posting for awhile.


Just my opinion, but if a person is too risk averse, stay out of the market or have a small percentage. Maybe 30% is good. Virtually every time the market goes down it comes back. Trying to find a magic bullet to only have positive returns and never negative returns is a waste of energy. One needs equity exposure or future returns may be bleak, unless you are an adept trader.

[chang]

Dec 30, 2020 7:21:18 GMT Norbert said:

We've both made some great trades, but that doesn't prove that there's a proverbial Free Lunch.

I bought some ICLN this Spring and am up over 100%. But, I would never post about this incredibly smart trade publicly. This is just for your private information. However, it does suggest that I'm a helluva trader and deserve a good deal of public admiration; I played the Biden "Green New Deal" narrative to perfection. Am I good or what? Brilliant, but also very modest.

I think I might be a God.

The recent performance of SWAN and DRSK is as good as the S&P 500 with far lower volatility. It's impressive. So, is there a snag, or not? Should we load up? The OP asked for opinions and I explained what has to go right for these ETFs to succeed going forward.

Is it too late to join the Clean Energy party? Is this just a trade or is C.E. a B&H for the indefinite future? (At least until fusion energy is perfected.)

I'll see if ProBoards will allow me to deify individual members. There's an "attaboy" feature somewhere.

"The recent performance of SWAN and DRSK..." - the word "recent" worries me. When I bought SEMMX, its "recent" performance had also been admirable.

[FD1000]

Recent is a relative term. For me it's several weeks-months.  A party can last years but the longer it lasts you better watch out and markets got quicker, so you must watch closer.

[Norbert]

chang

"Is it too late to join the Clean Energy party? Is this just a trade or is C.E. a B&H for the indefinite future? (At least until fusion energy is perfected.)"

The "Clean Energy" party is being driven by two narratives:

- The global push to reduce CO2 emissions, with the EU and US gearing up to throw big money into the sector;

- The rapidly falling costs per unit of energy, making certain technologies cheaper than carbon-based fuels.

I don't have time now to make a decent opening post in a new thread, but I will soon. I want to explore the various aspects of alternative energy, the available investments, while pondering your question.

My hunch is that there's a lot of money to be made here over multiple decades.

N.

[chang]

Norbert Not directly related, but I read that the only coal energy-dedicated ETF recently announced their liquidation:

www.barrons.com/articles/the-only-coal-etf-is-closing-what-it-means-for-investors-51608225200

"Coal" seems to be a dirty word. If that perception expands to all of fossil fuels, then your party might well just be getting started.

What would be a safe, gentle way to get a foot in the door for a B&H investor who doesn't like to trade?

[rhythmmethod]

Dec 31, 2020 8:48:45 GMT chang said:

"Coal" seems to be a dirty word. If that perception expands to all of fossil fuels, then your party might well just be getting started.

What would be a safe, gentle way to get a foot in the door for a B&H investor who doesn't like to trade?

Norbert said " My hunch is that there's a lot of money to be made here over multiple decades."

YEP!

My 2 cents, and what I've been doing since summer, is you guessed it. BTD. They don't happen very often. I'm using ETF CNRG. I started around $50 (of course in hindsight I should have backed the truck) It's now ~$108. My intuitive thought is this sector is going to have a lot of money thrown at it for a long time. I'd be curious as to Norbert thoughts about CNRG VS. what he is using. 

[acksurf]

FWIW - another "downside protection" etf I am monitoring is SPD. It invests in the SP 500 with a downside option overlay.