Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer.

Mostly Mary [0:19]

And now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez.

Mostly Uncle Frank [0:37]

Thank you, Mary, and welcome to Risk Parity Radio. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the first episodes where we did our introductions of the various topics. And those episodes are episode 1-3, 5, 7, and 9. And so if you go back and listen to those, it will get you up to speed. But now onward to episode 146. Today on Risk Parity Radio, I would first like to thank all you listeners because we just crossed 200,000 downloads for this podcast, which is quite a little milestone. Considering its non-commercial nature. Yes! And I wanted to thank you all for making that happen. We seem to be having over about 1200 downloads per episode right away and then close to 1900 as time goes on. I guess people really like hearing their emails answered and hearing other people's emails answered.

Mostly Voices [1:46]

You need somebody watching your back at all times.

Mostly Uncle Frank [1:50]

But I was talking to Mary today and saying, well, Mayor, there's a whole bunch of emails here for you to read. And she says, you, know, Frank, that sounds like work, and I'm retired. Forget about it. And have you looked at some of these emails? Some of them are two pages long, and their grammar is terrible. It's like they were written by engineers or something. Forget about it.

Mostly Voices [2:16]

Just kidding. She really didn't say that.

Mostly Uncle Frank [2:20]

But we are giving her the day off or the podcast off.

Mostly Voices [2:24]

Mary, Mary, I need your hug.

Mostly Uncle Frank [2:28]

And what we are going to do today is do a 10 question analysis of an ETF that most of you have never heard of and I had not heard of it until recently when it was suggested or presented to me by one of our prolific emailers, Alexei.

Mostly Voices [2:47]

So that's what you call me, you know, that or his dudeness or duder or, you know, Bruce Dickinson, if you're not into the whole brevity thing. He's also one of our patrons on Patreon.

Mostly Uncle Frank [2:59]

It was donated to our charity, the Father McKenna Center, through that mechanism, which you can do on the support page at www.riskparityradio.com. That would be great. But anyway, we will go through the same 10 question analysis that we use for analyzing all investments with this particular investment. What may be relevant to you is to also go back and listen to an episode number 114 when we were talking about another fund called BTAL, which is a neutral anti-beta fund because it is similar in nature to this fund as to what it may do in a portfolio. So without further ado, we are using David Stein's 10 Questions to Master Investing. And the first question is, what is it? What are we talking about here? We are talking about the Proshares Ultra Short Australian Dollar ETF. Which bears the ticker symbol CROC, C-R-O-C.

Mostly Voices [4:20]

He was raised in the land down under, where a man thinks on his feet, speaks with his fists, and lives by his wits.

Mostly Uncle Frank [4:31]

I do not know if they have a corresponding fund named Ru, I don't think they do, but we have Croc for this. Groovy baby.

Mostly Voices [4:38]

Anyway, the ProShares Ultra Short Australian Dollar

Mostly Uncle Frank [4:42]

seeks daily investment results before fees and expenses that correspond to two times the inverse of the daily performance of the price of the Australian dollar spot price versus the US dollar. ProShares Ultra Short Australian Dollar is designed for knowledgeable investors who seek to profit from the Australian dollar growing weaker relative to the US dollar. And I'm reading this from the fact sheet which I will link to in the show notes. All right, question two. Is it an investment, a speculation, or a gamble? Well, what you are doing if you are investing in this is you are saying that you believe that the US dollar will be stronger than the Australian dollar in the future. This is pretty much the definition of a pure speculation when it comes down to it. It does not pay any interest, it is not a fund that's generating dividends or running a business. You are simply making this bet. I wouldn't say it's a gamble in this case because it does have a positive expectation. Over its existence it has yielded between 2% and 3% on average per year. But let's move on to question three. Question three is what is the upside? Well, just looking at the investment itself, and we'll get to its relation to other investments later, but the upside to this is approximately a 2% return over time, at least for the past 10 years. And that could be more or less, depending on what the future holds. for the US dollar and the Australian dollar in their relationship. Number four, what is the downside? Well, this is a traded currency and it is leveraged, so it could go up or down over time. You can see that this could easily lose money when the Australian dollar is stronger than the US dollar. And just looking at some other metrics about upsides and downsides, and I will link to this in the show notes, it has an annualized return since inception of 2.52%, daily standard deviation of 1. 26%, which is similar to a stock market fund, monthly standard deviation 5.72%, annualized standard deviation 19.8%, and again, those are comparable to stock index fund kind of metrics other than the annualized return. All right, question five. who is on the other side of the trade? Well, the people on the other side of the trade in particular, in this since it's an ETF, are just the people that are buying and selling it on the exchange you are buying and selling it on, which you can do in the US, over all the people on the other side of this trade are people who are trading in foreign exchange markets, which are very large and is mostly a lot of banks, but all sorts of other Speculators are involved in that and people that do business in Australia. Alright, question 6, what is the investment vehicle? The investment vehicle here is an ETF, that's how you invest in this fund. If you look underneath and see what's inside of the ETF you see that what they are doing is just Simply holding options on futures, which you could do yourself, by the way. You could simply buy put options on the Australian dollar or trade what they call the pair, the Australian dollar, US dollar pair, either by selling the Australian dollar directly or by engaging with it through futures and options contracts. But that's the way all of these things work on foreign exchange. All right, question seven. What does it take to be successful in this investment? Well, there isn't much to it. You just buy it and hold it. And if it goes the way that you want it to, at least for this investment, you'll make some money off of it. The Australian dollar continues to be weaker than the US dollar over time. This investment will be successful. And if not, it will not be as successful. All right, question eight. Who is getting a cut? Well, this does have a relatively high expense ratio like many of these speculative funds. In this case, the expense ratio is 0.95%, which is similar to other funds of this ilk. It's paid to pro shares, and other than that, there really isn't anybody else getting a cut. You can trade it for no fees on most places where you buy and sell ETFs. All right, now let's get to a more interesting question. How does it impact your portfolio? Question nine. Because honestly, this is the only reason that you'd want to hold this thing because of its impact on your portfolio. That was weird, wild stuff. So, this fund has a very interesting characteristic which that it is negatively correlated with the stock market. It's one of the few funds that I've found that has a positive annualized return but is negatively correlated with the stock market and not really that correlated with anything else. So when you look at it, CROC, and we did a correlation analysis at Portfolio Visualizer that I'll link to, you'll see that the correlation coefficient for VTI, the Total Stock Market Fund, is negative 0. 53 for a small cap value fund, IJS, It's negative 0.47. For TLT, the bond fund that is negatively correlated with the stock market, it's positively correlated, but it's only 0.1. So it's kind of uncorrelated with that. Interestingly, it's negatively correlated with gold to 0.31 negative. That is probably due to the fact that the Australian dollar is a gold sensitive currency when gold is rising Australian dollars tend to rise relative to US dollars because Australia produces a lot of gold relative to its economy. Then you look at a couple of funds that are also negatively correlated with the stock market. One we talked about, BTAL back in episode 114 that you should listen to in conjunction with this one. And it is positively correlated with that to an extent of 0.37. on a scale from negative one to positive one. And it is also positively correlated with a volatility fund like a VIXY or VIXM in this circumstance. Against VIXY is a positive correlation of 0.45. So what does this mean? It means that this fund fits into that weird little category of volatility related funds. funds. And so it has an extremely high value when you're talking about diversification, that a small amount of this will add a lot of diversification to a portfolio that is otherwise comprised of stocks and bonds and gold and other things. And so since it does have a mildly positive return, it should also improve the performance of most funds or portfolios that you stick it in, at least from a risk reward perspective, because it's reducing the risk. It's not going to increase the reward of your portfolio with that kind of return, but it's going to reduce the risk probably more than it's reducing the reward. It should give you higher Sharpe ratios and Sortino ratios, etc. So what else did we do to look at that besides run this correlation analysis? to see where it fits in. We ran some backtests, which are similar to the backtests that we ran with BTAL back in episode 114. And so for a couple of the backtests, what we did is add some of Croc to a portfolio that was otherwise a golden butterfly portfolio or a golden ratio sample portfolio. So in the case of the Golden Butterfly Portfolio, we took out 10% of the short-term bond fund that is in there, which is usually represented by SHY or something like that, and put in 10% in CROC instead. For the Golden Ratio, we took out the cash in that portfolio and substituted in 6% of this CROC. And we link to both of these analyses in the show notes, along with the related BTAL analyses so you can compare them. It does show that this tends to make these portfolios improve just a little bit, particularly on the risk reward spectrum. It's not a profound improvement, but it is a significant improvement. And I'll just let you go take a look at those if you're interested. what was more interesting is we also took this and put it in a portfolio of leveraged funds, other leveraged funds like we did with BTAL back in episode 114. And so we did a comparison of a leveraged portfolio that is 35% UPRO, UPRO, 25% TMF, and those are the leveraged S&P 500 and long-term treasury funds. risk parity, respectively. Then we also included 25% in gold in these portfolios. And then for the remaining 15%, we put 15% of CROC in one of them, 15% of BTAL in another one. And then we also just ran this against the S&P 500 itself, just to see what the comparisons were. Now this backtest only goes back to 2012 due to the existence of Croc since then. But if you look at it, it does yield some interesting results. First of all, for the S&P 500 itself, the compounded annual growth rate was 16.2% over this period. For the levered version with BTAL in it, it was 18.51%, so over 2% better. But with the one with CROC in it, it gets up to 20.93%, which is a significant improvement. Looking at the best years and worst years, the best year for the S&P 500 for this period was 32.18, the worst year was -4.2. The version with BTAL in it is best year 40.34, worst year -6. And then for the version with CROC in it, the best year is 47.23, and the worst year is 4.76. which is comparable to the S&P 500 for that period. And then you look at the Sharpe ratios. This is probably the most interesting thing, Sharpe and Sortino ratios. For the S&P 500 itself for this period, the Sharpe ratio was 1.17 and the Sortino was 1.93. The version levered with the BTAL and it was less, so it was inferior to that. It was 1.07 for the Sharpe ratio and 1.92 for the Sortino ratio. But if you look at this new version levered with the CROC fund in it, you get a sharp ratio of 1.3 and a Sortino ratio of 2.56. So this is a very significant improvement in terms of those ratios against either one of these other two portfolios. All right, and with that, I think we can move to question 10, which is, should you invest? And the answer is maybe, but only in a certain kind of portfolio, because you certainly would not invest in this for its own purposes. It's got a relatively high volatility like the stock market, but the returns are very low. So you would only want to invest it in as part of a portfolio that it seemed to fit in well, because you're really using it for diversification. Now, what are the other cons of this? Well, the first con is that it's only been around since 2012, and so maybe it's not going to perform like that in the future. That's not a very long period of time to have something be around and make a pronouncement about it. The second criticism I have of it is a more big picture criticism. This fund is obviously not directly related to what you are trying to Diversify it against, namely the stock market for the most part. When you see something like this where there's a negative correlation, but the two things are not investing in the same things, what you are seeing then is a cause that is behind each one that is affecting each one in a different way, which in this case would have to do with the overall global economy and how it functions. And if you think about that, Australia has a relationship to Asia much like Canada has to the United States. And that has a relatively small population but produces a lot of minerals and raw materials that are used by the people in the area. He's got a knife. A knife? That's a knife. So when the economy is booming, those sorts of things tend to do well and their currencies tend to strengthen. When the overall global economy is doing poorly, then those economies tend to decline along with their currencies relative to the dollar and other reserve currencies. So I think that's what you're seeing when you're seeing this relationship. And because it's not a direct relationship, that means it could change in the future in unpredictable ways. And that's the advantage that, say, BTAL would have over this fund, because BTAL is actually another kind of investment in the stock market. So it's directly related to the performance of the stock market, whereas CROC is just something else that is related to a similar cause for the stock market to go up or down. Overall, what that means is the relationship could be tenuous in the future and may not be reliable in the future, depending on what goes on in the global economy and everything else that we can't predict anyway. All right, now on the positive side, and we've already talked about a lot of these positives already, for something that is essentially correlated with volatility, in US markets, this has a small positive return. So unlike things like BTAL or those volatility funds, which are a natural drag on your portfolio, this thing at least won't drag on your portfolio. It won't produce much. You would expect it to stay near zero most of the time. But if it does provide that kind of diversification benefit, when the stock market is crashing or going down, then it has some value in a portfolio. It would seem to have more value in some of those portfolios involving leveraged funds because there isn't that much space for this kind of thing in a kind of regular portfolio, a 60/40, 80/20, those sorts of portfolios. It doesn't have a lot of space left over to put something in there like this. And so that's why you saw when we ran it with Golden Butterfly or Golden Ratio, it was a little bit good, but it wasn't like it did great things. And that's because it does have this drag on a portfolio. But if you're sticking in leverage in other parts of the portfolio to make up for that drag, then you're gonna see this have a much more pronounced effect because you can use more of it like we did in our little back test with the UPRO and the TMF. The other thing that's bothersome is the fee. 0.95 is a high fee. For some of you more advanced investors, you could probably just invest in the options or futures themselves and avoid that kind of fee. Of course, then you'd have the problem of trying to figure out how much to add into the portfolio. But you could do that. That would be another alternative if you were thinking of using this idea, which you didn't like the fund. So where I come out is a big maybe. And what we may do is when we get to rebalancing some of these funds that have volatility funds in them that can be tax loss harvest, we will tax loss harvest those at rebalancing time and then replace them with something like this. And that's also a potential use for one of these kinds of things because it goes in this weird little volatility bucket that not many things fit into. So we will leave it as a qualified maybe for you to consider. But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com and put in your message into the contact form there and I'll get it that way. We will pick up this weekend with the portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com and we'll also get back to some emails. At least if I'm nice to Mary, we'll get back to some emails.

Mostly Voices [22:39]

Mary, Mary, I need your hug again.

Mostly Uncle Frank [22:43]

If you haven't had a chance to do it, please go to your podcast provider and like subscribe, give us some stars in a review. That would be great. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Mary [23:27]

The Risk Parity Radio show is hosted by Frank Vasquez. The content provided is for entertainment and informational purposes only and does not constitute financial, investment, tax, or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here. Making sure to take into account your own personal circumstances.