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 [0:36]

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 foundational episodes for this program. And those are episodes 1-3-5-7-10. and nine. One of our listeners, Karen, has also reviewed the entire catalog and has additional recommendations as foundational episodes. Ain't nothing wrong with that. And Karen's recommendations are episodes 12, 14, 16, 19, 21, 56, and 82, in addition to the first five that I mentioned. Now, I realize women named Karen get a bad rap these days, but I assure you that all of our listeners are intelligent, thoughtful, and savvy. Yes! And don't forget that the host of this program is named after a hot dog.

Mostly Voices [1:39]

That's not an improvement. Lighten up, Francis.

Mostly Uncle Frank [1:46]

But now onward to episode 170 of Risk Parity Radio. Today on Risk Parity Radio, we're gonna do what we do best here.

Mostly Voices [1:57]

Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys? Which is answer emails.

Mostly Uncle Frank [2:02]

But before we get to that, I'd like to just give a shout out to our listener George, who joined us as one of the patrons on Patreon for this show. We few, we happy few, We Band of Brothers. All of that money will go to the Father McKenna Center, which is the charity that this program supports. You can learn more about that at the support page at www.riskparityradio.com and any money you give there is greatly appreciated. It also will move you to the front of the queue in terms of getting your emails answered. Yes! I should also say we've also got some NFTs for sale there if you are so interested of the Risk Parity Radio logo. The best Jerry, the best. They can be purchased for about $20 each in Ethereum and that money too will go to the Father McKenna Center. Just full disclosure, I am on the board of that charity and will be an officer in the coming year. It looks like I took the wrong week to quit drinking. But without further ado...

Mostly Voices [3:19]

Here I go once again with the email. And? First off.

Mostly Uncle Frank [3:22]

First off, we have an email from Jeff, and Jeff writes... Could you please also publish yearly or most recent 12-month Martin Ratio or Ulcer Index for all the sample portfolios tracked? Thanks. Well Jeff, you need to understand something here. I am retired, and I do not wish to have another job. I don't think I'd like another job. I don't think I'm gonna go anymore. So I am unlikely to do this because it looks like work, and there is no easy way to get data off of Fidelity to make this calculation as far as I can tell. It's not that I'm lazy.

Mostly Voices [4:05]

It's that I just don't care.

Mostly Uncle Frank [4:09]

So I'm afraid you're out of luck on that score. I'm just gonna stop going. However, this information is available on a much longer time scale over at Portfolio Charts, and it is specifically available in their drawdown calculators, which I will link to in the show notes. So this goes and calculates that ulcer index going back to 1970. And so you can put in any portfolio you want there. But here are the ulcer indexes for some common portfolios. For a 60/40 portfolio, the ulcer index for that is 10.4, which is pretty high. And high is bad on this metric for those who are unfamiliar with it, because it means you have more ulcers.

Mostly Voices [5:00]

I'm talking about the central nervous system.

Mostly Uncle Frank [5:04]

This compares with an ulcer index of 2.5 for the Golden Butterfly portfolio, which is one of our sample portfolios. The ulcer index for the All Seasons portfolio, which is a reference portfolio we have, is 3.9. And the ulcer index for a Golden Ratio style portfolio, if you put it in there, is 4.3. So the upshot is that the Ulcer Index is much lower for these more diversified risk parity style portfolios than for standard stock bond portfolios of similar risk reward profiles. And I will link to that calculator in the show notes so you can try it out for yourself.

Mostly Voices [5:48]

Groovy baby! And thank you for that email. I have people skills. I am good at dealing with people.

Mostly Uncle Frank [5:58]

Can't you understand it? Second off, we have an email from Kyle.

Mostly Mary [6:01]

Kyle! And Kyle writes, Dear Frank and Mary, if one is looking to construct a leveraged portfolio using leveraged ETFs, does it matter which asset class to choose to use as leverage? My portfolio is levered to 150%. Does it matter if I use levered bonds versus stock ETF? The only difference I could see is when rebalancing. If one asset class does worse, but you have the levered ETF in the other asset class, you could actually end up rebalancing into the class that was doing worse as the levered ETF makes the better performing asset class lower in comparison in the case when both are declining. This could also happen inversely in times when both are rising.

Mostly Uncle Frank [6:51]

Does this make much of a difference for your long-term portfolio? All right, well the basic answer to your question is that in theory, no, it does not matter where the leverage is applied. However, you need to make sure that your holdings are still in the proportions you want.

Mostly Voices [7:06]

Kyle, I love you, babe.

Mostly Uncle Frank [7:10]

So for example, a 10% holding of a three times leveraged fund is equivalent to a 30% holding of an unleveraged fund. So make sure you are multiplying those out when you are doing your allocation proportions. There is also a practical consideration is that some leveraged funds are much better constructed than other leveraged funds, but that pertains to whether it's using options, futures, swaps, or something else to construct the leverage within the fund. And so you are looking for the most efficient ones that have the best tracking in terms of the index that they are following. Now, as for rebalancing, if you are rebalancing on a calendar basis, it should not matter since you were just going to reset everything back to where it was in the first place. If you are rebalancing on bands or some other structure where you were looking at how far something moves, then you will need to take the leverage into account depending on how you structure that. If you're doing it on a relative basis, as in it gets to be 20% more or less than it started as, then it should not make a difference whether the fund is leveraged or not. But if you're doing it on an absolute basis where you're looking at how far it actually moves, say going from 10% to 15%, which is a 5% move on an absolute basis, but as a 50% move on a relative basis, you can see that there are different considerations and different calculations depending on how you're doing that. What I would do is take your portfolio and put it into Portfolio Visualizer and then play around with the rebalancing options there. and then also look at the back testing of that to see which components in fact moved enough to be rebalanced. Because typically in a portfolio there'll be certain assets that do the most triggering of the rebalancing. I'm not aware of any magic formula that determines optimal rebalancing for a given portfolio. Although articles and research have suggested that at least in an unlevered portfolio, A 20% relative move seems to be as close to optimal as anything. I'm not aware of anybody that's done any real research on using leveraged funds and what would be optimal rebalancing for those. Uh, what? The money in your account, it didn't do too well. It's gone. And again, that's a good use of Portfolio Visualizers back tester with its options for rebalancing that you can adjust to see how it works out. And thank you for that email. Don't let it go, Cal.

Mostly Voices [10:06]

I want to hold you every morning and love you every night, Cal. I promise you nothing but love and happiness.

Mostly Uncle Frank [10:13]

Next off, we have an email from Richard, and Richard writes.

Mostly Mary [10:16]

Frank, just a quick follow up to my previous email below. After playing around a bit, I don't think combining GDE and NT-SX would be terribly useful. However, I do still like it, but perhaps paired with TYD/EDV and an SCV fund. 44% GDE, 22% TYD or EDV, 34% SCV.

Mostly Uncle Frank [10:41]

All right, what Richard is referring to here are some discussions in episodes 167 and 168 of this new Fund GDE, which is a combination of gold and the S&P 500 that is leveraged from WisdomTree. And I had said it looked interesting, but that we would have to wait and watch it for a couple of years to determine whether it was in fact that useful. But that should not prevent you from thinking about how you might use it, which Richard has done here. You have a gambling problem. And it's always nice to see people are thinking about these things and how they might employ them for their own portfolios. Well, you have a gambling problem. I don't have any comment on what you've constructed, but it looks interesting to me.

Mostly Voices [11:36]

You can't handle the gambling problem. And thank you for that email.

Mostly Uncle Frank [11:41]

Fourth off, we have an email from Jamie. And Jamie writes：hi Frank, thank you for your podcast and the insights you have shared.

Mostly Mary [11:49]

I have a special place in my heart for the Groundhog Day movie quotes. I would like to understand commodities related funds better as to whether they should have a place in my portfolio or not. I'm actually surprised that there has been no mention of VCMDX or BCI, two very low-cost broad commodities funds that seem to have a fair amount of assets under management. So, on to my questions. One, I remember hearing about Collateralized Commodity Futures back in the aughts from Larry Swedroe, from which he later withdrew his support. More recently, I have heard about Commodity Trading Advisors. Do VCMDX or BCI fall under either of these types of funds slash vehicles, or are they something different? Are they similar in operation to COM that you reviewed in episode 99? Do all commodities funds, excepting precious metals, involve active style fund management? Perusing the VCMDX Prospectus makes me wonder whether most non-precious metals commodities funds violate the simplicity principle what with the section on derivatives risk to the fact that they use Cayman Island subsidiaries. Would you agree? Can you suggest some resources to understand more how these funds work and the downside risks? I realize they are mostly up right now, but it wasn't always that way. Five, why do these funds sometimes have a negative SEC yield? Thank you in advance for your help. Sincerely, Jamie.

Mostly Uncle Frank [13:23]

All right, these are some interesting and timely questions.

Mostly Voices [13:28]

You know, whenever I see an opportunity now, I charge it like a bull. Ned, the bull, that's me now.

Mostly Uncle Frank [13:35]

Let's go through them one at a time. Regarding collateralized commodities futures back in the aughts, yeah, I don't recall what that was all about, but we have moved on with many more commodities funds since then. So to the extent that those were relevant at that time, I think they're more or less obsolete. If you are talking about commodity trading advisors or CTAs, Those are essentially hedge fund managers that trade primarily in futures contracts, which can include commodities, currencies, interest rates, and essentially any other thing. Usually, CTAs, at least ones that are available for private investors, are investing in trend following strategies. And often this is also referred to as managed futures strategies. There are not many ETFs that you can buy that go into those types of strategies. One that we have talked about is called DBMF, and we discussed that in episodes 55 and 57, and what that does is actually track a number of CTAs in their strategies and emulates them in the form of a fund. That fund has been particularly interesting this year since it's up about 20% year to date and is very much uncorrelated with pretty much any other asset class that we commonly hold in these portfolios. Now let's talk about some of these other funds that you mentioned. VCMDX, which is a Vanguard commodities fund, and BCI, which is a commodities fund that follows the Bloomberg index, are not CTAs that are not these kind of trend following managed futures strategies. They just hold Futures contracts in commodities and then roll them over periodically in accordance with the formulas that they use for the way they are set up. They are attempting to follow this Bloomberg index of commodities. And I will link to what that is in the show notes in a Wikipedia article. It's essentially 29.83% in energy commodities that include oil and gas and diesel. 22.58% in grains, that includes corn and soybeans and wheat. 15.48% in industrial metals, including copper, aluminum, and zinc. 19.75% in precious metals, which is 15% gold and approximately 5% silver. And then it's also got holdings in sugar, coffee, cotton, live cattle, and lean hogs.

Mostly Voices [16:22]

All our customers are invited to grab a sausage off the grill out front. Yes, piggies for the kitties. Then go inside and see our organs, but keep those fingers off the merchandise. Those little piggies are greasy.

Mostly Uncle Frank [16:38]

And as I was saying, both BCI and VCMDX follow this Bloomberg Commodity Index. There are a number of other commodities indexes. The more popular one is from Deutsche Bank. and they have several different commodities indexes over there. One of them I'll link to in the show notes is called the DBLCI Optimum Yield Index, and that one is comprised of about 55% in energy, 10% in gold, 12.5% in aluminum, and another 22.5% in grains. The funds that follow the Deutsche Bank indexes are the more popular ones, the larger ones and the more liquid ones. And that includes PDVC, which is the one we commonly refer to. That is the largest ETF for broad-based commodities and has approximately eight times the holdings of BCI. That Vanguard Mutual Fund is relatively new. It's only been around for two or three years and it does have a $50,000 minimum investment in it, which makes it not too popular. I think if Vanguard really wants to get serious about that space, they really need to get an ETF out there that people can easily buy into without having to deal with their mutual fund system. All right, you also asked about whether those were similar to Com C-O-M, which is another commodities fund that we use. And the answer is sort of. Com is an interesting fund in that it is a partially trend following commodities fund. And what it does is it will buy the commodities that are above a certain moving average, and I think it follows about 20 commodities, and then it will sell them and go to cash when the commodity is falling. And so it ends up being slightly more conservative than an average commodities fund like a BCI or a PTBC. It's essentially designed to perform well in inflationary environments and then go dormant in non-inflationary or low inflationary environments where you wouldn't expect commodities to be doing much of anything. But you can go back to episode 99 and learn all about that one. All right, your second question, do all commodities funds accepting precious metals involve active style fund management? And the answer is no, at least the ones that are attempting to follow these indexes, the ones that are attempting to follow the indexes usually follow some kind of set formula where they roll over their futures contracts on a periodic basis so that they can match their indexes. But there are funds that involve more active styles of management. And you do need to read the materials for any one of these funds to determine what it is and how it's managed. As to your third question, perusing the VCMD expert prospectus, you were wondering whether the fact that it involves derivatives and Cayman Island subsidiaries made it too complicated. And the answer is no. What these commodities funds do is actually simplify your ability to invest in this sector by aggregating a bunch of commodities that are in an index into a single index fund. And these structures are designed to minimize tax liabilities and also to make it easier to follow the indexes. So similar to an ETF that would invest in the total stock market and own several thousand different stocks, this allows you to simplify the commodity space into a single fund or a couple of funds. And this is why we use ETFs generally, that they take what would be a complicated set of things to invest in and aggregate it into a fund that is largely diversified in the space it occupies. A lot of work has actually been done in this space in the past 10 or 15 years to try to come up with funds that are more efficient and funds that do not throw off K1 partnership returns, which was an issue with a lot of the initial funds in this space. And it's still an issue with some of the funds that people do not want to get K1 partnership returns for their tax purposes and do not want to be holding something like that in a retirement account. And that's actually one of the reasons that people like to use PBDC and why it's the most popular commodities fund these days. is that it does not have a K1 and fits easily and nicely into retirement accounts. Now moving to your fourth question, can I suggest some resources to understand how these funds work and downside risks? Well, I'll see if I can come up with a couple links in the show notes that are infinite resources on the internet including Investopedia. But I think what you really need to do in considering any of these funds is to actually look at their fact sheets and prospectuses to see what they're trying to do, because there is enough variation in them that it would not be safe to generalize as to any one way that commodities funds work. I think one very useful place to just sort out what's available out there is the ETF database. I'll link to the commodities section in the show notes, but there you can see the commodities funds all listed by the amount of assets that are in them so you can see which ones are the most popular, the most liquid. And then there's links on there to get more information about each one in particular. All right, question five. Your last question. Why do these funds sometimes have a negative SEC yield? And the answer is, it's because it's the nature of the beast.

Mostly Voices [22:37]

You know, I got friends of mine who live and die by the actuarial tables, and I say, Hey, it's all one big crapshoot, anyhoo.

Mostly Uncle Frank [22:45]

In their essence, commodities are a speculation because they do not produce income and they are not businesses. So you are buying something and hoping it's going to be worth more later when the futures contract is sold. What that means in overall portfolio construction is that commodities funds tend to only have one job. You had only one job. And that job is to perform well in inflationary environments. And in fact, when you do not have an inflationary environment, commodities funds often do nothing or go down in value. And prior to the past year or so, you would have seen most commodities funds have zero returns or slightly negative returns, certainly not very good returns at all because we didn't have much inflation. But once inflation does kick in, then they become the best things on the planet to take advantage of that kind of environment. And so lots of these funds are up 50% or more in the past year. And so what that tells you overall is that you are not holding a commodities fund as a primary return driver. You are holding it for its diversification properties. and its outsized performance when you have an inflationary environment where both your stocks and your bonds could be struggling as they are today. You need somebody watching your back at all times. But if you hold too much of a commodities fund, it will drag down the overall performance of your portfolio.

Mostly Voices [24:26]

You can't handle the pop, bro!

Mostly Uncle Frank [24:29]

And if we see inflation cool off, you will see these commodities funds drop high up to 50% depending on how quickly inflation subsides or where it goes next. Along those lines, there's an interesting blog post over at Risk Parity Chronicles about which assets do the best in inflationary environments. And of course, commodities are at the top of that list. I'll link to that in the show notes so you can check that out. Real wrath of God type stuff.

Mostly Voices [24:57]

But this really does go to the idea that in a risk parity style portfolio,

Mostly Uncle Frank [25:01]

you need to look at your assets as performing particular roles and make sure that you pick the best asset to perform a particular role that is available. Because you would prefer to have less of something performing a role than having more of it perform a role. Because the less you have of things like commodities that are designed to do well in inflationary environments, the more space you are going to have for your ordinary return drivers like stocks. That is the straight stuff, O' Funkmaster.

Mostly Voices [25:35]

But that does get to the heart of portfolio construction. Yes!

Mostly Uncle Frank [25:44]

And it reminds me I really should do a 10 question analysis of PDVC since I haven't done one yet. I also probably owe you all a analysis of TMF, but that's a different story.

Mostly Voices [25:52]

That was weird, wild stuff. And thank you for that email. Am I right or am I right? Or am I right? Or am I right? Am I right? I gotta go. Last off, we have

Mostly Uncle Frank [26:06]

an email from My Contact Info. Again. Surely you can't be serious. I am serious. And don't call me Shirley. The prolific My Contact Info writes this time.

Mostly Mary [26:20]

Frank, currently listening to episode 165. Great stuff. Thank you. Perhaps this is obvious, but I sense it needs to be emphasized. There is no perfect solution to money management. I believe you state this as well. More likely, there is a range of acceptable solutions, but a far greater universe of possible mistakes, which you do a tremendous job of illustrating. The proliferation of tools for money management is, as you correctly point out, a potential positive, but also increases the possibility for devastating harm through suboptimal marketing. Education and transparency are key, in my view, which you provide via your content and portfolio updates. Concepts such as compounding, diversification, kurtosis, efficient markets, risk, etc. are difficult to internalize and superficially simple. My sense is that many in the finance industry do not grasp the core concepts, not to mention their clients. Sorry for the rant and thank you for the podcast. Bower your sensei. Bower your sensei. Alright, yeah, my contact info was referring to episode 165 if that wasn't clear.

Mostly Uncle Frank [27:29]

And yes, I agree, there is an awful lot of information out there and sometimes it is kind of like drinking from a fire hose with all that available now. But I think that if people do get more familiar with tools like Portfolio Visualizer and Portfolio Charts, you will see people acquiring better understandings of these concepts. And I agree that most people in the financial services industry do not grasp these core concepts because really that's not part of their job.

Mostly Voices [28:02]

That's really not what I do, Peter.

Mostly Uncle Frank [28:07]

There is an extremely low barrier to entry for people who want to work in the retail financial services industry. Basically, you have to show up, take some classes, and learn some materials that they will provide. But your real job is to sell the company's products using the company's marketing materials. Always be closing.

Mostly Voices [28:28]

Always be closing. Until that's what you really need to know.

Mostly Uncle Frank [28:32]

Because the way sales are made largely in the industry is by hand holding and making people feel feel good and not by necessarily informing them of all of their options.

Mostly Voices [28:47]

As we're adding a little something to this month's sales contest, as you all know, first prize is a Cadillac El Dorado. Anybody want to see second prize? Second prize, a set of steak knives. Third prize is you're fired. Which would be detrimental to the bottom line and the milkshake drinking. I drink your milkshake.

Mostly Uncle Frank [29:13]

I drink it up. But I'm glad you enjoyed the podcast and thank you for your rant.

Mostly Voices [29:21]

You are talking about the nonsensical ravings of a lunatic mind.

Mostly Uncle Frank [29:26]

But now I see our signal is beginning to fade. We'll pick up again this weekend with our weekly portfolio reviews. And I guess we'll have our monthly portfolio reviews, too. If you have comments or questions for me in the meantime, 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 your message into the contact form there and I'll get it that way. For more Risk Parity musings in a blog form, check out Risk Parity Chronicles www.riskparitychronicles.com which is run by one of our listeners, Justin.

Mostly Voices [30:11]

It's called a posse, weird wild stuff. That it is, sir, yes.

Mostly Uncle Frank [30:18]

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

Mostly Voices [30:34]

I swear by the moon and the stars and the sky. I'll be there, Cal. I swear like the shadow that's by your side. Cal, swear to God, I'll be there. I swear, Cal. I swear, Cal.

Mostly Mary [31:00]

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.