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 have just stumbled in here, you will find that this podcast is kind of like a dive bar of personal finance and do-it-yourself investing. Expect the unexpected. It's a relatively small place. It's just me and Mary in here. And we only have a few mismatched bar stools and some easy chairs. We have no sponsors, we have no guests, and we have no expansion plans.

Mostly Voices [1:10]

I don't think I'd like another job.

Mostly Uncle Frank [1:14]

What we do have is a little free library of updated and unconflicted information for do-it-yourself investors.

Mostly Voices [1:23]

Now who's up for a trip to the library tomorrow?

Mostly Uncle Frank [1:27]

So please enjoy our mostly cold beer served in cans, and our coffee served in old chipped and cracked mugs, along with what our little free library has to offer.

Mostly Voices [1:50]

But now onward to episode 237.

Mostly Uncle Frank [1:55]

Today on Risk Parity Radio we have a special treat for you. At least I think it's kind of special. Do you want a chocolate?

Mostly Voices [2:03]

I'm gonna go back and do something I haven't done in a long time,

Mostly Uncle Frank [2:07]

which is to do a 10 question analysis of a particular investment. Yeah, baby, yeah! And this one comes at the behest of Alexei, who was quite prolific in his emails in early December. So we'll read the email that prompted this episode, and then we'll get right to it.

Mostly Voices [2:32]

Here I go once again with the Dude Abides

Mostly Uncle Frank [2:37]

and the Dude writes. This was a good one.

Mostly Mary [2:41]

RRH ETF looks like an interesting product for a David Stein review. It's complex and actively managed, which makes it hard to model in a risk parity portfolio. Obviously, it has a very short track record. We'll need to see how much it bleeds in falling rate environments. But it looks like an IVOL that delivers better on its mandate to date. David Stein episode? Let's do it. Let's do it.

Mostly Uncle Frank [3:15]

Alright, for those of you who haven't heard one of these before, when we analyze a particular investment or asset class, we want to do it in a comprehensive way. And one of the best comprehensive ways I've found is by using David Stein's 10 Questions to Master Successful Investing and going through those 10 questions with respect to the particular asset we're talking about. Because then I think we've covered all the bases.

Mostly Voices [3:47]

There's no crying. There's no crying in baseball.

Mostly Uncle Frank [3:53]

And getting right to that, our first question is, What is it? What it is is an exchange traded fund called the Advocate Rising Rate Hedge ETF. Its ticker symbol is RRH. And I'll just read you some of these descriptions from their fact sheet, which pretty much summarize what's going on here. It says, Advocate Capital Management's Rising Rate Hedge ETF, is an actively managed multi-asset strategy that seeks to generate capital appreciation during periods of rising long-term US interest rates. The fund primarily invests in a combination of US Treasury securities and money market funds, forwards, futures, or options on various currencies, long and short positions on the short and long end of the Treasury or swap yield curve, via futures swaps, forwards, and other over-the-counter derivatives, long and short positions on equity indexes, and/or sector ETFs and commodity futures and options. RRH may be helpful to investors concerned about either rising interest rates or rising inflation. RRH may provide enhanced inflation protection if real yields continue rising from recent lows. Advocates diversified portfolio approach is different from most other rising rate products that mainly short bonds or purchase options to effectively short bonds. Those strategies may have significant negative carry, which could result in poor performance over extended holding periods. So this is a fund that invests largely in derivatives and is designed to perform well in increasing interest rate and inflationary environments. The dude had linked to a podcast in the show notes of the people that run this particular fund. If you want more of a description in that way, I will also link to the fact sheet and the summary prospectus and the general web page for this fund. You might also want to compare this with our analysis of the fund IVOL, I-V-O-L, which we talked about way back in episodes 70 and 72, that is trying to do similar things, although with other kinds of instruments. Moving on to question two：Is it an investment a speculation or a gamble? You have a gambling problem.

Mostly Voices [6:33]

Well, it's sort of a cross between an investment and a speculation,

Mostly Uncle Frank [6:37]

I would say. Some of the assets held inside this fund include things like energy ETFs, which are clearly an investment in companies that pay dividends. Other investments do pay some kind of yield, but there are also a number of investments in this fund that are more bets on which direction interest rates or currencies are going. And so in that respect, you would have to say it was a speculation. One of the problems we have with this fund is it has a very short history, only going back to November of 2021. And in that time, it has certainly been a very successful speculation on rising interest rates and inflation. It was up over 37% last year. Groovy, baby. But its history is so short that we really don't know, for example, how it would perform in a interest rate or neutral inflation environment where there wasn't much movement. It certainly is volatile. In the year of 2023, it is down about 11% because there's been a reversal in those trends. But you'll note from the description that I read that one of the goals or objectives of this fund fund is to remove that speculative element, what they call the negative carry that you might find in other kinds of funds that invest in futures and options. So right now, I'd have to say it's more of a speculation than an investment, but it does have investment qualities or components to it. Moving to question three, what is the upside? Well, the upside is that if you are Looking for something to perform well in inflationary environments, you will get lots of bang for your buck investing in this thing. Last year it repeatedly had months where it was up over 10 and up to 15%. I think the options and futures in it give it a kind of levered quality. Basically, it's about one and a half times as volatile as, say, a stock market fund. It's not as volatile as like a three times leveraged fund, but it does have a lot of volatility in it, which means when there is upside, there is a lot of upside to be had all at once. Which leads us to question four. What is the downside? Well, the downside is if the inflation barometers are going in the other direction, as they had at the beginning of this year, This fund can lose a lot in a very short period of time. So it's down 11% in January so far. It had months last year where it was down over 10%. And so you would expect that it will do poorly when inflation or interest rates are falling. The real outstanding question we have for it is what will it do when interest rates or inflation is relatively stable? because you would have to figure over the course of time you're going to have long periods where that's true and you would want to know whether this fund would have a downside then and essentially bleed out in some way. And right now we don't know that because we have not seen it operate for long enough or a long enough period of time. So that is another potential downside or a potential upside, I suppose. Moving to question five, who is on the other side of the trade? Well, in terms of it being an ETF, this can be bought and sold on the New York Stock Exchange. And so it could be a variety of people on the other side of the trade on the fund itself. I would imagine most of them are going to be registered investment advisors or similar people constructing portfolios that have a use for this kind of fund. This is a very specialized fund and it is not something that somebody would just go out and buy and hold in large quantities. You're going to be pairing this up in a portfolio or if you do have a crystal ball that says that there's going to be inflation and you wanted to bet on it, this is something you would buy.

Mostly Voices [11:01]

Now you can also use the ball to connect to the spirit world.

Mostly Uncle Frank [11:05]

So there's going to be a variety of speculators and fund advisors and some institutions that would likely be on the other side of the trades in this fund. When you look at what's going on inside the fund, then you are looking at very large institutions that are trading securities in treasury bond markets and interest rate markets and also currency markets. Those are some of the largest and most liquid markets on the planet. And so you were talking about a lot of large international banks in that arena, as well as central banks and insurance companies and other institutions that may have needs to hedge particular risks in particular ways. And this is actually very helpful to know in this circumstance that this fund is investing in extremely liquid, highly traded instruments, because that is actually a plus for the fund if it were investing in illiquid or lightly traded things, then you'd be much more worried about there being problems on that side of the ledger. What that also means is that if you did have a crystal ball that could accurately predict what next year's inflation is going to look like or how currency pairs are going to perform against each other, this fund is going to accurately be able to reflect that prediction pretty well.

Mostly Voices [12:31]

You can actually feel the energy from your ball by just putting your hands in and out.

Mostly Uncle Frank [12:38]

Moving to question six, what is the investment vehicle? Well, the investment vehicle is an exchange traded fund, and this is a good example of one of the new types of exchange traded funds that has come out in the past few years that is very specialized. It is a much more efficient way of getting into this for a do-it-yourself investor or a small investor than any other previous kind of product, which would have been in the form of a mutual fund or directly trading the underlying instruments, neither of which is very palatable. So it is in fact the form that it's in, the exchange traded fund, that makes this useful for consideration by an average do-it-yourself investor. All right, question seven. What does it take to be successful? Well, I suppose it depends on how you're measuring success here.

Mostly Voices [13:37]

You're not going to amount to jack squat.

Mostly Uncle Frank [13:43]

But the first and most obvious way to be successful with this fund is to be accurately predicting that inflation or interest rates will go up in the next period, in which case the fund will do extremely well, like it did in 2022.

Mostly Voices [13:59]

You can't handle the crystal ball.

Mostly Uncle Frank [14:03]

But that's not very interesting as far as we're concerned because we're not in the habit of using crystal balls here to predict the future. Fat, drunk, and stupid is no way to go through life, son. However, it does have another specific use, which is to diversify against this kind of risk in a larger portfolio. And as we'll talk about further in the next couple questions here, this does have a negative correlation, or at least in the brief history of it, a negative correlation with both stock and bond markets generally, which means it's basically going to provide a kind of insurance for the environment that we experienced in 2022. If you had happened to be fortunate enough to stumble into this in 2022, it would have saved you a few percent, depending on how much of it you were holding. Now moving to question eight, who is getting a cut? Well, there are two issues here. First, the expense ratio is 0.85%, which is high generally for a fund, but not very high for a fund like this. Because in the past, if you were going to try and invest in something like this through a fund, it probably would have costed you two or more percent to do it. The other issue I think you're going to have with this fund is that because it does a lot of trading, there will be significant distributions and tax consequences from those distributions if you hold this fund in a taxable account. So Uncle Sam's going to get a cut of that too. One thing that is generally true of levered funds or funds with a high volatility to them is that their returns or losses are probably going to dwarf the fee for it anyway if you have a fee that's under 1%. And it's also true that if you're going to hold a fund like this, you're probably not going to hold too much of it anyway because a little goes a long way in terms of potency. And that will minimize the fees in terms of who is getting a cut. All right, now to the question that is always my favorite, question nine：How does it impact your portfolio? Real wrath of God type stuff. Well, I went ahead and ran a asset correlation analysis over at Portfolio Visualizer. And as you might expect, this fund has a negative correlation with Bond funds, because bonds tend to appreciate when interest rates are going down and inflation is being tamed. So that's not surprising. It tends to have a zero correlation with other kinds of assets for the most part, although that's a little bit hard to tell with stocks given the short history of this fund. One thing it does have a positive correlation with is managed futures. And that's not surprising either, because if you look inside a managed futures fund like DBMF that follows trends, it invests in some of the same things. In fact, you might view this fund, RRH, as kind of a subset of a managed futures fund that only focuses on these interest rate sensitive and inflation sensitive asset classes. and only in the direction of increasing inflation and increasing interest rates. And so overall, with respect to your portfolio, this is going to provide essentially a small insurance policy against rising rates and rising inflation. One thing that is useful about it is that because it is so volatile for what it does, you would not need or want to hold very much of this in a portfolio. 5% would be a max, 3% probably would be effective in moving the needle, but it's going to be in the same kind of bucket with a managed futures fund. Two other things you might compare it to. I had mentioned IVOL, IVOL, which we had talked about back in episode 70 and 72. And we discovered that that fund was mostly TIPS with an overlay of options. And so in terms of being that great in fighting inflation and rising interest rates, it really wasn't that great. That turned out to be true last year as well. What that fund actually does is go positive when the yield curve is tending to slope more upward or going in that direction. and did not have a good year because the yield curve sloped down. So if you were looking for something that was going to be an inflation fighter in your portfolio in particular, this would be a better option than that. It also may be a better option than some commodities funds, simply because it's more of a pure play on inflation and because you probably have to hold less of it to get the same results. So I can see why the dude's excited about it. Because it does seem to fulfill an insurance component to a diversified portfolio with respect to rising inflation and interest rates that other funds do not necessarily do as well or require more exposure to and take up more space in your portfolio. The other thing you might compare this to is an investment in a volatility fund, although it's not directly comparable. But as I've said before, the problem we've had with looking at straight volatility funds like VIXM or VXX is that they tend to decay over time and have a negative expected return. The question is still out as to whether this fund would have a positive expected return overall. because we just don't have a long enough history for it. But if it did, then it might have a better spot in your portfolio than something like a volatility fund, even though they're not doing exactly the same things. They have a low or negative correlation to your main holdings in a typical portfolio, which are going to be stocks and bonds. So that might be another positive impact to think about. All right, finally, question 10：Should youd Invest? We can put that check in a money market mutual fund. Then we'll reinvest the earnings into foreign currency accounts with compounding interest. And the answer is, no, not at this time. Maybe in the future. Uh, what? It's gone.

Mostly Voices [20:53]

It's all gone.

Mostly Uncle Frank [20:57]

The problem, of course, with this fund is it's only been around since the beginning of November of 2021. And we had a very unusual year in 2022 with rising interest rates and rising inflation, the kind of year that doesn't happen but once about every 40 years. So the fact that it performed extremely well in that kind of environment doesn't tell you a whole lot of how it's going to perform in more typical environments. And we really want to see How it does in ordinary environments before we would take a flyer on something like this. Not going to do it. Wouldn't be prudent at this juncture. That being said, this is a fund that bears watching and is a good example of why say we're in the golden era of investing for DIY investors simply because this is a product offered at a reasonable price to something that we would ordinarily have a difficult time getting an exposure to if we wanted to. And there are more and more of these kinds of ETFs coming out every year now. And in a few more years we're going to have a lot better idea of what kinds of things work well and which kind don't after we see them perform in other economic environments. And then they're probably going to get cheaper, at least this more successful Formulas or efforts in these areas.

Mostly Voices [22:24]

Everything is proceeding as I have foreseen.

Mostly Uncle Frank [22:30]

But I think that concludes our discussion of the fund RRH, at least for now. Take it easy, dude. Oh, yeah. I know that you will.

Mostly Voices [22:41]

Yeah, well, the dude abides.

Mostly Uncle Frank [22:46]

Hope you enjoyed this little blast from the past. I can't promise you I'll continue to make more of these because I'm retired. This is more work than I usually do or have to do.

Mostly Voices [23:02]

I'd say in a given week, I probably only do about 15 minutes of real, actual work.

Mostly Uncle Frank [23:08]

Just another unrelated thing I wanted to flag out there. We talked from time to time about the problems with tips and why they don't do what they're supposed to do.

Mostly Mary [23:20]

You had only one job.

Mostly Uncle Frank [23:24]

But our friend Justin over at Risk Parity Chronicles has completed a very comprehensive analysis of tips and tips funds that I think is well worth reading. The best, Jerry, the best. And I will link to the summary article in the show notes, which also has the links to the rest of the eight part series there. So if you are interested in that investment and what it does and what it does not do, forget about it. I would highly recommend that you check that series out. But now I see our signal is beginning to fade. Just one announcement, as I've announced before and will be doing again over the next few episodes. I'll be having a little breakout session at the Economy Conference over the weekend of March 17th, and there'll be lots of other speakers there to talk about financial independence, topics and taxes and the like. It is a party about money run by my friend Diana Merriam in Cincinnati, Ohio, and I will link to that once again in the show notes. so you can check it out. In the meantime, if you have comments or questions for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com or go to the website www.riskparityradio.com put your message into the contact form and I'll get it that way. And eventually I'll answer it, although we're about a month behind in the queue now. It's not that I'm lazy, it's that I just don't care. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, give me some stars, 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 [25:44]

the risk parody 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.