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. There are basically two kinds of people that like to hang out in this little dive bar.

Mostly Voices [1:02]

You see in this world there's two kinds of people my friend.

Mostly Uncle Frank [1:06]

The smaller group are those who actually think the host is funny regardless of the content of the podcast. Funny how? How am I funny? These include friends and family and a number of people named Abby. Abby someone. Abby who? Abby normal. Abby Normal. The larger group includes a number of highly successful do-it-yourself investors, many of whom have accumulated multimillion dollar portfolios over a period of years. The best, Jerry, the best. And they are here to share information and to gather information to help them continue managing their portfolios as they go forward, particularly as they get to their distribution or decumulation phases of their financial life.

Mostly Voices [2:04]

What we do is if we need that extra push over the cliff, you know what we do? Put it up to 11. Exactly.

Mostly Uncle Frank [2:12]

But whomever you are, you are welcome here.

Mostly Voices [2:16]

I have a feeling we're not in Kansas anymore. But now onward to episode 259.

Mostly Uncle Frank [2:23]

Today on Risk Parity Radio we're just going to do what we seem to do best here which is answer your emails, your very interesting emails.

Mostly Voices [2:34]

Have you ever heard of Plato, Aristotle, Socrates?

Mostly Uncle Frank [2:38]

And so without further ado, here I go once again with the email

Mostly Voices [2:42]

and First off, first off,

Mostly Uncle Frank [2:46]

we have two emails from Eric. Eric from Cincy.

Mostly Voices [2:53]

I'm living on the air in Cincinnati.

Mostly Mary [2:56]

And in his first email, Eric from Cincy writes, Dear Uncle Frank, I had hoped to support the show by attending the economy conference that took place in March in the Queen City of my hometown, Cincinnati.

Mostly Voices [3:09]

She's a killer, Queen of my heart, dynamite with a laser beam, galaxy, Unfortunately, I was not able to attend due to a family illness.

Mostly Mary [3:21]

I am sorry. I hope you enjoyed your time in Cincinnati and you were able to enjoy some of our local delicacies. Perhaps it was for the best. You know what they say, never meet your heroes. I guess I will have to look more seriously into supporting the Father McKenna Center. I am really enjoying the podcast, Eric from Scintilla. And in his second email, Eric from Cincy writes, Dear Uncle Frank, have you ever looked closely into the execution of trades on different platforms for retail brokers such as Schwab, Fidelity, Interactive Brokers, etc? Are the bidask spreads basically all the same? Are orders filled with equal efficiency across platforms when buying and selling ETFs? Do you see similar price quotes and spreads across platforms at the same time of day? As our portfolios grow in size with age, the dollar value of our trades for buy and sell orders increases as well. If we in the risk parity community are not executing efficient trades, I imagine it could start costing us real money as our portfolios gain in dollar value. I have not looked at this closely myself, But I am starting to wonder if it is something to consider. Thanks, Eric from Cincy.

Mostly Uncle Frank [4:39]

All right, first things first. Well, I'm sorry about your family illness and that you were not able to come to the Economy Conference. I think it is really kind of a special event in the personal finance world and that it's largely due to the fact that it's a very creative expression of one person. namely Diana Merriam, who is really somebody that follows Thoreau's ideal of a different drummer or somebody who follows a different drummer. And so unlike a lot of conferences, it's more about the people who are attending and less about the personalities who are presenting. And so it attracts a much more diverse crowd and a much younger crowd than you might see at a lot of other finance oriented conferences. And so I've participated in two of the three that she's held so far. And I got involved with them just because she asked me. She sought me out and said, you, seem like a person who knows a bit about personal finance and could help me really get my dream off the ground and make it a reality. And I couldn't really say no to that because a friend in need is a friend indeed. I'll go ahead and make sure you get another copy of that memo, okay? And so she gives me a room and just kind of lets me go and do that thing I do.

Mostly Voices [6:03]

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

Mostly Uncle Frank [6:07]

And I think the first year I had about 50 or 60 people and then this past year is more like two or three hundred people. But I've been teaching for about 25 years and so I do like the classroom. kind of format. Bow to your sensei.

Mostly Voices [6:21]

Bow to your sensei.

Mostly Uncle Frank [6:25]

Anyway, she's already got plans for next year, about the same time in March of 2024. It's kind of like the cherry blossoms blooming in the spring, like we have here in the DC area. So hopefully we'll see you next year. Did you get that memo? As for the vittles in Cincinnati, we were disappointed that the Belgian waffle place near the University of Cincinnati had closed. And we were not able to go to the firehouse pizza place that we like. But I do get to Cincinnati frequently because I have a cousin that lives in Covington, Kentucky across the river and so frequently stopped there on my road trips to the Midwest. It's 106 miles to Chicago.

Mostly Voices [7:06]

We got a full tank of gas, half a pack of cigarettes, it's dark, and we're wearing sunglasses. Hit it.

Mostly Uncle Frank [7:18]

Now as for supporting the Father McKenna Center, that would be greatly appreciated. I'll insert a plug here. This podcast has no sponsors, but it does have a charity. It is the Father McKenna Center, which serves homeless and hungry people in Washington, DC. And you can reach it on the support page www.riskparadioradio.com and I'll put a link in the email as well. We've had a lot more demand there coming out of COVID and have about a hundred people that were feeding lunch every day in addition to lots of visitors to our food pantry.

Mostly Voices [7:57]

Now let's start by getting one thing straight. I'm not a do-gooder. If you're a bum, if you can't break off with a booze or whatever it is that makes you a bad risk, then get out. Now, I don't pretend to tell you how to find happiness in love when every day is just a struggle to survive. But I do insist that you do survive, because the days and the years ahead are worth living for.

Mostly Uncle Frank [8:26]

So anything you could give would be greatly appreciated, and you can do that directly or you can Join our patrons on Patreon. And if you do that, or if you make a donation, we'll move your email to the front of the line and make sure you tag yourself because there's too many of you to keep track of now. And I greatly appreciate each and every one of you.

Mostly Voices [8:49]

They will be able to find a way to give each man hope and a common future. And those are the days worth living for. All right, now moving to your substantive question about bid and ask spreads.

Mostly Uncle Frank [9:09]

I cannot say that I've done a case by case comparison, although I suppose I could because I have accounts at Fidelity and Interactive Brokers and other places. But my experience is that when you're trading highly liquid ETFs like the Vanguard funds in our sample portfolios that you're Not looking at much of a bitter ask spread. And since you're not buying or selling much, it should not matter that much anyway.

Mostly Voices [9:32]

Buy low, sell high, fear, that's the other guy's problem.

Mostly Uncle Frank [9:39]

But it still is a best practice to use limit orders, even though you can probably get away with market orders on things like VTI or TLT, and it shouldn't really cost you too much unless you're doing a lot of trading. One minute you're up half a million in soybeans and the next boom, your kids don't go to college and they've repossessed your Bentley. Are you with me? It's a really big difference from the landscape that existed just a few years ago when there were commissions on all ETF trades. But now that we have no commissions and we can buy and sell fractional shares, the costs of using ETFs have all but disappeared. I will tell you that historically Interactive Brokers has advertised itself as having Some of the best fills in the business because it is directed at traders and professionals. I don't think I really noticed that so much compared to say Fidelity, but that's probably because I don't trade that much. I'm not in there every day making trades. Forget about it. And so I wouldn't vex yourself too much about it. And thank you for your email. Second off, we have a long email from Ron.

Mostly Mary [11:02]

And Ron writes, hi, Uncle Frank and Aunt Mary. I watched the video from Investing with Leverage that you posted on episode 250, and which discussed how leveraged ETFs work. I wanted to bring up a topic that I was not able to find a lot of information on it. The topic is the best way to implement leverage using leveraged ETFs versus using a margin loan and how interest rates affect the best approach. Background. I have a small portion invested in an aggressive three times leverage portfolio. I modeled it off of the golden ratio and used a margin loan to get to three times. meaning let's say I put in $100 to start, I then borrowed $200 to get $300 total exposure. Now, when I started this, I had access to a 1% margin loan through my broker as the funds rate was close to 0%. However, that margin loan interest rate is now around 5.75% and may go up another 0.25% or more. So I wanted to know, at which point does it make more sense to use leveraged ETFs instead of using a margin loan to gain leverage? Originally, I used a margin loan to avoid the effects of the volatility decay risk in the daily leveraged ETFs. And I also wanted to have a small cap value ETF, which is not available in leveraged ETF form today. But given the rapid rise in interest rates, I took another look at how best to implement my little portfolio. So I did an analysis, and my conclusion is that it looks like when the margin loan is available at around 1.5% or lower, then using a margin loan may seem to make sense. However, when the margin interest rate exceeds 1.5%, it seems like the leveraged ETF is the way to go. Analysis setup. For my analysis, I used the Hedge Funde 55 UPRO/45 TMF portfolio as my example and then established a baseline result in Portfolio Visualizer using SPY/TLT and leveraging that up with a 0% interest loan in two different ways. First, using the negative cash flow method and second, using the leverage ratio setting. Here is the link. It seems I set this out correctly as both of these produced a similar CAGR, 26.57% versus 25.62% and Sharpe ratio 0.98 versus 0.92 for the 0% loan method. Then I compared that to UPRO TMF, which did not do as well using the 0% margin loan, 22.69 CAGR.86 Sharpe ratio, as I'm assuming this is related to the higher expense ratio and the volatility decay issue. Now, I then ran the SPY/TLT split with increasing the margin loan interest rates. Here are the results. I'll spare you all the links, but I used the second one above and just change the interest rate percent. For the leveraged ETF UPRO/TMF, 22.69% CAGR.86 Sharpe ratio. For the 0% interest rate, 25.62 CAGR.92 Sharpe ratio. For the 0.5% interest rate, 24.38% CAGR, 0.88 Sharpe ratio. 1.0 for the 1.0 interest rate, 23.16% CAGR, 0.85 Sharpe ratio. For the 1.5 interest rate, 21.95% CAGR, 0.81 Sharpe ratio. For the 2% interest rate, 20.75% CAGR.78 Sharpe Ratio. For the 5.75% interest rate, 12.10% CAGR. 52 Sharpe Ratio, my current margin interest rate. As you can see, somewhere around 1.5%, the performance of the margin loan method begins to degrade below the leverage ETFs. method. Here's my question：Do you concur with my findings? Did I set this up correctly? What am I missing? For what it's worth, I changed the implementation of my small leverage investment to use leverage ETFs due to the interest rates. Now, I don't include that the margin interest is tax deductible in my analysis, but I would think that might push up the breakeven to closer to 2%. But I wanted to share my thoughts and get your feedback. Thanks, Ron.

Mostly Uncle Frank [16:21]

Mary, Mary, I need your huggin'. Well, Ron, this is a very interesting analysis, and I commend you for doing it. It is something that I had thought about, but it really didn't seem to make much of a difference when interest rates were close to zero on margin loans. And I think you're right, there is kind of a hole in the literature about this issue as to which one is better at a given rate of margin interest. I found a few articles comparing forms of leverage, but none applying the kind of rigor that you've applied here to this. And I do agree with your conclusions based on the analysis that you've done that it seems like the breakeven point does seem to be about 1.5 to 2%. The only caveats I would have is just that this data set is just not that big and there's nothing you can really do about that. Because what's unusual about this particular data set is that for most of the data set, interest rates were really low, at least if you held a margin account at a place like Interactive Brokers. But I think we will learn more as time goes on, particularly if interest rates stay elevated for some time, and it looks like they probably will, at least for the next year or so. But you never know what the Fed's going to do. They say one thing, and then six months later they do something different. We don't know.

Mostly Voices [17:50]

What do we know? You don't know. I don't know. Nobody knows.

Mostly Uncle Frank [17:55]

I will link to all of your analysis here so other people can check it out. This also reminded me there was a nice interview of Corey Hoffstein Of Return Stacking Fame over at the Investors Podcast Network, like the one on Millennial Investing. And it was specifically talking about using leverage and not only in drawdown portfolios, but in accumulation portfolios, and also the rise of leveraged ETFs as a vehicle for doing that. And it specifically mentioned constructing a potential portfolio out of NTSX, which we've talked about, that leveraged composite S&P 500 and Treasury Bond Fund and DBMF as a managed futures overlay on top of that. And also the new leveraged ETF that Cory Hoffstein has created, which is a combination of bonds and managed futures. One of the other interesting things he noted that was in terms of tax location, If you have a choice and you're using managed futures or a managed futures ETF, you would want to put that in a tax advantaged account because there's no getting around that it's going to have significant distributions in any given year. But anyway, that's a little tangential to what you were talking about, but close enough. And I will link to that in the show notes because I think a lot of you will be interested in that discussion as well. But thank you for your good work that you've done in this area. The best Jerry, the best.

Mostly Voices [19:30]

Because I think it's an opportunity for all of us to learn something

Mostly Uncle Frank [19:34]

that we did not know before.

Mostly Voices [19:40]

That's the fact, Jack! That's the fact, Jack!

Mostly Uncle Frank [19:44]

And thank you for your email. Last off, we have an email from Jeffrey.

Mostly Mary [19:59]

And Jeffrey writes, Frank, I am interested in having some gold in my portfolio. I think something like GDMN is a better way to go about it, given that it is leveraged and holds both gold and stocks of gold miners. I like the idea of capital efficiency and the diversity of having both.

Mostly Uncle Frank [20:19]

Okay, I took a look at this fund GDMN. and it's relatively new. It's only been around since 2021. But I think probably the better approach is simply to own the two funds separately. You could own GLDM for gold and then own GDX for gold miners. And I ran a 50/50 portfolio of that against GDMN, and the 50/50 portfolio was slightly better over the limited data set that we have. But the reason you would want to keep those two things separate is that it allows you for better control over what your allocations are in terms of how much gold and how much gold miners you have. It allows you for better rebalancing if they're separate. And they do just have different performance characteristics. You'll find that a gold miner fund of gold mining stocks like GDX tends to be More correlated with the rest of the stock market than straight gold. And it's also more volatile. So it will often move one and a half times what a gold fund will move based on some move in the price of gold itself. So while this fund is interesting, I don't see any particular need for it given that you can achieve the same thing in a more useful way simply by combining funds that already exist. And I think your overall expense ratio using two funds for gold and gold miners is going to be more efficient than the 0.45 expense ratio of this particular fund. So this is probably the example of a fund trying to solve a problem that is not really a problem because it's already been solved in a more efficient way, even if you have to use two funds instead of one. But Wisdom Tree is kind of like that. They do have a tendency to put out lots and lots of funds and some of them become very interesting and useful like NTSX and other ones like this one are more of a meh. Maybe we really don't need that even though it's an interesting idea. But anyway, those are my thoughts on this.

Mostly Voices [22:28]

Forget about it. And thank you for your email.

Mostly Uncle Frank [22:31]

And now I see our signal is beginning to fade. There will not be a podcast this weekend because I'm going on hiatus and there may not be podcasts on the weekends for the next two or three weeks. Surely you can't be serious. I am serious. And don't call me Shirley. Just so we can get more backed up on our emails again. It's not that I'm lazy. It's that I just don't care. But if you have comments or questions for me, I do invite them. You can 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 and I'll get it that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, give me some stars or 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 [23:56]

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.