Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.

Mostly Mary [0:16]

If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer. 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 [0:38]

Thank you, Mary, and welcome to episode 72 of Risk Parity Radio. Today on Risk Parity Radio, we are going to continue and finish our analysis of the ETF IVOL, I-V-O-L, that we started last week. in episode 70 if you wanted to go back and listen to that. And so we will be continuing with questions six through 10 of David Stein's 10 Questions to Master Successful Investing in Connection with that Investment. But before that, we've got a couple of emails from the mailbag. The first one comes from Maggie S and Maggie S writes, Great presentation on Choose FI this evening. You have a new listener. Well, thank you, Maggie, for being my new listener. The presentations she's referring to is we did a Facebook live session with the Choose FI podcast guys, and they will be putting a variation of that out on a podcast, I believe, at some point in the future. And it's also on YouTube, I think, right now. If you wanted to look it up, you can check it out there. I was answering some questions off the cuff and hopefully I didn't miss too much on them. You always remember things you wish you would have added to any answer that you give to a question in connection with this. Let's move on to the next email. This one comes from Dominic L. Dominic L writes, Frank, I love the show. I'm learning so much from you. Thank you for introducing me to Portfolio Visualizer. The problem I have when using PV though is that the data does not go back far enough, especially for some of the new indices. For example, the ETF TIPX goes back to 2013 only and doesn't cover the last recession. To get the most data, everything reduces down to VFINX and VBFX, which are a stock and bond fund. from Vanguard. How do you address this lack of historical data problem? Thanks so much for everything. Thanks, Dominic. Yes, this is one of the limitations of Portfolio Visualizer. It can only go back in time as long as something has existed. There are a couple of ways to get around this, although tips themselves have only existed since the 1990s, so you're not going to find anything past that. Instead of using the back tester that takes specific ETFs and stocks, use the one that goes for asset allocations. It won't be exactly the same things. You won't be able to put in exactly TIP X, but I believe there is, I'm hoping from memory, there is a category of tips that you can add into there. And so at least on Portfolio Visualizer, you can often go back into the 90s or 80s using the back tester that is going for asset classes as opposed to specific funds. The other resource, of course, is portfolio charts, which goes back to 1970. But unfortunately, it does not have tips in there, I don't think, and tips would not go back to 1970 either. So I'm not sure that one's going to help you for this, but that one is also asset classes for the past 50-some years. And so that's also one you want to consult. But that is a good point is that these analyses need to be taken with a grain of salt if they're not very long. And the same thing's happening with our IVOL analysis this time around because it's It's only two years of data. So you need to think about, well, what else was performing well in that time and how did that work out? Was it correlated or not? So those correlation analyses can often give you an idea of how well or poorly some asset would perform in different time periods. When you have, if you get back to the '70s, that's an inflationary time period. the 80s, you have falling interest rates and growth with a stock market crash in 87. The 90s are growth followed by a popping bubble in tech. Then you have recession that goes on for a few years, and then you have another bubble popping in real estate, and then you had the great recession, and then you have the most recent growth period. But the more of those alternating or differing periods you can get analyses for, the more comfortable you can feel that what you're looking at is something that is useful and then you're getting a good picture of it. It is most important to find or think about when will on my particular asset class do badly? That's the most important question actually with these asset classes. And then, and how bad do we think it's going to get? Tips themselves, I can tell you have been remarkably and reliably quite boring for most of their existence, probably because there hasn't been any serious inflationary episodes since TIPS came into being. In fact, the trend has been downward in terms of inflationary expectations for the past 20-some years. All right, let's go back to our questions, our 10 questions to master successful investing and apply them to I Vol, the name of this ETF, just so you can recall, it's called the Quadratic Interest Rate Volatility and Inflation Hedge ETF, which is a mouthful, but basically what's in it is 85% TIPS, and I think that TIPS fund is SCHP from Schwab, which is a garden variety TIPS fund, and then it's got 5% that is in these options contracts on credit spreads that tend to do well when there's a lot of volatility and when the credit spreads are widening as they have been recently. But we talked about that a lot in our last episode, so I won't repeat it. Question six on our list is what is the investment vehicle? That one's an easy one for this. It is an exchange traded fund. The advantage of exchange traded funds is they're well regulated and you can look them up and you can look and see what's inside of them pretty much at all times. And so they are transparent. The other advantage to them is you can easily trade them on most exchanges and now you can trade them with no fees and often fractional shares, which are both advantageous, all this fund only costs 20 some dollars, so you probably don't need too many fractions to be investing in iVOL. Okay, question seven. What does it take to be successful? Not a whole lot here. There's not a lot of skill involved. You simply pick the allocation you would want of this and buy it and hold it until it either declines and then you would buy more or it increases and you would Sell some. So it doesn't take a lot of effort to invest in this kind of investment. All right, question eight, who is getting a cut? Now we talked about this briefly in episode 70. Really the biggest cut coming out here is this fund does have a fairly high fee of around 1%. I think it's 0.97 in the materials and I'll link to those again in the show notes so you can see that. So that is a high fee for something that is essentially a bond fund. If you were just to invest in the underlying tips fund, SCHP or a comparable tips fund like TIP, I mean you're really talking about 0.1 kind of fees for something like that. So this is a relatively high fee fund, especially for something that is not expected to have great returns. It's designed to be relatively conservative with 85% of tips in it. So that's a drawback. Other than that, there is nobody really getting a cut out of this. There is no other management fees that are on the horizon for it. All right, now we get to the most interesting question here. How does it impact your portfolio? And to look at this, we did a Asset Correlation Analysis on Portfolio Visualizer, taking this IVOL fund and comparing it to a bunch of different assets that you might find in one of our risk parity style portfolios. So we have compared this, and we will link to it in the show notes, to VTI, a total stock fund, TLT, a long-term treasury fund, both the TIP fund and the SCHP fund because those are both TIPS funds. Then we also compared it to gold, a GLD, and a small cap value fund, VIOV, a commodities fund, PBDC, and a preferred shares fund, PFF. And recall that the measure for correlations here or diversification is between negative one, which is negatively correlated, and positive one, which is positively and totally correlated. And so readings close to zero mean basically uncorrelated. And when we look at this, and again, you do need to take this with a grain of salt because it's only been around since June of 2019, so the data is limited. But you do see that this fund is fairly uncorrelated with most of our other assets. It's got a 0.22 for VTI, the stock fund. It's got negative 0.05 for TLT, the treasury fund. 0.34 for gold, 0.14 for small cap value, 0.09 for commodities, 0.1 for the preferred shares fund, PFF. The only thing that it seems to be correlated with, which doesn't surprise anyone, is the TIPS funds that we put in here for the purpose of analysis. And the correlation there is 0.4 and 0.42 for those two funds. So from a perspective of not being correlated, this looks like something that would be potentially useful to put into a risk parity style portfolio. There are a couple other factors that you can look at here. The annualized return right now is 9.69%. Now this you do have to take with a grain of salt. for this period because this period happens to be one of the most favorable periods for this kind of fund. And why it has been favorable is that when this fund was started, the yield curve itself was relatively flat to down. Then it became more flat when the market crashed in March of 2020. And since then it has been widening and has been widening considerably in a way that you don't see very often. And that is the most favorable environment for this kind of fund. So you have to expect that this annualized return is on the high side for this kind of fund that if we are going from a period like now and then the yield curve gets flat again, that will detract from the performance of this fund. So the annualized return at 9.69 is good, but that is expected to be high given we haven't seen this fund go through a complete cycle of having the credit spreads widen and then having them go back to flat again. Okay, the other point on this asset correlation analysis, there is a daily standard deviation for this of 0. 63 and that is a low standard deviation and that what that means it's it's This has low volatility that compares with, say, a stock market with a daily standard deviation of 1.7 for this period. So we're saying that the IVOL fund is about one-third volatile than the stock market. And if you look at all of these things, the only things that are less volatile on this list of things that we did for correlation purposes were the TIPS funds themselves. which isn't surprising since the iVOL Fund is 85% one of those TIPS funds. Now you might also be interested as how this compares in volatility with other bond funds and the answer is it is definitely more volatile than say a short-term Treasury fund by a couple of factors, a factor of three really. It is about the same volatility as an intermediate-term Treasury bond fund. it is lower volatility than a long-term treasury bond fund, which is not quite comparable with the stock market. Alright, let's get to question 10, the final question, should you invest? Should you make this part of a risk parity style portfolio? And the answer is a little bit qualified. First we have the problem that We just don't have a very long history for this fund. So there's a little lack of confidence as to how it will do overall. Oddly enough, one of the other problems I see with it is that it's not volatile enough so that for it to have an impact in your portfolio, you would have to have a big slug of it in there to make it really make a difference. And I'm talking 15 to 20% before the performance of this will really affect your portfolio very much. So that's another thing to consider. It would have probably been better if they would have designed it to be more volatile. Right now, since it's 85% one of those TIPS funds, it's really not much different than one of those TIPS funds. It would be more interesting, I think, and potentially more useful if it, for instance, had instead of 5% in those options on credit spreads, if that was 10% or 15%, then you would see something that was more volatile but also or non-correlated with your other assets. And it could be much more interesting from an overall valuation for that. But where this fund may be the most useful is if you have a conservative bond oriented portfolio already. And to do a little comparison and analysis of that, I took our most conservative sample portfolio, the All Seasons portfolio, which is 30% stocks and then it's got 40% in in long-term treasuries, 15% in intermediate-term treasuries, 7. 5% in gold, and 7.5% in commodities, and decided what if we replaced some of the treasury bond funds in there with this IVOL fund. So I took out all of the intermediate treasuries and some of the long-term treasuries and put in 25% in the IVOL fund. And I'll link to this analysis in the show notes. But it does show an improved performance with about the same upside and reduced drawdown on the downside. So it looks like it could be something that would be very useful for that kind of portfolio. And the Sharpe ratio is much better than the Sharpe ratio for the All Seasons portfolio. But again, this is only a two-year analysis, so it doesn't tell you a whole lot. But I think if you were going to go with a very conservative bond-heavy portfolio, this might be a nice addition to that because it will be negatively correlated with a lot of your bonds, but it won't be very positively correlated with the stocks you have in there. So if I were planning or trying to use it in something, that is where I would go with it. I have a much harder time or much more difficult time seeing where it would go in one of our more traditional portfolios that are more driven by the stocks and then the highly negative correlation of the types of bonds we have in there. But that may improve in the future and maybe they'll come up with a new variation of this that has a little bit more kick to it, if you will, that might be better in one of our more standard portfolios. And I think this does also illustrate sort of where we are in the world of do-it-yourself investing, that we have many more options now than we did just even a few years ago, and certainly many more than we did 20 years ago. and it'll be up to us to take a look at these things and see how they might work or not because the ETF world only continues to grow and give us more options to consider. But now I see our signal is beginning to fade. I wanted to thank all of our listeners again. It seems like we have about 400 regular listeners now, which is very gratifying for me and There's over 18,000 downloads so I think people are getting something out of this. If you have questions or comments for me, I welcome them. You can send them to frank@riskparadioradio.com by email. That's frank@riskparadioradio.com or you can go to the website www.riskparadioradio.com and go and fill out the contact form there and I will get your message that way. Tune in next time for our weekly portfolio reviews, and we'll see what else comes through the mailbag. And then maybe we'll talk about a featured portfolio if there is time to do that. Thank you for tuning in. This is Frank Vasquez with risk parity radio signing off.

Mostly Mary [19:42]

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.