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Reuters posted an article that could be summed up as man there's a lot of defined outcome and derivative income funds, and they're getting more complex. These are fun to look at, and although I don't really do much with them, I get a lot of questions from people outside the sphere of my day job (firefighters and friends).
The theory of barbelling yields out of a narrow slice of the portfolio, seems to hold some water; my only client use is intermittent and more of a volatility tool, and I do not have any of the crazy high yielders in my ownership universe. I don't use any of the buffer funds, but I would caution that if you want to use them, do not expect them to be proxies for the equity market. I haven't looked at a ton of buffer funds, but I do think some can continue to function as a low vol, low return type of exposure.
This is a fun one. BALT is a large, defined outcome fund that we've looked at before. IYW is a broad-based tech and a long-time client holding. ROM is a 2X tech ETF from ProShares. Technology should go up more than the broad market on the way up and down more on the way down, which is why I chose it for this exercise, but oddly, the idea sort of works with consumer staples (XLP and UGE) too. Interestingly, the blend of BALT and 20% exposure tech is very underweight versus the S&P 500 and almost exactly in line with the tech exposure of VBAIX, so as big of a sector bet as you might think.
I would have thought that this sort of BALT/tech mix would have done worse than 60/40 in something like the popping of the internet bubble. Using XLK and client/personal holding MERFX as substitutes, the drawdown at the 2003 bottom was the same as plain vanilla 60/40. IYW started trading just after the 2000 peak, and BALT just started in 2021.
IRL, putting 80% into one low volatility strategy seems insane to me. Below, Portfolio 2 has 8 different low vol strategies with 20% in IYW.
Testfol.io has VBAIX's CAGR since inception at 7.16% which is noticeably better than the 6.46% available in our back test, but I don't think the skew creates too distorted of a picture.
This variation of barbelling can work, but despite the back test, I think it would be quite risky.
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