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Cullen Roche was a guest on Meb Faber's podcast this week. I've known both of them for many years, both are very smart obviously, and the podcast was fascinating. Part of the fascination lies in how differently they appear to approach portfolio construction.

Meb is a big believer in alts, specifically with a huge emphasis on trend following/managed futures, whereas I cannot recall Cullen ever talking about alts, and certainly his ETFs are comprised of very plain vanilla assets. Both approaches are, of course, valid. The difference in approaches is what's really noteworthy. 

There was a shocking nugget that came up that I will get to in a moment, but Cullen recently made a change to his ETF offerings, essentially shutting down DSCF and replacing it with three different ETFs, each one targeting a specific duration. DDV targets a five-year duration, with DDX at a 10-year duration, and DDXX at a 20-year duration. 

DDV allocates 87% to bonds and 13% to equities. DDX allocates 34.5% to equities and 65.5% to bonds, while DDXX allocates 100% to equities. He is blending together assets with different durations to achieve the intended the target duration number in the name of each fund.

Part of the understanding here is that equities are a long duration asset. In the podcast, he worked through an explanation that lands on equities' duration being 15-20 years. An advisor wanting to use these funds would probably need to really dig into this idea before buying. 

Since we've looked at something similar lately with drawdown strategies and the LDDR ETF, let's hone in on DDX, the 10-year product. To be clear, these don't deplete or have a termination date.
 

Very plain vanilla, like I said. In 2022, VGIT was down 10.5% versus AGG down 13%. Backtesting DDX, we get the following:
 

I started the backtest when the bond market became less reliable to give a better sense of the volatility. To DDX's credit, it has the same volatility as the portfolio that is very heavy in holding FLOT. If interest rates take another meaningful leg up, not even as much as in 2022, VGIT would get hit, which would be rough on DDX.

VGLT would go down the most, of course, but the weighting in DDX is pretty low. On a price basis, VGIT is down 15.5% from its 2021 high, and on a total return basis, the fund is down 1.19% cumulatively. 

I'm not trying to predict anything, I am just pointing out that bonds are now in a different regime than they once were, and so they are less reliable. If I was comfortable with intermediate and further-out treasuries, I'd use individual issues. VGIT has no par value to return to. Waiting for a bond that is down a ton to get back to par is not a great place to be in, but it's better than being in a fund that has no par value to get back to. TLT may never get back to its high, for example. 

The shocking part of the podcast episode came just past the 37-minute mark, when Cullen said, "my own career has been a series of me jumping from portfolio strategy to portfolio strategy trying different things, and I say this has resulted in a lot of portfolio divorces."

Maybe I am taking that the wrong way, but I was very surprised to hear him say that. A practitioner's process is going to evolve, of course, as they learn more. I hope I know more today than I did in 2015, and more 10 years ago than I knew 20 years ago, and so on into the future. 

Then, there was a lot of discussion on the equity as long duration idea, which speaks to the importance of taking a long-term approach to equities. Getting twitchy (my phrase, not from the podcast) based on short-term catalysts is wildly counterproductive for the vast majority of investors, and Cullen and Meb did a great job exploring the idea.

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