How's The (All) Weather Portfolio?


For some context, the Invesco QQQ Trust (QQQ) was down 9.6% in the period charted. Being spared 50 basis points is certainly better than the alternative but it's not really a place to hide out from a fast or slow decline, it is an equity proxy with a high yield.

Also charted is the iShares Core S&P Total Market ETF (ITOT) which is a fine proxy for broad, domestic equity market exposure, and the AGFiQ U.S. Market Neutral Anti-Beta ETF (BTAL) which of course is a client holding. An at home all weather portfolio's equity allocation should IMO anchor around something like ITOT, straight, plain vanilla equity exposure. Exposures to other things like in the case of this post, QYLD and BTAL should be pretty small. If you do a little spreadsheet work, a small allocation to QYLD along with a lot of something like ITOT would increase the overall yield considerably. QYLD will of course lag at times but adding basis points in the form of yield can add meaningfully to long term returns.

As a substitute or possible as a pairing with something like ITOT, a fund that takes defensive action could also be considered. I own Pacer Trend Pilot Large Cap ETF (PTLC) for clients and there are others; WisdomTree has one or two funds that take defensive action. PTLC is likely to miss the lift off of any bear market bottom as a function of its methodology, at least that is my expectation as a holder of the fund. If it were my only equity position I might want to be prepared to switch to ITOT or the like when the market is in a state of panic, easier said than done of course. Working PTLC or something similar in to a portfolio provides an extra bit of defense beyond BTAL (discussed below) but with a better opportunity for up capture over the course of the entire cycle.

BTAL has a role in this type of portfolio in terms of weathering adverse market conditions. Unlike an inverse fund, BTAL has shown it can go up as the market is going up. For most of its existence it has gone down in value and I would expect that coming off the bottom of the next bear market (regardless of whether it has started or not) and into a new bull it will decline for a long time. It doesn't have to decline (repeated for emphasis) like an inverse fund but I would expect it to which speaks to why an all weather concept can't be set and forget.

I would want to include more alternatives in such a portfolio. Some consider gold to be an alternative, and I own it for clients, and maybe it is but I would want something that could offer bond market returns without taking interest rate risk. Anyone reading my posts for a while knows I like merger arbitrage in this context. The IQ Merger Arbitrage ETF (MNA) and the ProShares Merger ETF (MRGR) are the only two ETPs in the space. I've owned the Merger Investor Fund (MERFX) for clients for many years and it seems like that fund outperforms the ETPs far more often than not. This has been a relatively good year for the fund having gained 4.51% YTD per Yahoo Finance.

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Disclaimer: The information, statements, views, and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but no ...

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