Getting FATT on VIXY

A look at strategic funds that utilize Bitcoin and VIX.
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A big draw to working in the financial services industry is the opportunity to always learn new things. Part of learning is seeing new strategic funds that come out, blending different exposures together to try to deliver a specific portfolio effect. A good example of this is client and personal holding AGFiQ U.S. Market Neutral Anti-Beta Fund (BTAL) which goes short high beta stocks and goes long low beta stocks in hopes of an end result that mutes portfolio volatility. Like any such strategy there will be times were BTAL will outperform and times it will lag, nothing can be the best for all times.

I’ve always been interested in looking at new funds as they come, trying to learn and then watching them either meet the expectations the fund companies set or failing to do so. Along the way I’ve taken small positions in some of these as a dry run for clients for possible inclusion in their portfolios. Again, some funds succeed, some don’t and some it takes a while to figure out success or failure.

This brings us to a couple of new funds out this week. First is the Simplify US Equity PLUS GBTC ETF (SPBC). The basic idea is to blend US equity exposure with Bitcoin in a barbell of sorts heavily favoring US equities. A little more specifically it’s 100% equities with a 10% Bitcoin overlay using the Grayscale Bitcoin Trust (GBTC). I own some shares of GBTC which is a very imperfect way to access Bitcoin because similar to a closed end fund, GBTC can trade at a premium or discount to its NAV.

The leverage implied in the description comes from owning mostly iShares S&P 500 ETF (IVV), which I own some shares of too and some clients have this as well, and S&P 500 futures. So no leverage like margin debt but leverage from the futures exposure. I’ve been increasingly interested in blends like this since I stumbled into the Standpoint Multi-Asset Fund Institutional Class (BLNDX) which I then bought personally and for clients. BLNDX targets a 50/50 mix of equities and managed futures.

When I looked on the Simplify website, I did not see any sort of back test (if someone knows otherwise let me know) but I am sure it is good otherwise why launch the fund and of course we know that despite the volatility the track record of Bitcoin’s performance has been strong thus far.

One wrinkle in the strategy is that Simplify will try to manage the 10% Bitcoin target based on GBTC’s NAV not it’s market price which sets the table for a lot of work and by work, I mean a complicating factor that could be difficult to manage.

The question is whether or not a blended fund is a good way to access Bitcoin for anyone who is interested. If Bitcoin goes up then yeah, it would be a good way to get access…that’s a joke. In my opinion, anyone who wants to dabble in Bitcoin but hasn’t yet done so should start with much less than 10%. Maybe, someone could buy 90% IVV and 10% SPBC and get to 1% in the Bitcoin proxy but it is not clear why someone would do that instead of just buying 1% or 0.5% or 2% to start dabbling in Bitcoin.

Speculating in Bitcoin, speculating, is not for everyone, maybe not even the majority, unless it keeps going up (another joke) but if you don’t believe that Bitcoin will be part of the solution (I’m a maybe) or don’t want to take a chance on the asymmetry (that’s what I am mostly interested in for now) then don’t buy it. Don’t dabble. Leave it for other people.

The other new fund is the Fat Tail Risk ETF (FATT) managed by Tuttle Capital Management. This fund is intended to be an equity proxy using VIX ETPs to manage/reduce volatility. The current holdings show approximately 85% spread over two S&P 500 ETFs, 10% in ProShares VIX Short-Term Futures ETF (VIXY) and 3.73% in iPATH SERIES B S&P 500 VI (VXX).

Again, I am sure the back test is strong otherwise why list it, but I did not see one on the website. The problem I’ve always had with using VIX derivatives is that VIX does not have to go up when the market goes up. Yes, it usually does but it doesn’t have to. Layer on top of that history of VIX’s futures curve pricing further out futures much cheaper than front month futures. This means that if the market goes down a lot and VIX as you look at it on the screen goes up a lot, an ETP may not capture the full move in VIX. That was the case in March of 2020. VXX and VIXY track each other identically. Was the move enough of a hedge in the face of that event? I think it is clear that if FATT had existed back then it would have gone down less but that doesn’t mean it would in the future and as to whether or not the move in the ETPs captured enough of the actual VIX is of course up to the end user. 

I think it is important to spend the time learning about these, some of them do make their way into portfolios I manage and depending on your level of engagement with your portfolio you might too find funds this way. The fun thing is that we might each look at the same fund and draw completely different conclusions.