Mid-Week Round Up

A review of articles and news read this week.

Bloomberg had a profile on the returns generated by the $120 million endowment for Carthage College in Wisconsin. The short version is that the returns have far surpassed other endowments (a follow up Tweet about the article noted that Carthage has a very high allocation to equities) using index funds while avoiding hedge funds, private equity and other illiquid investments that purport to be sophisticated and exclusive.

Straight indexing is not my preference for portfolio construction and management but like many different strategies, when combined with an adequate savings rate, it can absolutely get a disciplined investor to where they need to be. Arguably, indexing is the simplest strategy, it can be as simple as two or three funds. The point I make with indexing is that if you accept that it can get the job done, how far away from indexing's simplicity do you want to get? There are many valid objectives to pursue beyond indexing but it is worth measuring and understanding the time devoted and the risk taken (risk could mean opportunity cost).

It is possible to transfer a small bit of money from a traditional IRA into a health savings account. It is called a qualified HSA funding distribution and for now can only be done once in a lifetime, before you go on Medicare and in a year that you're eligible for an HSA. The amount that can be transferred equals the amount you can contribute to an HSA. This is interesting in a tax planning context. A few weeks ago we looked at converting small pieces of a traditional IRA to a Roth in years with no earned income such that you stayed under the standard deduction (effectively making the conversion tax free) and this would seem to be related; both are a way to reduce the amount of retirement savings that is subject to required minimum distributions. It would make the most sense to do this past the age of 55 which is when the $1000 HSA catch up contribution kicks in (traditional and Roth IRA catch up contributions kick in at 50).

J.D. Roth from the Get Rich Slowly blog had a recent post that disclosed some current problems he is having related to health and fitness as well as past problems related to personal finance. This ties in with an idea that has been making the rounds lately which is that our happiness tends to bottom out pretty close to 50 years old, Roth appears to be 49.

I write about this sort of stuff a lot for several reasons. Life is much easier, infinitely easier, when we are not worried about being over-indebted, under-saved and we feel good by virtue of diet and exercise. Part of this is figuring out what is truly important to us and what isn't which I realize can require very difficult introspection. Correctly figuring yourself out means you're saving and planning for the correct outcome, thus your saving and planning can be more efficient. I think part of an advisor's role is to be able to guide client through this when circumstances call for it. Anyone who is healthier is likely to spend less on healthcare which has obvious saving and planning benefits. Another reason to write about this is that in terms of having credibility, I think Advisors need to have their act together in this context; I would think a client would prefer their financial advisor walks the walk. Also personally, I want to have my act together financially, emotionally and physically and I read a lot on these topics to try to learn more.

The Aptus Defined Risk ETF (DRSK) just launched and like a few of the ETFs we've looked at here lately, this one tries to use leverage, as opposed to misuse it, to deliver an objective of "current income and capital appreciation." Specifically it allocates 90-95% into iShares corporate bond ETFs, currently an equal weight bond ladder ranging from 2019 to 2025, and the rest into slightly in the money call options on individual stocks and/or sector ETF options. The basic idea is very little capital is exposed to equity market volatility. What I find intriguing is the idea of getting most of your return from a small portion of the portfolio which can be thought of as a form of portfolio efficiency. Not to say it is easy to do but in building a portfolio that includes narrow based exposures you can get a sense of which ones are likely to be more volatile and which ones are not.

Where volatility and alpha seeking can be concentrated in one portion of the portfolio so too can yield. ETF.com profiled the Horizons Nasdaq-100 Covered Call ETF (QYLD) by interviewing Horizons' head of product development Jonathan Molchan. I've mentioned QYLD before, it is an interesting fund. According to ETF.com is had a yield just under 10% and per the interview it has captured half the return of the NASDAQ 100. A small allocation to a fund like this could add significant yield to the overall portfolio. The biggest risk seems to be that the calls it sells are written against the Nasdaq 100 Index (NDX) which settle in cash. This means that if the options end up being assigned, the fund would need to deliver cash. The fund owns stocks but sells index calls, it appears that is almost a naked call strategy. I don't doubt Horizons's ability to manage the strategy effectively but where the 10% yield might draw you in, you should not overlook the mechanics of the strategy.

Finally, the Reality Shares DIVS ETF (DIVY) was featured on ETF IQ today. It is not a dividend stock ETF. It is more of an alternative that uses swaps to capture overall dividend growth. So if dividend growth was 10% then ideally DIVY would gain 10%, all regardless of what stock prices are doing. The volatility of dividends is much less than stock prices. Often, when a company declares a dividend it stays put for a while and as the company grows it can increase its dividend. There's not much volatility in a company's dividend that is at $.50/share for a year or two and then maybe goes up to $0.53 for example. The way it all works out, the standard deviation of the fund has been 4.2% versus 3.1% for Barclays Aggregate Bond Index and 12.2% for the S&P 500. The correlation of DIVY to the Agg is -0.05 and 0.41 to the S&P 500.

The chart is certainly interesting. It shows that it isn't an equity proxy, at least it hasn't been, and during the few dips that have occurred in the last three years it has traded pretty flat. Thinking there is more to learn, I will follow this one for a bit but it is very interesting.

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