Capital Efficient ETFs – Part 2

Today’s post is our second visit to Capital Efficient ETFs.

The story so far

Here’s what we learned last time:

1. Capital Efficient ETFs (CEEs) are ETFs with exposure to more underlying assets than the capital you put in – it’s a fancy term for leverage.
2. They usually hold a lot of physical assets (typically stocks) plus a futures overlay.
3. CEEs are difficult to access from the UK – a couple of brokers will let UK investors buy US ETFs, but only in taxable accounts.
4. We now have one in the UK – the WisdomTree US Efficient Core UCITS ETF (NTSX) – which holds 90% of US large-cap stocks and adds a 60% exposure to US Treasury bonds via a futures overlay, for a total exposure of 150% or 50% additional leverage.
5. There are five funds in the US CEE range from WisdomTree:
   • NTSX – US stocks plus Treasuries
   • NTSI – International stocks plus Treasuries
   • NTSE – Emerging Markets Stocks plus Treasuries
   • GDE – Gold plus US stocks
   • GDMN – Gold plus Gold Miners
6. Portfolios including CEEs outperformed their unlevered counterparts
   • They have increased volatility (as expected) but their Sharpes are comparable or better.
   • The drawdowns are not great, so you wouldn’t want a huge allocation to this
   • Their PWRs (perpetual withdrawal rate – similar to the Failsafe Withdrawal Rate, but not adjusted for inflation) are excellent

Return Stacked Funds

We’re working through a series of six articles on CEEs by Justin from Risk Parity Chronicles.

• Article number four looks at some new funds.

I mentioned in my first post that ReSolve and NewFound have joined forces to launch some “Return Stacked” ETFs.

• The first one is RBST, which is 100% bonds plus 100% managed futures.

On the bond side, it will have a target duration of 2 to 8 years, though may purchase bonds up to 20 years in term. On the managed futures side, it will be a long & short fund covering 27 separate markets in four asset classes: equities, bonds, currencies, and commodities.

The second fund (in the works when Justin was writing) is RSSB, which is 100% global equities plus 100% bonds (Justin thought it would be 90/60, but their plans changed).

• This launched during the week I was writing these posts.

Managed futures funds

Back to article number four – a third fund mentioned by Justin is the first leveraged managed futures fund – Tuttle Capital 2X DBMF ETF (MFUT).

On the managed futures side, there aren’t even that many regular ETFs available. Of the few, iMGP DBi Managed Futures Strategy ETF (DBMF) is my choice. And you have KMLM, WTMF, FMF, and CTA, but that is not very many.

Considering their usefulness, CTA funds are surprisingly rare (there are none here in the UK) but if I were a US investor, six funds is getting there.

Fund List

Justin notes that the usual ETF screener sites (he uses Barchart and VettFI in the States – I use JustETF here in the UK) don’t pick up the CEEs.

• So he has created his own list.

The list has a lot of US mutual funds on it, and since I can’t access those from the UK, I have provided an abridged list of just ETFs below:

There are also a couple of levered BitCoin funds that Justin has left out:

Simplify has two capital efficient funds featuring an allocation to BitCoin (SPBC and MAXI), but that was a bit out of my frame of reference.

RSST

Article number five in Justin’s series was dedicated to a third Return Stacked ETF (which was actually the second to launch, in September 2023).

• RSST is 100% US large-cap stock plus 100% managed futures.

It’s expensive (1.04% pa in charges) but not if you see that as the fee for an extra 100% of leverage.

• You can also see this as a hurdle rate for the managed futures portion of the fund to clear, such that the ETF makes sense.

CEE portfolio tracker

The final post (so far) in Justin’s series sums everything up, and documents his enthusiasm for CEEs:

I’m totally enamored with the promise of Capital Efficient ETFs. There is hope that they will bring to the average DIY investor some new possibilities typically reserved for a few: the use of smart, reasonable leverage to achieve higher expected returns while still maintaining highly diversified portfolios.

I’ve spoken of this as the second path of Risk Parity [higher returns for the same level of volatility].

It also covers how to account for these “strange” beasts (are they 90+10, 90+60 or 100+100?) in your portfolios. He defines some terms:

• Actual allocation – where the cash is invested
• Proportional allocation – the ratio between asset classes, usually as a share of 100
• Effective allocation – how the fund performs (its exposure to asset classes)

Here are some fund examples:

Here’s how Justin recommends tracking the funds:

1. Keep track of proportional allocations. This will help you put the different parts of a fund correctly in the right asset class, and allow you to keep track of the actual dollars in your portfolio.
2. Then, for percentages of your portfolio, use the effective allocation. This will allow you to fully comprehend the impact that leverage has within the portfolio.

If you want to do things this way, Justin has a Google Sheets template that you can use.

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I account for leverage in a slightly different way:

• In my cash accounting (to calculate my net worth) I track the proportional allocation
• I then track the additional leverage separately, to work out where my overall leverage stands.
  • I don’t track leverage for individual asset classes.

Note that I have multiple sources of leverage (margin from spread bets and US brokerage accounts as well as levered ETFs).

• It works for me, but your mileage may vary.

Conclusions

I’m not quite as stoked as Justin, but I’m pretty excited by the growth of CEEs, and I hope they succeed.

• As always, the problem here in the UK is implementation – we only have one fund over here as yet.

There are US brokers who provide access to the US funds, but only in taxable accounts.

• 94% of my wealth is in UK tax-sheltered locations, so that is of limited use to me.

If the government really wanted to encourage private investors, they would allow non-UCITS ETFs in SIPPs and ISAs.

• Until then, I’ll just have to do my best.

Until next time.