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ElLobo
Participant ○○

Simple, high yield portfolio, with volatility on your side

I have one account that consists of two funds, both 2x leveraged, SDYL, the UBS ETN based upon the 20 year divey aristrocrats within the S&P1500 index, and PCI, the PIMCO bond CEF.  It has some impressive performance characteristics, regardless of whether you are a buy and hold accumulator, retiree, or actively manage it in either case.

SDYL has been around since June 2012 while PCI came out in February 2013.  Running the PV Portfolio Optimization tool on the two (link) gives the following performance characteristics, compared to SPY:

AssetCAGRExpected Return*Standard DeviationSharpe Ratio*Distribution YieldCorrelation Coefficient
SPY13.05%13.74%11.20%1.1661.85%1  
PCI10.41%10.91%9.65%1.0598.53%0.511 
SDYL23.56%26.50%22.04%1.1715.71%0.910.451

 

First note that both the expected return and the SD of that return, for SDYL, are roughly twice that of SPY, reflecting the effect of leverage.  Note that the Sharpe Ratio of the two is the same although the distribution yield of SDYL, at 5.71%, is 3.1 times as high as that for SPY.  For those of you agnostic to the unrealized capital gain/loss componant of the total return of a fund, three times the distribution income for SDYL, compared to SPY, means that a retiree is spending SPY capital/principle during retirement whenever withdrawing more that 1.85% from SPY, compared to distribution income ONLY from SDYL, up to 5.71%.

For those of you NOT agnostic to unrealized capital gains/losses for either SDYL or SPY, consider the correlation coefficients of the two with respect to PCI.  The SDYL covariance comes in at 0.45 while SPY comes in a bit higher, at 0.51.  This leads to an interesting active account management technique, which favors the more volatile SDYL over the less volatile SPY.

Here is the yearly chart of SDYL, SPY, and PCI.  There were times, for example, in December 2018, where all three zigged at about the same time, SDYL being the most volatile as expected.  But there were 4 times this year (February, April, July, and September) where the SDYL unit price was above, percentage wise, PCI, and two times (June and August), where it was lower.  As you can see from this figure, SDYL went below PCI yesterday.

The 'technique' I use is to, in general, hold SDYL and PCI in equal proportions in my account.  Then, whenever one or the other, drops or rises significantly below or above the other, I move roughly 10% of the account to it, a 'partial rebalance', or 'overbalance', as it were.  So, for example, my initial PCI position in this account was taken in July.  Whenever SDYL 'tanked' in August, I moved 10% of the account from PCI to SDYL.  Whenever SDYL recovered in September, it was moved back.  Today, I'm waiting to see ifn SDYL drops another 5% or so before moving cash the other way.  IOW, I basically toggle between 55/45 SDYL/PCI and 45/55.

SDYL and PCI both pay monthly and both go -ex-div about the same time, so my monthly income fluctuates a bit, but not that much, basically averaging about 7%.  As I said, this technique would also be possible using SPY, but the 2X leverage volatility of SDYL makes the toggle signal much more pronounced.

Finally, I did a PV run, comparing an un-rebalanced 50/50 SDYL/PCI portfolio to a 100% SPY portfolio.  Here is the link.  It shows that the SDYL/PCI portfolio returned about 5% more than SPY over the last 6 years at about 5% more risk.  The Sharpe and Sortino Ratios were almost identical.  The SDYL/PCI portfolio produced over 3 times as much distribution cash in all years as well.

38 Replies
racqueteer
Participant ○○○

Re: Simple, high yield portfolio, with volatility on your side

But you have to consider, El, that this is during a period where equities were doing well.  If/when things turn around, I'd expect the outcome to turn around as well.  Clearly, the more equity one has had, the better things have been in general.  2x just multiplies that effect.  If things turn south, a 2x just leads to a greater reduction in value (admittedly, not a particular concern on your part).

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Intruder
Participant ○○

Re: Simple, high yield portfolio, with volatility on your side


@racqueteer wrote:

But you have to consider, El, that this is during a period where equities were doing well.  If/when things turn around, I'd expect the outcome to turn around as well.  Clearly, the more equity one has had, the better things have been in general.  2x just multiplies that effect.  If things turn south, a 2x just leads to a greater reduction in value (admittedly, not a particular concern on your part).


Not exactly. There have been 4 stock corrections of at least 10% since Aug 2011 but stock market has recovered each time to climb higher. No reason to believe that market will not recover and climb higher after next down turn.

Investors who have diversified portfolios that provide sufficient investment income, wages/retirement distributions and SS at tax efficient rates will not have to sell stocks at depressed prices and will buy stocks selling at depressed values that will recover when economy improves.

investment strategy depends on time frame for investment. Investor with sufficient income and assets can outlast decline in stock prices and profit from recovery when stocks rise. Investing in low volatility and high dividend stocks will mitigate decline in stock values while providing investment income.

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Bentley
Participant ○○

Re: Simple, high yield portfolio, with volatility on your side


@ElLobo wrote:

I have one account that consists of two funds, both 2x leveraged, SDYL, the UBS ETN based upon the 20 year divey aristrocrats within the S&P1500 index, and PCI, the PIMCO bond CEF.  It has some impressive performance characteristics, regardless of whether you are a buy and hold accumulator, retiree, or actively manage it in either case.

 


 

El,

 While very interesting, you really should include some of your product choices that have not done as well. For as long as you have been posting, you only present your winners. This makes it looks like your strategies contain much less risk than they actually do. Ever since MLPL went "out of business," I have never seen you include its loss in any "research you post.

 The stretch for yield has been littered with grenades. Two months before KMI collapsed, cutting dividend by 75%, you were sure it was going to raise its dividend.

  If I may suggest, you should include a disclaimer citing previous performance results on your high yield strategies; this time include all products, not just the winners.

archer
Explorer ○○○

Re: Simple, high yield portfolio, with volatility on your side

Posting winners can give good ideas for others to do their own DD on. I assume this is why El shares his findings. On the other hand, sharing losers only helps in the off chance that someone would be contemplating specific holdings that failed, which DD would have already confirmed. The key is DD on any ideas we come across. El's overall success/failure record seems irrelevant to me. I think this objectivity  is important in avoiding a repeat of threads focusing on the poster rather than what is posted. 

@ElLobo My initial thought on your post was that if one is looking for dividends, why not just go with PCI? Its div is about 1.5 of SDYL and with much less SD and better Sharpe compared to a 50/50 SDYL/PCI. link  I assume the answer is the TR is better. That has its merit of course, but usually a div investor is looking more for reliable income rather than TR and if you use the 2018-present time frame, PCI alone has better TR and higher divs. True, 2018 is a short time frame, but it represents well the volatile times from which Div investors (I believe) are wanting to protect themselves. Just another perspective from the risk averse.

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ElLobo
Participant ○○

Re: Simple, high yield portfolio, with volatility on your side


@racqueteer wrote:

But you have to consider, El, that this is during a period where equities were doing well.  If/when things turn around, I'd expect the outcome to turn around as well.  Clearly, the more equity one has had, the better things have been in general.  2x just multiplies that effect.  If things turn south, a 2x just leads to a greater reduction in value (admittedly, not a particular concern on your part).


Remember that, although SDYL is equity, PCI is debt, so that account went from 100% equity, mostly individual stocks, to PCI. 

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ElLobo
Participant ○○

Re: Simple, high yield portfolio, with volatility on your side


@archer wrote:

Posting winners can give good ideas for others to do their own DD on. I assume this is why El shares his findings. On the other hand, sharing losers only helps in the off chance that someone would be contemplating specific holdings that failed, which DD would have already confirmed. The key is DD on any ideas we come across. El's overall success/failure record seems irrelevant to me. I think this objectivity  is important in avoiding a repeat of threads focusing on the poster rather than what is posted. 

@ElLobo My initial thought on your post was that if one is looking for dividends, why not just go with PCI? Its div is about 1.5 of SDYL and with much less SD and better Sharpe compared to a 50/50 SDYL/PCI. link  I assume the answer is the TR is better. That has its merit of course, but usually a div investor is looking more for reliable income rather than TR and if you use the 2018-present time frame, PCI alone has better TR and higher divs. True, 2018 is a short time frame, but it represents well the volatile times from which Div investors (I believe) are wanting to protect themselves. Just another perspective from the risk averse.


That particular account was all individual stocks last year, all of which were divey paying, most of which were divey growth, and most of which were current, or former, divey aristrocrats.  I first sold off all of 'em that were paying less than an 8% divey, first gaining diversification (a CEF instead of individual stocks) and also gaining a bit of yield.

I then sold the remaining individual stocks, some of which, like VGR and SFL, I held for over a decade and bought SDYL.  Here, I gained diversification but gave up yield, since all of the stocks paid more than 8% while SDYL paid less than 6%.

Just as importantly, I went from a 100% equity account (all individual stocks) to a 50/50 stock/bond well diversified portfolio.  I did, as you note, give up some yield.

Although I didn't mention it, SDYL also has the particular characteristic that, as the unit price goes up from one month to the next, there is a compounding effect on the distribution.  You see that in the fact that, over time, the unit price has risen from its initial $25/unit to today's $86, the distribution itself has increased beyond the 2X leverage to today's 3.1X.  Whenever you look at that on an Excel chart and draw the linear trendline, the distribution is increasing at about a 16% per year rate.  For example, the July 2019 distribution was $0.455 while it was at $0.212 in July 2012.  So SDYL itself is a 5 year ever increasing divey aristrocrat!

That is, it yields 5.7% and has a 16% distribution growth rate, leading to an expected 22% TR, going forward, per the Gordon Equation.

BTW, I fully realize the risks involved in the fact that SDYL is an ETN, not an ETF, so I'm taking on a bit of risk that UBS will default on this unsecured debt.

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outandabout
Participant ○○

Re: Simple, high yield portfolio, with volatility on your side

 Bentley/Brantley, you seem bent on reminding M* members of their losses, or ask that they acknowledge that they post their losses. How about you coming clean on your investments before you challenge others?

Bentley
Participant ○○

Re: Simple, high yield portfolio, with volatility on your side


@outandabout wrote:

 Bentley/Brantley, you seem bent on reminding M* members of their losses, or ask that they acknowledge that they post their losses. How about you coming clean on your investments before you challenge others?


 

 I have posted, and so have others, every product in my portfolio. I have posted every buy and sell I have made over the last several years........IN REAL TIME!!! "How about YOU coming clean on your investments before you challenge others?"

 My suggestion to El was to include the performance of some of his previous "researched" portfolios. I never suggested he stop posting his newer ideas but when you eliminate any of your losers and then post performance data for your winners, it weakens support for the type of strategies he likes to advance.

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outandabout
Participant ○○

Re: Simple, high yield portfolio, with volatility on your side


@Bentley wrote:

@outandabout wrote:

 Bentley/Brantley, you seem bent on reminding M* members of their losses, or ask that they acknowledge that they post their losses. How about you coming clean on your investments before you challenge others?


 

 I have posted, and so have others, every product in my portfolio. I have posted every buy and sell I have made over the last several years........IN REAL TIME!!! "How about YOU coming clean on your investments before you challenge others?"

I see no record of your buys and sells on M*, Brantley!


 

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Bentley
Participant ○○

Re: Simple, high yield portfolio, with volatility on your side


@outandabout wrote:

@Bentley wrote:

@outandabout wrote:

 Bentley/Brantley, you seem bent on reminding M* members of their losses, or ask that they acknowledge that they post their losses. How about you coming clean on your investments before you challenge others?


 

 I have posted, and so have others, every product in my portfolio. I have posted every buy and sell I have made over the last several years........IN REAL TIME!!! "How about YOU coming clean on your investments before you challenge others?"

I see no record of your buys and sells on M*, Brantley!


 


Do you know how to do a search?

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outandabout
Participant ○○

Re: Simple, high yield portfolio, with volatility on your side

"Posting winners can give good ideas for others to do their own DD on. I assume this is why El shares his findings. On the other hand, sharing losers only helps in the off chance that someone would be contemplating specific holdings that failed, which DD would have already confirmed. The key is DD on any ideas we come across. El's overall success/failure record seems irrelevant to me. I think this objectivity  is important in avoiding a repeat of threads focusing on the poster rather than what is posted."

Have to agree with archer!

 lobo's past record shouldn't discredit him as Bentley seems to advocate. 

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Bentley
Participant ○○

Re: Simple, high yield portfolio, with volatility on your side


@outandabout wrote:

"Posting winners can give good ideas for others to do their own DD on. I assume this is why El shares his findings. On the other hand, sharing losers only helps in the off chance that someone would be contemplating specific holdings that failed, which DD would have already confirmed. The key is DD on any ideas we come across. El's overall success/failure record seems irrelevant to me. I think this objectivity  is important in avoiding a repeat of threads focusing on the poster rather than what is posted."

Have to agree with archer!

 lobo's past record shouldn't discredit him as Bentley seems to advocate. 


 

  Not sure how you can support an investment strategy if you don't look at its past record. It makes no sense. BTW, you always try to make this personal. What you should have written was, "lobo's past record shouldn't discredit him (his strategy) as Bentley seems to advocate." See how silly it sounds now?

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steelpony10
Participant ○

Re: Simple, high yield portfolio, with volatility on your side

      El - your getting much closer to my way of thinking. My yield is a stretched 5% (reinvestment of everything except CEF income lowers that) simple for me in five years will be about 20 holdings (16 CEF’s still give me the willies) and that space age stuff makes be dizzy, I have enough with just 1x. I’am married to a 2nd generation French red head so volatility to me is old hat.

       Congrats on combining three different income streams. 

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outandabout
Participant ○○

Re: Simple, high yield portfolio, with volatility on your side

I'll live with the below.

"Posting winners can give good ideas for others to do their own DD on. I assume this is why El shares his findings. On the other hand, sharing losers only helps in the off chance that someone would be contemplating specific holdings that failed, which DD would have already confirmed. The key is DD on any ideas we come across. El's overall success/failure record seems irrelevant to me. I think this objectivity  is important in avoiding a repeat of threads focusing on the poster rather than what is posted."

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archer
Explorer ○○○

Re: Simple, high yield portfolio, with volatility on your side

@Bentley  El's OP advocates a strategy which he describes in some detail. His last paragraph in the OP has a link to the past record of this strategy. Are you suggesting that it is important to know the past record of El's other strategies and recommendations to see if this one is valid or not? His other ideas on investing really don't seem relevant to this one which is why it seems personal to say it is. These forums have a long history of calling out posters lack of real time trades in the guise of protecting against the very unlikely possibility that someone would follow them without doing their DD. It's not going to happen. Those types of investors act on tips from their barber or cab driver, not these forums. 

 

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ElLobo
Participant ○○

Re: Simple, high yield portfolio, with volatility on your side


@archer wrote:

@Bentley  El's OP advocates a strategy which he describes in some detail. His last paragraph in the OP has a link to the past record of this strategy. Are you suggesting that it is important to know the past record of El's other strategies and recommendations to see if this one is valid or not? His other ideas on investing really don't seem relevant to this one which is why it seems personal to say it is. These forums have a long history of calling out posters lack of real time trades in the guise of protecting against the very unlikely possibility that someone would follow them without doing their DD. It's not going to happen. Those types of investors act on tips from their barber or cab driver, not these forums. 

 


The purpose of my OP was to simply show how leverage affects a portfolio.  I could have, but didn't, talk about the theoretical aspects of leverage in terms of Efficient Market Hypothesis, efficient frontiers, FF3/5F, and Sharpe's CAPM (Capital Asset Pricing Model).  Most investors know, and understand, that 2X leverage doubles the TR of an investment, both the unrealized capital gains as well as the losses.  As such, most investors will avoid using leverage, especially during retirement.

Most investors would probably fail to realize that, although the unrealized cap gains, and losses, are doubled with 2X leverage, so is the yield income.  And for retirees, such as myself, who rely on portfolio distribution income to fully fund our retirement withdrawals, doubling the portfolio cash flow should, logically, result in a doubling of the Safe Withdrawal Rate during retirement!!

That is, the yield of an unleveraged portfolio consisting of a 50/50 allocation to SDY (2.43% yield) and BND (2.72% yield) is 2.575%.  The yield of a 2X leveraged portfolio consisting of a 50/50 allocation to SDYL (5.71% yield) and PCI (8.49% yield) is 7.1%!  Both portfolios are a 50/50 stock/bond allocation.  I would suggest that the Probability of Success, POS, for a 50/50 stock/bond portfolio, which yields 7.1%, is significantly higher than that for a 50/50 stock/bond portfolio that yields only 2.575%.

(BTW, you can't use the PV Monte Carlo Simulation tool on either SDYL or PCI since it requires at least 10 years of historical returns to do the analysis.)

Those around here that know me fully understand that, as an income focused retiree, the most important piece of data in my OP was the last line of the last paragraph, specifically:

"The SDYL/PCI portfolio produced over 3 times as much distribution cash in all years as well."

The OP was all about retirement portfolio income, not specifically the funds I used in this one account.  There has been a lot of chatter about the PIMCO CEFs, especially PCI and PDI, so most investors know how it affects their specific portfolios.  OTOH, I have seen no specific discussion of SDY, let alone SDYL, on these forums.

(BTW, since my 'focus' was on retirement, I probably should have looked at VWINX, compared to my 50/50 SDYL/PCI and a 100% SPY portfolio.  VWINX currently yields 2.87% and its 'performance' over the last 6 years was roughly half that of my 2X leveraged portfolio in terms of TR, but not for distribution yield income, which was less than 2X.  Here is that link.)

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outandabout
Participant ○○

Re: Simple, high yield portfolio, with volatility on your side

You offer much to ponder, Lobo. Informative tread.

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archer
Explorer ○○○

Re: Simple, high yield portfolio, with volatility on your side

@ElLobo I see your point of using leverage to increase yield. For an income investor do you see SDYL as a better choice than QYLD, 12 mo yield 10.76% ? 

TR is a lot better of course with SDYL as is sharpe and sortino, but for lower SD without sacrificing income (actually increasing it) QYLD seems a better choice. Combined with PCI, the metrics improve. This doesn't refute the effect of leverage, but does show another way of increasing yield, and with less risk*. Comparing 50/50 SDYL/PCI with 50/50 QYLD/PCI it looks like the advantage of leveraging al goes to increased TR. Link

* On the other hand, how much does SD matter with reasonably steady income? 

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norbertc
Participant ○○○

Re: Simple, high yield portfolio, with volatility on your side


@outandabout wrote:

"Posting winners can give good ideas for others to do their own DD on. I assume this is why El shares his findings. On the other hand, sharing losers only helps in the off chance that someone would be contemplating specific holdings that failed, which DD would have already confirmed. The key is DD on any ideas we come across. El's overall success/failure record seems irrelevant to me. I think this objectivity  is important in avoiding a repeat of threads focusing on the poster rather than what is posted."

Have to agree with archer!

 lobo's past record shouldn't discredit him as Bentley seems to advocate. 


Bentley is right: full disclosure is best. 

El's strategies have and continue to target leveraged high yield with little analysis of or concern about loss of capital.  His analysis is hindsight oriented for relatively short periods when the sun was shining.  Underlying his thinking is a belief that dividends are basically safe, so leverage is always good;  total returns don't really matter.  It has worked out very poorly in the past.

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