What the the equity equivalent of STRIPS?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Topic Author
LTCM
Posts: 412
Joined: Wed Sep 09, 2020 3:58 am

What the the equity equivalent of STRIPS?

Post by LTCM »

Some investors prefer the continual payouts of the coupons on bonds and some investors prefer a lump sum in 30 years. During the accumulation phase its seems best to prefer the latter. During the decumulations phase it seems like you might prefer the regular payments.

What is the equity/options equivalent of this strategy? What method removes dividend payments in order to provide a more distant but larger lump sum? Is there a benefit to accumulators to sell the income stream from equities in return for a larger lump sum at the end?

I understand bonds have finite terms and equities do not, but since I can't touch my equity investments for 25 years it seems like there must be some way of pushing the entire benefit to that point for some marginal gain extracted from those who wish to do the opposite.

Thanks for any help!
55% VUG - 20% VEA - 20% EDV - 5% BNDX
rhe
Posts: 138
Joined: Sun Feb 26, 2017 1:10 am

Re: What the the equity equivalent of STRIPS?

Post by rhe »

A couple years ago someone (I think Kevin Muir on Twitter) said that very long-dated calls on european indexes looked cheap. I took a look at it but the market is very thin, so they are tricky to buy. A deep in the money call should give you exposure to the underlying but not the dividends.

There are also dividend futures, but I think they have a short-term hedging purpose that is not really what you are looking for.
Thesaints
Posts: 5087
Joined: Tue Jun 20, 2017 12:25 am

Re: What the the equity equivalent of STRIPS?

Post by Thesaints »

non-dividend paying stocks
venkman
Posts: 1338
Joined: Tue Mar 14, 2017 10:33 pm

Re: What the the equity equivalent of STRIPS?

Post by venkman »

LTCM wrote: Tue May 18, 2021 12:19 am What is the equity/options equivalent of this strategy? What method removes dividend payments in order to provide a more distant but larger lump sum? Is there a benefit to accumulators to sell the income stream from equities in return for a larger lump sum at the end?
Just reinvest the dividends.
User avatar
Topic Author
LTCM
Posts: 412
Joined: Wed Sep 09, 2020 3:58 am

Re: What the the equity equivalent of STRIPS?

Post by LTCM »

To add to my own thoughts on this...

When you buy equities included in the price/cost is the ability/option to sell those equities any time you like. That seems like there would be a premium paid for that. How do I not pay the premium since I have zero intention of selling for 25 years? Someone must be willing to pay me extra for that length of lockup.

I guess I'm not only looking to strip out the dividends, I'm also looking to strip out the options value of the equity that allows someone to trade it for the next 25 years. So how do I sell that to someone?

I effectively want to loan my equity position to someone for 25 years so they can use it for whatever purpose and then get it back in whatever condition it would have been in anyway with a little cherry on top for the loan.
55% VUG - 20% VEA - 20% EDV - 5% BNDX
User avatar
Topic Author
LTCM
Posts: 412
Joined: Wed Sep 09, 2020 3:58 am

Re: What the the equity equivalent of STRIPS?

Post by LTCM »

Further thoughts...

Do Vanguard already do this? If 100 bogleheads buy $1000 of VTI each do Vanguard really just hold it? Why wouldn't they loan 80% of it out to whoever wants it for a fee? The chances of more than 20% of us asking for it back at the same time seem low and if we do they can borrow it on the open market as needed. Like fractional reserve banking but for ETFs.
55% VUG - 20% VEA - 20% EDV - 5% BNDX
Karamatsu
Posts: 1447
Joined: Mon Oct 27, 2008 2:42 am

Re: What the the equity equivalent of STRIPS?

Post by Karamatsu »

I guess I'm not only looking to strip out the dividends, I'm also looking to strip out the options value of the equity that allows someone to trade it for the next 25 years. So how do I sell that to someone?
I don't think there is any kind of vehicle for doing this available on exchanges, in part because the issues would never trade! But you could do it as restricted stock options contract between buyer and seller. For an individual company this would be great... cash in exchange for issuing new shares 25 years from now? They should earn you the value you're looking for. With an index things would be less clear since the issuer would want to limit their costs. Most likely they'd arrange it like convertible bonds or convertible preferreds, where they set a range: the holder gets X shares if the market price is A or less, Y shares if the market price is B or more, and shares based on market price if it's between A and B. So that would work. The tricky part is just arranging it, since these things wouldn't be exchange-traded.
Iorek
Posts: 1567
Joined: Fri Mar 08, 2013 8:38 am

Re: What the the equity equivalent of STRIPS?

Post by Iorek »

LTCM wrote: Tue May 18, 2021 4:57 am Further thoughts...

Do Vanguard already do this? If 100 bogleheads buy $1000 of VTI each do Vanguard really just hold it? Why wouldn't they loan 80% of it out to whoever wants it for a fee? The chances of more than 20% of us asking for it back at the same time seem low and if we do they can borrow it on the open market as needed. Like fractional reserve banking but for ETFs.
I’m not sure but I am under the impression this is how Fidelity offers its zero expense fee funds (it covers the costs through income from lending securities).
AlohaJoe
Posts: 6609
Joined: Mon Nov 26, 2007 1:00 pm
Location: Saigon, Vietnam

Re: What the the equity equivalent of STRIPS?

Post by AlohaJoe »

LTCM wrote: Tue May 18, 2021 4:57 am Do Vanguard already do this? If 100 bogleheads buy $1000 of VTI each do Vanguard really just hold it? Why wouldn't they loan 80% of it out to whoever wants it for a fee? The chances of more than 20% of us asking for it back at the same time seem low and if we do they can borrow it on the open market as needed. Like fractional reserve banking but for ETFs.
Yes, Vanguard already does security lending.

There isn't enough demand to loan out anything like 80% of the fund holdings, especially when you can also borrow the same stocks from Fidelity, BlackRock, State Street, Charles Schwab, American, thousands of pension funds, and millions of individual investors.
User avatar
firebirdparts
Posts: 4387
Joined: Thu Jun 13, 2019 4:21 pm
Location: Southern Appalachia

Re: What the the equity equivalent of STRIPS?

Post by firebirdparts »

LTCM wrote: Tue May 18, 2021 4:05 am I guess I'm not only looking to strip out the dividends, I'm also looking to strip out the options value of the equity that allows someone to trade it for the next 25 years. So how do I sell that to someone?
I haven't thought about it, but generally, I don't think you can without a customized swap with somebody. You can easily charge people money for options, but that's not actually what you are asking for. It's close though. If you sell a covered call then you are "stuck" and the other person is not, and they pay for that. The danger of course is that you chop off the upside, you can only set it up a few years at a time, and you haven't sold the dividends either.

If you want to strip out the dividends, then you can hold an ITM call and sell a covered call against it, creating a call spread. Same problem, the upside is chopped off, and now you're paying option value, not just the other guy. The good news here is that you'd only need to spend a fraction of the money, so if it all goes pear shaped, perhaps most of your money is still under the mattress on that day.
This time is the same
User avatar
Topic Author
LTCM
Posts: 412
Joined: Wed Sep 09, 2020 3:58 am

Re: What the the equity equivalent of STRIPS?

Post by LTCM »

Thanks for the replies everyone. I have done some more reading.
Investopedia wrote:A futures contract is a legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future.
So this is what I need? Ideally a 25 year dated one, but if not then as long as possible and then roll it for 25 years. If futures are leveraged then I can buy 30 year treasuries/STRIPS with whatever % of the fund I need to bring the leverage down close to 1?
Investopedia wrote:A convenience yield is the benefit or premium associated with holding an underlying product or physical good, rather than the associated derivative security or contract.
So this is what I'm trying to strip out of my retirement account by using futures?
55% VUG - 20% VEA - 20% EDV - 5% BNDX
Post Reply