What to pair with NTSX?

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siriusblack
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What to pair with NTSX?

Post by siriusblack »

Bogleheads,

I've been reading up on NTSX and I would like to dip my toe into the water by devoting one of my Roth IRA's (my smallest account) to a strategy that uses this fund. For those of you who are not familiar, there are many other threads that discuss the fund on bogleheads, but in a nutshell it's a 1.5x leveraged fund that aims to provide returns and risk consistent with a 60/40 stock/bond portfolio. (The way it works, as I understand it, is it invests 90% in S&P 500, and creates a 60% bond exposure by investing the remaining 10% in futures contracts with effective leverage of 6x. The net result is 90% allocation to stocks, 60% allocation to fixed income -- which is basically a 60/40 portfolio juiced with 50% leverage.)

There are perhaps many ways to use this fund in a portfolio. One way is to simply buy the fund outright and have effectively a 90/60 allocation. However, as I understand it, the intended purpose of the fund is a little different-- specifically, its goal is to create some headroom in your portfolio to invest in alternatives, while still capturing similar returns of a 60/40 portfolio. One idea I've heard suggested is to allocate 2/3rds of your portfolio to NTSX (which should give you similar returns to the entire portfolio invested in 60/40 allocation) -- and this leaves 1/3rd of your portfolio to invest in "something else" (and it's suggested that some kind of alternative investments would be a good choice, which would balance the portfolio by adding expected return, while further reducing overall portfolio risk).

What I'm trying to figure out is what is the "something else" that I want to pair with NTSX in this manner. (Just for simplicity, I would probably do something closer to 70/30, rather than the above-mentioned 2/3rds, 1/3rds.) I've thought about a REIT ETF, but two issues-- (a) correlation can still be very high to general stocks, and (b) I can't imagine doing such a large percentage to REIT's. I've considered doing something like long-term treasuries just to get the low correlation, but I'm concerned that I'm sort of negating the purpose by doing that. I'm leaning towards something along the lines of a buy/write, or long/short, etc., but haven't come across an option yet that looks compelling.

So, question to bogleheads-- what alternatives do you think should be considered? Any ETF or fund ideas that might fit well with this approach?

Thanks
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Re: What to pair with NTSX?

Post by muffins14 »

Anything you want can fit with this approach. For me, I use NTSX for about half my US allocation, and the other half is a mix of small cap value via IJS, and VFMF, vanguard’s multi-factor fund. Overall it gives the US part of my equities a size load of ~0.2 and value load of ~0.1.

Considering the futures, this is like a mildly tilted 95% equity portfolio plus 30% in bonds with duration ~7 years. Feels like it should return enough to compensate for the 0.19% combined fee
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Re: What to pair with NTSX?

Post by nisiprius »

Wisdomtree says:
we ... believe that 90/60 provides investors with the ability to enhance returns with noncore assets such as long/short equities, risk parity, CTAs or true alternatives.
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Re: What to pair with NTSX?

Post by HawkeyePierce »

I think there are roughly three ways to use this fund:

1) Hold NTSX as 66% of your portfolio, which gives you exposure to 60/40. Use the remaining 34% for any other asset class you want to hold. E.g., if you just held total international, you'd have a 94/40 portfolio with roughly 2/3rds of your equity in US stock, 1/3rd in intl.

There are limitless variations on this. Tilt to small-cap value, low-vol, etc. This is along the lines of the original intent of the fund, where 66% gives you the standard 60/40 portfolio and you use the freed-up space for alpha-seeking investments. Since Bogleheads are generally skeptical of alpha, you can use it to simply aim for more beta.

2) Hold enough NTSX to reach your target bond exposure. Half your portfolio in NTSX gives you 20% bonds. See #1 for what to do with the rest of the space.

3) Treat NTSX as a hopefully less volatile S&P500. This is the approach I've taken. Half my US equity exposure is in NTSX, the other half regular total stock market. The rest is in long-term treasuries, small-cap value, intl small and emerging markets.
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Re: What to pair with NTSX?

Post by schismal »

HawkeyePierce wrote: Mon Jan 27, 2020 11:30 am 3) Treat NTSX as a hopefully less volatile S&P500. This is the approach I've taken. Half my US equity exposure is in NTSX, the other half regular total stock market. The rest is in long-term treasuries, small-cap value, intl small and emerging markets.
This is similar to how I use it. I consider it part of my large cap holdings, but I view it as a hedged equity strategy with 10% of its investment leveraged into a 6x exposure to an asset that's weakly or uncorrelated with large stocks. It's basically a cheap way to access treasury futures. That should dampen volatility compared to a pure S&P 500 fund, and it has succeeded so far. Holding a minimum volatility fund (e.g. USMV) is another way to achieve this, but I have more faith in persistence of the poorly correlated stock/treasury relationship than in a fund construction strategy that was implemented less than a decade ago.
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Re: What to pair with NTSX?

Post by schismal »

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Re: What to pair with NTSX?

Post by Vegomatic »

There are many things you could so, as noted above.

One is ... take 66% NTSX, and the remainder split:
  • 60% USMV [iShares Edge MSCI Min Vol U.S.A. ETF] and
  • 40% VTEB [Vanguard Tax-Exempt Bond ETF]
That would give you a cheap and relatively tax efficient balanced fund (one of benefits of NTSX) that takes advantage of the 'low volatility' factor.
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Re: What to pair with NTSX?

Post by Portfolio7 »

Great question. I can only invest in NTSX via my IRAs. I have one IRA for $10K invested 25% each:
NTSX 90/60,
ACWV Global Min vol
MTUM Momentum
ONEQ Nasdaq

This is not a strategy, this is a non-random assortment of funds that I'm watching and trying to understand a little better. I do think NTSX pairs well with ACWV. As for momentum, well there seem to be a lot of years where both momentum and min vol are really good, or both are really bad, though there are also some where they are at opposite ends of the spectrum, so I'm not sure if there's much of a relationship there really. ONEQ just because I think there's a fair amount of growth yet to happen here, and this small portfolio is where I can take some risks.
Last edited by Portfolio7 on Mon Jan 27, 2020 9:57 pm, edited 1 time in total.
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Re: What to pair with NTSX?

Post by LincolnTunnel »

HawkeyePierce wrote: Mon Jan 27, 2020 11:30 am
2) Hold enough NTSX to reach your target bond exposure. Half your portfolio in NTSX gives you 20% bonds.
How would this work in terms of rebalancing? Does the fund rebalance itself?
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Re: What to pair with NTSX?

Post by klaus14 »

i would add international. Various options:
(1) VXUS: Total International Market.
(2) ISCF + IEMG: Developed Small Cap Multifactor + Emerging
(3) EFAV + IEMG: Developed Minimum Volatility + Emerging.

I would do 2nd. Small international has lower correlation to US Stocks.
My investment algorithm: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=351899&p=6112869#p6112869
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Re: What to pair with NTSX?

Post by HawkeyePierce »

LincolnTunnel wrote: Mon Jan 27, 2020 9:53 pm
HawkeyePierce wrote: Mon Jan 27, 2020 11:30 am
2) Hold enough NTSX to reach your target bond exposure. Half your portfolio in NTSX gives you 20% bonds.
How would this work in terms of rebalancing? Does the fund rebalance itself?
NTSX rebalances itself, yes. You would still need to rebalance it within the rest of your portfolio.
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Re: What to pair with NTSX?

Post by willthrill81 »

I think that a portfolio with 60% of NTSX and 40% of long-term Treasuries is interesting.
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Re: What to pair with NTSX?

Post by MotoTrojan »

willthrill81 wrote: Mon Jan 27, 2020 10:40 pm I think that a portfolio with 60% of NTSX and 40% of long-term Treasuries is interesting.
70% NTSX and 30% treasury strips (EDV) sounds even better.
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Re: What to pair with NTSX?

Post by willthrill81 »

MotoTrojan wrote: Mon Jan 27, 2020 10:42 pm
willthrill81 wrote: Mon Jan 27, 2020 10:40 pm I think that a portfolio with 60% of NTSX and 40% of long-term Treasuries is interesting.
70% NTSX and 30% treasury strips (EDV) sounds even better.
Possibly. The two allocations have tracked each other pretty closely since September, 2018, though the one you mention had slightly higher returns and volatility.
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Re: What to pair with NTSX?

Post by HawkeyePierce »

MotoTrojan wrote: Mon Jan 27, 2020 10:42 pm
willthrill81 wrote: Mon Jan 27, 2020 10:40 pm I think that a portfolio with 60% of NTSX and 40% of long-term Treasuries is interesting.
70% NTSX and 30% treasury strips (EDV) sounds even better.
I mix NTSX with EDV, albeit with other funds thrown in there as well.

* 32% US equities (half in NTSX in IRAs, half in VTSAX in taxable)
* 15% EDV
* 16% small cap value
* 18% int'l small cap
* 8% emerging markets
* 8% emerging markets govt bonds
* 5% gold
Last edited by HawkeyePierce on Thu Feb 06, 2020 10:54 am, edited 1 time in total.
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siriusblack
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Re: What to pair with NTSX?

Post by siriusblack »

willthrill81 wrote: Mon Jan 27, 2020 10:40 pm I think that a portfolio with 60% of NTSX and 40% of long-term Treasuries is interesting.
I think I'm leaning in similar direction. Here is 70/20/10 NTSX, Long-Term Treasuries, and Real Estate.

https://www.portfoliovisualizer.com/bac ... ion6_2=-35

The return is very close to S&P 500 -- but the volatility is about 1/2 and the maximum drawdown is 1/3rd. In some ways this reminds me of Hedgefundie's adventure, but a much tamer version with less upside but way less downside risk.
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Re: What to pair with NTSX?

Post by muffins14 »

Be wary of inferring anything from 17 months of data.
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Re: What to pair with NTSX?

Post by garlandwhizzer »

siriusblack wrote:

(The way it works, as I understand it, is it invests 90% in S&P 500, and creates a 60% bond exposure by investing the remaining 10% in futures contracts with effective leverage of 6x. The net result is 90% allocation to stocks, 60% allocation to fixed income -- which is basically a 60/40 portfolio juiced with 50% leverage.)/quote]

This sounds interesting but I do not believe that futures contracts can reliably produce a positive leverage of 6 to 1 in the ultra-competitive Treasury futures market, without substantially increasing risk. How futures do has a lot to do with the price you purchase the asset at. Treasuries are now near the lowest yields in history which means they are very richly priced. In theory when you buy a future contract you want to purchase an asset which is underpriced and likely to appreciate in value by the time of the contract expiration date. There's a lot more potential downside in price action on bonds if inflation gets going in the future relative to the limited upside unless Treasuries go into to serious negative yields as sovereign bonds have done in Europe and Japan. So I'm not sure this is the best market to move into the bond market with future contracts.

Most importantly, the main purpose of holding bonds in a portfolio is safety and volatile reduction. I doubt very seriously that a 10% 6X bond exposure will perform the same in this regard as 90% of your portfolio (equity) gets killed. A non-leveraged 40% bond portfolio with 60% equity (1/3 less of the asset that's getting killed) and 4 times more bonds just feels safer to me.

I could be wrong about this because I'm an old grizzled investing veteran that has seen and participated in many short cut schemes to investing success that sounded wonderful but turned out much less so. I do not do leverage or future contracts any more of any flavor because I know that leverage works both ways, up and down. Whether it's up or down in the long run has a lot to do with what price you pay for the asset when you enter. The time to optimally increase leverage is when there's a fire sale on asset prices, unlike now when all assets are richly priced IMO. Even if they weren't richly priced I wouldn't do it.

Since inception 5 months ago, NTSX has outperformed VBIAX the Vanguard Balanced Index Fund which is exactly what you would expect with a 1/3 more equity in a bull equity market and leverage in a bond market where yields have fallen and bond prices have risen. If you believe that the bond bull and the stock bull are going to continue running into the future uninterrupted, NTSX seems like a no-brainer for you. When the opposite happens, a bear market in equity you'll lose more. Likewise in a bond bear market of rising rates, rising inflation, you'll lose more. If both happen at the same time like stagflation, NTSX will suffer much more severely than VBIAX. It is a sunny weather strategy, the kind that proliferate after a strong bull market has been going for a long time, but it is not an all weather strategy which is what I prefer. No one knows the future and it seems reasonable to me to always be ready for any change in the market cycle.

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Re: What to pair with NTSX?

Post by willthrill81 »

muffins14 wrote: Tue Jan 28, 2020 6:03 pm Be wary of inferring anything from 17 months of data.
Indeed. Some of the backtests with synthetic data created here are helpful, but I'd still be wary about putting much of my portfolio into a fund with so little live history.
siriusblack wrote: Tue Jan 28, 2020 5:41 pm
willthrill81 wrote: Mon Jan 27, 2020 10:40 pm I think that a portfolio with 60% of NTSX and 40% of long-term Treasuries is interesting.
I think I'm leaning in similar direction. Here is 70/20/10 NTSX, Long-Term Treasuries, and Real Estate.

https://www.portfoliovisualizer.com/bac ... ion6_2=-35

The return is very close to S&P 500 -- but the volatility is about 1/2 and the maximum drawdown is 1/3rd. In some ways this reminds me of Hedgefundie's adventure, but a much tamer version with less upside but way less downside risk.
That allocation might be reasonable for a portion of your portfolio, but based on the above, very prudent, comment, I wouldn't recommend that you do this with all of your portfolio.
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Re: What to pair with NTSX?

Post by abuss368 »

siriusblack wrote: Mon Jan 27, 2020 9:47 am Bogleheads,

I've been reading up on NTSX and I would like to dip my toe into the water by devoting one of my Roth IRA's (my smallest account) to a strategy that uses this fund. For those of you who are not familiar, there are many other threads that discuss the fund on bogleheads, but in a nutshell it's a 1.5x leveraged fund that aims to provide returns and risk consistent with a 60/40 stock/bond portfolio. (The way it works, as I understand it, is it invests 90% in S&P 500, and creates a 60% bond exposure by investing the remaining 10% in futures contracts with effective leverage of 6x. The net result is 90% allocation to stocks, 60% allocation to fixed income -- which is basically a 60/40 portfolio juiced with 50% leverage.)

There are perhaps many ways to use this fund in a portfolio. One way is to simply buy the fund outright and have effectively a 90/60 allocation. However, as I understand it, the intended purpose of the fund is a little different-- specifically, its goal is to create some headroom in your portfolio to invest in alternatives, while still capturing similar returns of a 60/40 portfolio. One idea I've heard suggested is to allocate 2/3rds of your portfolio to NTSX (which should give you similar returns to the entire portfolio invested in 60/40 allocation) -- and this leaves 1/3rd of your portfolio to invest in "something else" (and it's suggested that some kind of alternative investments would be a good choice, which would balance the portfolio by adding expected return, while further reducing overall portfolio risk).

What I'm trying to figure out is what is the "something else" that I want to pair with NTSX in this manner. (Just for simplicity, I would probably do something closer to 70/30, rather than the above-mentioned 2/3rds, 1/3rds.) I've thought about a REIT ETF, but two issues-- (a) correlation can still be very high to general stocks, and (b) I can't imagine doing such a large percentage to REIT's. I've considered doing something like long-term treasuries just to get the low correlation, but I'm concerned that I'm sort of negating the purpose by doing that. I'm leaning towards something along the lines of a buy/write, or long/short, etc., but haven't come across an option yet that looks compelling.

So, question to bogleheads-- what alternatives do you think should be considered? Any ETF or fund ideas that might fit well with this approach?

Thanks
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Re: What to pair with NTSX?

Post by dru808 »

Portfolio7 wrote: Mon Jan 27, 2020 9:52 pm Great question. I can only invest in NTSX via my IRAs. I have one IRA for $10K invested 25% each:
NTSX 90/60,
ACWV Global Min vol
MTUM Momentum
ONEQ Nasdaq

This is not a strategy, this is a non-random assortment of funds that I'm watching and trying to understand a little better. I do think NTSX pairs well with ACWV. As for momentum, well there seem to be a lot of years where both momentum and min vol are really good, or both are really bad, though there are also some where they are at opposite ends of the spectrum, so I'm not sure if there's much of a relationship there really. ONEQ just because I think there's a fair amount of growth yet to happen here, and this small portfolio is where I can take some risks.
You are the first person I’ve seen holding oneq on this board. I have some qqq.

I’ve been contemplating switching it to oneq for a few months but it’s held about 25% of its assets it’s number one holding in cash. Do you know why it’s holding so much cash for so long? Qqq holds very little cash.
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Re: What to pair with NTSX?

Post by Portfolio7 »

dru808 wrote: Tue Jan 28, 2020 7:40 pm
Portfolio7 wrote: Mon Jan 27, 2020 9:52 pm Great question. I can only invest in NTSX via my IRAs. I have one IRA for $10K invested 25% each:
NTSX 90/60,
ACWV Global Min vol
MTUM Momentum
ONEQ Nasdaq

This is not a strategy, this is a non-random assortment of funds that I'm watching and trying to understand a little better. I do think NTSX pairs well with ACWV. As for momentum, well there seem to be a lot of years where both momentum and min vol are really good, or both are really bad, though there are also some where they are at opposite ends of the spectrum, so I'm not sure if there's much of a relationship there really. ONEQ just because I think there's a fair amount of growth yet to happen here, and this small portfolio is where I can take some risks.
You are the first person I’ve seen holding oneq on this board. I have some qqq.

I’ve been contemplating switching it to oneq for a few months but it’s held about 25% of its assets it’s number one holding in cash. Do you know why it’s holding so much cash for so long? Qqq holds very little cash.
I frankly bought it because there was no commission. It's a tiny sliver of my total portfolio, so I never gave it a lot of thought, but it seems to be doing what it ought. I know it tracks the Nasdaq Composite instead of the N 100. I think it generally puts about 15% in Nasdaq Futures and 80% or so in individual stock holdings, and maybe 5% in Treasuries.
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Re: What to pair with NTSX?

Post by dru808 »

Portfolio7 wrote: Tue Jan 28, 2020 10:24 pm
dru808 wrote: Tue Jan 28, 2020 7:40 pm
Portfolio7 wrote: Mon Jan 27, 2020 9:52 pm Great question. I can only invest in NTSX via my IRAs. I have one IRA for $10K invested 25% each:
NTSX 90/60,
ACWV Global Min vol
MTUM Momentum
ONEQ Nasdaq

This is not a strategy, this is a non-random assortment of funds that I'm watching and trying to understand a little better. I do think NTSX pairs well with ACWV. As for momentum, well there seem to be a lot of years where both momentum and min vol are really good, or both are really bad, though there are also some where they are at opposite ends of the spectrum, so I'm not sure if there's much of a relationship there really. ONEQ just because I think there's a fair amount of growth yet to happen here, and this small portfolio is where I can take some risks.
You are the first person I’ve seen holding oneq on this board. I have some qqq.

I’ve been contemplating switching it to oneq for a few months but it’s held about 25% of its assets it’s number one holding in cash. Do you know why it’s holding so much cash for so long? Qqq holds very little cash.
I frankly bought it because there was no commission. It's a tiny sliver of my total portfolio, so I never gave it a lot of thought, but it seems to be doing what it ought. I know it tracks the Nasdaq Composite instead of the N 100. I think it generally puts about 15% in Nasdaq Futures and 80% or so in individual stock holdings, and maybe 5% in Treasuries.

Fidelity says cash, Morningstar says cash, m1 is showing nasdaq 100 mini futures. I think you’re right.
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Re: What to pair with NTSX?

Post by Uncorrelated »

I don't think you should "pair" NTSX with anything that you shouldn't pair a normal 60/40 fund with. NTSX is a cheap and straightforward form of leverage, which is great if you want to use leverage to hold more stocks. But quite irrelevant if you just want to tilt to value/small cap value/commodities/low vol.

If you're interested into leveraging and tilting, you might be better off with an allocation of 10 to 20% TMF (3x leveraged 20 year treasuries). This gives you the remainder of your portfolio to do whatever you want, as similar cost to NTSX. You can use the rest of your portfolio to invest in -say- 50% international, 25% US small cap value and 25% US total stock market.


Just don't tilt to REIT's. Or momentum. Or sector indices. Or long term treasuries in excess of what's already in NTSX.
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Re: What to pair with NTSX?

Post by oldcomputerguy »

siriusblack wrote: Mon Jan 27, 2020 9:47 am I've been reading up on NTSX and I would like to dip my toe into the water by devoting one of my Roth IRA's (my smallest account) to a strategy that uses this fund. For those of you who are not familiar, there are many other threads that discuss the fund on bogleheads, but in a nutshell it's a 1.5x leveraged fund that aims to provide returns and risk consistent with a 60/40 stock/bond portfolio.
I think I must be misunderstanding something. If the objective is "to provide returns and risk consistent with a 60/40 stock/bond portfolio", why not just invest in 60% stocks and 40% bonds? What am I missing? What is the advantage to using this fund versus, say, 60% VTSAX and 40% VBTLX, if returns and risk are similar?
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Re: What to pair with NTSX?

Post by Chicken Little »

Apologies in advance...

There are many threads asking "What did you learn in 2000 and 2008?".

It's this, right? It's this very thing.

This is it, it's here now, all over bogleheads...everybody levering up long.

This is a discovery? This is something the hedge fund guys don't know? This is a new found way to print money?

It's ridiculous (I'm forthright is saying I don't participate, I actually TRY to earn substantially less that the S&P500 through a relatively conservative asset allocation, I LIKE seeing HEDGEFUNDIE do well, I am far behind, but on track, and past the most important milestones, no regrets, couldn't participate in a meaningful way even if I wanted to, couldn't stomach it). Step back and consider the premise. You've figured it out. Not the people selling these instruments. Not the legion of PhDs trying to beat the market. You. With a retail product anybody can buy?

And if it all goes wrong, you'll just bail, right? I mean, it'll be fine when everybody heads for the exit at the same time, right? Plus you won't need to, because you hold long treasury exposure and everybody is going to want all the new long US treasury issuances when the sh_t hits the fan, because of back test.

I remember in 2000, there was a guy interviewed on local TV news. Started trading options on paper. Actually very disciplined and rational approach. Got to the point where he was right 80% of the time. Started making real bets. Started making real money. After his actual job, the thing he trained to do and had human capital invested in, started to get in-the-way of him making money, of course he quit to trade options full time. I have no idea where that guy is, but I doubt he was 80% after the NASDAQ implosion. I doubt he just "took the other side".

What did 2000 feel like? Feels like right now.
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Re: What to pair with NTSX?

Post by caklim00 »

Uncorrelated wrote: Wed Jan 29, 2020 3:08 am I don't think you should "pair" NTSX with anything that you shouldn't pair a normal 60/40 fund with. NTSX is a cheap and straightforward form of leverage, which is great if you want to use leverage to hold more stocks. But quite irrelevant if you just want to tilt to value/small cap value/commodities/low vol.

If you're interested into leveraging and tilting, you might be better off with an allocation of 10 to 20% TMF (3x leveraged 20 year treasuries). This gives you the remainder of your portfolio to do whatever you want, as similar cost to NTSX. You can use the rest of your portfolio to invest in -say- 50% international, 25% US small cap value and 25% US total stock market.


Just don't tilt to REIT's. Or momentum. Or sector indices. Or long term treasuries in excess of what's already in NTSX.
For someone taking this approach I think they'd be better off purchasing an equivalent amount of 5 or 10 year treasury futures. This would mimic the NTSX holdings better than TMF.
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Re: What to pair with NTSX?

Post by muffins14 »

Chicken Little wrote: Wed Jan 29, 2020 5:10 am Apologies in advance...

There are many threads asking "What did you learn in 2000 and 2008?".

It's this, right? It's this very thing.

This is it, it's here now, all over bogleheads...everybody levering up long.

This is a discovery? This is something the hedge fund guys don't know? This is a new found way to print money?

It's ridiculous (I'm forthright is saying I don't participate, I actually TRY to earn substantially less that the S&P500 through a relatively conservative asset allocation, I LIKE seeing HEDGEFUNDIE do well, I am far behind, but on track, and past the most important milestones, no regrets, couldn't participate in a meaningful way even if I wanted to, couldn't stomach it). Step back and consider the premise. You've figured it out. Not the people selling these instruments. Not the legion of PhDs trying to beat the market. You. With a retail product anybody can buy?

And if it all goes wrong, you'll just bail, right? I mean, it'll be fine when everybody heads for the exit at the same time, right? Plus you won't need to, because you hold long treasury exposure and everybody is going to want all the new long US treasury issuances when the sh_t hits the fan, because of back test.

I remember in 2000, there was a guy interviewed on local TV news. Started trading options on paper. Actually very disciplined and rational approach. Got to the point where he was right 80% of the time. Started making real bets. Started making real money. After his actual job, the thing he trained to do and had human capital invested in, started to get in-the-way of him making money, of course he quit to trade options full time. I have no idea where that guy is, but I doubt he was 80% after the NASDAQ implosion. I doubt he just "took the other side".

What did 2000 feel like? Feels like right now.
There are no leveraged long equities in this fund.
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Chicken Little
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Re: What to pair with NTSX?

Post by Chicken Little »

muffins14 wrote: Wed Jan 29, 2020 8:40 amThere are no leveraged long equities in this fund.
You made me look...

The WisdomTree 90/60 U.S. Balanced Fund (NTSX) takes a unique approach to balanced fund investing. The Fund offers investors a risk profile that is similar to the traditional 60/40 portfolio with the potential for enhanced returns and increased tax potential. The 90/60 strategy has the potential to enhance total returns while also helping dampen volatility by combining 90% equities, 10% short-term fixed income plus a 60% Treasury futures overlay to help boost capital efficiency.

So you get the reward of 90% equity with the risk of 60/40?

It’s all the same to me...if I can earn some money with an index, wouldn’t I be stupid not to earn more with this?

Good luck.
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siriusblack
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Re: What to pair with NTSX?

Post by siriusblack »

Chicken Little wrote: Wed Jan 29, 2020 5:10 am Apologies in advance...

There are many threads asking "What did you learn in 2000 and 2008?".

It's this, right? It's this very thing.

This is it, it's here now, all over bogleheads...everybody levering up long.

This is a discovery? This is something the hedge fund guys don't know? This is a new found way to print money?

It's ridiculous (I'm forthright is saying I don't participate, I actually TRY to earn substantially less that the S&P500 through a relatively conservative asset allocation, I LIKE seeing HEDGEFUNDIE do well, I am far behind, but on track, and past the most important milestones, no regrets, couldn't participate in a meaningful way even if I wanted to, couldn't stomach it). Step back and consider the premise. You've figured it out. Not the people selling these instruments. Not the legion of PhDs trying to beat the market. You. With a retail product anybody can buy?

And if it all goes wrong, you'll just bail, right? I mean, it'll be fine when everybody heads for the exit at the same time, right? Plus you won't need to, because you hold long treasury exposure and everybody is going to want all the new long US treasury issuances when the sh_t hits the fan, because of back test.

I remember in 2000, there was a guy interviewed on local TV news. Started trading options on paper. Actually very disciplined and rational approach. Got to the point where he was right 80% of the time. Started making real bets. Started making real money. After his actual job, the thing he trained to do and had human capital invested in, started to get in-the-way of him making money, of course he quit to trade options full time. I have no idea where that guy is, but I doubt he was 80% after the NASDAQ implosion. I doubt he just "took the other side".

What did 2000 feel like? Feels like right now.
No need to apologize. Comments like this are the reason why I come to this forum.

Two things I would say:

(1) Overall I'm a hugely risk averse investor. In fact, that's the reason why I'm interested in this approach. It gives me perhaps a better opportunity to participate in the market while still staying conservative.

(2) I recognize the risk conditions that would "break" this approach. That's why the majority (90%) of my portfolio is boring boglehead-style with relatively conservative allocation (hovering in the neighborhood of 55/45 these days).
Texanbybirth
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Re: What to pair with NTSX?

Post by Texanbybirth »

oldcomputerguy wrote: Wed Jan 29, 2020 4:58 am
siriusblack wrote: Mon Jan 27, 2020 9:47 am I've been reading up on NTSX and I would like to dip my toe into the water by devoting one of my Roth IRA's (my smallest account) to a strategy that uses this fund. For those of you who are not familiar, there are many other threads that discuss the fund on bogleheads, but in a nutshell it's a 1.5x leveraged fund that aims to provide returns and risk consistent with a 60/40 stock/bond portfolio.
I think I must be misunderstanding something. If the objective is "to provide returns and risk consistent with a 60/40 stock/bond portfolio", why not just invest in 60% stocks and 40% bonds? What am I missing? What is the advantage to using this fund versus, say, 60% VTSAX and 40% VBTLX, if returns and risk are similar?
This is a good quick read from the advisor. Basically, they're saying you can get a typical 60/40 portfolio with "exposure" of only 2/3 of your assets, freeing up 1/3 of your assets for other investments.

Obviously if you're inclined to choose 60/40 only (which I have no problem with), then this fund isn't for you.
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nullisland
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Re: What to pair with NTSX?

Post by nullisland »

oldcomputerguy wrote: Wed Jan 29, 2020 4:58 am I think I must be misunderstanding something. If the objective is "to provide returns and risk consistent with a 60/40 stock/bond portfolio", why not just invest in 60% stocks and 40% bonds? What am I missing? What is the advantage to using this fund versus, say, 60% VTSAX and 40% VBTLX, if returns and risk are similar?
Chicken Little wrote: Wed Jan 29, 2020 9:03 am So you get the reward of 90% equity with the risk of 60/40?

It’s all the same to me...if I can earn some money with an index, wouldn’t I be stupid not to earn more with this?
There's nothing magic happening here, on its own NTSX is unquestionably more risky than a 60/40 portfolio. It's similar in the sense that it should have roughly the same Sharpe ratio, but it has 1.5x the risk and return.

To answer the OP's question, one way to use this fund would be to hold 2/3 in NTSX and 1/3 in something like tax-free muni bonds. If the muni bonds return more than the financing rate of the futures you come out slightly ahead of a regular 60/40 portfolio with similar risk.

Historically a 60/40 portfolio has been more efficient than 100% stock (much lower risk, moderately lower returns), so compared to 100% stock a 1.5x version of 60/40 has in the past had higher returns than and lower risk. It's still riskier than a regular unleveraged 60/40 portfolio, though.

One risk as an example to show that this isn't an automatic free lunch: if stocks and treasury bonds both decline at the same time this will probably lose more money than both the 100% stock and 60/40 portfolios. Holding this fund is a bet that the risk-adjusted return benefits of a 60/40 portfolio will continue in the future. I think this is a good bet, but it's not guaranteed.

EDIT: Using a simulated version of what NTSX holds, here's a comparison of 90/60, 60/40, 100% stock, and a mix of 90/60 and tax-free munis, as an example of how each of these performs: https://www.portfoliovisualizer.com/bac ... ion6_3=-50
Last edited by nullisland on Wed Jan 29, 2020 10:20 am, edited 1 time in total.
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siriusblack
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Re: What to pair with NTSX?

Post by siriusblack »

Pulled the trigger today on this. Only one of my Roth IRA's (< 5% of total net worth... the majority still in 55/45 boglehead-style portfolio, with a few other exceptions for my entertainment and/or education).

70% NTSX
20% Vanguard Long-Term Treasuries ETF
10% Vanguard Real Estate ETF

https://www.portfoliovisualizer.com/bac ... tion3_1=10
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Re: What to pair with NTSX?

Post by Lee_WSP »

Chicken Little wrote: Wed Jan 29, 2020 9:03 am So you get the reward of 90% equity with the risk of 60/40?

It’s all the same to me...if I can earn some money with an index, wouldn’t I be stupid not to earn more with this?

Good luck.
Not quite. You get the rewards & risk of 90% equity with the benefit of having an extra 60% bonds.

Compared to a 60/40 un-leveraged portfolio, the draw downs are positively disastrous.

https://www.portfoliovisualizer.com/bac ... ion3_1=-50
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Re: What to pair with NTSX?

Post by MotoTrojan »

siriusblack wrote: Wed Jan 29, 2020 10:12 am Pulled the trigger today on this. Only one of my Roth IRA's (< 5% of total net worth... the majority still in 55/45 boglehead-style portfolio, with a few other exceptions for my entertainment and/or education).

70% NTSX
20% Vanguard Long-Term Treasuries ETF
10% Vanguard Real Estate ETF

https://www.portfoliovisualizer.com/bac ... tion3_1=10
Wouldn’t REITs do poorly in a rising rate environment? I feel like you’d do better with gold or small-value for the extra 10%. Maybe even international small-value for deeper diversification. Could get more duration leverage with EDV too, leaving room for more diversifiers.
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Re: What to pair with NTSX?

Post by Lee_WSP »

MotoTrojan wrote: Wed Jan 29, 2020 10:20 am
siriusblack wrote: Wed Jan 29, 2020 10:12 am Pulled the trigger today on this. Only one of my Roth IRA's (< 5% of total net worth... the majority still in 55/45 boglehead-style portfolio, with a few other exceptions for my entertainment and/or education).

70% NTSX
20% Vanguard Long-Term Treasuries ETF
10% Vanguard Real Estate ETF

https://www.portfoliovisualizer.com/bac ... tion3_1=10
Wouldn’t REITs do poorly in a rising rate environment? I feel like you’d do better with gold or small-value for the extra 10%. Maybe even international small-value for deeper diversification. Could get more duration leverage with EDV too, leaving room for more diversifiers.
Or just go all in.
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Re: What to pair with NTSX?

Post by rascott »

Chicken Little wrote: Wed Jan 29, 2020 9:03 am
muffins14 wrote: Wed Jan 29, 2020 8:40 amThere are no leveraged long equities in this fund.
You made me look...

The WisdomTree 90/60 U.S. Balanced Fund (NTSX) takes a unique approach to balanced fund investing. The Fund offers investors a risk profile that is similar to the traditional 60/40 portfolio with the potential for enhanced returns and increased tax potential. The 90/60 strategy has the potential to enhance total returns while also helping dampen volatility by combining 90% equities, 10% short-term fixed income plus a 60% Treasury futures overlay to help boost capital efficiency.

So you get the reward of 90% equity with the risk of 60/40?

It’s all the same to me...if I can earn some money with an index, wouldn’t I be stupid not to earn more with this?

Good luck.

It's 1.5x the risk of 60/40.....that may or may not me be a better risk/reward than a 100% equity portfolio.... if you are just holding it alone.

There aren't many people on here just leveraging up just long equities (other than the young, lifecycle investors). Most are leveraging some sort of balanced portfolio.... under the assumption that it's a better risk/reward than just being 100% equity. It certainly has been in the past 40 years..... the risk is that both bonds and stocks fall together.... for a prolonged period (some 1970s era stagflation).... that would be a very poor outcome for these strategies.
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Re: What to pair with NTSX?

Post by oldcomputerguy »

nullisland wrote: Wed Jan 29, 2020 10:07 am There's nothing magic happening here, on its own NTSX is unquestionably more risky than a 60/40 portfolio. It's similar in the sense that it should have roughly the same Sharpe ratio, but it has 1.5x the risk and return.
That's what I was missing. The way I read the above, the risk and return of the fund was basically the same as the risk and return of a 60/40 portfolio, so I couldn't see the point. Added return with more risk makes sense. Thanks.
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Re: What to pair with NTSX?

Post by willthrill81 »

oldcomputerguy wrote: Wed Jan 29, 2020 10:39 am
nullisland wrote: Wed Jan 29, 2020 10:07 am There's nothing magic happening here, on its own NTSX is unquestionably more risky than a 60/40 portfolio. It's similar in the sense that it should have roughly the same Sharpe ratio, but it has 1.5x the risk and return.
That's what I was missing. The way I read the above, the risk and return of the fund was basically the same as the risk and return of a 60/40 portfolio, so I couldn't see the point. Added return with more risk makes sense. Thanks.
I'm not convinced that NTSX merely offers 50% more risk and return than a 60/40 portfolio. If it did, then the Sharpe ratio should be about the same for both. But over the admittedly brief history of NTSX, that hasn't been the case. The Sharpe ratio for NTSX since September of 2017 was .78, whereas it was .69 for a 60/40 of VTSAX/VBTLX.

Further, over the same period, NTSX provided higher returns than VTSAX (12.72% vs. 9.11%) but a lower drawdown as well (-11.24% vs. -14.26%). That doesn't look like merely ramping up risk and returns to me.
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Re: What to pair with NTSX?

Post by nullisland »

willthrill81 wrote: Wed Jan 29, 2020 10:46 am I'm not convinced that NTSX merely offers 50% more risk and return than a 60/40 portfolio. If it did, then the Sharpe ratio should be about the same for both. But over the admittedly brief history of NTSX, that hasn't been the case. The Sharpe ratio for NTSX since September of 2017 was .78, whereas it was .69 for a 60/40 of VTSAX/VBTLX.
NTSX holds treasury futures, VBTLX includes corporate bonds. If you use a mix of short, intermediate, and long-term treasuries on the bond side I get .78 vs .75, closer to what I think you're expecting.
Further, over the same period, NTSX provided higher returns than VTSAX (12.72% vs. 9.11%) but a lower drawdown as well (-11.24% vs. -14.26%). That doesn't look like merely ramping up risk and returns to me.
It ramps up the risk and return relative to an unleveraged 60/40 portfolio. Compared to VTSAX, over the long run I'd expect it to have slightly higher returns and slightly lower volatility like you show, with occasional periods of underperformance on both metrics.
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Re: What to pair with NTSX?

Post by willthrill81 »

nullisland wrote: Wed Jan 29, 2020 10:59 am
willthrill81 wrote: Wed Jan 29, 2020 10:46 am Further, over the same period, NTSX provided higher returns than VTSAX (12.72% vs. 9.11%) but a lower drawdown as well (-11.24% vs. -14.26%). That doesn't look like merely ramping up risk and returns to me.
It ramps up the risk and return relative to an unleveraged 60/40 portfolio. Compared to VTSAX, over the long run I'd expect it to have slightly higher returns and slightly lower volatility like you show, with occasional periods of underperformance on both metrics.
That's what I'm thinking as well. If NTSX can provide higher returns than VTSAX and lower volatility over the long-term, that seems like a slam dunk to me. But I still think that it's too early to say that with much confidence.
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Re: What to pair with NTSX?

Post by rascott »

willthrill81 wrote: Wed Jan 29, 2020 11:06 am
nullisland wrote: Wed Jan 29, 2020 10:59 am
willthrill81 wrote: Wed Jan 29, 2020 10:46 am Further, over the same period, NTSX provided higher returns than VTSAX (12.72% vs. 9.11%) but a lower drawdown as well (-11.24% vs. -14.26%). That doesn't look like merely ramping up risk and returns to me.
It ramps up the risk and return relative to an unleveraged 60/40 portfolio. Compared to VTSAX, over the long run I'd expect it to have slightly higher returns and slightly lower volatility like you show, with occasional periods of underperformance on both metrics.
That's what I'm thinking as well. If NTSX can provide higher returns than VTSAX and lower volatility over the long-term, that seems like a slam dunk to me. But I still think that it's too early to say that with much confidence.

It may well look like that.... for a very long time..... until it doesn't. Any full assessment must keep in mind the tail risk of this fund.... where bonds and equities fall in unison... for a prolonged period. Now that may never occur... and if so it'll be smooth sailing for NTSX.
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Re: What to pair with NTSX?

Post by columbia »

rascott wrote: Wed Jan 29, 2020 11:12 am
willthrill81 wrote: Wed Jan 29, 2020 11:06 am
nullisland wrote: Wed Jan 29, 2020 10:59 am
willthrill81 wrote: Wed Jan 29, 2020 10:46 am Further, over the same period, NTSX provided higher returns than VTSAX (12.72% vs. 9.11%) but a lower drawdown as well (-11.24% vs. -14.26%). That doesn't look like merely ramping up risk and returns to me.
It ramps up the risk and return relative to an unleveraged 60/40 portfolio. Compared to VTSAX, over the long run I'd expect it to have slightly higher returns and slightly lower volatility like you show, with occasional periods of underperformance on both metrics.
That's what I'm thinking as well. If NTSX can provide higher returns than VTSAX and lower volatility over the long-term, that seems like a slam dunk to me. But I still think that it's too early to say that with much confidence.

It may well look like that.... for a very long time..... until it doesn't. Any full assessment must keep in mind the tail risk of this fund.... where bonds and equities fall in unison... for a prolonged period. Now that may never occur... and if so it'll be smooth sailing for NTSX.
We’re all in trouble if that happens, however.
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Re: What to pair with NTSX?

Post by mr.masku »

willthrill81 wrote: Wed Jan 29, 2020 10:46 am
oldcomputerguy wrote: Wed Jan 29, 2020 10:39 am
nullisland wrote: Wed Jan 29, 2020 10:07 am There's nothing magic happening here, on its own NTSX is unquestionably more risky than a 60/40 portfolio. It's similar in the sense that it should have roughly the same Sharpe ratio, but it has 1.5x the risk and return.
That's what I was missing. The way I read the above, the risk and return of the fund was basically the same as the risk and return of a 60/40 portfolio, so I couldn't see the point. Added return with more risk makes sense. Thanks.
I'm not convinced that NTSX merely offers 50% more risk and return than a 60/40 portfolio. If it did, then the Sharpe ratio should be about the same for both. But over the admittedly brief history of NTSX, that hasn't been the case. The Sharpe ratio for NTSX since September of 2017 was .78, whereas it was .69 for a 60/40 of VTSAX/VBTLX.

Further, over the same period, NTSX provided higher returns than VTSAX (12.72% vs. 9.11%) but a lower drawdown as well (-11.24% vs. -14.26%). That doesn't look like merely ramping up risk and returns to me.
The Sharpe Ratios for a Simulated NTSX and an Actual 60/40 Portfolio over a longer duration are the same, at 0.64.
https://www.portfoliovisualizer.com/bac ... ion3_1=-50
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Re: What to pair with NTSX?

Post by PluckyDucky »

mr.masku wrote: Wed Jan 29, 2020 11:55 am The Sharpe Ratios for a Simulated NTSX and an Actual 60/40 Portfolio over a longer duration are the same, at 0.64.
https://www.portfoliovisualizer.com/bac ... ion3_1=-50
Is there data available to go back to 1955-1982 (the bad bonds period) to look at how it did?
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Re: What to pair with NTSX?

Post by Portfolio7 »

Lee_WSP wrote: Wed Jan 29, 2020 10:24 am
MotoTrojan wrote: Wed Jan 29, 2020 10:20 am
siriusblack wrote: Wed Jan 29, 2020 10:12 am Pulled the trigger today on this. Only one of my Roth IRA's (< 5% of total net worth... the majority still in 55/45 boglehead-style portfolio, with a few other exceptions for my entertainment and/or education).

70% NTSX
20% Vanguard Long-Term Treasuries ETF
10% Vanguard Real Estate ETF

https://www.portfoliovisualizer.com/bac ... tion3_1=10
Wouldn’t REITs do poorly in a rising rate environment? I feel like you’d do better with gold or small-value for the extra 10%. Maybe even international small-value for deeper diversification. Could get more duration leverage with EDV too, leaving room for more diversifiers.
Or just go all in.

That would bump the risk characteristics a lot for a 5% additional gain. Another approach:
70% NTSX
10% LT Treasuries (The extra 10% in the 20% treasuries doesn't get you that much additional protection.)
10% VMNVX (high efficiency)
5% MTUM (combine with Min vol)
5% VNQ (Since the original portfolio had some RE. This could also just be more vmnvx or MTUM)
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Re: What to pair with NTSX?

Post by mr.masku »

siriusblack wrote: Wed Jan 29, 2020 10:12 am Pulled the trigger today on this. Only one of my Roth IRA's (< 5% of total net worth... the majority still in 55/45 boglehead-style portfolio, with a few other exceptions for my entertainment and/or education).

70% NTSX
20% Vanguard Long-Term Treasuries ETF
10% Vanguard Real Estate ETF

https://www.portfoliovisualizer.com/bac ... tion3_1=10
The way I see this particular AA:

Stocks/Bonds/Cash
NTSX 70%: 63/42/-35
LTT 20%: 0/20/0
VNQ 20%: 20/0/0

Overall: 83/62/-35, so 57/43 Stocks/Bonds with 1.45x Leverage.
Good to be aware of the 1.45x overall leverage - could be fine for some, not for others.
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Re: What to pair with NTSX?

Post by MotoTrojan »

oldcomputerguy wrote: Wed Jan 29, 2020 10:39 am
nullisland wrote: Wed Jan 29, 2020 10:07 am There's nothing magic happening here, on its own NTSX is unquestionably more risky than a 60/40 portfolio. It's similar in the sense that it should have roughly the same Sharpe ratio, but it has 1.5x the risk and return.
That's what I was missing. The way I read the above, the risk and return of the fund was basically the same as the risk and return of a 60/40 portfolio, so I couldn't see the point. Added return with more risk makes sense. Thanks.
Nope that is false. You are directly holding 90% S&P500 which is clearly more risky than 60/40. If you held 33.3% t-bills (cash) with 66.6% NTSX then yes indeed you'd essentially have a standard 60/40 portfolio, minus the expense ratio.
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Re: What to pair with NTSX?

Post by Uncorrelated »

PluckyDucky wrote: Wed Jan 29, 2020 12:00 pm
mr.masku wrote: Wed Jan 29, 2020 11:55 am The Sharpe Ratios for a Simulated NTSX and an Actual 60/40 Portfolio over a longer duration are the same, at 0.64.
https://www.portfoliovisualizer.com/bac ... ion3_1=-50
Is there data available to go back to 1955-1982 (the bad bonds period) to look at how it did?
By definition, leveraging up the portfolio by borrowing against the risk free rate (which is what happens in that particular simulation) does not affect the sharpe ratio.

I plugged the numbers into simba's backtesting spreadsheet since 1934 (prior to 1934, a there is no decent benchmark for the risk-free rate available) and found 50% higher drawdowns, 50% higher standard deviation and 40% higher real return than 60/40. The CAGR is is slightly higher than 100% stocks at slightly lower standard deviation, but slightly higher max drawdown (in 1974).

Honestly, it's not that impressive. The entire appeal of total bond market is that 100% stocks is too risky, so you use only 60% stocks and fill up the rest of the space with a fund that has low returns. But if you borrow money to leverage total bond market (which is basically what NTSX is doing) then you're basically flipping pennies. I expect this approach to be slightly better than 100/0, but it really boils down to 0.1% or 0.2% annually, depending on how good the order execution is at the bond side.

This is fund to replace 100/0 or 90/10 for people that don't believe in factors, not a fund to replace 60/40. The leverage adds more risk, you're probably being compensated for this extra risk, but it's more risk nonetheless.
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Re: What to pair with NTSX?

Post by Lee_WSP »

I think vs a Total Market fund that NTSX is a good way to go for an accumulator. Probably not the best idea for wealth preservation.
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