muffins14 wrote: ↑Fri Jan 31, 2020 7:17 pm
It feels non-intuitive that TMF would be preferred over EDV. Is the 24 year duration of EDV that much more problematic than 18 on TLT/TMF in terms of some anomaly at higher duration, or volatility decay?
I currently get about half my bond exposure from NTSX, and half from EDV, for a total of 28% on a portfolio that's 87% equity and 28% bonds (leverage via ntsx)
Happy to learn if others think it would be more efficient to use another approach rather than NTSX+EDV, since my goal isn't to be at or above 100% equity, but I'd like to maintain my tilt toward SCV and am clearly too lazy to roll my own futures.
I'm also not confident enough on the factor side to lean into something heavier than 60% SCV, nor do I think I have the appetite go with TMF as the bond portion due to the higher expense ratio ... maybe I'm being too difficult
current portfolio is exactly like the one you think is suboptimal:
25% us SCV
15% international SCV
To be clear, the reason why “TMF is preferred over EDV” is purely based on past data. As Uncorrolated says, it’s a bet-against-beta anomaly. Here’s some things to consider:
1) Nothing EDV-like existed back in those periods. It’s all artificial, simulated data.
2) Even if it did exist, it will only continue to exist from limits to arbitrage (as there is no risk-based explanation AFAIK). If every one could freely swap things like EDV for things like leveraged bonds, they would. So it relies on institutions being unable to arbitrage this away so retail benefits.
3) Even if it did exist back then, and the limits of arbitrage stayed, this requires a similar level of faith to the bet against beta stock anomaly (know as Low Volatility). Do you invest in that too? If you don’t, whatever reasons you used most likely apply here here too.
My take? Leveraged bonds, EDV, etc is getting into extremely nit picky, optimize-past-data, data mining, cute analysis. You will come to your own conclusions but just wanted to give you a little bit of perspective.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson