QQQ - I Came Back From A Trip To Africa With These 3 Timely ETF Ideas

2023-07-05 18:10:08 ET

Summary

• We took a “bucket list” trip to Africa to see the “Great Migration,” the annual wildlife journey. It prompted several market outlook ideas.
• I offer views on several ETFs for investors to consider researching including RPAR, UTWO, and NUSI, each embodying the traits of different animals.
• My bottom-line outlook and view: Today’s markets are different. Be proactive, consider multiple scenarios, be ready for each one, and consider the potential for "tail risk events."

Normally, I don’t mix personal life with my writing. But after a 10-day, adventure-filled “bucket list” trip to Serengeti National Park in Tanzania, by way of Kigali, Rwanda, where we picked up my brother-in-law and fellow Seeking Alpha contributor Alex Rosen and his family, I couldn’t resist sharing some of my thoughts here.

We went to see the “Great Migration,” the annual trek undertaken en masse by a variety of wildlife from their winter locations to their summer homes. If you thought that only humans did this? Guess again! The picture attached to this article is typical of the hundreds we took on the trip.

I tend to analogize nearly everything in life to investing, and often to under-the-radar ETFs, my chosen focus area on this platform. So, here's an African safari-inspired short list of ETFs that I think investors should have on their watchlist. My bottom line message: ETF Investors should be more like giraffes, less like wildebeests. This will be much clearer after you read below.

Wild Animals and ETFs: First, the giraffe

Giraffes are incredible animals, especially up close. And since our family tends to be on the tall side (Alex is 6’5” and I'm 6’4” and our wives are each 5’7”) so between that an our kids (mine grown, his younger), we have a natural affinity to these majestic creatures. Alex kept joking that the cell towers were located on their heads.

As a career professional investor, I thought about how the giraffe reminds me of a vital aspect of investing, particular for ETF geeks like me. That is, just like the giraffe takes full advantage of their height to get a wide-ranging field of vision, so too should investors seek to have as wide a perspective as possible in their research. I’ve answered many hundreds of questions and comments from Seeking Alpha subscribers since I joined the platform late last year. And the No. 1 common thread I see that I’d like to see changed is this: Too many investors take an attitude of “I’ve done my research, and I concluded that if anyone disagrees with my conclusions, they are an idiot.”

Few if any successful investors survive the jungle that is modern investment markets with this attitude. Furthermore, we all tend to get caught up in the “right now” aspect of investing. Modern markets demand that we follow short-term trends more closely than in the past, since the speed and magnitude of such moves has accelerated in recent years. But you can’t beat the giraffe-eye view when it comes to spotting opportunity and protecting capital.

A giraffe-like ETF to research

RPAR Risk Parity ETF ( RPAR ) manages just over $1 billion and allocates across four asset classes: TIPS, equities, commodities and US Treasuries, with the goal of providing risk-adjusted returns over time. It rebalances quarterly, which may allow it to buy low and sell high during times of market turbulence. While I personally allocate each part of my portfolio, thus playing the role of detailed asset allocator, I like RPAR’s approach of spreading out risk in a way that foregoes the traditional stock/bond allocation mix. I think Treasuries are going to be head and shoulders above “credit” bonds for a while, in terms of reward-risk trade off.

The chart above shows that RPAR has done a nice job of outperforming the corporate bond index, at a time when the corporate bond market has struggled. I'm not a huge fan of RPAR specifically, but I'm a fan of approaches that bypass the standard stock/bond paradigm. Because I think the 60/40 portfolio strategy of the past is going to be a losing proposition for a while.

Why? Because you might get a higher yield in corporates and high-yield bonds, but those come with blow up risks from a re-investment cycle that is going to hit less-well-capitalized business like a hail storm in 2024. Imagine being a CFO of a so-called “zombie” company that's only still in business because they could borrow for several years at rates of 3% or so. Now, those bonds are coming due, and the re-investment rate is going to be more like 7%, or higher.

As they say in the Serengeti when you walk up to a lion and say hello…good luck with that! You won’t make it out of that scene safely, I promise. So too are many zombie corporations living on borrowed time, so to speak.

Elephants and ETFs

The elephant in the room, so to speak - interest rates. The degree to which short-term bonds, particularly US Treasuries, are priced to pull in wealth from the stock market, from banks and from lower credit/high risk/long-term bonds.

A 4.90% rate to hold 2-year UST’s provides a very competitive core portfolio for many retirees. At some point, the markets are going to react to that, and I suspect that when they do, it will happen at break-neck speed. So, don’t ignore the elephant in the room.

RBB Fund, Inc. - US Treasury 2 Year Note ETF ( UTWO ) invests in the most recently-issued two-year note. That bond maturity is issued monthly, and the fund swaps out of the old and into the new each time, so investors always own the latest two-year note. UTWO debuted last August and has accumulated $330 million in assets. At a time when the two-year yield has gone from practically zero (where it had been for a long, long time!) to nearly 5%, this is getting too juicy to pass up for a chunk of my portfolio.

I don’t own this personally, but I very well could buy it soon. I do own iShares Treasury Floating Rate Bond ETF ( TFLO ) as well as a floating rate Treasury note directly, and a Treasury ladder I created from a few months to maturity out to nearly two years. TFLO has been a great team player in my income portfolio, since it owns bonds from three months to three years, and has seen its distribution rate climb as rates have.

The rate cycle still may have a bit to go (higher) but I believe we are nearing the point where owning the two-year through UTWO is a good complement to TFLO and the rest of the aforementioned Treasury “ladder.” The yield curve is very friendly out to about 2-3 years, and it’s getting attractive further out as 2023 continues.

This is something I'm watching carefully, since having a base return in the 5% range for a chunk of my portfolio allows me to take on a more aggressive posture with the tactical and long-term growth portions of my assets. So, use this investor-friendly interest rate cycle, the elephant in the room, to your advantage.

The Wildebeest’s message: Don’t wait til the last minute!

I barely knew what a wildebeest was prior to this trip. But after seeing thousands of the roughly two million that roam that area, I sure know them now.

Their most distinguishing personality characteristic: We noticed that they tend to be last-minute movers. They kept blocking our path through the park, and our driver nearly ran over a few by accident. So my message to investors: Don’t be a Wildebeest. This is a market climate that favors being proactive with your research, defining multiple scenarios, and making sure you are ready for each one. My ETF-related answer to this includes a variety of tactical moves I make in my own portfolio, but I searched for an ETF that embodies a similar spirit, by playing, as I say, “offense and defense at the same time,” and not dying on the proverbial sword of being a “long-term investor” as their wealth drops 20%, 30%, then 40% in bear markets.

So, for a “don’t be a wildebeest” ETF to research, I offer Convergence Long/Short Equity ETF ( CLSE ). This was a mutual fund, but converted to the ETF security format 16 months ago. This under the radar fund has $24 million in assets, allocates to both the long and short sides of the stock market, and has posted a return of over 4% so far this year, which is competitive within its peer group.

In the chart above, I think it's clear to see the value-added in uncertain markets that can be gained by a more tactical, offense-defense approach offered by ETFs like this. I have long-believed that investment management is risk management first, then everything else second. So having some mechanism to do that is paramount, at least for retired or semi-retired folks like me.

Zebra: Because sometimes, it's not a horse you hear!

These beautiful horse-like creatures have a very buddy-buddy relationship with Wildebeests. They tend to travel and migrate together. On Wall Street, there’s a common expression: When you hear hoofbeats, think horse, not zebra. Here in the midst of a very pivotal 2023 for ETF investors, I’m going to suggest making room for the Zebra in your research. Because there are too many “tail risk event” signals firing right now to do otherwise.

I have written up many tail risk, Zebra-like ETFs on Seeking Alpha, and I encourage you to look back at those. But for this article, I'm naming one I have not written about previously, but probably will in the near future.

That is Nationwide Nasdaq-100 Risk-Managed Income ETF ( NUSI ). This $450 million ETF throws off a decent yield of more than 7%, by taking the Nasdaq 100 and “collaring” it. That is, it owns the 100 stocks just as they are in the index, and surrounds that index portfolio by selling call options and buying put options. The net result is a slug of premium income, some of which is spent for “insurance” against a crash in the Invesco QQQ ETF ( QQQ ).

NUSI was originally set up like many other ETFs that write covered calls against the index. I owned it briefly in my model portfolio during early 2020, but exited when things got really rough in March, as it had no “tail risk” protection. In other words, in a rare occurrence, QQQ didn’t just have a correction, it had a crash. Those hoof beats we heard in February and March of 2020 were not a horse as usual. They were a Zebra! Thus, tail risk protection was a wealth saver.

NUSI was not equipped to handle that in 2020, and its peers were not either. But management took the additional step of adding the put purchase protection feature. And, while the jury’s still out, if you look at the first real test for the “new NUSI,” it passed with flying colors (or at least black and white stripes, like a zebra). As the chart below shows, and as investors with short memories may forget, QQQ fell around 18% very quickly from August through September, recovered half of it, and then “tested” its bottom in December. All through this time, NUSI barely broke below zero.

That put it in position to capture a lot of the QQQ recovery this year, such that its return since 11 months ago is right there with QQQ. That’s while earning a nice yield, and taking a fraction of the risk. So, as “tail risk” goes, NUSI is starting to look like a zebra to me, in an ETF world full of horses.

How to be your own king of the jungle

We saw lions, though they do a good job hiding from humans in the Serengeti. We also heard a pack of them turning a wildebeest into dinner as we tried to sleep in our tent one night. In a market like this, you probably don’t need me to tell you that you want to avoid being the chased, so to speak.

Think more like giraffes, account for those zebras, don’t ignore the elephants in the room, and skip the wildebeest impersonations. I hope this article helped to prompt some deeper thinking about today’s markets and key items to drive ETF research and portfolio management efforts as we enter 2023’s second half.

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