SVOL: This 16% Yielding Monthly Dividend ETF Is Perfect For One Type Of Investor

seekingalpha07-20

Jose Luis Pelaez IncI love high-yield ETFs, as do many of my readers and members. ETFs eliminate single-stock risk, such as buying a high-yield dividend aristocrat like Walgreens (WBA) and having the ...

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ETFs eliminate single-stock risk, such as buying a high-yield dividend aristocrat like Walgreens (WBA) and having the ...</p>\n\n<a href=\"https://seekingalpha.com/article/4704829-svol-this-16-percent-yielding-monthly-dividend-etf-is-perfect-for-one-type-of-investor\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>SVOL: This 16% Yielding Monthly Dividend ETF Is Perfect For One Type Of Investor</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nSVOL: This 16% Yielding Monthly Dividend ETF Is Perfect For One Type Of Investor\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-07-20 19:00 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4704829-svol-this-16-percent-yielding-monthly-dividend-etf-is-perfect-for-one-type-of-investor><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Jose Luis Pelaez IncI love high-yield ETFs, as do many of my readers and members. ETFs eliminate single-stock risk, such as buying a high-yield dividend aristocrat like Walgreens (WBA) and having the ...</p>\n\n<a href=\"https://seekingalpha.com/article/4704829-svol-this-16-percent-yielding-monthly-dividend-etf-is-perfect-for-one-type-of-investor\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"CTA","symbol_name":"SIMPLIFY MANAGED FUTURES STRATEGY ETF","start_time":0,"source_url":"https://seekingalpha.com/article/4704829-svol-this-16-percent-yielding-monthly-dividend-etf-is-perfect-for-one-type-of-investor","article_id":"2452626514","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/76133201/image_76133201.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2452626514","pubTimestamp":1721473200,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Jose Luis Pelaez IncI love high-yield ETFs, as do many of my readers and members. 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ETFs eliminate single-stock risk, such as buying a high-yield dividend aristocrat like Walgreens (WBA) and having the wheels fall off. YchartsRecently, I've done deep dives into some of the most popular high-yield monthly ETFs, including JEPI. JEPI: The Smart Investor's ETF For Reliable 8% Monthly Yields  And the Nasdaq version, JEPQ. JEPQ: This 9% Yielding Monthly Dividend ETF Is Perfect For 2 Kinds Of Investors  Several members and readers have asked me to analyze the Simplify Volatility Premium ETF (NYSEARCA:SVOL).  This 16% yielding monthly paying ETF represents a brand new asset class and thus offers many wonderful benefits... on paper. After carefully analyzing SVOL's pros and cons, I have concluded that it's perfect for one kind of investor. And everyone else needs to be warned about the major downsides of this ETF. SVOL: Harnessing Market Volatility Through Options Let's go straight to the source, Simplify, to learn about this unique ETF and how it works. SimplifyThis means that SVOL is shorting market volatility through VIX futures. When volatility goes up, SVOL falls; when volatility goes down, SVOL maximizes its gains. SimplifyLike its managed futures ETF (CTA), Simplify seeks to prevent extreme volatility whipsaws (though it sometimes fails). In other words, SVOL seeks high monthly income with below-market volatility. We'll see whether the ETF has achieved its goals in a minute. What Is Market Volatility? A Guide To The VIX SimplifyThe VIX, the \"fear gauge\" of the market, is actually just a measure of implied volatility for the next month. The rule of 16 means that for every 16 points of the VIX, the market is pricing in the S&P, moving up or down 1% in a single day over the next month. Charlie Bilello The average VIX is 19.5%, meaning investors, via options markets, are pricing an average of 1.22% daily moves in the S&P. Note to investors: If the S&P falls 1.22% in a single day, that's 100% normal and expected.  When the VIX experienced high volatility, like in 2008, the S&P was priced for 2% daily moves. YchartsDuring the Pandemic, the VIX hit a record 83, as the stock market priced in 5.2% daily swings. Lowest Recorded Levels   All-Time Lowest Close: The VIX closed at 9.14 on Nov. 3, 2017.  All-Time Lowest Intraday Level: The VIX reached an intraday low 8.56 on Nov. 24, 2017.  Highest Recorded Levels   All-Time Highest Close: The VIX closed at 82.69 on March 16, 2020, during the COVID-19 pandemic.  Previous High: Before this, the highest close was 80.74 on November 21, 2008, during the financial crisis.  The VIX was created in 1990, so it wasn't around the time of the Black Monday crash of 1987. VIX Is Estimated To Have Been 150 to 170 On Black Monday, 1987 WikipediaThe VXO (old VIX calculation method) reached an all-time highest close of 150.19 on Black Monday (Oct. 19, 1987). The all-time intraday high for the VXO was 172.79 on Oct. 20, 1987 (the day after Black Monday). Potentially, around 10% to 11% daily S&P swings are priced by options investors.  The result notes that while the VXO calculation differs from VIX's, the data suggests that VXO tends to reach higher highs than VIX on the same days. It states that 1987 VIX highs \"might not have reached 150 (close) or 170 (intraday), but would almost certainly have been way above 100.\" In other words, the VIX soars when markets are volatile in either direction due to extreme uncertainty around the economy and corporate earnings. SVOL uses this to generate its income by shorting the VIX to generate monthly income. SimplifyNormally, the VIX futures contracts are upward sloping, like the yield curve. Longer-duration bonds yield more than shorter-duration bonds. Future options contracts cost more than short term because there's more uncertainty about what prices might do. As the date of the options expiration arrives, there's less uncertainty and the future price approaches the spot price or current market price. In other words, options of all kinds shift risk between parties, such as sellers and producers of commodities, or in this case, market volatility. When the futures curve of any commodity or asset is upward sloping, this is called \"Contango,\" and those who short the curve generate \"positive carry.\" SimplifyCarry means the difference between income yields between two asset classes or the same asset class but different time periods. SVOL's positive carry is the backbone of its generous monthly yield. SimplifyRisk Mitigation: To protect against extreme volatility spikes, SVOL employs a modest budget for deep out-of-the-money (OTM) VIX call options. This strategy aims to provide low-cost protection against adverse market moves. SimplifySVOL can \"harvest roll-yield\" by buying back its futures at lower prices as the expiration date approaches. This roll-yield harvesting (carry) is just one of several ways SVOL generates income and capital gains. A large portion of SVOL's portfolio is invested in income-producing securities. This is because futures have a 10% margin maintenance requirement. So when you give SVOL $1, they can sell VIX futures with $0.10 as collateral and then invest $.90 into bonds to generate a second layer of income. Compounding positive carry. SimplifyThis includes high-yield bonds, government bonds, and other fixed-income instruments. SVOL generates positive carry from bond investments when the yield curve is not inverted (positive carry-on bonds). Risk Mitigation: To protect against extreme volatility spikes, SVOL employs a modest budget for deep out-of-the-money (OTM) VIX call options. This strategy aims to provide low-cost protection against adverse market moves. SVOL will actively manage its duration risk on the VIX futures based on the VIX itself. Lower volatility = longer duration for higher income. When volatility is high in a bear market, it's lower duration since SVOL doesn't have to take on duration risk to earn attractive income. Simplify Option Strategies: SVOL employs option strategies on both VIX and fixed-income securities. SimplifyThis includes selling fixed-income options and using VIX call options for hedging or income generation. Third layer of income generation. SVOL also writes long and short options contracts on bonds because sometimes the carry-on bonds are negative (inverted yield curve). SVOL is actively managed, allowing its managers to adjust the portfolio based on market conditions, including reallocating assets and adjusting exposure to different income-generating strategies. In other words, SVOL is primarily a VIX-focused ETF that uses carry trades but is also willing to take a long or short position in fixed-income strategies when its management deems it appropriate. Simplify You can think of SVOL as a triple-income compounding hedge fund. Critical Things To Know About SVOL Before Buying SVOL is not designed to hedge falling stocks but to replace equity allocation within a portfolio.  It's not a replacement for bonds, managed, or yield futures but a high-yield version of equity risk.  Simplify85% of the time, VIX futures are in contango, upward-sloping. 15% of the time, they are in \"backwardation,\" and SVOL is losing money on them. When volatility is falling, SVOL makes money on its futures. This usually happens in a bull market but is especially present right now in a low-volatility bull market, when stocks have only fallen 5.9% from record highs so far this year. When stocks correct, SVOL is going to face two levels of headwinds.  The VIX is going to soar (SVOL is betting on a falling VIX) The VIX futures curve will go into backwardation (betting on lower volatility in the future)  SimplifyAs Simplify management says, \"SVOL is designed to be positively correlated with stocks.\" However, do not try to time SVOL by selling during a correction. That's precisely the best time to buy it. SimplifyAnyone wanting SVOL should own it as part of a permanent allocation. Volatility futures income is a completely separate asset class. SimplifyTiming asset classes is no more successful in the long term than timing the stock market. SVOL Is Not A Hedging Asset JPMorgan Asset Management As I'll show in a moment, SVOL has historically been correlated to the S&P 500 of corporate bonds. No investor should own corporate bonds as a \"recession hedge.\" They're a lower volatility source of income, and so is SVOL. Hedging Strategies During Bear Markets Since 1991 Dividend Kings Portfolio Optimizer Tool The average and median returns for various hedging strategies in the last six bear markets are listed below. The median hedging strategy generates 13% positive returns in a bear market (stocks fall 28%) and has a -0.63 correlation to the S&P in a bear market. They generate 5.4% post-tax returns, about 50% that of the S&P. SimplifyStocks and SVOL earn money in different ways. In a 60-40 portfolio, SVOL should replace some of the stock allocation, not the bond allocation. SimplifySVOL uses managed distributions, which means that it will, at times, use destructive returns on capital or ROC. If its bond income + VIX roll yield doesn't cover distributions, it will keep paying them for a few months or quarters, reducing NAV and the share price over time. Eventually, it will cut the distributions. Since bond yields are at 20-plus year highs, as bond yields fall, SVOL distributions will fall as well. YchartsSVOL's yield has been falling steadily over time, a sure sign of ROC, which it used initially, though not apparently in recent months. SimplifyAbout 50% of distributions were ROC at the start of the year. ROC is giving investors back their own money.  MLP ROC is different. It's non-destructive.  Imagine you give me $1 and I promise a 16% yield. Over one year, I give you $0.16 in income, and now your $1 investment is worth $1 minus $0.16 (ex-dividend date) or $0.84. Some ETFs or CEFs use destructive ROC to make investors think they're getting yields as high as 20%, but in reality, they're getting their own money back and are seeing their buying power eroded by inflation. SimplifySimplify is honest about the fact that ROC can be used to hide losses and poor management. If NAV is stable over time, the income comes from profits and carry and thus is sustainable. Simplify That will generate positive total returns. If NAV falls over time and total returns are less than the average yield, management is losing money and hiding losses through ROC. Relatively High Fees Because SVOL Is Investing In Its Own ETFs SimplifyAbout 33% of SVOL is invested in bond ETFs run by Simplify. That's why it has a 1.16% expense ratio. That's not an outrageous expense ratio, but it's higher than many alternative asset ETFs like KMLM (0.9%) or Return Stacked ETFs (0.4% to 1.04%). The reason for the higher fees is that Simplify is paying itself twice. You give it money, and it will invest about 33% into its own ETFs that will charge higher fees, as opposed to putting the funds into something like a Vanguard bond market index fund. Who SVOL Is Perfect For Stock Investors Seeking Diversification In A Tax-Advantaged Account SimplifySVOL is designed to come out of equity allocation. SimplifyIt's not a hedging asset, and if you wish to optimize volatility-adjusted returns, you must remember that it is correlated to the S&P.  VIX is falling as stocks rise. Stocks fall as VIX rises.  SVOL Historical Returns Since June 2021 Portfolio Visualizer SVOL has done a good job matching the S&P's returns but with lower volatility and a much smaller peak decline. However, its correlation to the S&P is very high, unlike KMLM (managed futures). Combining SVOL with managed futures generates returns similar to those of both individually but with sub-8 % annual volatility and a peak decline of less than 5%. Portfolio Visualizer Portfolio Visualizer SVOL's volatility has been low thus far, though we've only had one period of significant market stress. 2022 Bear Market Portfolio Visualizer Notice how SVOL is down when the market is down. It's usually down less, but it's not going up like managed futures are. In contrast, combining SVOL with managed futures is like combining equities with managed futures, which tends to result in solid returns but with much lower volatility. S&P's Worst Months Since June 2021               SVOL KMLM SVOL/KMLM S&P 500   Year Month Return Return Return Return   2022 9 -5.44% 3.98% 0.21% -9.22%   2022 4 -6.73% 9.75% 2.46% -8.73%   2022 6 -2.56% -1.44% -1.90% -8.27%   2022 12 1.60% 1.55% 1.57% -5.77%   2022 1 -3.68% 5.04% 0.68% -5.19%   2023 9 -0.38% 4.63% 1.95% -4.78%   2021 9 -3.13% 2.48% -0.44% -4.66%   2024 4 -0.92% 4.18% 1.63% -4.10%   2022 8 -1.30% 8.69% 4.45% -4.09%   2022 2 -4.69% 3.95% -0.18% -3.00%   Average   -2.72% 4.28% 1.04% -5.78%   Median   -2.85% 4.08% 1.13% -4.99%   Click to enlarge (Source: Portfolio Visualizer Premium) S&P's Best Months Since June 2021               SVOL KMLM SVOL/KMLM Vanguard 500 Index Investor   Year Month Return Return Return Return   2022 7 5.42% -2.50% 0.71% 9.21%   2023 11 4.74% -5.90% -0.36% 9.12%   2022 10 3.07% -1.41% 0.29% 8.08%   2021 10 5.72% 3.81% 4.78% 6.99%   2023 6 5.35% -2.53% 1.52% 6.60%   2023 1 5.03% -2.88% 1.07% 6.27%   2022 11 4.72% -10.05% -4.30% 5.58%   2024 2 1.59% 2.38% 1.98% 5.33%   2024 5 3.15% -4.95% -1.00% 4.95%   2023 12 1.72% -5.32% -1.47% 4.53%   2021 12 4.33% -0.36% 2.05% 4.47%   Average   4.08% -2.70% 0.48% 6.47%   Median   4.72% -2.53% 0.71% 6.27%   Click to enlarge (Source: Portfolio Visualizer Premium) The pros of combining SVOL with managed futures is that you go up in the market's worst months. The downside is that you give up a lot of upside in the market's best months. (Source: Portfolio Visualizer Premium)Although SVOL has delivered solid, high single-digit returns, there's still plenty of market envy/FOMO risk. A nearly 20% rally has left almost all non-growth stock strategies in the dust this year. (Source: Portfolio Visualizer Premium)SVOL's historical beta so far is 0.53, meaning that when the market falls 10%, you'd expect a 5.3% decline, and when it is up 10%, you'd expect a 5.3% gain. With managed futures, SVOL creates a zero beta portfolio completely uncorrelated to the market. Alpha is the return compared to the beta-adjusted return. For example, SVOL was expected to generate 0.53X the market's 11.4% annualized return, but it beat that by 4.33%. The Sharpe ratio is the annualized total return divided by volatility. The Sortino ratio is annualized excess return divided by negative volatility. The Treynor ratio is the annualized excess return (relative to bonds) divided per beta unit. (Source: Portfolio Visualizer Premium)In bear markets, SVOL can expect to suffer a 6% monthly decline (the conditional value at risk is 5%, and the worst is expected in future months). Thus far, it's captured 61% of the S&P's upside in rising markets and 52% of the downside in falling markets. So far, SVOL has delivered on the goals that management has laid out. Its active management of three levels of income compounding appears to have been successful so far. Owning SVOL In A Taxable Account Is Not A Good Idea Futures contracts are taxed under Section 1256 of the U.S. Internal Revenue Code, which provides a unique tax treatment known as the \"60/40 rule.\" This means that gains and losses from these contracts are treated as follows:   60% Long-Term Capital Gains: 60% of the gains are taxed at the more favorable long-term capital gains rate, regardless of the holding period.  40% Short-Term Capital Gains: The remaining 40% of the gains are taxed at the short-term capital gains rate, the same as ordinary income tax rates.  This applies to managed futures ETFs and most ETFs that use futures contracts, including Return Stacked funds. SimplifyVIX futures are slightly different, and almost all of SVOL's income is taxed as ordinary income. This means SVOL is extremely tax inefficient and should be owned in a tax-advantaged account. College InvestorFor those in the top tax bracket, there's also a 3.8% ACA surcharge for federal taxes, and most states tax all income, including options income, as ordinary income.          ETF Pre-Tax Annual Return Since Inception Post-Tax Return Tax Expense Ratio % Of Total Returns Going To Taxes   SVOL 12.14% 5.88% 6.26% 52%   JEPQ 16.87% 11.82% 5.05% 30%   JEPI 8.36% 4.29% 4.07% 49%   VNQ (REITS) 7.48% 5.63% 1.85% 25%   BAGPX (60-40) 6.02% 4.51% 1.51% 25%   SCHD 12.80% 11.72% 1.08% 8%   COWZ (FCF Yield, Deep Value) 13.53% 12.72% 0.81% 6%   SPY (S&P) 10.13% 9.48% 0.65% 6%   QQQ (Nasdaq) 9.74% 9.21% 0.53% 5%   Click to enlarge (Source: Morningstar) SVOL's tax expense ratio is the highest I've seen so far, with over 6% of historical returns, or 52% of total returns, going to Uncle Sam. And keep in mind Morningstar is using the average tax rate for Americans, not top marginal rates.   Perplexity Depending on where they live, up to 56% of the richest Americans' returns can go to the IRS. Bottom Line: SVOL Is A Great Choice For Exactly One Kind Of Investor If you understand that SVOL is designed to replace stocks in your tax-advantaged portfolio and are comfortable with the FOMO you'll experience in a raging bull market, then SVOL is a potentially attractive choice. If you found SVOL in a screener, attracted to the 16% yield, or on YouTube as some kind of \"Rich retirement dream stock,\" you should reconsider. SVOL is not likely to generate 16% yields forever. SVOL has been lucky to have experienced a golden age of falling contango VIX. In the future, its yield will likely be closer to 8% to 12%. Replacing some stocks with a lower-volatility SVOL is a potentially attractive trade-off in a tax-advantaged account. Do you think you can earn 16% safe monthly yields forever? And don't understand that half of the returns are going to taxes? You're in for a shock. And if you don't realize that SVOL is not a hedging tool, that it's designed to fall less than the S&P but fall in a market downturn, you're in for a nasty shock. YouTube is a great place to find wonderful information if you're using the right sources, such as fund managers or reputable channels like Ritholtz or Charlie Bilello. But most people pumping specific ETFs, especially those that start out with impressive returns or yields, might be inadvertently leading investors to ruin. Stay safe, stay skeptical, and remember that the only free lunch on Wall Street is diversification. Diversification, done thoughtfully, is indistinguishable from magic.\" Rodrigo Gordillo Since the ZEUS Family fund is a taxable account, I won't be buying SVOL since it would have to replace equities with a future consensus return potential of 24% with post-tax returns of about 6%. But for anyone looking to diversify their equity holdings in a Roth IRA, SVOL is a potentially interesting ETF. 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