In April 2022, I introduced on this blog The Italian Leather Sofa Model Portfolio. As a reminder, here is the portfolio composition:
- 60% stocks (via NTSX)
- 40% bonds (via NTSX)
- 20% trend (via DBMF)
- 10% commodities trend (via COM)
- 4% Tail risk (via TAIL)
- -34% cash
The idea behind the portfolio is stolen from here. The link offers the best explanation to what I think is the most common question related to it, i.e. why the portfolio uses leverage (and why in this context leverage decreases risk).
It represents a simplified version of the portfolio I have been building since I moved to Switzerland: here you can find details about the “enhancements” to this model.
Please note that the returns you find in the Model Portfolio series will always reflect the point of view of a USD-based investor. The ETFs are priced in USD and Testfol.io, the app I use to track the portfolio, does not allow me to change the reference currency.
Besides these ‘technicalities’, the focus of this series is on how to build a great and simple permanent portfolio. There are various solutions an investor can employ if they do not have the USD as their base currency and want to eliminate the FX volatility. As I wrote here about the All Weather Portfolio, I am not bothered by the FX risk, given my investment horizon and the fact that I do not consider myself a CHF-based investor even if I live in Zurich. Plus, I do not have any currency-specific audience that would make this series more helpful if run in EUR, CHF or GBP (if you want a deeper dive into FX risk, I wrote this).
After posting a 3.95% gain in Q3-24, the portfolio lost 2.25% in Q4-24:
The blue line represents the Model Portfolio, while the other two are functional references (I cannot really call them benchmarks): the 60/40 portfolio (red line) and the S&P500 (yellow line).
Since Inception, including a backtest period
Q4
Since inception plus backtest (May, 2019). VBAIX is the 60/40.
Below you can find details of each ETF performance, including dividends, in the quarter:
Below is the Q4 price graph for each component of the portfolio:
How to read the portfolio performance
I have to admit I fell for the single-line item performance fallacy. NTSX is the ETF with embedded leverage that allows the addition of “free diversifiers” to the portfolio. I, wrongly!, judged the merits (or otherwise) of leverage within NTSX, thinking for example about the implications of an inverted yield curve (NTSX borrows at the short-term rate and invests in bonds that pay the long-term rate…not great when the curve is inverted).
Leverage belongs to the portfolio.
Not only that. COM and DBMF use futures; a small fraction of the sum invested in those ETFs is posted as margin while all the balance erns the T-Bills returns. In other words, if the Bills rate is 5% and DBMF returns 3%, it means DBMF alpha, the real yield of the strategy, was -2% for that year.
This quarter felt like the midwit meme:
Aside from the SP500 part of NTSX, everything went south. Even futures’ cost of funding exploded:
(maybe this affected SPX only but I doubt it. I found it on Twitter). Some users said it is just an end-of-the-year phenomenon, cause banks want to keep cash on their BS and do not engage in arbitraging activities; others see it as degen need to leverage considering SPY performance. Let’s just hope it is going to reverse back to normal.
For the whole year, bonds got hammered back down every time they tried to rally. At least, even the 3mvs10 curve is not inverted anymore:
Truth be told, throughout the year DBMF and COM generated a positive alpha:
The “2024 August crash” was so fast, and shallow, that it was impossible (for me) to capitalise, ie sell and rebalance, TAIL. The ETF performed as expected in a year where stocks rallied, but more sophisticated products like CAOS and BTAL proved to be better insurance options.
Going Forward
In November WisdomTree launched NTSG, a better ETF than NTSX for Europoors (and Americans as well but try to explain that to them…). If I would start investing today, I would use that ETF for sure; but for this exercise, there is no history to show the merits of the fund. I still remember two years ago when I was using a 90% SPY + 60% IEF – 50% CASHX to represent a longer backtest for NTSX and the constant rebuttal I got: yes but THAT is not the REAL NTSX (it is). Anyway, for the NTSG bond sleeve, I am not even sure there is a good proxy; and if there is, there is no UCITS-fund backtest tool.
It looks like in 2025 some of the Return Stacked ETFs will arrive in UCITS land (and DBMF as well). I would like to preserve the logic behind the model, a diversified capital-efficient portfolio. Conversely, fiddling too much with its components might feel like data mining.
I like to have “something in production” to demonstrate its value out-of-sample.
So, I went back to GetQuin and started my simulation on 01/11/24 with 62% in NTSG and 38% in DBMF. I choose the % so that bonds and trend are equally weighted and I will rebalance once a year. Let’s see how long this configuration will last.
What I am reading now:
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16 Comments
Marco · January 2, 2025 at 6:20 pm
Ciao Nicola, buon anno!
Se arrivasse RSSB lo “preferiresti” a NTSG per liberare ancora più spazio per DBMF/COM o altro?
TheItalianLeatherSofa · January 3, 2025 at 7:49 am
Buon anno!
Ho fatto qualche test in passato e mi sembra che RSSB segua peggio i 2 indici (azioni/obbl): non so se e’ una questione di costi loro o perche’ ho costruito male io la replica. NTSX in questo senso ha sempre funzionato alla perfezione e mi aspetterei altrettanto da NTSG…ma fare questo test con NTSG e’ un po’ complicato da fare perche’ non esite un ETF che segue la loro stessa strategia per la parte bond.
Insomma, alla fine userei un mix dei 2 🙂
Marco · January 3, 2025 at 1:30 pm
Grazie! Trovato ora 80/20 (NTSG o (X/I/E) / RSSB).
Purtroppo negli investimenti più scopro più voglio cambiare 🤣🤣
Fabio · January 3, 2025 at 2:20 pm
nell’ottica di esporsi al mercato azionario ma minimizzando il rischio, cosa ne pensi dei prodotti da poco sbaracti in UCITS JEPQ e JEPI con esposzione 80% al mercato Nasdaq/S&P e 20% covered call?
TheItalianLeatherSofa · January 3, 2025 at 4:15 pm
che sono delle super-merde? 😉
il problema delle covered call e’ che ti riducono la volatilita’ che a te interessa, quella all’insu’ ma ti fanno rimanere esposto a quella che non vuoi, quella all’ingiu’.
JEPIX e’ la versione che ha piu’ storia (ha anche 30bps in piu’ di fees rispetto a JEPI ma non e’ che la storia cambi poi molto…): se il mercato vien giu’ tipo nel 2020, le covered call ti proteggono tanto quanto Gresko come terzino sinistro…
https://testfol.io/?s=5sFv74EoHmy
Fabio · January 4, 2025 at 2:40 pm
Quindi rischio un 5 maggio 2002 senza alzare nessun trofeo negli altri anni? 😉
Grazie mille ne faccio tesoro.
Tornando al Topic alcune domande sparse:
la componente TAIL ha senso solo per liquidarla nei momenti di forte stress per compensare la perdita del ptf?
La parte COM si può fare anche con ETF che replicano le materie prime? Perché anche lì una parte attiva?
Infine, sto recuperando piano piano post e commenti ma non mi è chiaro perché se andato sul singolo trend DBMF e non stai mantenendo diversificazione model risk?
TheItalianLeatherSofa · January 4, 2025 at 5:14 pm
TAIL: l’idea e’ quella di aumentare il CAGR riducendo la vol nei momenti peggiori. Questa la teoria. Nella pratica e’ molto piu’ difficile perche’ devi beccare i momenti giusti per liquidare. Pero’ nella pratica e’ anche un po’ piu’ facile perche’ uso strumenti come BTAL e CAOS che non perdono quando il mercato sale (BTAL pero’ non e’ convesso come TAIL e CAOS non e’ sicuro al 100% che funzioni…per questo nel modello c’e’ TAIL)
COM: non lo puoi replicare con ETF che fanno buy-and-hold. Il BaH sulle commodity fa piangere, funziona solo se lo fai sull’oro (purtroppo)
DBMF e’ da solo solo nel modello per renderlo semplice. nella realta’ diversifico con DBMF, KMLM e RSST
Federico · January 9, 2025 at 3:51 pm
Quando un update sull’ Enhanced Model Portfolio e le sue eventuali modifiche visti tutti super nuovi e super power ETFs?
TheItalianLeatherSofa · January 9, 2025 at 5:37 pm
hey, sono andato a guardare quel post e….effettivamente da allora 4/5 ETF interessanti li ho aggiunti, non pensavo!!
sai che invece ho fatto un backtest abbastanza serio del “pendolino” che ci hai programmato per toobigtofail.it ed ha uno Sharpe piu’ alto del mio portafoglio? ahahahah
Federico · January 9, 2025 at 6:30 pm
Allora aspetto con ansia l’update allora. Sto cercando di capire il come ultimare il mio restart portfolio ahahahah.
Pendolino troppo potente. Incredibile ma vero, quasi si passa all’active trading con signals qua e lá ahahahah
stefano · January 10, 2025 at 5:38 pm
Sto seguendo con moltissimo interesse tutti i tuoi contenuti oltre che risorse e soprattutto questo ragionamento su asset è molto interessante. Ma un europovero retail come me, non potrebbe considerare di inserire un etf come Amundi S&P 500 VIX Futures Enhanced Roll UCITS ETF Acc LU0832435464?
TheItalianLeatherSofa · January 10, 2025 at 6:02 pm
purtroppo no, ha un bleed troppo grande
stefano · January 16, 2025 at 10:32 am
ok grazie, e purtroppo temevo fosse cosi’ infatti non riuscivo a trovare la quadra circa la percentuale da allocarci, perche’ di fatto la vedevo solo come una perdita. tuttavia l’idea di sfruttare la leva per “liberare” spazio la trovo davvero interessantissima, non mi resta che aspettare l’introduzione di etf trend e vedere cosa combinano. per abbassare la volatilità mi incuriosivano anche gli etf della global x SPAH e SPAB che ovviamente mi limiterebbero l’upside, ma associati ad un etf in long 20 o 25+ ig in fase di ribilianciamento mi avrebbero protetto. grazie mille per la condivisione di tutte le risorse sia qui che sugli altri canali, sono davvero preziosi
Bob · January 11, 2025 at 10:25 am
Hi Nicola
Thanks for your excellent blog and the ‘too’ fun podcast! 😊
I’m curious if you have any thoughts on whether it’s more tax-efficient for a Swiss investor to invest in DBMF through the US-based ETF or its Luxembourg equivalent, the IMGP – DBI Managed Futures “R” (USD) ACC (LU257248194).
In Switzerland, it seems a good portion of the “dividend” from DBMF wouldn’t be taxed as it’s treated as a capital gain, and investing through the Luxembourg fund would avoid the US withholding tax.
In case it’s of interest, there’s some discussion happening on this forum:
https://forum.mustachianpost.com/t/managed-futures/10396/27
Thanks again!
TheItalianLeatherSofa · January 12, 2025 at 10:19 am
Hi,
I did my first tax declaration here in Switzerland last here, not really an expert. Might be that the fund can be more tax-efficient than the ETF, I do not have millions invested so it is not really the priority for me to understand if I can save 20 CHF between one or another 😉 Looking at the link you posted there is not a definitive answer at the moment? But keep me posted! Fact is, the other interesting MF I am using, KMLM and RSST, are not (yet) avaliable in UCITS fund so, even if one is better than the other the savings for me would be marginal
TheItalianLeatherSofa · January 12, 2025 at 10:27 am
just had a look at IBKR: it seems they correctly re-state what’s a ‘real’ dividend and what’s a ST or mixed distribution and apply the correct WHT to them
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