A simple portfolio using three blended capital efficient ETFs (one equities + bonds, one equities + gold, the last bonds + managed futures) to create a balanced but still likely successful portfolio, with relatively high exposure to alternatives.
The Capital Efficient Butterfly (CEB) was added in February, 2023, after a mini-series dedicated to exploring blended capital efficient ETFs. These use leverage in the form of futures contracts to gain additional exposure to various asset classes, such as WisdomTree’s US Efficient Core Fund (NTSX) which uses every dollar invested to gain 90 cents of exposure to the S&P 500 and 60 cents exposure to intermediate-term Treasuries via futures. To learn more on capital efficiency, this intro to the topic may be helpful, and then you may want to look at the next few posts after that.
Motivated by this mini-deep dive, plus the announcement of a new blended capital efficient fund on the market (Return Stacked ETFs’s Bonds + Managed Futures - RSBT), I decided to put together a simple, three-fund portfolio that could roughly mimic the original Golden Butterfly (henceforth, the OGB). I have kept the proportions between stocks and bonds the same as the OGB, in a 1:1 ratio. I do have slightly less gold, proportionally speaking (22.5%, when it should be 30% if I were copying the OGB exactly), but this is balanced out by the large presence of managed futures in the fund, an exposure of 35%.
Adding it all together, it’s a 58.5%/59%/22.5%/35% stocks/bonds/gold/managed futures portfolio. The capital efficient part is the leverage, which allows these higher than usual allocations to alternatives. In this case, the portfolio uses 75% of additional leverage.
Of course, a souped-up version of the OGB already exists: the Levered Butterfly (the LB), but this one differs in the type of leverage it uses. In the LB, there are daily resets of the 3X leverage based on options contracts, whereas with this CEB, the leverage is obtained through the use of futures contracts. I don’t yet have a good handle on which type of leverage is best, and that’s the main reason I launched this portfolio.
Backtesting is a bit hard with this portfolio, due to the relative youth of managed futures as an asset class available to DIY investors. It doesn’t exist as a category in either Portfolio Charts, or the Asset Class Correlation on Portfolio Visualizer. Those tools allow us to take backtests back to the 1970s, but without them, the best we can do is to use particular managed future funds as proxies. The oldest of these that I know of is Arrow’s Managed Futures Strategy A Fund (MFTFX), which goes back to just April, 2010. As you look at the backtests below, please keep in mind the shorter timeframe, and when comparing them, I’ll refer only to my estimates.
Nevertheless, I’d expect this to have about the volatility of the Levered Butterfly, meaning it is in the neighborhood of the Bogleheads 80/20 and the Qian Portfolio. We’ll see how this one performs compared to those in the group of still pretty stable funds that have a bit of upside.
I did play around with several versions of this portfolio before settling on the 40/25/35 split between NTSX, GDE, and RSBT. I went over some of the variations in the blog post I wrote to announce the portfolio, and one such variation creates a Golden Butterfly of sorts with 89% of the cash, freeing up 11% of “extra” cash to deploy in different ways. If you’re like me and you want to play around with different possibilities, here is the spreadsheet I used to figure things out. If you change the numbers in the gray column, you can see how the different combinations shake out. Make a copy and fiddle until your heart's content!
Correlation Matrix
Note: I’ll use the proxy funds that go into the portfolio rather than use the capital efficient funds themselves, as it's more helpful to see how the pieces fit together. Data begins in May 2010. Credit to Portfolio Visualizer.
Backtest Analysis
Note: here is the backtest since May 2010, with the original Golden Butterfly and my Leveraged Butterfly for comparison. Usually, I just put the portfolio on its own, but since it has a different starting date, it’s probably more helpful to see how they fared during the same time period. I also put in the Classic 60/40 as a baseline. Here is the link for seeing the backtest for yourself via Portfolio Visualizer.
Housekeeping note: since I decided to start this portfolio in mid-February 2023, I face the question of how to track it mid-stream. Do I go back to July, 2021 to see how it would have fared if I had started it at the same time as all the others? But then you have the issue of RSBT not existing, so you'd have to reconstruct returns from proxy funds. Whoa - that’s a lot of work. Since I’m comparing it to the Leveraged Butterfly, I’m instead going to look at where that one was in early February (after the January 2023 Portfolio Review), and use the LB’s number as my starting point: $843,542.78.