Stacked (assets allocation) ETFs: Opinions, Taxes?

Thanks for sharing. Will look into it. I am just a bit wary of leverage. I try to use money I have :slight_smile:

1 Like

Agreed here of course.

Someone having a 50/50 portfolio wanting to replace it with a 100/100 and expecting similar drawdowns, will have a bad time of course.

On the other hand someone having say a 100% VT portfolio and replacing 20% of it with this fund, will not have a materially different drawdown experience, as it has similar volatility.

Or someone already being 60/40 VT/bonds, could replace 20% VT with it and then having 20% of an alternative 3rd asset instead of bonds i.e. managed futures or gold or similar. You’d still be 60/40 stocks bonds, but would have 20% exposure to a diversifying/uncorrelated 3rd alternative that way.

Which is also completely reasonable and suitable for the majority of people.

I still don’t understand what is the point of leveraging bonds if their return is due to the coupon payments, not due to the price appreciation.

I mean it‘s both, as you are taking term risk, you are also getting what‘s called roll yield, due to rolling the futures.

How else would you leverage a 50/50 portfolio?

The reason to do this is shown here:

You could do it the other way round and have real bonds and then buy mostly equity futures, but there you are pretty limited in markets and especially in the US they are tax inefficient. And you have the taxable coupon payments.

That‘s what Pimco does with their stock plus funds.

If you otherwise wanted a leveraged product, you would need daily leverage reset swap etfs and there we are talking about something very different. Think SSO/TMF kind of thing in a single fund (while tmf also only being long bonds for example)

Not sure about the TER. The prospectus allows them to charge 95bp + trading costs. Maybe they use a lower one initially as the fund is new, don’t know. But I’d conservatively assume 95bp + trading cost as that’s what they seem to be allowed to charge.

Yes, you can rebalance the portfolio back to 100/100. The stock physical/ futures part may need to be adjusted though. Also, not sure what realized gains/ losses mean for distributions and taxes however (and how the futures are treated anyway). And, as described in the prospectus, rapid selling assets to acquire necessary margin may need to take place at unfavorable prices, and future markets may experience moments of distress :wink:

But I can see your argument, maybe I am a bit pessimistic. I understand the product now better also. For my personal taste I still see too many risks/ unknowns for which I am not fully convinced one is well remunerated for, taking also the high TER into account. Even 56bp “only” is 8 times more expensive than VT…

1 Like

It is my understanding that those ETFs distribute dividend/income at the end of the year (please tell me if being completely mistaken). What would be a simple and efficient way to achieve total return ?

Particularly interested in the RSST ETF.

Yes they do distribute everything at year end.

But what do mean with “achieve total return”?

In a ideal world, I would like the ETF to be accumulating so the burden of reinvesting the yearly distribution (fairly small amounts in my case yet ? What would be the distribution ratio?) into the strategy would not be placed on the investor shoulders.

On the other hand I see that it should not matter that much over time : testfol.io

Maybe Perfect truly is the enemy of the Good :wink:

E: forgot a word

US etfs sadly can‘t be accumulating, their tax code prevents them from having tax efficient accumulating versions of funds.

Now in the case of RSST, you will have fairly large distributions per year due to them having to distribute basically any and all gains from the futures.
This creates quite a few implications and it‘s also not yet clear how ictax will treat it.

RSST is essentially:

75% S&P 500 etf (it‘s literally the ishares sp500)
25% t-bills/cash

That‘s the hard assets.

On the futures side you then have 25% S&P 500 futures, that are always long.

This gives you 100% effective S&P 500 exposure.

On top of that goes 100% of their managed futures strategy that aims to replicate the SG trend index (DMBF btw replicates the SG CTA index, small difference)

Now on the distribution side you will therefore have quite some:

  • The interest on the 25% cash will be distributed as income → fully taxable

  • the gains on the s&p 500 futures will be 60/40 distributed as long term capital gain & short term capital gains. This is adhering to IRS tax code. For swiss investors this potentially means 60% is tax free and 40% taxable as income. There has been some change in the tax code for us, that treat short term cap gains as income distributions. But it‘s still not fully clear and it may (if we are lucky) be treated as full cap gain and therefore tax free, but I would not count on that.

  • dividends on the S&P 500 etf, will of course be fully taxable.

  • distributions on the managed futures: basically simar to the s&p futures. But for example technically commodity futures are treated 60/40 as cap gain/income. This is also IRS specific and ictax interpretation is at their discretion essentially. They do however have shown to interpret it as income with many funds.

So in the end you will have, my guess, 4 (5) different distributions at year end:

  • interest
  • dividends
  • long term cap gains
  • short term cap gains
  • (maybe a 5th in income distributions from the commodity futures)

2-3 (my hope is only 2) of those will be taxable.

4 Likes

I’m also waiting to see how RS** ETFs distribution ( dividend and cap gains) are taxed in 2024 in ictax. Dividends would be taxed as income and capital gains should be tax free. If things look as expected, and dividends are low (under 2-3%), I’ll be quite interested in them.

2 Likes

Nice insight you provided here ! Thanks !

Yes, I knew that DBMF was not replicating the same index, but thought it was a good enough proxy.

Would you have an educated guess of what amount we should discount from the portfolio return (i.e. the ?E=x in testfol) to reflect the net-of-tax return ?

1 Like

I would agree, should be good enough as proxy.

My educated guess would be something like this as realistic worst case, assuming 25% marginal tax rate:

  • 75% just normal S&P 500 dividends → 1.5% x 0.75 x 0.25% = ~ 0.25%

  • Cash 25% ~ 4% interest → ~0.25%

  • 25% SP futures: 8% return assumed, 60/40 → 0.2%

  • 100% Managed Futures: assuming 7% average return.
    60/40 → 2.8% taxable → 0.7%

Added together: ~1.4 % tax drag over the long term.

1 Like

It seems, I’m not up to date. I’m also unable to find it online. Got some sources?

I just checked some funds like CTA over the years and cross-checked on the fund websites, what is defined as what.
From 2022 to 2023 something changed and lots of the distribution were classified as taxable.

I think I also remember reading in some federal document the definition of taxation of short term cap gains. But dont have it on hand right now.

The commodity futures definition is IRS specific. See here for example: https://www.fidelity.com/learning-center/investment-products/etf/special-rules-commodity-etfs

1 Like

Yes, but does this 60/40% rule apply to us in Switzerland? Isn’t the classification cap gain/income relevant for US investors and their tax declaration?

It is technically only relevant for US investors.

But ictax has shown to just copy that or more to just book it also as taxable short term capital gains.