Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Monday, March 31. The last day of the first quarter. Today’s Stocks On The Contrarian Radar©️ segment features tail risk ETFs and starts at the bottom of this page.
State of Play
Stocks sold off pretty dramatically on Friday after inflation data came in slightly ahead of forecasts. As we eye our board of indicators for signs of direction at 0655, risk off is the mood, though happily it appears inflation concerns have moved to the back burner:
Stock index futures are moving lower, led by tech. The Nasdaq is down 1.3%. S&P 500 down 1%;
Bonds are getting bid up, which tells us the inflation concerns that surfaced on Friday are less vexing than growth concerns. The 10-year yield is down 5 basis points to 4.20%, to its low point of the year (yields move inversely to prices);
In commodities land, the interesting move is in copper, which is down 2%. This would indicate larger concerns about economic growth. Gold is up 1%. WTI crude oil is stuck in the middle, unchanged at $69.50/barrel;
Cryptos are dropping a bit. Bitcoin down 1.7% to trade around $81,700.
Today’s Known Events
Not much. Chicago PMIs are at 0945 are about it. A reading of 45.5 is expected, the same as last month. That is below the 50 level that separates expansion from contraction. This would normally be ignored by the market. Today it may be watched a little more closely just because of all the selling we had on Friday.
It’s a slow day but a busy week. The whole thing culminates with non-farm payrolls on Friday, but in the interim we have this ‘Liberation Day’ to worry about. That means tariffs. The question is exactly how bad the tariffs are going to be and whom they will affect. The situation is extremely fluid, as are many things with Trump especially around tariffs.
The Bottom Line
The drop in bond yields (meaning a rally in bond prices) tells us that stagflation is not a concern for investors right now. The drop in copper prices indicate scaling back of economic growth prospects. Clearly investors are positioning for deflationary recession right now, at least judging by those indicators.
Whether that comes to pass remains an open question. It has certainly been an ugly month for stocks. The S&P 500 is down 6% with the damage in tech even worse as the Nasdaq has given up 8%. Since it’s high in early February, the S&P is down 11%. That puts it firmly in correction territory. Will it fall enough to enter a bear market? That would require it to drop to 4918 from its current level of 5524. Could happen. Probably won’t happen today. This week? If things get ugly enough?
A bear market is one thing. It’s still hard to see how tariffs alone will bring about a recession. As we pointed out last week, the economic data (actual data, that is. Not surveys) are not yet indicating any kind of retrenchment from the consumer. There was some noise on social media about home delinquency rates, but those have since been debunked. Don’t believe everything you see on social media.
Yes, appearance can catch up to reality. If consumers truly are concerned about a recession they will pull back on spending and it will become a self-fulfilling prophecy. That could happen, but there are few indications that it is. Airlines are cutting capacity for flights from Canada to the US, so there is that even if it isn’t terribly dramatic yet. Consider this a final reminder that media — and especially social media — are more than happy to push disaster scenarios. Not because they’re true, but because they result in clicks and clicks = revenues. The business model for media in today’s age is quite simple and very cynical. But that leaves room for opportunities for those who can spot them.
Stocks On The Contrarian Radar©️
The Contrarian has been researching tail risk ETFs. He started doing this last Thursday, during a big rally, then got distracted. Obviously the time to buy these would have been during the rally. Now that risk appetite has retrenched again, these funds should very much be in vogue. Still, it makes sense to take a look.
To simplify matters — and make things a little more palatable to us ADHD folks — we included just four metrics:
strategy, i.e. ‘how it works’/its asset base
fees
dividends
assessment of efficacy
We then assigned a grade, and ranked the funds in order of effectiveness.
1. Alpha Architect Tail Risk ETF (CAOS 0.00%↑)
How it works: Trades options, mostly on the S&P 500. Uses leverage
Fees: 75bps
Dividend: none
Assessment: CAOS is relatively new, having launched in 2023. It’s been positive since, and managed positive returns YTD (+0.7%).
Grade: B. The use of leverage isn’t great though and it doesn’t even have the returns to make up for the additional risk. The fund appears to work, but the track record is not long.
2. SPDR® Bloomberg 1-3 Month T-Bill ETF (BIL 0.00%↑)
How it works: BIL buys and holds short-term Treasuries. Simple!
Fees: 15bps
Dividend: 4.85%
Assessment: While not strictly a tail-risk fund (or at least not advertised as such), BIL invests in the safest portion of the Treasury market, making it a good hedge for risk-off. During periods of dramatic risk off (2008, 2020) it did appreciate a bit. As such, it works as advertised.
Grade: B. BIL is cheap. It also doesn’t move very much, having gained a whopping 12 basis points since inception in 2007.The dividend makes it better than holding cash, but the dividend fluctuates with interest rates (and appears to follow the Fed fund rate pretty closely, which makes sense).
3. iShares Short Duration Bond Active ETF (NEAR 0.00%↑)
How it works: NEAR buys Treasury notes and short-term bonds, including some (limited) corporates
Fees: 33bps
Dividend: 4.9%
Assessment: Like BIL, NEAR is not a tail-risk fund per se. However as a holder of short-term Treasuries it can certainly work like one. It has slightly more volatility than BIL. As such, it is a bit more aggressive and therefore a tiny bit more risky. It tends to drop marginally with the bond market. It crucially did not do well during March 2020.
Grade: C+. NEAR works fine as a short-term bond proxy. As such it will rise a bit during Treasury rallies and drop when bonds lose their favor. With a slightly higher price point than BIL and more volatility but with the same yield, it gets a slightly worse grade.
4. Cambria Tail Risk ETF (TAIL 0.00%↑)
How it works: Buys mostly Treasuries, trades options
Fees: 73bps
Dividend: 2.7%
Assessment: TAIL has been around since early 2017. It has done its job during major drawdowns: The fund appreciated in price during COVID, in 2022, last summer, and this year (it’s up 5% YTD).
Grade: C. TAIL is not cheap. It appears to work as advertised during major moments of chaos. However, held over the long term the fund has performed poorly (see charts below).
5. Global X S&P 500® Tail Risk ETF (XTR 0.00%↑)
How it works: Trades options, but also buys stocks seeking out ‘defensive’ names
Fees: 53bps
Dividend: 21%
Assessment: XTR is the cheapest tail risk ETF reviewed here. It also appears to the be the last effective, with a 11% drawdown this year. The fund has been around since late 2020 but does best when markets rally.
Grade: D. The performance record speaks for itself. Returns this year are worse than the S&P, which means XTR literally doesn’t do what it is intended to. The dividend is almost certainly not long for this earth at its current yield, but is a nice bonus while it lasts. Still, the risk is too great, especially for a product that is supposed to protect from risk-off.
NB: BIL and NEAR are hardly the only short-term bond funds on offer. There are many others that The Contrarian has not, to date, looked into. He holds the NEAR in his Roth IRA account. There are of course many other ways to hedge risk, not least through inverse ETFs. But those are another topic for another day.
It’s worth asking how the actively-managed funds TAIL and CAOS behave versus ‘vanilla’ fixed-income ETFs like BIL or iShares 1-3 Year Treasury Bond ETF (SHY 0.00%↑). Let’s hold them up to the S&P 500 (SPY 0.00%↑) and take a look:
As you can see, this five-year chart is pretty telling. The S&P has more than doubled during this time. CAOS has managed to gain 18% (since inception in 2023) while SHY is down a bit and BIL has done absolutely nothing. TAIL however, has dropped 51%! That’s a heavy price to pay for tail risk.
Let’s move in a bit and look at the last couple years, to the start of 2023:
Again, period corresponds to a bull market. So we would expect the S&P to be the best performing index during this time. CAOS again managed to produced gains while the two bond proxies were roughly even. But TAIL again gave up a lot, 22%.
The Verdict
These ETFs certainly present some interesting options for those concerned about imminent disaster. It is worth keeping in mind that anything linked to Treasuries will not perform well in stagflation. Probably an options strategy is a better bet at that point. For deflationary recessions like we saw in 2008 and (briefly) in 2020, Treasury-linked funds should do fine. The question then becomes why you shouldn’t just buy Treasuries? You can, but that market is more illiquid and requires more upfront costs than ETFs. In such a scenario, a cheap Treasury proxy like BIL can make sense. Again BIL is just one option. Do your own research, make your own decisions.
The Contrarian for his part is loath to buy a tail risk fund when everybody is concerned about tail risk. He will wait for a happier day in markets to consider an investment like that. Otherwise he is not being contrarian but just fearful.
Housekeeping
Obviously this is not investment advice (duh). Do your own research, make your own decisions.
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