Risk Parity Radio

Episode 382: Managed Futures, VUG vs. QQQ, And Other Fund Considerations

• Frank Vasquez • Season 5 • Episode 382

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In this episode we answer emails from George, Alexi (a/k/a "the Dude") and Sean.  We discuss a new article about the benefits of managed futures in a portfolio, the Dude's face-off between VUG and QQQ, and considerations for choosing large cap growth funds and international value funds.

Links:

Father McKenna Center Lessons And Carols:  Lessons and Carols - Father McKenna Center

New Article About Managed Futures:  2024Q3_QuanticaQuarterlyInsights.pdf

Bloomberg Presentation On Investments In Inflationary Environments:  MH201-SteveHou-Bloomberg.pdf

DBMF "Managed Futures 101" Microsite:  iMGP DBi Managed Futures Strategy ETF | iM Global Partner

The Dude's VUG vs. QQQ Link #1:  Asset Correlations

The Dude's VUG vs. QQQ Link #2:  testfol.io/?s=kMopG7yQ6SO

The Dude's  VUG vs. QQQ Link #3:  testfol.io/?s=2dpHLA3ndmV

The Dude's  VUG vs. QQQ Link #4:  Factor Regression Analysis

Amusing Unedited AI-Bot Summary:

Discover the power of trend-following strategies and the impact of charitable giving in the latest episode of Risk Parity Radio. We promise you'll gain insights into the effectiveness of managed futures strategies, particularly in high-interest rate environments, and how they can bolster your risk parity portfolios. We also explore listener George's perspective on CTA strategies and dive into the compelling debate of VUG versus QQQ for large-cap growth ETFs. Plus, you'll hear about the incredible work being done by the Father McKenna Center in Washington, DC, and how you can make a difference through their holiday and Giving Tuesday events.

Join us for a thoughtful conversation filled with humor as we engage with our diverse audience, ranging from finance enthusiasts to seasoned investors. This episode is packed with practical financial wisdom that simplifies portfolio management while offering listeners opportunities to support meaningful causes. As we wrap up, we're grateful for your continued support and donations, and we encourage listener engagement through comments, questions, and reviews. Tune in to be part of this vibrant community and enhance your financial journey.

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Mostly Strange Voices:

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer.

Mostly Mary:

A different drummer and now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor, Broadcasting to you now from the comfort of his easy chair. Here is your host, Frank Vasquez.

Mostly Uncle Frank:

Thank you, Mary, and welcome to Risk Parity Radio. If you have just stumbled in here, you will find that this podcast is kind of like a dive bar of personal finance and do-it-yourself investing.

Mostly Strange Voices:

Expect the unexpected.

Mostly Uncle Frank:

There are basically two kinds of people that like to hang out in this little dive bar.

Mostly Strange Voices:

You see, in this world there's two kinds of people.

Mostly Uncle Frank:

my friend, you see, in this world there's two kinds of people my friend, the smaller group are those who actually think the host is funny, regardless of the content of the podcast.

Mostly Strange Voices:

Funny how, how am.

Mostly Uncle Frank:

I funny. These include friends and family and a number of people named Abby.

Mostly Strange Voices:

Abby someone Abby who Abby normal. Abby, someone Abby who Abby normal.

Mostly Uncle Frank:

Abby normal. The larger group includes a number of highly successful do-it-yourself investors, many of whom have accumulated multi-million dollar portfolios over a period of years.

Mostly Strange Voices:

The best, jerry, the best over a period of years.

Mostly Uncle Frank:

The best, Jerry, the best. And they are here to share information and to gather information to help them continue managing their portfolios as they go forward, particularly as they get to their distribution or decumulation phases of their financial life.

Mostly Strange Voices:

What we do is, if we need that extra push over the cliff, you know what we do Put it up to 11. 11, exactly.

Mostly Uncle Frank:

But whomever you are, you are welcome here. I have a feeling we're not in Kansas anymore. But now onward, episode 382. Today, on Risk Parity Radio, we're just going to do what we do best here, which is attend to your emails, and so, without further ado, here I go once again with the email. And First off, first off, an email from George.

Mostly Strange Voices:

You can't go. Who's going to do the feats of strength? How about George Good thinking Cougar?

Mostly Mary:

And George writes Hi, Frank, Interesting article that you may have already seen. It reinforces the value of using CTA strategies like DBMF or similar holdings in a risk parity portfolio. Dbmf or similar holdings in a risk parity portfolio. However, I won't adjust my allocations based on the cash rate environment, but this is good information to have. No reply or comment is necessary unless you find something to comment on that I may have missed or would be of value to fellow risk parity followers. Keep up the good work. Your podcast and Risk Parity Portfolio Design has simplified my life in significant ways. Blessings to you and yours, George. Longtime Patreon donor.

Mostly Uncle Frank:

Well, thank you George.

Mostly Strange Voices:

Until you pin me, George, Festivus is not over.

Mostly Uncle Frank:

And George gets to go to the front of the line because he is one of our donors to the charity we support. That charity is the Father McKenna Center that serves hungry and homeless people in Washington DC, and if you give to the charity and let me know, you get to go to the front of the line for emails. So there are two ways to do that line for emails. Yes, so there are two ways to do that. You can go directly to the Father McKenna website and donate there and just let me know. Or you can become one of our Patreon donors, like George, and you can do that from the support page at wwwriskpartyradarcom and we take all that money and sweep it up and give it to the Father McKenna Center at regular intervals.

Mostly Strange Voices:

The best, Jerry the best.

Mostly Uncle Frank:

Either way you get to go to the front of the line and full disclosure. I am on the board of the charity and am the current treasurer and a couple of things we have going on next week with the Father McKenna Center that you might be interested in. First one is we're having our annual holiday program on December 5th at 7 o'clock. It's called Lessons and Carols. We get together. There's some songs, there's some lessons. It is actually an old tradition dating back to post-World War I in England. We'll be doing our own version on December 5th at 7 o'clock at 900 North Capitol Street. If you're in the DC area and would like to come down, we'd love to see you on December 5th at 7 o'clock at 900 North Capitol Street. If you're in the DC area and would like to come down, we'd love to see you. I won't be doing any singing, but I will be handing out a few programs.

Mostly Strange Voices:

And you won't be angry. I will not be angry.

Mostly Uncle Frank:

The other thing happening next week is, of course, giving Tuesday, on December 3rd, and if you were thinking about giving some money to a worthy charity or some other asset, I'd be very pleased if you would consider the Father McKenna Center, and that would also qualify you for going to the front of the oh behave, yeah, yeah baby.

Mostly Uncle Frank:

So thank you for your consideration. Now getting to your email yes, this is a very interesting article and I think a lot of findings like this are coming out. This paper is talking about the value of using a trend following strategy, particularly in a high interest rate environment, like we had in 2022. And these are these managed futures strategies like you might find in a fund like DBMF. This has actually been known for a while, but it's good to see this confirmed. A couple of years ago, I had also found a study, a Bloomberg study that I will link to again in the show notes, talking about what kinds of things perform well in inflationary environments, and managed futures or trend following strategies is one of those things, and the DBMF fund itself has now put up a nice website talking about these strategies generally and how they might be employed. What I find interesting about their site is it's actually directed more at financial advisors who advise wealthy individuals, but that doesn't mean we can't use it too.

Mostly Strange Voices:

Manly, yes, but I like it too.

Mostly Uncle Frank:

And I should also say this is one of the reasons I like to say here we have the finest podcast audience available, because you guys are really good at finding interesting things for us to talk about and hopefully that means it's a cut above what you find in most personal finance podcasts.

Mostly Mary:

Top drawer, really top drawer.

Mostly Uncle Frank:

So thank you very much for your participation, thank you for your donation and Thank you for your donation and thank you for your email.

Mostly Strange Voices:

Georgie, would you like some jello? Why'd you put the bananas in there? George likes the bananas, so let him have bananas on the side. All right, please, please. I cannot have this constant bickering. Serenity, no.

Mostly Uncle Frank:

Second off. Second off, we have an email from Alexi, so that's what you call me. You know that.

Mostly Strange Voices:

Or his dudeness, or duder or, you know, bruce Dickinson, if you're not into the whole brevity thing.

Mostly Mary:

And the dude writes hey Frank, here's a brief question for you to address on the pod. Which is a better ETF for the large cap growth bucket in a risk parity portfolio, vug or QQQ? Splitting hairs here, I know, but I will present some data as fodder for conversation. You have a gambling problem. One expense VUG expense ratio is 0.04. Vug is 0.20. Verdict VUG wins. Two correlation Link Verdict QQQ wins. It is less correlated with its pairing in a risk parity portfolio small cap value. Three performance in a 50% stock, 50% diversifier portfolio Longer back test Link Verdict QQQ wins Higher, sharp, higher CAGR. Lower max drawdown but slightly higher vol. Four performance in a 50% stock, 50% diversifier portfolio with managed futures. So a shorter back test Link Verdict QQQ wins Higher sharp, higher CAGR. Lower max drawdown but slightly higher vol. Five Factor loading Link Verdict Draw VUG is slightly larger by SML. Qqq is slightly growthier by HML. So what say you? I am team QQQ, but then I have a gambling problem AZ.

Mostly Strange Voices:

You can't handle the gambling problem.

Mostly Uncle Frank:

Well, thanks for writing in, dude. It's been a while since we got an email from you, at least one we could put on air.

Mostly Strange Voices:

Shirley, you can't be serious. I am serious.

Mostly Uncle Frank:

And don't call me Shirley. The dude is actually rolling in from Dude Town or wherever he lives Also next week, and Mary and I are going to meet with him for dinner. Tina, you fat lard, come get some dinner. One of the reasons I started this podcast was to go make a few new friends out there.

Mostly Strange Voices:

You seem a decent fellow, I hate to kill you. You seem a decent fellow, I hate to die.

Mostly Uncle Frank:

Take care. And so if you are in the DC, coming to the DC area, let me know, because I can always spare a little bit of my nap time to go see somebody at some point.

Mostly Strange Voices:

Well, you haven't got the knack of being idly rich. You see, you should do like me Just snooze and dream, dream and snooze.

Mostly Uncle Frank:

The pleasures are unlimited, and as long as our audience is still relatively small, it's all doable anyway.

Mostly Uncle Frank:

Getting to your email, which is essentially which do you think is better, vug, which is a large cap growth fund, or qqq, which is the nasdaq index fund?

Mostly Uncle Frank:

Honestly, I think it's really a coin flip, and the thing is, these two funds are so incredibly overlapped in terms of what they hold, so it's probably kind of a distinction without a difference. Forget about it. I think I would probably go with VUG that's what I'm talking about but for kind of an esoteric reason, and that reason is that VUG is built off an algorithm, so it doesn't care what exchange a company is listed on for inclusion, whereas what companies happen to be in the NASDAQ is actually kind of arbitrary, moved either from the New York Stock Exchange to the NASDAQ or from the NASDAQ to the New York Stock Exchange. I don't think that should determine whether or not it would be included in this index. That being said, I think you are correct that QQQ has outperformed VUG in a number of metrics, at least over the course of the time we've had these funds. But just call me the Fama French purist.

Mostly Strange Voices:

Let's face it you can't talk about anything.

Mostly Uncle Frank:

Anyway, I'm sure we can have a few drinks and fight about this when we see each other in another week or so.

Mostly Strange Voices:

You're using Bonetti's defense against me. Huh, I thought it fitting, considering the rocky terrain. Naturally, you must suspect me to attack with capoferro, naturally, but I find that tibble counts as a capoferro, don't you? Unless the enemy has a study. He's a gripper, which I have.

Mostly Uncle Frank:

And I should mention that the dude is also one of our donors to the Father McKenna Center and that's why he also gets to go to the front of the line, not just because he's going to buy me a drink.

Mostly Strange Voices:

Thank you. I've worked hard to become so. I admit that you are better than I am. Then why are you smiling? Because I know something you don't know. And what is that? I am not left-handed.

Mostly Uncle Frank:

I will include all these links in the show notes so people can check them out for themselves. And thank you for your email. Take it easy, dude. Oh yeah, I know that you will.

Mostly Strange Voices:

Yeah well, the dude abides.

Mostly Uncle Frank:

Well done, the dude abides Last off.

Mostly Strange Voices:

Last off, an email from Sean Sean Sean Sean. Sorry, we're closed.

Mostly Uncle Frank:

Sean of the Dead and Sean writes.

Mostly Mary:

Aloha Frank. I recently discovered your podcast while digging into research about managed futures, and I'm so glad I did. I'm only 33, but still find the information incredibly pertinent.

Mostly Strange Voices:

Young America. Yes, sir.

Mostly Mary:

I have some family members who are deathly traumatized and afraid of any kind of portfolio after witnessing my father lose exorbitant amounts of money in assets I can't get him to confess about. I know it's not the focus of your show, but I'm in the process of decluttering my IRA from a bunch of ETFs and individual stocks. I've only been investing for three years. I love to hold just two to three equity funds and like your advice about 50% growth, 50% value. I'm looking at AVGV and CGGO. The latter has around the PE ratio of the S&P 500 and isn't as bad as some US growth ETFs, but I'm still nervous about investing in something that may be overpriced.

Mostly Mary:

I can't recall who said the market can remain irrational longer than you can remain solvent, but I get it. Should I just go for it and invest in those two funds, split evenly, or use something more like AVLC for growth? I don't know if that fund counts as growth, as it doesn't seem like the specialty of Avantis. I'm hesitant to hold only one fund like VT or AVGE because I don't understand how the rebalancing works. It may not be the case, but it seems that holding two polarized funds creates the rebalancing magic. Do you miss out on that by only holding one balanced fund. Again, Frank, I really appreciate your material. You've inspired me to segregate my brokerage account into two. One is a risk parity portfolio for a house fund a couple of years down the road and my more speculative individual companies in another.

Mostly Strange Voices:

Yeah, baby, yeah.

Mostly Mary:

I know you're interested in the demographic of your listeners, so just for fun, I'm a residential and commercial service plumbing technician. Thank you very much and best wishes Sean.

Mostly Uncle Frank:

Well, I'm glad you're finding the podcast and getting some good information out of it. Sean, just looking at your questions here, talking about AVGV and CGGO First, cggo is a large cap growth fund, but it's also a managed fund and has a expense ratio of about 0.47%. I think it's too expensive for what it's offering. I think you'd be much better off using QQQ or VUG if you're looking for a large cap growth fund.

Mostly Uncle Frank:

The truth is that most large cap US focused funds even just like a total market fund or an S&P 500 fund also tilt heavily towards large cap growth, and so you have a lot of options there and you should just pick a cheap one, because large cap growth is actually an area where managers have the least effect, if you will, and so you really want to go for cheap in terms of what you're looking for. There is more advantage in the small cap and value categories as to getting a better algorithm or some kind of light management, so I'd pick a different option than C-G-G-O for your large cap growth fund. Now, avgv is interesting because it's a global value fund and we do include it in that Optra portfolio, but it does kind of have a drawback in that it is actually heavily tilted towards large caps and you can see that if you look at the composition of it, it's got more large cap than small cap in it.

Mostly Strange Voices:

I could have used a little more cowbell.

Mostly Uncle Frank:

If you're just going to go with one fund, I'd go with AVUV, but if you are looking for other options, in particular international options like AVDV, you could also add something like that. I will give you Paul Merriman's best-in-class ETF list because it's got a number of funds you might consider in there for that slot. But I agree that AVGV is probably not the optimal thing, particularly if you're talking about an accumulation portfolio, because large cap value tends to be the combination that is the least volatile but the least likely to grow long term. So that tends to work better in a drawdown portfolio.

Mostly Strange Voices:

Frankly, that's the fact, Jack. That's the fact, Jack.

Mostly Uncle Frank:

I agree that holding one fund like VT or AVGE probably doesn't make that much sense because you can't rebalance it, and I don't think holding two or three funds is that complicated, so I wouldn't use either one of those. I think we did talk about VT just a couple of episodes ago, and those two are also heavily weighted towards large caps and you can't control how much large cap you have there.

Mostly Strange Voices:

So heavily weighted towards large caps, and you can't control how much large cap you have there.

Mostly Uncle Frank:

I got a fever and the only prescription is more cowbell so that's another reason I would consider those to be a suboptimal choice because, as I said in that podcast when I was talking about vt, you don't want to get fixated on the god of simplicity.

Mostly Strange Voices:

I am a scientist, not a philosopher.

Mostly Uncle Frank:

Because that is the least important of the three principles we talk about here. The most important one is the Holy Grail principle about diversification. The next one is the macro allocation principle. Simplicity is important, but it's not the critical or the main thing that you should be focused on, and having an obsession with simplicity is actually counterproductive.

Mostly Mary:

That's not how it works. That's not how any of this works.

Mostly Uncle Frank:

And finally, thank you for letting me know about your career in work life. I always do wonder who this podcast actually appeals to.

Mostly Strange Voices:

You're insane, Goldmember.

Mostly Uncle Frank:

And that's the way. Uh-huh, uh-huh, I like it. In case you're in the sunshine bud, it seems to be lots of run-of-the-mill doctors and engineers, for the most part.

Mostly Strange Voices:

Hearts and kidneys are tinker toys.

Mostly Uncle Frank:

But there also are a good cohort of what I would call small business people such as yourself, and we have at least one dog trainer and at least one arborist in the mix.

Mostly Strange Voices:

I used to be able to name every nut that there was and that used to drive my mother crazy, because she used to say Harlan Pepper, if you don't stop naming nuts and the joke was, of course, that we lived in pine nuts and I think that's what put it in my head at that point. So I'd go to see. She'd hear me in the other room and she would just start yelling. I'd say peanut, hazelnut, cashew nut, macadamia nut that was the one that was sent her into going crazy. She said you stop naming nuts. And Hubert used to be able to make the sound and he wasn't talking, but he used to go. That sounded like macadamia nut, pine nut, which is a nut, but it's also the name of the town Pistachio nut. Red pistachio nut. Natural, all natural, white pistachio nut.

Mostly Uncle Frank:

So thank you for sharing that information with us. Hopefully my answers here help.

Mostly Strange Voices:

You are talking about the nonsensical ravings of a lunatic mind.

Mostly Uncle Frank:

And thank you for your email, but now I see our signal is beginning to fade. I wanted to make this a short episode, since we have many family descending upon us for Thanksgiving. I think we'll have about 20 here on the day and we still have a few preparations left to do and hopefully you will be having your own celebrations. I should be able to get another podcast out this weekend, but I make no promises.

Mostly Strange Voices:

It's not that I'm lazy, it's that I just don't care, don't care.

Mostly Uncle Frank:

In the meantime, if you have comments or questions for me, please send them to frank at riskparityradarcom. That email is frank at riskparityradarcom. Or you can go to the website, wwwriskparityradarcom. Put your message into the contact form and I'll get it that way. If you have any chance to do it, please go to your favorite podcast provider and like subscribe. Give me some stars, a follow, a review that would be great. Okay, thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Mary:

Stand, it's gone. Uh, what it's gone. It's all gone to you Signing off. The content provided is for entertainment and informational purposes only and does not constitute financial investment, tax or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here, making sure to take into account your own personal circumstances.

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