Risk Parity Radio

Episode 471: Holy MiFID Quandaries, HGER, And The Desert Portfolio

• Frank Vasquez • Season 6 • Episode 471

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In this episode we answer emails from Anonymous, Pete, and Wilhelm.  We discuss how MiFID reshapes investing for U.S. citizens retiring in the EU, the commodities fund HGER and the "Desert Portfolio."

Links:

Father McKenna Center Donation Page:  Donate - Father McKenna Center

IBKR MiFId Client Page:  MiFID Client Category

Portfolio Charts Assets Page (for finding funds):  Assets – Portfolio Charts

Animal Spirits Podcast re HGER: Talk Your Book: How to Invest in Commodities - Animal Spirits Podcast | Podcast on Spotify

Testfolio HGER Analysis:  testfol.io/analysis?s=dcDPCTQc1j6

HGER Fund Page:  ETF | Harbor Commodity All-Weather Strategy ETF (HGER) | Harbor Capital

Portfolio Charts Safe Withdrawal Rates Chart:  Withdrawal Rates – Portfolio Charts

Breathless Unedited AI-Bot Summary:

Planning to retire in Europe while keeping a U.S.-style portfolio? The moment you change residency, MiFID rules can block purchases of U.S.-domiciled ETFs, turning routine rebalancing into a headache and putting your safe withdrawal rate at risk. We break down practical steps to keep your plan intact, including using Interactive Brokers to run a two-sleeve setup—sell-only in the U.S. account, buy in an EU account with UCITS equivalents—and how to make rebalancing work without creating a tax and paperwork nightmare. You’ll hear the pros, cons, and tradeoffs of each path so you can navigate regulation with confidence, not guesswork.

We also examine a smarter way to think about commodities. Legacy benchmarks like BCOM haven’t evolved with investor goals, and that’s where HGER’s rules-based design stands out with a quality and carry overlay that often elevates gold. But if you already hold gold, does a gold-tilted commodity fund add diversification or just overlap? We compare HGER to PDBC, highlight correlations with stocks and gold, and explain why managed futures can deliver broader, more resilient diversification across commodities, rates, and currencies. If you’re after true crisis defense, a blend of gold and managed futures may beat a traditional commodity sleeve.

To round it out, we stress-test the “desert portfolio”—high treasuries, modest equities, a touch of gold—and explain when its calm ride helps and when it lowers your long-term sustainable withdrawal. If your real objective is durable retirement income, consider upping equity exposure, adding value tilts, and relying on uncorrelated diversifiers that keep you rebalancing through drawdowns. Subscribe for more DIY-friendly portfolio tactics, share with a friend who’s eyeing an EU move, and leave a review to tell us what cross-border investing questions you want answered next.


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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. A different drummer.

Mostly Queen Mary:

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 are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program.

Voices:

Yeah, baby, yeah!

Mostly Uncle Frank:

And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Some of our listeners, including Karen and Chris, have identified additional episodes that you may consider foundational. And those are episodes 12, 14, 16, 19, 21, 56, 82, and 184. And you probably should check those out too, because we have the finest podcast audience available.

Voices:

Top drawer. Really top drawer.

Mostly Uncle Frank:

Along with a host named after a hot dog.

Voices:

Lighten up, Francis.

Mostly Uncle Frank:

But now onward, episode 471. Today on Risk Parity Radio, we're just going to keep hacking at this pile of emails that keeps refreshing itself.

Voices:

And you've gone over something again and again and again and again! Like I have, certain questions get answered, others spring up. Mine plays tricks on you, you play tricks back! It's like you're unraveling a big cable knit sweater. But someone keeps knitting and knitting and knitting and knitting and knitting and knitting and knitting.

Mostly Uncle Frank:

And so without further ado.

Voices:

Here I go once again with the email.

Mostly Uncle Frank:

And first off. First off, we have an email from Anonymous. I have Lonely.

Voices:

Well, that right there may be the reason you had difficulty finding game for employment.

Mostly Uncle Frank:

And Anonymous Rights.

Mostly Queen Mary:

Hi, Uncle Frank and Queen Mary. Hope you're doing great. First off, I made a donation to the Father McKenna Center. Please find the receipt attached. I hope it helps.

Voices:

Really tum updrumer.

Mostly Queen Mary:

Second off, I'd like to bow to my sensei.

Voices:

Bow to your sensei. Bow to your sensei!

Mostly Queen Mary:

Thanks for all the education and insights you provide. I'm a DYIR at heart. For a long time I felt like I was flying solo.

Voices:

No more flying solo.

Mostly Queen Mary:

But now I really feel I have a handle on my own financial future. Thanks in large part to you, so I award you all the points.

Voices:

And may God have mercy on your soul.

Mostly Queen Mary:

Third off, sorry in advance for the long email, but I felt the need to expand a little. I'm a 40-year-old Mexican, now a naturalized U.S. citizen who wants to retire in Europe, perhaps Portugal or Spain, ideally within two years max. 80% of my assets are in a brokerage account and the rest in my 401k account. I treat both as a single golden ratio style portfolio. My naive retirement plan was to just move to Europe while keeping all the assets in my US accounts, withdrawing around 5% from my annual expenses, and transferring them from the US via Wise or something similar. However, pretty soon I learned it's not that easy. In fact, it seems to be incredibly difficult. It doesn't work. The main complication and possible showstopper is that the European Union has the so-called MIFID Regulation, Markets and Financial Instruments Directive, which makes it sort of impossible for EU residents to buy U.S. domiciled ETFs and mutual funds. I can keep my existing ETFs, but can't buy new shares. That's not an improvement. So, retiring in the EU means I won't be able to rebalance my portfolio, which would make my safe withdrawal rate suboptimal at best and completely uncertain at worst. I've done a lot of research, but I just can't find a solution that will allow me to keep my risk parity portfolio without significantly decreasing my safe withdrawal rate or complicating my life too much. Do you happen to have any recommendations or references that will help me find a solution? I know this might not be right up your alley, but figured I'd ask anyway because you're a smart man.

Voices:

I'm not a smart man.

Mostly Queen Mary:

I know many people retire abroad, so hopefully this problem has already been solved. For reference, I'm listing a few options below, which I have considered but ultimately deemed infeasible or just too complicated. Don't notify my US brokerages of my change in residence. If my brokerage thinks I'm in the US, then the MIFID restriction doesn't apply, which is technically a solution, but I don't think this is as sustainable long term, since I've read the brokerage firm can close my account and liquidate my assets if they find I no longer live in the US, which would be catastrophic. Open an international account with Schwab or IBKR. Not feasible since MIFID applies for both Schwab and IBKREU. I called Schwab and they recommended getting the international account and transforming my assets into Ireland-domiciled ETFs that mirror US ETFs, aka UCITs. In this case, the portfolio's performance would be pretty much the same compared to keep it in the US. However, UCITs are classified as PFICs by the IRS, which causes capital gains to be treated as regular income, which would most likely decrease the safe withdrawal rate significantly, not to mention the incredibly painful tax reporting that comes with it. Hiring a professional financial planner. This one doesn't require much explanation, am I right?

Voices:

Am I right or am I right or am I right?

Mostly Queen Mary:

But this means getting into the financial planning industry world with their AUM plans, less than ideal knowledge about risk parity-style investment, etc. I've been shopping around, but haven't found any prospects I can trust. Becoming an elective professional client. This is so far the best option I've found, but not sure I can pull it off. Basically, MIFID allows an exemption where clients classified as professionals don't have any restrictions to buy US domiciled ETFs. However, getting that status is not easy since one of the qualification requirements involves making at least 40 transactions in one year, 10 per quarter, amounting to a total of at least 200,000 euro. Not sure I can pull that off given the current state of my portfolio. Thanks again for everything you both do.

Voices:

But first, first you must travel a long and difficult road. A road fraught with peril.

Mostly Uncle Frank:

Well, first off, thank you for being a donor to the Father McKenna Center. As most of you know, we do not have any sponsors on this program. We have a charity we support called the Father McKenna Center. It supports hungry and homeless people in Washington, D.C. Full disclosure, I am on the board of the center and am the current treasurer. But if you give to the charity, you get to go to the front of the email line. Two ways to do that. You can do it directly at the Father McKenna website on the donation page, or you can become one of our patrons on Patreon, which you can do at the support page at www.riskparody.com. Either way, you get to go to the front of the email line. Just make sure you mention it in your email or in the subject line so that I can duly move you to the front of the line.

Voices:

Yes!

Mostly Uncle Frank:

Now getting to your question, yeah, I think this is way beyond my pay grade.

Voices:

Are you stupid or something?

Mostly Uncle Frank:

When I first saw it, I was like, that's an interesting problem. I didn't even know there was that problem. But it doesn't surprise me these days because the United States and the European Union have a lot of conflicting laws now with regard to financial matters, with regard to the internet, data privacy laws, and it can be a little bit of a morass. I think it gets worse if you're moving back and forth here like you are. So my first reaction was well, I would probably move all my stuff over to interactive brokers and talk to them about it because they are one of the best at this in dealing with people who are living in different places with accounts in different places, since you can have multiple interactive brokers' accounts in different jurisdictions. But I didn't want to completely punt here, particularly since you're a generous donor to the Father McKenna Center. So I did do a little bit of research, and what I found was from artificial intelligence sources. Grok in particular had the best or most comprehensive answer. But you need to take this with the grain of salt that this is not an expert speaking, this is me using artificial intelligence to try to find some answers.

Voices:

It's all one big crapshoot, anywho.

Mostly Uncle Frank:

So I think your list of options is essentially correct, but there are some nuances here. First, you can still hold your account in the US with all the stuff in it, and you can sell those things. The problem is you can't buy any of those shares anymore due to the EU regulations. So you would essentially be in a circumstance where you can sell out of the US side of the account, but to the extent you need to buy to rebalance or do other things, you would have to do that in a different account using the corresponding kinds of funds from Ireland or similar. And if you are looking for what those ETFs would be, you can actually find that information pretty easily over at portfolio charts. If you go into their assets or you just change the country name to a different one, I should say you go to the asset link, which I'll try to link to in the show notes, and then change the country. It will give you a whole bunch of lists of ETFs or UKS that are applicable to that particular country. So finding those things shouldn't be that difficult in most circumstances. But Grok agrees with me that interactive brokers is the way to go here because they are familiar with this for US citizens living in the European Union. They handle the FATCA seamlessly, according to Grok. If you qualify as a professional, you could still buy US ETFs while being a resident of the EU, but it didn't sound like that's going to apply to you. For Schwab, it says it's very limited, and many people experience closed accounts, EU accounts at a certain time. That is a problem that U.S. financial services firms typically do not want to deal with anything outside the US if they can avoid it. Same rules for whether you can buy ETFs, although evidently Schwab does not allow you to do the exception for professional traders. I doubt you're going to qualify for that. Fidelity was bad, EU local brokers were bad according to this. So what the GROK recommended was put all your stuff at Interactive Brokers and then work with them to deal with these specific issues. So that's what I would probably do in your case. And then I would leave the US account alone and sell out of it when necessary. But then when you had to buy things, you would have to do that by transferring the money over to the other account in Europe and buying the corresponding European ETFs or UKIDs. Also, if you want to insert the actual question that I used into your favorite artificial intelligence, the question I put in was can a US citizen with an account at Interactive Brokers buy and sell US ETFs even if they become a resident of the European Union? And that's how I got my answers out of this. I didn't ask it about Schwab or the other brokers, but it conveniently provided me that information anyway. And the conclusion at the end was in summary, selling is fine, but buying requires professional status or workarounds. IBKR remains one of the best options for US expats. Reach out to them for personalized confirmation. If your portfolio qualifies for professional status, this won't change much. But again, I don't think yours does based on your description. Anyway. Hopefully that helps a little bit. Thank you for being a donor to the Father McKenna Center. And thank you for your email. Second off. Second off, we have an email from Pete.

Voices:

I got a little rabbit in this hole, and I'm gonna catch the little rabbit and eat him up.

Mostly Uncle Frank:

And Pete writes.

Mostly Queen Mary:

Dear Uncle Frank and Aunt Mary, during a recent episode of Animal Spirits, Don Castro of Quantix Commodities LP discussed how he evolved the low-returning Bloomberg Commodity Index, composed of 24 commodities, into an investor-facing rules-based active index designed to create positive returns and diversify a 60-40 portfolio. Harbor Capital packaged the Quantix Active Index into ETF HGER that has an expense ratio of 0.68% and an inception date of February 2022, so it's too new to really judge yet, but still represents an interesting evolution of commodity exposure. HGER purports to use a quality overlay to actively manage and adapt the BCMO index with weighting scores based on each commodity's ability to 1. 2 roll yield, reduce cost of carry.

Voices:

It's carry.

Mostly Queen Mary:

3. Reflect scarcity in the current economic environment versus dollar debasement, which allows the index to dynamically reweight between consumable and storable commodities, i.e. go under and overweight on gold. Of course, I plugged and chugged HGER into Testfolio's asset analyzer. For the 3.5 years of existence, HGER CAGR at 9.43% with a 3.1% dividend yield fell between the returns of managed futures and gold, which has been on a tear lately. It trounced PDBC over that period, which returned only 1.63%, but was still correlated 0.916 with HGER. HGER's lack of correlation to stock seems very similar to gold at right around zero. Interestingly, HGER also has a low correlation to gold itself, as well as at least one of the two managed future ETFs I compared it to. I'd be curious to see what it does during the next equity correction and secular bear gold market. It may be a good alternative for those who use PDBC in their portfolios. Myself, I may consider splitting it evenly with my current gold allocation. Too soon to tell, but worth watching. QuidProQuo, do you know what the new telltale plot in Testfolios Asset Analyzer is supposed to communicate? It says it represents the ratio of cumulative growth between two assets over time. I'm not sure what the ratio on the y-axis is supposed to tell me. How much one asset dominates returns versus another asset? Cheers. De Apresso Libre, Pete.

Voices:

How many lumps do you want?

Mostly Queen Mary:

Oh, two or four.

Mostly Uncle Frank:

All right, Pete, our old friend and contributor. So I did take a look at this new fund, H G-E-R, and I did listen to that episode of Animal Spirits, where they talk to the people that run it and how it is and why it is. This is an interesting development, I think. And the issue here is that the original commodities index that was set up a long time ago, that things like PDBC and a lot of other commodities funds are based on, is an arbitrary index. It's kind of like the total bond market index. Somebody just decided these are the things that should be in this index and in these proportions, and let's just go with that. And so they created an index on it a long time ago in the 1980s or 90s, I think. And it's been kind of living with that ever since. And then these funds came along and say, all right, well, let's just make a fund that reflects that index. So what HGER is recognizing that maybe that's not the best mix of assets to put in a commodities fund, even if you want to use the same commodities, let's change the proportions of them. From what I saw, the main difference is that HGER has a very high percentage of gold in it relative to commodities index funds. And that is what is really driving its superior performance both this year and in early 2022 when it first came out, I think. So your baseline question though is is this a good replacement for PDBC? And the answer is maybe, probably. It's hard to tell without going through a period where gold does not perform very well. And since it's relatively new, we've really not seen that, although I suppose somebody could model it if they really took the thing apart. But the thing is, I don't know if it really adds that much if you're already holding gold separately. Although maybe it's just a matter of changing the proportions of what you're holding to get the kind of mix that you ultimately want. My ultimate view is that an allocation to managed futures generally makes more sense and gives you kind of more bang for your buck than the allocation of the commodities fund. So these days I don't have an allocation to a commodities fund anymore. I just incorporate that with managed futures. Managed futures does cover the commodities sector, and depending on which of those funds you pick, it can have more or less traditional commodities in it. But it also covers things like currencies and interest rates and not only going long commodities, but also going short commodities and everything else in there. At least if you're using a trend following type fund like DBMF. And of all the other assets that you put in your little comparison that I'll also link to in the show notes, I think it was most correlated with gold, which makes sense to me. So my preferred solution at this point in time for this allocation, the macro allocation is the alternative solution. The alternatives being things that are uncorrelated with both stocks and bonds would be to use gold and managed futures in those slots and not bother with a commodities fund, although there's nothing wrong with using a commodities fund. I think it's just more difficult to use it and it doesn't generally perform as well as managed futures funds.

Voices:

That's the fact jack.

Mostly Uncle Frank:

Unless it's got a lot of gold in it, of course.

Voices:

I love gold.

Mostly Uncle Frank:

At least this year. So yeah, I do think it's worth watching. And I should mention that somebody else also emailed about this same fun, just asking what I thought of it. And so I will call this email or answer good enough for both emails. I will not be answering that other email, which came also in early September, around the same time this one did. I suppose you both listened to the Animal Spirits podcast at the same time. And then your final question: do I know what the new Telltale plot in Testfolio asset analyzer is supposed to communicate?

Voices:

It's a trap.

Mostly Uncle Frank:

And I looked at it, but no, I'm not sure what you would do with that. But there are a lot of things in testfolio, and they're keep being more rolled out in terms of tools and things that I wouldn't necessarily use, but many other people might find useful for many different types of analyses, particularly those people who are more interested in active trading strategies and things like that. The thing I'm hoping to see in testfolio at some point is a more extended data set of simulated tickers for the various combinations of asset classes, small cap value, large cap growth, large cap blend, so on and so forth. They do have tickers in there, simulated tickers now for the sectors going all the way back to I think the 1920s. I think using the Frama French data set. But if anybody's listening there, what I'd really like to see is something that would be similar to what Tyler's got at Portfolio Charts. He's got, say, you can do like small cap value back to 1970, which you can also do at someplace like Portfolio Visualizer. What would be great is if you would did the same thing that you did with sectors, but for these factor sets as far back as you can do them. Because that would greatly expand the back testing capabilities or opportunities for people who are using factor combinations. Anyway, that's what I want for Christmas this year.

Voices:

You'll shoot your eye out, kid. Merry Christmas.

Mostly Uncle Frank:

See what you can do, Santa Baby.

Voices:

Santa honey. One little thing I really need. The deed. To a platinum mine, Santa Baby. So hurry down the chimney tonight.

Mostly Uncle Frank:

Thank you once again for writing in, Pete. I believe you are a donor to the Father McKenna Center, but you didn't mention it in your email, which is why I missed it the first time. Oh well. Thank you for being such a good participant here, and thank you for your email.

Voices:

And here's a cigar for you.

Mostly Uncle Frank:

Last off. Last off of an email from Wilhelm. Wilhelm from Deutschland. I was gonna say it. And Wilhelm writes.

Mostly Queen Mary:

Hey guys, my name is Wilhelm. I live in Nordrhein-Westfalen, Germany. I'm a private investor and always interested in learning something new. A great page you have, very interesting. My question: what do you think about the investing desert portfolio? For me, it's one of the most stable portfolios for retirement and the safe withdrawal rate. Minimum drawdown in volatility with an acceptable return over a long period. I would be very happy for a short answer. Many thanks, Wilhelm.

Mostly Uncle Frank:

The Germans aren't our smiles and sunshine.

Voices:

Oh, the Germans are mad at me. I'm so scared. Ooh, the Germans. Uh oh, the Germans are coming to get me. Stop the pretending you're scared to get me.

Mostly Uncle Frank:

Oh no, there's so big and pretending you're scared of us to stop. So, the desert portfolio. Well, what is it? I looked at it. I will put this link in the show notes you provided. It is 30% in a total stock market fund, like VTI is what they're using there. 60% in an intermediate treasury bond fund. They're using IEI, which is actually slightly shorter in duration than the usual IEF. And then they've also got 10% in gold, and they're using GLD for that one. So this portfolio is very similar to the all seasons portfolio, that sample portfolio that we use as a reference portfolio. And that is a very conservative portfolio that you would probably only want to hold if you were extremely conservative. Or as originally designed as a risk parity kind of portfolio, you would apply leverage to something like that to essentially goose up its returns because it is so conservative that you're willing to add some volatility via leverage to get the returns up a little more. And that is the traditional way that a hedge fund would have used a risk parity style portfolio back in the original days in the 1990s and early 2000s. It probably isn't going to be that useful for most people because it doesn't usually match what people's goals are. Usually people's goals in investing are either to accumulate the most in terms of growth, or in our circumstances, our primary goal here is to find portfolios that have the highest safe withdrawal rates that we can withdraw the most money out of during retirement. And this doesn't do either one of those things, although it does have a decent safe withdrawal rate, at least for how conservative it is. And if you look at it in portfolio charts, which I would do, I would just run it through the calculators there. You can see that it performs very similarly to the all-seasons portfolio. But I think you would probably want to modify it if you were going to actually turn it into some kind of drawdown portfolio. You would want more stocks in it, you would want fewer bonds in it, and you'd want some value stocks in it. And so I went and put this into the safe withdrawal rate calculator over at Portfolio Charts. For IEI, I used a split between intermediate-term treasury bonds and short-term treasury bonds, since it's a little shorter than IEF. And it will give you something like a 4.8% safe withdrawal rate since 1970 at 30 years, but that tails off as you go further out. Mostly I would suspect because it has low growth possibilities with only 30% in stocks in it. So the perpetual or long-term withdrawal rate's only about 3.5%. This would be a good portfolio to use if you were just very conservative anyway, and you weren't going to take out much more than 3.5%. Or you had a relatively short time frame, and you really weren't worried about long-term results. So thank you for stopping by and writing in with your question. Sorry it took so long. I realize this is from August. But hopefully it helps. And thank you for your email. But now I see our signals beginning to fade. Guess it was a short podcast today, huh? That happens sometimes. I'd say in a given week, I probably only do about 15 minutes of real actual work. If you have comments or questions for me, please send them to Frank at RiskPartyRadio.com. Then email us frank at riskparty radio.com. Or you can go to the website www.riskpartyradio.com. Put your message into the contact form and I'll get it all that way. If you haven't had a 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 Party Radio. Signing off.

Voices:

Santa Baby. Forgot to mention one little thing. A ring. I don't mean on the phone. Santa Baby. So hurry down the chimney tonight. Hurry down the chimney tonight. Hurry tonight.

Mostly Queen Mary:

The Risk Parody Radio Show is hosted by Frank Vasquez. 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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