ETF Battles: Alternative Strategies for Beating Stock Market Volatility - A QUADRUPLE HEADER!

When financial markets get rocky, people want alternatives. Now, this can help to ease volatility and diversify risk with the goal of smoother returns. Today's audience requested a quadruple header between four alternative strategy ETFs. So what's the best choice? Find out right after this.

I'm Ronda Legi, you're watching ETF Battles, an original program series that's now in season six, and we're glad to have you here. Our goal is to help you make better investment choices. So if you need help analyzing any specific ETFs and you're not sure how they stack up versus the competition, send me your ETF ticker symbols in the comment section below or on our X feed at etfguide.

I want you to visit the description section below. We've got links to our program judges. We've also got links to our program sponsor, Direction, who's been expanding their ETF lineup from single stock ETFs to more diversified index linked funds. There are lots of good choices there, so be sure again to check out the description section. We've got outbound links going to Direction and also lots of good viewer resources down there, so don't miss it.

Today's quadruple header, actually a triple header, was requested by a longtime viewer named Gladstone, and it's between ETF ticker symbols, strike that, this is a quadruple header. Man, I scrambled eggs today. We've got BAL versus MRRK versus CTA versus KMLM. Thank you so much, Gladstone, for this ETF battle suggestion.

Judging today's contest, we've got Shaina Sisel with Bancree Capital Management, also known as the queen of alts, and we've got David Durkin with the street.com. Welcome back, great to see you. Thank you so much for having me again. Good to see you. So we've got our four battle categories of cost, exposure, strategy, performance, and then the mystery.

Mystery, of course, is where our judges can surprise us with any factor or thing that they feel is crucial to today's contest. Our judges can also nominate wildcard ETFs if they feel there's better choices elsewhere, or they can opt for split decisions. It's up to them. I've got the scorekeeping duties, and at the end of the program, we will declare an overall winner. Keep in mind none of the battle outcomes are ever predetermined or known in advance by myself or our judges. So sisters before misters, let's begin with the first category, cost.

Shaina, please get us started. Well, I want to start by saying that you're basically asking me to choose my favorite child in this battle because three of these ETFs are issued by partners of Bonan BT, MRRK, and CTA. So you're asking me to choose between my favorite child, and I don't want to make any of my clients mad. So with that in mind, I will do my best to provide the viewers with very objective, clear, and David can keep me honest.

In terms of expenses, there's a couple of things that are worth noting, and that is that in this alternative space, especially with products that short within the fund, there are some regulatory requirements in the calculation of their expense ratio that results in what I call Phantom expenses. So the only one of these ETFs that it impacts is BTO because it's the only one that is actually shorting within the ETF individual securities. CTA and CMLM are going long short, but they are investing in a Cayman based product, and so they're like investing in a fund that shorts, and then the Cayman that it's calculated and taxed differently.

But BAL actually does short individual securities, so they are impacted by these Phantom expenses, meaning that the SEC requires that they add back into the expense ratio the cost of shorting, meaning the cost of margin as well as the cost of any dividend payment that they have to pay, but it's Phantom because it's also calculated as part of the NAV of the value of the security, so it's not really an expense that's being double counted. So in this battle, BAL is my winner, and the reason why is because even though the stated expense ratio everywhere you look is 1.43%, that isn't the actual expense ratio. The actual adjusted expense ratio is 45 basis points. That is the actual expense ratio that anybody who invests in this fund is paying. It's not 1.43, that's with the Phantom, and then the adjusted is 45 basis points. As such, it is the lowest expense ratio of the four. It has a spread of three cents, which is the lowest of the four, and so for that reason, BAL is my winner.

Again, I felt the need to preface and allow the viewers to understand that there is this Phantom thing that happens, and anytime you're evaluating an ETF that is shorting actual securities, not using futures, not using options, not using some sleeve impact like the CTAs, actually short where you look at the holdings and it shows the short position, it is going to be impacted by this SEC rule, and so you need to go and look into the prospectus to find out what the adjusted actual expense ratio is, and in the case of BAL, it's 45 basis points. The devil is in the details.

Thank you so much, Shaina, for that strong start, and we appreciate that. Dave, you're up next. Give us your analysis on cost. Well, this is why I am not the queen of alts or anywhere in the Royal Court or even in the building. Yeah, that was, I don't think there's anything I can add to that. I was looking strictly at expense ratios, but maybe I should change my mind now based on what Shaina said. I was looking at CTA with the expense ratio of 76 basis points as the pure lowest stated expense ratio, obviously not the case with betail as Shaina laid out. Spreads on these funds are okay, there's enough liquidity to trade here. I'm just going to stick with my original choice on this one, CTA, based on the lowest expense ratio.

Okay, well thank you very much. That takes us next to exposure strategy, and Dave, you're up, so break it down for us. Yeah, Shaina kind of started laying this out already. These are really some different strategies within this sort of risk management umbrella. BAL again is long low beta, short high beta, so it's designed to really outperform regardless of what the market's doing as long as low beta is outperforming, so it can generate gains in both up and down markets, which is what you want in a good hedge. BAL's got a relatively large negative correlation with the S&P 500, so that could be a good match.

MRRK is pretty much kind of a standard S&P 500 holding with a protective put on it and then an out-of-the money covered call in order to help pay the fees for that put. So in an up market, this is going to pretty much look like the S&P 500, and it's really not going to provide much protection unless things start heading down, and then of course you've got the cost of the option strategy, which is going to add is going to be a performance drag on the fund overall over the long term.

CTA and KMLM are kind of your traditional manage future strategies and that they're looking at, you know, currencies and energy and commodities and all these other things to sort of diversify the portfolio and really give you sort of that risk managed component to your portfolio. So in that sense, I like those two funds a little better. I do like CTA in that it specifically excludes equities from the equation, so it tries to give sort of a pure non-correlated portfolio that'll do hopefully a little better over the long term and managing the risk of the portfolio. So I'm going to give the slight edge to CTA here because I think this fund and KMLM probably do a better job of more traditionally what manage future are supposed to do.

Thank you, Dave. Shaina, you're up next for exposure strategy. How do you see it? So this is where the asking me to pick my favorite child part comes in. I actually use all of the products, BAL, MRRK, and CTA, in my model portfolios because they actually are complimentary to each other, and when you're building an alts portfolio, you really want to have, just like with equity and fixed income, a diversified mix of strategies. I usually pick four or five that have low excess return correlations to each other and then low correlations to traditional fixed income and equity.

I use MRRK as kind of juice in the portfolio when markets are going up, and having that really negative correlation from the CTA and BAL is not helping, but they are, as Dave pointed out, very different. So BAL is a market neutral fund, which means it goes long and short in equal measures. It goes, as was pointed out, long low beta and short high beta. It looks at the thousand US stocks in the Dow Jones index, and it picks what it goes long based on the top quartile of names, and then bis sector, and then it's neutral, and it's waiting bis sector, it's equal weighted, and then on the short side, it does the same thing to pick it shorts, and the goal here is to have literally neutral exposure, so it should be neutral sector, it should be neutral, and it's individual stock weightings, and it's supposed to be beta zero, and so that's the focus.

What I like about this product is a lot of market neutral funds, the gain you get, it has, as was pointed out, nothing to do with what the market's doing, so it has to do with are your shorts underperforming your Longs because that's how you make money even if they're both down, as long as your long book is outperforming your short book, you have positive return. So it's a lot about stock selection, and this product is very clear in what it's trying to achieve. It's trying to achieve the Arbitrage between the outperformance of low volatility stocks with high volatility stocks, and when low V is outperforming even if the market's going up, BAL will do well, and vice versa, if higher beta names are doing well and lower beta names are not, it will do worse, and it will be magnified in both directions because of the nature of these products, right, because it's basically lowall on steroids because you're not just getting low Val exposure, but you're actively choosing to short high Val, and so that can lead to quite a bit of volatility.

This fund is, I've seen it profiled by a lot of quote industry expert websites who have no knowledge and no understanding of alss in general, and they don't understand how this product works, and they just trash it and say, well, you can buy managed futures, and I would say, well, that is a copout because this not a managed futures fund, and those two things pay different roles in the portfolio, and they're not actually correlated to each other, and they actually can both be used at the same time and add value. So Ball's role is an important one and quite frankly, if you look at what it did in this last month, particularly with the Deep seek stuff, it crushed everybody else by far, even the managed future strategies when the market was going down because of the nature of how it's performance.

Now, MRRK is looking to give you market exposure. It wants to give you the return of the S&P 500. It just wants to protect you on the downside generally speaking. The product does just that, so when the market's going straight up, it consistently will perform in line with the market, maybe with a little bit of underperformance just due to the Hedge nature of the products. It does use puts, long dated puts contracts to hedge on the downside and then pays for them by writing call options and put options and then playing on the spread. So it's near or in the money long-term put options, and then it writes far out of the money call or put options and plays on the spread to pay for the cost of the puts. That's unique. Most of these bught strategies that are doing this type of product don't actually do that second effort to try to cover the expense of it, so that helps the fund keep up with the markets, so it will do well in good markets, and that's why it's in portfolios that I use. It has downside protection but gives you market performance if you think the market's going to go straight up.

Now, the CTA funds are managed future funds. They are very much managed futur are completely uncorrelated with traditional markets. They're basically Trend following. They use futures to take advantage of global Trends. Another version of this that just expands what the underlying base of investment opportunities are is called Global macro, and TTA is a strategy that goes back forever. In fact, the KMLM product is based on the Mount Lucas index, which has been around for decades. CTA is actively managed and KMLM is not, so they're doing the same type of thing. They're structured the same way, but CTA being actively managed has done better performance- wise.

Now you're going to ask me which one I think has the best exposure strategy, and I can't pick. They all have merit. I think the one that implements the most unique strategy that stands out in terms of like doing something that you don't see its peers doing is MRRK, so there Market neutral is not a new thing, hedged Equity is not a new thing, manag future is not a new thing. The only thing that MRRK is doing that is unique is this writing calls and puts to cover the cost of their long-dated put options for them the Hedge, and that is unique. So if I have to choose one, again, you're asking me to choose my favorite child, I'm going to choose MRRK just because if you look at it in the the advantage of hedged equity, which is the category it sits in, that one thing is unique to them, and it is not something that you'll find in a lot of other places, so I will give it to MRRK, but I just want to go on record saying that I think all of these strategies have merit in what they're doing, and they're very different, but in terms of what is unique, that's the only one that has something truly unique that it's doing that you won't find somewhere else.

Wow, solid analysis, and I can tell you none of your children are angry with you right now. I don't know, I'm gonna have to check with them, they might be after this airs. All right, well that takes us next to Performance, so Shan, you're still up. How does the performance of these four ETFs look? So this is going to be super point in time biased, and that is if you were to look at these funds in three months or a year, there would be a completely different winner, so I'm just going to start there, point in time bias.

Right now the winner is BAL. Ball's performance on one month year to date, three months and is is superior. CTA has a much better one-year number, but doesn't have a three-year number, and BAL has, you know, a stronger three-year number. It's kind of in line with MRRK, so I'm going to give it to BAL, but again, I preface that by saying if the Deep seek thing didn't happen earlier this month, this would not be the case. It crushed crushed during that downturn because technology stocks, specifically Nvidia and all the AI names or high beta names that are short in the portfolio, so it did great, but it is very point in time, so I'm going to choose it as my winner, but I'm going to preface it as saying that from a consistency standpoint for a fund that's going to give you good outsized returns that is not correlated with some consistency and you're not going to have this volatility, the winner is CTA, so it's a tie.

All right, gotcha, between CTA and BTO. Thank you, Shaina. Dave, you're up next on performance. How do you see it? Yeah, Shaya made the same point that I was going to and that these aren't funds that I don't think you can really judge on performance in absolute terms because they try to do so many different things here. Looking back since CTA is the most, well, I guess is the youngest of these funds, it's about three years old, and if you just look at Absolute performance since then, CTA is the winner. It's up about 38%, I think is the number, but again like Shaina said, these are, you know, very situationally dependent and, you know, they're all going to outperform in different situations. It just really depends on kind of what's happening at the moment, and again, that's the good thing about these funds if you, you know, you can find very different Hedges to, you know, however you want to layer that on your portfolio.

So I'm just going to stick with the since Inception return or since the common Inception return and call CTA the winner on this one, but again, same disclosure that Shaina made. All right, well that takes us next to the mystery battle category where our judges could pick a certain factor or thing that they feel is important to today's contest. So Dave, what is your mystery battle category and which of these ETFs wins it? Yeah, my category is going to be the efficient Frontier, and I look at that because, you know, if these funds are really designed to, you know, risk manage and diversify, you really kind of want to find out what the the right balance is that sort of U maximizes risk adjusted returns, and MRRK there's really, you know, not much different than the S&P 500. You know, the market really hasn't gone down substantially over the last three years at any given point, so there hasn't been a significant amount of advantage of pairing that up with the S&P 500.

The other three funds do a much better job in the right quantities, and usually that's somewhere in like the 50 to 60% range S&P 500 and about 40% in one of these managed Futures funds or in a fund like Bell. If you look historically, I found that CTA does has done at least recently the best job of producing better risk adjusted returns over the last year, and that's been, you know, roughly a 40 50% allocation to CTA with the rest going to S uh the S&P 500, and that's done the best job of managing risk adjusted returns. Now you're giving away a little in absolute performance to get that, but the trade-off is on a risk adjusted basis, you're you're doing a little better, at least you've done better over the last year or so. So I'm going to call CTA the winner on this one, but again for the same reasons as performance, it's really kind of situationally dependent what you're looking to do and kind of what time period you're looking at.

Thank you, Dave. Shander, you're up next, your mystery battle category. What is it and which of these four ETFs wins it? So I appreciate David's aggressive nature of saying 40 to 50% one of these names. I would never ever put that much money in any of these, that's not what they're meant to do. In fact, will, I mean yes, they have will help with risk, but they will absolutely start to eat at your returns. I would never put more than 20% in an alts Fund in a diversified portfolio like ever. That's like the optimal percentage to do an ALT sleeve, a diversified alt sleeve.

I wanted, yeah, I think he did that just as an example, okay, but I'm actually kind of going to use the same idea and and approaching this, what I wanted to look at is which one of these funds provides the most ability to even out the ride without taking too much away from your returns, and as much as I love CTA, it doesn't have a long enough track record for me to really be have high conviction in the analysis. If you just were to replace CTA with KMLM as a proxy for managed futures, it doesn't actually help as much. In that sense, I want something, and this is going to sound crazy, that has High Vol but not volatility correlated with traditional markets, right? So this is the Bitcoin argument sometimes, if a small percentage of Bitcoin even with its insane amount of volatility can juice your portfolio in a meaningful way, and in that case, the winner is BAL.

So BAL even with its crazy B and the fact that it can be up 19% and then down, you know, 15, the nature of the volatility of returns and when that up and down happens is so negatively correlated to the markets that it evens out your ride, but if you don't put a huge percentage of that product in your portfolio, it's not going to eat away at your returns. So for me, if I were just going to pick one, it would be BAL, and the waiting would be somewhere between 8 and 10% against a 6040, that's, and it would give you the most amount of alpha without taking away from returns, and it would it would absolutely smooth out the ride.

However, I tend to use these funds as a basket, and I don't use KMLM because I pick one managed Futures fund, and for me that's CTA because it's a better fund, and we've kind of established that, and I choose those three funds, BAL, MRRK, CTA, and then I throw in two more funds with them, CBLS, which is the cloud Equity Fund, which is a long short actively managed almost hedge fund like strategy, and then I put in a fund called RDFI, which is by RAR view Capital, it's a RAR view Dynamic income, which is a closed end fund Arbitrage kind of thing, and I take those five products and put five well 5% in e or is it five 4% in each, and then I have that as a 20% sleeve within my traditional 60/40 Arrangement, so it ends up being like 50 TW uh 30 20 or something like that, but that's how I do it, and that gives you R return just a quick question.

Within that 6040 sleeve, is that is that percentage reducing the 40 or reducing the 60 both? So that's why I said it ends up being more like a 50 30 20. Oh, gotcha, okay, perfect. I actually do it a little bit differently, but that's the simplified version. Personally, if somebody gave me a million dollars, I would take $800,000 and put it in a 6040 and then take 200,000 and put it in this alt, but that ends up with like a very like I would have to pull out a calculator and it's not it's not clean, but it essentially is like 503020. Got it.

Okay, well thank you very much, Shaina, for that detailed analysis. Now we gonna give our judges an overall final opportunity to give us their overall winner, and so far my scorecard this this has been a a quadruple header, but it looks like there's three that are leading the way and vying for the win, so how will this go down? Shaina, give us your final take. So I think we've sort of established there's nothing against KMLM. It's a very good managed Futures strategy. It's based on the Mount Lucas managed Futures index, which has a very long track record. I wrote a white paper on the benefits of alternatives for diversification in 200 9 2010, and I used that as my managed future proxy, so it has a super long track record, but it's passive, and you can actually add a lot of alpha in an actively managed CTA portfolio, so CTA beats KMLM, so it's just, you know, scratch off.

So now I have these three left. I'm going to tell you that I have five winners because that's how I would build a portfolio, and it would be what I just said, it would be BAL, MRRK, CTA, CBLS, and RDFI, and those five funds are my winners of this battle because I would use them in combination, and I would never use any one of these on their own at all, and so I have a five-way tie of those five funds because that is the allocation portfolio that I manage that I actively manage at this moment, and that's how it's allocated.

Dave, your final chance to weigh in with your overall winner. Well, I have no favorite children here, so I'm just going to speak my mind. I like CTA on this list. You know, you can look at cost, you can look at short-term performance, things like that. I don't think those are the driving factors of why you'd want to choose a fund like this, so I kind of lean on the exposure strategy as my tiebreaker. I just like how it's constructed. I like the long short nature of the multiple assets that they use in in constructing the portfolio. I like that equities is kind of removed from the equation, so you have a true uncorrelated asset. Yeah, I think it's just got the best structure and composition for I think what you're looking for out of a managed Futures prod uh product, and it just checks the boxes for me, so I'm going to go with CTA.

Well, our judges have weighed in, and according to fi my battle final battle scorecard, this is going to be a split decision between five ETFs. We had two wild cards from Shaina, CBLS and RDFI, and then it was between those three in today's headliner bit, BAL, CT ta, MRRK, and we had a lot of different children in this battle, so to speak. Shaya, of course, making the argument that each of them does something a little bit different, and so in that sense, they complement each other rather than compete. Dave bringing his point that CTA he likes, obviously it for all of his, actually it was pretty much a clean sweep for him on all categories. It is actively managed, so it does kind of the same thing as KMLM but with an active hand, and wow, we got some incredible analysis today on today's program.

We had the queen of alts breaking it down, and of course Dave's solid analysis. What did you think about today's Showdown? Let us know in the comments section below. Shaina and Dave, great job, we couldn't have done it without you. Thank you so much for having me. I love these all battles, keep them coming. Yeah, when the when the chef's cooking get out of the kitchen, it was fun. Poor Dave has to be on the show with me and he is like why why are you doing this to me Ron Hey Hey I learn as much as anybody on this this is beneficial for me as well so I I love it iron sharpens iron as it says in the Proverbs and so we definitely appreciate the solid analysis all the way around. Be sure to hit us up in the comment section below with your ETF battle suggestions. Again, a big thanks to Gladstone for this particular battle suggestion. Nice job job I'm Ronda legi thanks for watching ETF battles we'll see you on the next episode.