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, 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. 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 triple header, was requested by a longtime viewer named Gladstone, and it's between ETF ticker symbols 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 judges. Welcome back, great to see you.
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 investing in a fund that shorts, and then the Cayman that it's calculated and taxed differently.
Ball actually does short individual securities, so they are impacted by this 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.
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. 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 you know 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. 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 is 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.
As Dave pointed out, they are very different. 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 individual stock weightings, and it's supposed to be beta zero.
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.
