Risk Parity Radio

Episode 397: Small Cap Value Funds, How To Recognize Bad Books, CAOS And Weekly Portfolio Reviews As Of January 24, 2025

• Frank Vasquez • Season 5 • Episode 397

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In this episode we answer emails from Bones, Paul and Justin.  We discuss small cap value funds and their underlying indexes, an odd book from an unreliable source and an alternative ETF called CAOS.

And THEN we our go through our weekly portfolio reviews of the eight sample portfolios you can find at Portfolios | Risk Parity Radio.

Additional Links:

Bankruptcy Case Involving David R. Webb:  In re Verus Investment Management, LLC, 344 B.R. 536 | Casetext Search + Citator

CAOS Main Page:  CAOS ETF - Alpha Architect ETFs

CAOS Fact Sheet:  Factsheet_CAOS.pdf

Amusing Unedited AI-Bot Summary:

What if your investments could outpace market trends with a simple shift in strategy? On Risk Parity Radio, we promise to unravel the complexities of asset allocation, specifically tailored for the DIY investor. We kick off with a deep dive into the world of small-cap value funds, dissecting the evolution of Vanguard’s funds alongside iShares' stalwart, IJS. The competition heats up with new entrants like Avantis and Dimensional, particularly the rising star AVUV. With insights from Paul Merriman's research, we explore why diversifying into small-cap value can be a game-changer for your portfolio, no matter which fund you choose.

Ever wondered if an investment product could thrive in both stable and volatile markets? Enter Wes Gray’s Alpha Architect product, Chaos, which challenges traditional investing with tools like protective puts and box spreads. We bring you a thorough examination of this intriguing product and a candid discussion about its potential and risks. Our analysis extends to sample portfolios, showcasing the power of diversification with assets ranging from the S&P 500 to commodities. We wrap up by contrasting popular portfolios like the All Seasons and Golden Butterfly with the experimental Accelerated Permanent Portfolio, making sure you are equipped with cutting-edge strategies to optimize your investments.

Support the show

Mostly Bones:

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.

Voices:

If a man does not keep pace with his companions, perhaps it is because he hears a different drummer, a different drummer.

Mostly 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. Whoa, and you probably should check those out too, because we have the finest podcast audience available.

Mostly Mary:

Top drawer, really top drawer.

Mostly Uncle Frank:

Along with a host named after a hot dog.

Mostly Bones:

Lighten up Francis.

Mostly Uncle Frank:

But now onward to episode 397. Today on Risk Parody Radio. It's time for the grand unveiling of money which means we'll be doing our weekly portfolio reviews of the eight sample portfolios you can find at wwwriskparityradiocom on the portfolios page.

Voices:

Boring.

Mostly Uncle Frank:

But before I put you to sleep with that, I'm intrigued by this how you say emails. And First off. First off, we have an email from Bones.

Mostly Bones:

I am Leonard McCoy, senior medical officer aboard the USS.

Mostly Uncle Frank:

Enterprise. You know I've been waiting to answer this one.

Mostly Bones:

What am I? A doctor or a moonshottle conductor? You know I've been waiting to answer this one.

Mostly Mary:

And Bones writes Look.

Voices:

I'm a doctor, not an escalator, Spock give me a hand Well.

Mostly Uncle Frank:

Bones, I'm a lawyer, not an escalator. Spock, give me a hand Well.

Mostly Bones:

Bones, I'm a lawyer, not a fun creator. I'm a doctor, not an engineer? No, you're an engineer, so I've talked about this before, but I don't mind talking about it again.

Mostly Uncle Frank:

I'm a doctor, not a coal miner. The history of this is kind of interesting, because Vanguard originally started out with a mutual fund. That was their small cap value fund and I believe it's still VSIAX and it is based on the CRSP indexes, which are some of the oldest indexes actually, and so when they first created an ETF of small cap value, they essentially took that formula from that mutual fund and created VBR with it. I will not peddle flesh, I'm a physician. In the meantime, their competitors over at iShares had created a fund called IJS, an ETF, and that small cap value fund is based on what is called the S&P 600 small cap value index, because I'm a doctor, that's how I know.

Mostly Uncle Frank:

Now, most people who wanted an exposure to small cap value gravitated towards IJS and not VBR, and the reason they did that is because the S&P 600 small cap value index is essentially smaller and more value-y than the index that is used in VBR, which gets close to mid cap in some of its range, and so, in effect, the S&P 600 index gives you a more direct exposure to what you're trying to get exposure to, which means if you're constructing a complicated portfolio, you essentially need less of the S&P 600 fund than you would of the CRSP-based fund to get the same kind of exposure. Ah yes, now Vanguard's not dumb, and when they saw everybody was running to IJS instead of using their VBR fund, they went and created their own version of IJS that is based on the S&P 600 small-cap value index and that fund is VIOV, and so that is generally viewed as the industry standard, if you will, for small cap value, at least over the last 20 years or so. It also has a nice profitability filter, so it excludes companies that have not been profitable for the last four quarters. I think is the test. So out of the basic index funds, that is the one people gravitate to Now.

Mostly Uncle Frank:

It does have competition now from dimensional and Avantis funds, which previously were only available if you went through a financial advisor and bought a specific mutual fund which is DFSVX and goes all the way back to 1993 and was one of the first totally dedicated small cap value funds. But you can get that in ETF form now, and probably the more popular one these days is the Avantis version of that, which is AVUV. I'm not a scientist or a physicist, mr Spock, and so more people are gravitating towards that. I've used VIOV in the sample portfolios simply because it's got a longer history and it still is the industry standard, but I think there's a good probability that AVUV is actually a better choice these days. It's one of those things where I say you should treat personal finance as an evolving technology.

Mostly Uncle Frank:

I'm a doctor, not a bricklayer, and that just because you used a particular fund or funds 10, 15, 20 years ago does not mean that they are necessarily the best choice to make prospectively or going forward.

Mostly Uncle Frank:

I would also say that you shouldn't be selling a whole bunch of things to run to the next greatest thing without really thinking about it and really examining reviews and what other people think about it. In this case, I rely on the research from Paul Merriman's website. They do a best-in-class ETF analysis every two years. Avuv is the top choice in the small cap value category, but VIOV is also listed there as a good alternative. But here's also the thing you should recognize Whether you're using AVUV or VIOV or VBR, any one of those could outperform the other one in any decade of time, and so what's more important is just that you have an exposure to that if you're building a portfolio with small cap value in it, than getting all wound up about which particular fund and whether this one's going to be better than that one in the future. So it would not be quote wrong, unquote to be using any one of these as an allocation in a diversified portfolio.

Mostly Bones:

I'm a surgeon, not a psychiatrist.

Mostly Uncle Frank:

And over time, I would not expect your performance of the overall portfolio to be much different regardless of which one you use. So if you have VBR and it's in a taxable account in particular, I would not sell it for this reason. Just a shift to VIOV or something else. You might consider future allocations or future buys in one of these other funds, but that will add a little bit of complication, good or bad. One good use of these funds is for tax loss harvesting, actually, because you can sell one at a loss and then buy the other one right away and they are different enough that they will not trigger a wash sale.

Mostly Bones:

I'm not a magician, spock, just an old country doctor.

Mostly Uncle Frank:

So keep that in mind as well.

Mostly Bones:

I don't know. Keep saying that Are you a doctor or aren't you?

Mostly Uncle Frank:

Hopefully that helps and thank you for your email.

Mostly Bones:

Random chance seems to have operated in our favor. In plain, non-Vulcan English, we've been lucky. I believe I said that, Doctor.

Mostly Uncle Frank:

Second off. Second off we have an email from Paul.

Mostly Mary:

You've grown up, Paulie. I know I don't understand. When I was a kid, you two were old ladies, Now I'm old and you two are still old. And Paul writes Hi Frank, have you read the Great Taking by David Rogers Webb? Would love your thoughts. Merry Christmas to you and yours.

Mostly Uncle Frank:

No, I hadn't read that before you mentioned it, but I did look it up. I did look it up and this is my approach to looking up books like this, or really any book in finance is I want to know where the author came from, what their history is, because that's my approach to most things. I want to know the history of where this thing came from, and I approach these sorts of things as if I were going to cross-examine the author about what they're talking about. Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys? Forget about it.

Mostly Uncle Frank:

So a good place to start with that is always to put in the name of the person who wrote the thing and the words fraud in one search and the word bankruptcy in another search, because you want to see whether they are actually good with money. In this case, we don't get any fraud coming up with David Rogers Webb, we do get bankruptcy. He apparently worked in the hedge fund industry for a number of years 80s and 90s kind of thing Went off and started his own thing in the early 2000s. It promptly blew up and went bankrupt and it looks like it kind of just put him out of the industry.

Voices:

You're not going to amount to jack squats. You're going to end up eating a steady diet of government cheese and living in a van down by the river.

Mostly Uncle Frank:

I don't know what he's been doing for the past couple of decades other than apparently living in Sweden, but this is a frequent character you see in this world of tomes about finance. It's basically failed fund managers who go off and become newsletter writers or authors or other things, and so this person falls into that category.

Voices:

I have officially amounted to Jack U Squat.

Mostly Uncle Frank:

Which is not very inspiring. I did find this work online. It's there for free. It's like 65 pages long. It is a rambling part memoir, part conspiracy theory of global elites taking over the world and Illuminati and the same stuff that has been written in this genre and it is almost like a fictional genre. For at least my entire lifetime there have been books like this going back to the 1960s and 70s. The Trilateral Commission was really popular back then, as were the Illuminati, but now it's just referred to as in his book, I think global elites and we don't even know who they are, according to him. But we're going to find out. So it's kind of poorly written conspiracy, economic trash.

Voices:

What you just said is one of the most insanely idiotic things I have ever heard.

Mostly Uncle Frank:

And I did go find a couple of interviews of them on YouTube, because a lot of channels will put these kind of people on. They gather attention and then you can sell things, usually physical precious metals and other expensive nonsense. It's kind of a racket of alternative nonsense forget about it anyway, he kind of babbled on, for I don't know how long this interview was, but he's kind of inarticulate.

Voices:

I'll tell you that at no point in your r incoherent response were you even close to anything that could be considered a rational thought.

Mostly Uncle Frank:

And at the end of the day, I mean the host asked him you know well, what's your recommendations for what we should do? And he basically said oh yeah, you should probably just hoard cash and maybe stock up on some supplies and things like that. That is a really worthless recommendation.

Voices:

Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul.

Mostly Uncle Frank:

And so, while it would be fun to cross-examine somebody like this because they've got so many warts, it's like shooting fish in a barrel. There's really no there there, and I wouldn't waste your time with this. Fat, drunk and stupid is no way to go through life, son, unless you find it entertaining.

Voices:

Are you stupid or something?

Mostly Uncle Frank:

Because a lot of this stuff is designed to be read like a clandestine spy novel kind of genre. Oh, yeah, yeah, baby but it ends up being all noise and very little signal in the end. So I hope you weren't hoping that I would say something nice about this person and their work, because it's not really what I do here. I just give you my personal impression, as unwashed as it is.

Mostly Mary:

Do not implore him for compassion, do not beg him for forgiveness, do not ask him for mercy.

Mostly Uncle Frank:

And hopefully that helps and thank you for your email.

Voices:

Amazing thing about snakes is that they reproduce spontaneously. What do you mean? They have both male and female sex organs. That's why somebody you don't trust you call a snake.

Voices:

Last off. Last off.

Mostly Uncle Frank:

Last off we have an email from Justin, our old friend Justin, of Risk Parity Chronicles.

Mostly Bones:

The best, Jerry the best.

Mostly Mary:

And Justin writes hey dude, I like the 60-60. Great stuff Tests out well and I like the basic construction of half equities, half diversifiers from equities. You get pretty close to the upside of the pure S&P but with a volatility profile way closer to the 6040. And ain't nothing wrong with that. Also, you guys have any thoughts on CAOS, alpha, architect, short-term Rate Plus Tail Protection in the form of out-of-the-money put spreads on the S&P. It's been my current infatuation, been putting it into just about every test portfolio I run these days. Basically, instead of X percentage to the S&P, I'm going one-third of that into UPRO, plus the other two-thirds into into CAOS and getting generally better returns, as long as you're rebalancing Pro tip if you want to backtest. Caos used to be AVOLX and dates back to 2013 before converting to the ETF in 2023, and you used to be able to do a workaround in Portfolio Visualizer to get the longer test, but Testfolio doesn't even recognize the symbol, so you can't do it anymore. Anyway, hope your evening together went well. Happy holidays, justin.

Mostly Uncle Frank:

So this is a follow-up to the conversation we've been having with the dude over the past three episodes or so.

Mostly Bones:

So that's what you call me. You know that, or his dudeness or duder, or you know, bruce Dickinson, if you're not into the whole brevity thing, and he did talk about the 60-60 portfolio in episode 394.

Mostly Uncle Frank:

Part of the charm of this podcast is it actually is like a dive bar, with these guys sitting around talking about this stuff.

Voices:

Well, what I can't fathom is how one can drink ice cold beer in freezing weather.

Voices:

Cliff explanation please.

Mostly Mary:

Now, how do you know he has one?

Voices:

Five bucks says he does, ten says it's a doozy.

Voices:

When the British ruled the puns ten bucks all the way they drank steaming hot pots of tea on the hottest days of the year to balance out the inside and outside temperatures. See, conversely, drinking an ice cold drink on a cold day actually results in a more comfortable body temperature. All right, why do you drink ice-cold beer on a hot day? Mr Cleven what else you gonna do with it?

Mostly Uncle Frank:

Here's to cheers eh.

Voices:

You wanna go where people know people are all the same. You wanna go where everybody knows your name.

Mostly Uncle Frank:

So I have looked at this fun chaos in the past out of curiosity. It's an Alpha Architect product created by Wes Gray, who's a very well-respected fun creator and a good friend of Rick Ferry, actually, although they take polar opposite approaches to investing. So this thing trades in protective puts, put spreads and box spreads and says over its 10-plus year history, chaos has produced positive returns during quote normal, unquote market conditions and positive asymmetric returns during fast crashes. We define a fast crash as a loss of approximately 10% to 15% or greater in the S&P 500 index over 60 days or less. Given this track record, we believe chaos may complement or replace US core bond funds. And that's all from the fact sheet that I will also link to in the show notes.

Mostly Uncle Frank:

So when I see something like this, I'm like well, that's interesting, but I really don't know what to make of it overall or how I would even evaluate it over a long period of time, because, honestly, I don't understand exactly how it works and whether there's an algorithm going on in the background that places the trades for them, or it is actually a manager who is making decisions as they go. It's probably a combination of both. So I would say it's certainly not for me, but it may be for you if you understand this and are inquisitive and curious the way my friends Justin and the dude are. They're kind of like the kids who you would dare to lick the frozen flagpole.

Voices:

Are you kidding? Stick my tongue to that stupid pole. That's dumb. That's why you know where to stick. You're full of it. Oh yeah, yeah Well, I double dog, dare ya?

Mostly Uncle Frank:

Or put the Mentos in their Coke or something, just to see whether they'll do it and what's gonna happen.

Mostly Bones:

Now it was serious. A double dog, dare. What else was left, but a triple dare you? And finally, the coup de grace of all dares, the sinister triple dog. Dare I? Triple dog, dare ya?

Mostly Uncle Frank:

So I am very curious to see what you listeners out there come up with in terms of these things, even though I am unlikely to partake in such things. There is no going back now.

Voices:

This is nuts.

Mostly Uncle Frank:

Duck, duck, duck, duck, duck, duck, duck, duck, duck, duck, duck, duck, duck duck, we already run enough hideous experiments here in terms of some of these sample portfolios. Anyway, I will leave this out there, because I'm sure there are other audience members who would be interested in looking at these things, and thank you for your friendship and thank you for your email.

Mostly Uncle Frank:

Now we're going to do something extremely fun, and the extremely fun thing we get to do now is our weekly portfolio reviews. Of the eight sample portfolios you can find at wwwriskparityradiocom on the portfolios page. Just looking at how the markets have been running this month the S&P 500, represented by VOO, is up 3.75% for the month. The NASDAQ, represented by the fund QQQ, is up 3.6% for the month. Small cap value, represented by the fund VIOV, is up 2.73% for the month. Gold has been the big winner so far this month and this year.

Voices:

I love gold.

Mostly Uncle Frank:

Our representative fund GLDM, is up 5.62% for the month so far and the year. Long-term treasury bonds have not been doing much this month other than going up and down. The representative fund VGLT is down 0.27% for the month. Reits, represented by the fund REET, are up 1.67% for the month. Commodities, represented by the fund PDBC, are also a big winner this month. They are up 4%, 4.00%. Preferred shares, represented by the fund PFFV, are up 1.78% for the month, and managed futures, represented by the fund DBMF, have managed to be up 0.84% for the month, and so you see a wide dispersion in these various assets, which is a good indicator of diversification amongst them. Now moving to these portfolios. First one's the all seasons. This is a reference portfolio. It is only 30% in stocks in VTI, the total stock market fund, 55% in intermediate and long-term treasury bonds and 15% in gold and commodities. It is up 1.91% month to date and year to date and is up 10.64% since inception in July 2020.

Mostly Uncle Frank:

I'm moving to these bread and butter kind of portfolios. First one's gold and butterfly. This one is 40% in stocks in two funds a total market fund, vti, and a small cap value fund, viov. It's got 40% in bonds, divided into long and short-term treasuries and 20% in gold GLDM. It is up 2.54% month-to-date and year-to-date and is up 37.33% since inception in July 2020.

Mostly Uncle Frank:

Next one's a golden ratio. This one is 42% in stocks, divided into a large cap growth fund and a small cap value fund, 26% in long-term treasury bonds, 16% in gold, 10% in a managed futures fund, dbmf and 6% in a money market fund, from whence we take our distributions. It is up 2.32% month-to-date and year-to-date and up 32.96% since inception in July 2020. Next one is the Risk Parity Ultimate, which we kind of use as a kitchen sink portfolio to put a little bit of everything in, and so it often performs a little bit differently than the rest of these portfolios. We won't go through all 15 of these funds, but it is up 2.52% month-to-date and year-to-date and is up 23.04% since inception in July 2020. Now, moving to these experimental portfolios. Don't try this at home. These all involve portfolios with leveraged funds in them.

Mostly Bones:

You have a gambling problem.

Mostly Uncle Frank:

First one's the accelerated permanent portfolio. This one is 27.5% in a levered bond fund TMF, 25% in UPRO, a levered S&P 500 fund, 25% in PFFV, a preferred shares fund, and 22.5% in gold GLDM. It's having a banner month. It's up 4.11% month-to-date and year-to-date and up 5.18% since inception in July 2020. Moving to the next one, the aggressive 50-50. This is the most levered and least diversified of these portfolios and suffers on both scores in terms of its overall performance. It is one-third in a levered stock fund, upro, one-third in a levered bond fund TMF, and the remaining third divided into a preferred shares fund, pffv and an intermediate treasury bond fund, and those serve as ballast in the portfolio. It is up 3.38% month-to-date and year-to-date, but down 8.95% since inception in July 2020.

Mostly Uncle Frank:

Next one's the levered golden ratio, the one with the very inauspicious start date in 2021, which has crimped its performance characteristics. This one is 35% in a composite levered fund called NTSX, that's the S&P 500 and Treasury bonds. It's got 25% in gold GLDM, 15% in a REIT fund, o, and 10% each in a levered bond fund TMF and a levered small cap fund, tna. The remaining 5% is in a managed futures fund, kmlm. It is up 4.05% month-to-date and year-to-date, but down 0.55% since inception in July 2021. And now, moving to the last one, the newest one is the Optra portfolio One portfolio to rule them all.

Voices:

Day 2. My love, my love, my love.

Mostly Uncle Frank:

My love. It is 16% in a levered stock fund, upro, 24% in a worldwide value-tilted fund called AVGV from Avantis, 24% in a US Treasury Strips Fund, govz, and the remaining 36% divided into gold and managed futures, gldm and DBMF. It is up 3.71% month-to-date and year-to-date and it's up 6.73% since inception in July 2024. And that concludes our weekly portfolio reviews, and you can find all this information at the website, wwwriskpreviewcom, on the portfolios page.

Voices:

Yes.

Mostly Uncle Frank:

And if you search the early episodes, you will also find specific episodes about each one of these portfolios, at least the first six. Then you'll find one about the levered golden ratio in June or July of 2021, and one about the Optra portfolio in June or July of last year. But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank at riskparityradiocom. That email is frank at riskparityradiocom. Or you can go to the website, wwwriskparityradiocom. Put your message into the contact form and I'll get it 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.

Mostly Bones:

That would be great.

Mostly Uncle Frank:

Okay, thank you once again for tuning in. This is Frank Vasquez with Risk Party Radio Signing off ©.

Voices:

BF-WATCH TV 2021.

Mostly 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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