Tag Archives: alternative

Preparing For A Market Collapse, Part III

Summary U.S. equities are down but not cheap. They could fall further. It is time to prepare…. … In fact, it is always a good time to be prepared. This is the third in a series. You can read Part I and Part II for background. Since the series began, the S&P 500 (NYSEARCA: SPY ) is down over 10%; it could have much further to fall. What current shorts have the most asymmetric exposure? How can average investors see the need to short? Here are three specific short ideas followed by three ways for investors, including retail investors, to weigh when to short. China In terms of country exposure, China is among my favorite shorts. Artificial central bank stimulus drove the Chinese equity mania in early 2015. New equity buyers flooded into the market. These new investors purchased stocks using a record amount of margin debt. They had weak hands once the market direction turned around. The supply of new capital was finite. Eager new investors pushed up prices, but quickly pulled out of the market once prices declined. How do you short China? One way is to short Direxion Daily China Bull 3X Shares (NYSEARCA: YINN ). It is down over 70% since I first disclosed this idea, but it could drop much further over time. That being said, not all Chinese equities are expensive. While China is a big short idea overall, there are some small long ideas worth considering, such as Taomee (NYSE: TAOM ). Biotech Turning to sector exposure, biotech is another favorite short opportunity. This has been a hot sector, but one with market prices that are high, unstable, and precarious . It is down over 20% but remains overpriced. In the long term, it will probably decline substantially further. While biotech is a major short opportunity, one can find bargains in the wreckage. Depomed (NASDAQ: DEPO ) is one worth considering. Due to its drug prices, it is far less sensitive to political pressure than Horizon (NASDAQ: HZNP ) or Valeant (NYSE: VRX ). High Yield In the current credit environment, “high yield” is a bit of a misnomer. In fact, it borders on false advertising. This is one of my favorite types of securities to short because high yield is expensive enough that it does not cost too much if it maintains these rarified prices, and investors long this exposure will probably not hang in there if it begins to decline substantially. Retail investors (including not just a few on Seeking Alpha) who seek yield at any price have driven securities with the appearance of stable yield to zany prices. One security to consider is PIMCO High Income Fund (NYSE: PHK ). As of today, it trades at a 13% premium to its NAV. Down over 25%, it is still overpriced. Its price should continue to converge upon its value in the years ahead. If credit spreads widen from here, it could decline substantially. Should you own any broad-based bond exposure? At today’s prices, no. “HPHs [high priced helpers] frequently think of risk as a function of asset class along the lines of “cash is safe, stock is risky, and bonds are in the middle”. In reality, risk is never a function of asset class; it is a function of price. Thinking proxies such as asset class-based risk models are designed only to excuse HPHs from doing any fundamental analysis to determine value. They can’t make you safe because they can’t even define, let alone quantify, risk. If you are a 65-year-old retiree, a smart-sounding HPH might say that you should be 65% in bonds, with others arguing importantly that the right number is 70% or 60%. The right number is 0%. Alternatively, come up with an explanation of how the credit market is currently undervalued. I could, of course, be completely wrong, but the current credit market looks like an epic bubble. It is conventional to own a lot of bonds, but when the bubble bursts, you will conventionally lose a lot of money.” – Where Can I Find Safe Income For Retirement? Shiller P/E When to short? At the level of individual securities, the fundamental analysis and event analysis takes more time than most investors have to short stocks. In terms of shorting country markets, sectors, or parts of the capital structure, there are some readily-available resources that might be helpful in knowing when to short. For a quick heuristic on the market’s price, you might consider the Shiller P/E. This ratio is more indicative of value across business cycles because it is less impacted by fluctuating profit margins. The U.S. equity market’s Shiller P/E is currently over 43% above its historical mean of about 17. Market prices have rarely maintained such high multiples for long. For further reading on topics, including the Shiller P/E, you might like Rock Breaks Scissors: A Practical Guide to Outguessing and Outwitting Almost Everybody . U.S. equities are the fourth most expensive in the world according to this metric, behind only Japan, Ireland, and Denmark. Market Cap/GDP Market capitalization / GDP in the U.S. is another key metric. When it is high, it is a particularly important time to focus on short opportunities. Today, the U.S. market cap is about 112% of the U.S. GDP. Historically, from such lofty levels, subsequent total returns are typically less than 2% per year. The U.S. equity market is pricey on both metrics. Real returns are probably negative or too low to justify the risk. Incidentally, on both metrics, Russia is a bargain. Its Shiller P/E is about 5 and its market cap/GDP is about 18%, close to its historical minimum of 17% over the past 15 years. The inverse, leveraged Russian ETF (NYSEARCA: RUSS ) is down over 25% since our previous article on that opportunity. However, despite the move in price, it remains an attractive short. 7-Year Real Return Forecast GMO publishes a monthly chart comparing the estimated prospective annual real return over the subsequent seven years of various asset classes from current market prices. The comparison between the 6.5% long-term historical U.S. equity return and the returns from today’s levels is not favorable for today’s equity investors. Average returns will probably be around zero, with somewhat negative returns overall and only marginally positive returns for equities that GMO considers to be high quality. At least we have plenty of timber in Maine, so we have that one covered. Conclusion Part I covered the virtues of maintaining both sizing discipline and a cash balance. “Ordinary opportunity sets should lead to only ordinary position sizing, leaving extraordinarily large positions for only the rarest of opportunities. At a one percent position, one could conceivably find subsequent risk:reward opportunities to double down three times and still have a statistically diversified portfolio. Hyper-diversification accomplishes very little, but having a dozen truly uncorrelated positions accomplishes much of what correlation can offer. However, if one starts with a 5% position and doubles it three times on apparently better subsequent entry points, one is left with an over-concentrated or overleveraged portfolio.” “When everything is going horribly wrong, the comparative advantage of being more liquid than your marginal counterparty becomes extreme. So, while I do not know what the right amount of cash is, I am certain that it is better to have more. You should have more than whomever you are trading against when nothing is working in the markets. How much is that? I currently have 25% of my assets in easily accessible cash and am glad that I do. My percentage might be too low but I am virtually certain that it is not too high. Whatever opportunity cost that I pay in terms of diminished return can be quickly recouped during the next market collapse.” Part II covered some of my favorite company-specific short ideas. The ten disclosed short ideas declined from 2 to 35% since publication; none have yet to fully converge upon their intrinsic values. The average decline of 16% is over three times the S&P 500 ( SPY ) decline over the same period. The larger point is that a flexible mandate that allows one to go long or short creates an optimal environment for analytical rigor. “When someone is able to buy or short investment opportunities, he can first be analytical – gathering relevant facts, measuring value, and examining events that are likely to unlock or reveal that value. One need not be a fan, only an analyst. Regardless of whether or not you like what you are looking at, there is something to do either way. One can buy, one can short, one can ignore. One does not need to prejudge before reaching a conclusion informed by the relevant premises.” You can protect your capital by shorting expensive (and therefore risky) securities with exposures to China, biotech, and high yield credit as described above in Part III. Additionally, you can monitor the Shiller P/E ratio, the market cap/GDP, and the 7-year return forecast for a quick look at the market’s price. These tools are valuable additions to the toolkit of the prepared investor. Regardless of the specifics on how you choose to prepare for the possibility of a market crash, it is unlikely that the next half-century will look anything like the past. It is (barely) conceivable that it continues at the current pace and the S&P 500 races through 48,000. But even if it is possible, it is not a safe bet. When it comes to investing, I do not hope for or expect any single outcome. I do not hope or expect that my home will burn down either, but I still have fire extinguishers and plenty of insurance. None of this is a call to panic; it is a modest call to prepare. I would be perfectly happy to be wrong in my view that such preparation is both wise and timely. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

On Contango-Based XIV Trading Strategies

Summary In July 2014, Seeking Alpha author Nathan Buehler discussed a strategy where you short VXX when VIX goes from backwardation to contango, and cover when VIX re-enters backwardation. Buying XIV rather than shorting VXX is a very similar idea. The XIV version of Mr. Buehler’s strategy can be viewed as making a 1-day bet on XIV whenever VIX is in contango. VIX contango is a useful predictor of 1-day XIV growth. But historically a contango cut-point around 5% rather than 0% generates better raw and risk-adjusted returns. XIV is extremely risky (beta > 4), but trading strategies based on VIX contango appear promising. Background The VelocityShares Daily Inverse VIX Short-Term ETN (NASDAQ: XIV ) has had tremendous growth since it was introduced in late 2010, but has suffered major losses recently. (click to enlarge) The recent 11.9% dip in the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) coincided with XIV losses of 55.7%. XIV is still ahead of SPY since inception by a fair amount ($26.2k vs. $18.0k), but the extreme volatility of XIV makes it arguably an inferior investment (Sharpe ratio = 0.040 for XIV, 0.055 for SPY). In my view, XIV is a rather dubious fund to buy and hold long-term. It amplifies returns, but seems to amplify volatility even more, resulting in worse risk-adjusted returns than SPY. But trading XIV based on VIX contango – that is, the percent difference between the first and second month VIX futures prices (available at vixcentral.com ) – appears very promising. The purpose of this article is to assess the predictive value of VIX contango, and to assess and attempt to improve a strategy proposed by Seeking Alpha author Nathan Buehler. Data Source and Methods I obtained daily VIX contango/backwardation data and historical XIV and SPY prices from The Intelligent Investor Blog . Daily contango/backwardation is defined as the percent difference between the first and second month VIX futures. While the Intelligent Investor dataset includes simulated XIV data going back to 2004, for this article I only use the actual daily closing prices for XIV since its inception in Nov. 2010. I used R (“quantmod” and “stocks” packages) to analyze data and generate figures for this article. A Look at Nathan Buehler’s Strategy In the Seeking Alpha article Contango and Backwardation Strategy for VIX ETFs , Mr. Buehler suggests shorting VXX when VIX goes from backwardation to contango, and closing the position when VIX re-enters backwardation. The exact time frame for back-testing is a little unclear to me, but Mr. Buehler reported 221.09% total growth from ten VXX trades between May 21, 2012, and April 14, 2014. That is impressive growth. Then again, VXX fell 86.1% over this time period, and XIV gained 213.9%. So it’s a bit unclear how much of the strong performance was due to VXX tanking over the entire time period, and how much was due to the contango strategy providing good entry and exit points. I am not a short seller so I’m more interested in the “buy XIV” version of Mr. Buehler’s strategy. Let’s consider an approach where you look at VIX contango at the end of each trading day. If VIX has entered contango, you buy XIV; if it has entered backwardation, you sell XIV. If we backtest this strategy since XIV’s inception, ignoring trading costs, we get the following performance: (click to enlarge) The contango-based XIV strategy performs well relative to buying and holding XIV for the entire period, achieving a higher final balance ($57.0k vs. $26.2k), smaller maximum drawdown (56.3% vs. 74.4%), and a better Sharpe ratio (0.061 vs. 0.040). Looking at the graph, we see a major divergence in mid-2011 when selling XIV avoided a huge loss. However, there were many times where the contango strategy failed to prevent big losses. Note that buying XIV when VIX enters contango, and selling when it enters backwardation, is equivalent to holding XIV for 1 day whenever VIX is in contango. So this strategy is entirely dependent on VIX contango predicting 1-day XIV growth. VIX Contango and 1-Day XIV Growth For Mr. Buehler’s strategy to have worked so well over the past 5 years, there must have been positive correlation between VIX contango and subsequent 1-day XIV growth. There was indeed some correlation, but not very much. (click to enlarge) The Pearson correlation was 0.059 (p = 0.04), and the Spearman correlation 0.027 (p = 0.35). Note that VIX contango explained only 0.3% of the variability in subsequent 1-day XIV growth. But there does appear to be some predictive value in VIX contango. It’s a little easier to see when you filter out some of the noise and look at mean 1-day XIV growth across quartiles of VIX contango. (click to enlarge) Naturally, we’d hope that VIX contango has enough predictive power to pull the distribution of XIV gains a little bit in our favor. The next figure compares the distribution of XIV gains on days after VIX ended in contango to days after it ended in backwardation. (click to enlarge) The mean was higher for contango vs. backwardation, but the difference was not statistically significant (0.22% vs. -0.26%, t-test p = 0.37). Surprisingly the median was a bit higher for backwardation (0.50% vs. 0.86%, Wilcoxon signed-rank p = 0.62). Towards A Better Cut-Point Holding XIV whenever VIX is in contango is somewhat natural, but there’s no reason we have to use 0% as our cut-point. We might do better if we hold XIV when VIX is in contango of at least 5%, or at least 10%, or some other cut-point. Actually if you look at the regression line in the third figure, you can work out that the expected 1-day XIV growth is only positive for VIX contango of 1.65% or greater. Based on that, we actually wouldn’t want to hold XIV when contango is betwen 0% and 1.65%. Let’s compare 0%, 5%, and 10% VIX contango cut-points. (click to enlarge) The higher cut-point you use, the less frequent your opportunities to trade XIV, but the better the trades tend to be. Notice how the 10% cut-point rarely allows for trades, but tends to climb really nicely when it does. Performance metrics for XIV and the three contango-based XIV strategies are summarized below. Performance metrics for XIV and XIV trading strategies with various VIX contango cut-points. Fund Growth of $10k MDD Overall Sharpe Ratio Sharpe Ratio for Trades XIV $26.2k 74.4% 0.040 0.040 Contango > 0% $57.0k 56.3% 0.061 0.065 Contango > 5% $65.1k 37.3% 0.072 0.090 Contango > 10% $49.3k 14.9% 0.110 0.293 Total growth was best for a contango cut-point of 5%, while maximum drawdown decreased and Sharpe Ratio increased with increasing contango cut-point. (Note that “overall Sharpe ratio” includes the 0% gains on non-trading days, while “Sharpe ratio for trades” does not.) Of course we aren’t restricted to cut-points in 5% intervals here. Let’s play a maximization game and see what VIX contango cut-point would have been optimal for total growth and for overall Sharpe ratio. (click to enlarge) Final balance peaks at VIX contango in the 5-6% range, and is maximized at $100.4k for VIX contango of 5.42%. Overall Sharpe ratio is maximized at 0.115 for VIX contango of 9.95%. Sharpe ratio for trades is maximized at 4.231 for VIX contango at the highest possible value, 21.6%. Of course it wouldn’t make much sense to use a cut-point of 21.6%, as that number is hardly ever reached. Play Both Sides of the Trade? If sufficient VIX contango favors holding XIV, it seems that sufficient VIX backwardation would favor holding VXX. That brings to mind a trading strategy where you buy XIV when VIX contango reaches a certain value, and buy VXX when VIX backwardation reaches a certain value. Trading both XIV and VXX would provide more opportunities for growth. Indeed many of the analyses presented so far are similar when you look at holding VXX based on VIX backwardation. In particular: VIX backwardation is positively correlated with 1-day VXX growth. Regression analysis suggests that VXX on average grows when VIX backwardation is at least 0.38% (equivalently, VIX contango is -0.38% or more negative). Growth of $10k for a backwardation-based VXX strategy is maximized at $13.3k, when you hold VXX when VIX backwardation is at least 5.67%. Unfortunately, 33% growth over 5 years with VXX is nothing compared to 900+% growth with XIV. I experimented with strategies that use both XIV and VXX, but was unable to improve upon XIV-only strategies. Concerns One of my concerns with these strategies is that we’re working with a very weak signal. VIX contango explains about one-third of one percent of XIV’s growth the next day. Contango-based volatility trading strategies do appear to have potential, but keep in mind that VIX contango just isn’t a strong predictor of XIV growth. Another concern is that the excellent historical performance of these strategies may be driven by the bull market of the past 5 years. I think it is very possible that in a bear market these strategies might work poorly for XIV, and perhaps well for VXX. Each strategy involves holding XIV/VXX at certain time intervals, so of course they will be affected by the underlying drift of XIV/VXX. After all, the absolute best you can do with either version of the trade is the total upswing in the fund you are trading over a period of time. Finally, I have noticed in the past that XIV seems to have positive alpha when markets are strong, and negative alpha when markets are weak. This makes it really hard to do portfolio optimization, as the net alpha of a weighted combination of funds including XIV actually depends on what sort of market you’re in. I think an analogous problem could arise for contango-based XIV strategies. For example, holding XIV when VIX contango is at least 5% may only be prudent in periods when XIV itself is rapidly growing, which would typically occur in a strong market. And a strategy that only works during bull markets isn’t very exciting. Conclusions A variant of a strategy discussed by Nathan Buehler, where you hold XIV whenever VIX is in contango, appears promising based on backtested data since Nov. 2010. But increasing the contango cut-point from 0% to 5% increases total returns while also improving Sharpe ratio and reducing MDD. Going to 10% further improves the Sharpe ratio and reduces MDD, but sacrifices total growth as there are fewer trading opportunities. Since Mr. Buehler’s strategy is based on the idea that VIX contango favors XIV, increasing the contango cut-point above 0% makes a lot of sense. It allows us to trade XIV only when we have a substantial advantage due to contango, which reduces trading frequency and therefore trading costs. Strategies based on backtested data are almost always overly optimistic, and I suspect that this analysis is no exception. I am particularly concerned that much of the excellent historical performance is due to XIV’s positive alpha during the past 5 years, which itself was due to a strong market. Therefore, I probably wouldn’t recommend implementing these strategies just yet, at least not with much of your portfolio. Personally, I would consider freeing up a small portion of my portfolio for occasional high-conviction XIV trades based on VIX contango. For example, I might buy XIV on the relatively rare occasion that VIX contango reaches 10%.

PLW Is A Nicely Designed Treasury ETF

Summary PLW has a diversified ladder of maturities. The fund does a solid job of providing negative beta to reduce the volatility of the portfolio. Using longer maturity treasury securities offers better yields and a stronger negative beta because price movements are larger. The PowerShares 1-30 Laddered Treasury Portfolio ETF (NYSEARCA: PLW ) is an ETF with a fairly even distribution of maturities across the yield curve. It is an interesting ETF because most treasury ETFs are focused on a single duration range. As a treasury ETF that includes long maturities it shows a fiercely negative correlation with major equity indexes, but the individual volatility of the ETF is reduced compared to longer treasury ETFs because there is also a substantial allocation to the shorter parts of the yield curve. Expense Ratio The expense ratio on PLW is .25%. That isn’t too bad, but there are quite a few cheaper options out there if investors don’t mind having their holdings concentrated across certain maturities. For investors that want diversification across maturities, it may still be worth considering simply buying short, medium, and long term ETFs with lower expense ratios. There isn’t a great deal of “expertise” that goes into picking which bonds to hold in a treasury ETF. Most funds have a guideline establishing which part of the yield curve they will buy and it is really easy to decide which issuer to buy. There is no assessment of the credit rating of different companies or the impacts of the industries, this is simply buying up treasury ETFs and forwarding interest payments to shareholders. Maturity The diversification across the yield curve is clearly demonstrated here. This is far more diversified than most treasury ETFs, but I would favor replicating the portfolio with lower expense ratio funds. Characteristics The fund is showing an effective duration of 10.73 years, so investors should expect to see some material volatility when interest rates are shifting. The nice thing about that is the volatility tends to be headed in the opposite direction of the equity indexes. Perhaps I’m being a little strange, but I actually prefer longer durations on treasury ETFs because of the negative correlation with the market. When correlations are substantially negative, an increase in volatility for the individual ETF will often result in a decrease in volatility for the portfolio. That is, of course, assuming that the individual ETF is a fairly small portion of the total portfolio. For investors that want to go heavy on treasury securities and light on equity, the logic of going for longer duration and higher volatility falls apart. Building a Sample Portfolio This hypothetical portfolio has a moderately aggressive allocation for the middle aged investor. Only 25% of the total portfolio value is placed in bonds and a fifth of that bond allocation is given to high yield bonds. If the investor wants to treat an investment in an mREIT index as an investment in the underlying bonds that the individual mREITs hold, then the total bond allocation would be 35%. Given how substantially mREITs can deviate from book value, I’d rather consider the allocation as an equity position designed to create a very high yield. This portfolio is probably taking on more risk than would be appropriate for many retiring investors since a major recession could still hit this pretty hard. If the investor wanted to modify the portfolio to be more appropriate for retirement, the first place to start would be increasing the bond exposure at the cost of equity. However, the diversification within the portfolio is fairly solid. Long term treasuries work nicely with major market indexes and I’ve designed this hypothetical portfolio without putting in the allocation I normally would for equity REITs. An allocation is created for the mortgage REITs, which can offer some fairly nice diversification relative to the rest of the portfolio and they are a major source of yield in this hypothetical portfolio. The portfolio assumes frequent rebalancing which would be a problem for short term trading outside of tax advantaged accounts unless the investor was going to rebalance by adding to their positions on a regular basis and allocating the majority of the capital towards whichever portions of the portfolio had been underperforming recently. Because a substantial portion of the yield from this portfolio comes from REITs and interest, I would favor this portfolio as a tax exempt strategy even if the investor was frequently rebalancing by adding new capital. The portfolio allocations can be seen below along with the dividend yields from each investment. Name Ticker Portfolio Weight Yield SPDR S&P 500 Trust ETF SPY 35.00% 2.06% Consumer Discretionary Select Sector SPDR ETF XLY 10.00% 1.36% First Trust Consumer Staples AlphaDEX ETF FXG 10.00% 1.60% Vanguard FTSE Emerging Markets ETF VWO 5.00% 3.17% First Trust Utilities AlphaDEX ETF FXU 5.00% 3.77% SPDR Barclays Capital Short Term High Yield Bond ETF SJNK 5.00% 5.45% PowerShares 1-30 Laddered Treasury Portfolio ETF PLW 20.00% 2.22% iShares Mortgage Real Estate Capped ETF REM 10.00% 14.45% Portfolio 100.00% 3.53% The next chart shows the annualized volatility and beta of the portfolio since April of 2012. (click to enlarge) A quick rundown of the portfolio Using SJNK offers investors better yields from using short term exposure to credit sensitive debt. The yield on this is fairly nice and due to the short duration of the securities the volatility isn’t too bad. PLW on the other hand does have some material volatility, but a negative correlation to other investments allows it to reduce the total risk of the portfolio. FXG is used to make the portfolio overweight on consumer staples with a goal of providing more stability to the equity portion of the portfolio. FXU is used to create a small utility allocation for the portfolio to give it a higher dividend yield and help it produce more income. I find the utility sector often has some desirable risk characteristics that make it worth at least considering for an overweight representation in a portfolio. VWO is simply there to provide more diversification from being an international equity portfolio. While giving investors exposure to emerging markets, it is also offering a very solid dividend yield that enhances the overall income level from the portfolio. XLY offers investors higher expected returns in a solid economy at the cost of higher risk. Using it as more than a small weighting would result in too much risk for the portfolio, but as a small weighting the diversification it offers relative to the core holding of SPY is eliminating most of the additional risk. REM is primarily there to offer a substantial increase in the dividend yield which is otherwise not very strong. The mREIT sector can be subject to some pretty harsh movements and dividends from mREITs should not be the core source of income for an investor. However, they can be used to enhance the level of dividend income while investors wait for their other equity investments to increase dividends over the coming decades. If you want a really quick version to refer back to, I put together the following chart that really simplifies the role of each investment: Name Ticker Role in Portfolio SPDR S&P 500 Trust ETF SPY Core of Portfolio Consumer Discretionary Select Sector SPDR ETF XLY Enhance Expected Returned First Trust Consumer Staples AlphaDEX ETF FXG Reduce Beta of Portfolio Vanguard FTSE Emerging Markets ETF VWO Exposure to Foreign Markets First Trust Utilities AlphaDEX ETF FXU Enhance Dividends, Lower Portfolio Risk SPDR Barclays Capital Short Term High Yield Bond ETF SJNK Low Volatility with over 5% Yield PowerShares 1-30 Laddered Treasury Portfolio ETF PLW Negative Beta Reduces Portfolio Risk iShares Mortgage Real Estate Capped ETF REM Enhance Current Income Risk Contribution The risk contribution category demonstrates the amount of the portfolio’s volatility that can be attributed to that position. Despite TLT being fairly volatile and tying SPY for the second highest volatility in the portfolio, it actually produces a negative risk contribution because it has a negative correlation with most of the portfolio. It is important to recognize that the “risk” on an investment needs to be considered in the context of the entire portfolio. To make it easier to analyze how risky each holding would be in the context of the portfolio, I have most of these holdings weighted at a simple 10%. Because of TLT’s heavy negative correlation, it receives a weighting of 20% and as the core of the portfolio SPY was weighted as 50%. Correlation The chart below shows the correlation of each ETF with each other ETF in the portfolio. Blue boxes indicate positive correlations and tan box indicate negative correlations. Generally speaking lower levels of correlation are highly desirable and high levels of correlation substantially reduce the benefits from diversification. (click to enlarge) Conclusion PLW offers investors a fairly solid exposure to the treasury securities across the yield curve and will help equity heavy portfolios reach a substantially lower level of volatility. If an investor is willing to do the work, they may be able to replicate PLW at a lower cost by simply buying a few treasury ETFs that each offer exposure to a particular sector of the yield curve. Exposure to the shorter parts of the yield curve reduces the total volatility of PLW which makes sense for investors that are going heavy on bonds and light on equity, however the reduction in volatility can be counterproductive for investors that are going heavy on equity securities. Strong price movements on treasury ETFs can be desirable because of the negative correlation with the equity market.