Below is a simple backtest from 2016-2021, without rebalancing, of the passive ETF VOO, the equity REIT O, and the mutual fund PSLDX. We all know of the first two entries, and the third is a fund that holds the S&P along with a complex array of derivatives.
The outperformance of PSLDX is pretty clear. I am not very familiar with its methodology, but I did some reading and encountered the opinion its outperformance may not last due to a potential rise of interest rates. So I looked at a couple of other metrics--please keep in mind I don't know much about the bond market overall and would be happy to learn I have examined things incorrectly.
I chose 2016 because it captured when the Federal Fund Rate started to meaningfully rise (they also started to rise in 2015, but I chose a nice 5 year slice). They increased steadily into 2019, then plateaued a bit, then of course were struck down by covid.
https://www.macrotrends.net/2015/fed-funds-rate-historical-chart
Next I looked into the daily treasury yield curve rates from this period. The 10 Year rate fluctuated steadily all throughout 2016 but ultimately ended the year higher. It fluctuated similarly through 2017, ending very slightly lower. It increased during most of 2018, then only ended slightly higher by the end of the year. It lowered through the end of 2019. It ended much lower by 2020. And through today it is higher than in 2020, but still much lower than it has been in years.
Below is a plot of the dividends paid from PSLDX, where all the gains are to be had.
https://seekingalpha.com/symbol/PSLDX/dividends/history
You'll notice the higher dividend payouts tend to correspond to where the higher interest rates are plotted. Granted, the fund holds the S&P, so its outperformance can in part be explained by the general rise of the S&P 500 equities since 2016. But, I did not find where higher interest rates pose a risk to its performance. I also noticed its highest-ever dividend payout was in 2013, where the federal funds rate was miniscule and the 10 Year increased from 1.86 to 3.04 by the end of the year. And even when interest rates are very low, say from 2020-2021, the fund still outperforms the S&P ETF listed, much less our favorite REIT. O, I can forgive, since I believe in its long term success.
https://www.portfoliovisualizer.com/backtest-portfolio#analysisResults
It appears the fund generates a great deal of alpha the higher interest rates become. It also generates alpha when interest rates are low. Drawdowns can indeed be high, so if one were to invest in the fund, it is likely best to put money into it after it has experienced a drawdown, or simply do what investors should do and put money into it that you don't plan on using for many years.
The share price is low--this is common with many mutual funds. Someone recently mentioned that as a drawback to it... yes, it is lower than the 10 dollar price in 2007... but I think if you understand this is a particular sort of fund and not some silly low budget penny stock, the difference is clear. It is a volatile fund, yet appears to have an overall stability over time, with extreme dividend payouts. While I think broad market ETFs are great for capturing the mood of the overall corporate economy, the more I read about this particular fund, the more I find it to be a good choice for outperformance over a multi-year period. People worry about so many things: expense ratios, volatility, weird methodology. Yet, total returns tend to present their own strong argument for an investment.
It appears to benefit from higher interest rates, and also does fine with lower interest rates. That is what I find to be especially interesting (ha). It's not a 3x leveraged daily fund subject to decay or anything like that, to my knowledge. It may even be simpler than your average PIMCO CEF.
I plan on trying to learn more about the fund before I actually put money into it, since I want a firmer grasp of its mechanics and especially want to determine if it can maintain its performance over more time. In the meantime, I think it's overlooked by everyone but niche investors. Plenty of garbage tickers are passed around on Reddit (hello bizarre mortgage REITs that obviously destroy value over time and fraudulent SPACs) but there is little popular information on this fund which is still kicking out solid performance since the Great Recession when derivatives really were the devil.
Anyway when I post on Reddit, I do so to learn. I very recently posted about the fund here--this was before I looked at interest rates and how they may correlate with it. I am becoming more convinced it is a good investment and would like to know arguments against it beyond the fact it's more complex than a simple passive ETF.
Submitted May 16, 2021 at 02:33AM by ThemChecks https://ift.tt/3tV9EWC
