Commission-free ETF commentary, current trends and analysis

January 1, 2022January 1, 2022

Happy new year!

Happy new year from ETFMathGuy! In this post, we will provide some updates to our plans for 2022.

happy birthday to you wall decor — Photo by Anna Tarazevich on Pexels.com

New Priorities

As 2022 begins, we decided to reset our priorities for this website. Up until now, we provided the following services to our subscribers.

Free and Premium ETF portfolios, updated monthly
A retirement calculator that plans for tax efficient asset decumulation in retirement
Periodic commentatry on ETFs, taxes, the economy, cryptocurrency, etc.
A daily monitor of stock market volaitlity

For 2022, we’ve decided that the cost to produce and maintain the free and premium portfolios was simply too high. We also recognized that, while these portfolios did exceed their objective in 2020, they did not in 2021. All premium subscribers will receive a pro-rated refund of their subscription payments shortly. In the meantime, free and premium subscribers can now access the final monthly portfolios, based on data through December 31, 2021.

Coming soon

So, after receiving very positive praise on our retirement calculator, we’ve decided to make improving it a priority. Also, thanks to significant feedback from individual investors and financial services professionals, below is a list of features we hope to provide in the near future:

Projection of retirement assets at beginning of retirement for pre-retiree planning
Optimized social security starting age for single or married couples
Medicare Income-Related Monthly Adjustment Amount (IRMAA) tax
State taxes, as applicable
3.8% medicare surtax
Roth conversions using either IRA or taxable account funds
Robustness checks with an automated sensitivity analysis for selectable uncertain variables
Risk assessment with simulation of uncertain stock market returns, life exptancy, after-tax income needs, and others
Real estate income and residual value
Support for Financial Independence, Retiree Early (FIRE)
Online storage of previous results for future reference

Of course, our retirement calculator already has many features discussed in the FAQ and listed at the top of the calculator. Also, if you are interested in greater details, you are welcome to download this whitepaper that we developed recently to describe the current model in greater depth.

We hope you have a wonderful 2022!

ETFMathGuy is a subscription-based education service for investors interested in tax-efficient investing with ETFs

December 5, 2021December 5, 2021

Inflation Hedging

Inflation hedging continues to be of great interest for investors large and small. In this post, we quantify some possible ways to combat inflation based on a recent article in the WSJ.

Historical Inflation Trend

Inflation is currently around 6%, well above the 2% rate seen recently. The chart below shows how most of this change occurred in 2021. This rate is well above the 2% long-term target set by the Federal Reserve. So, what are some options for investors in this current inflation climate?

Treasury inflation-Protected Securities (TIPS)

TIPS are one of the most obvious places investors look for inflation hedging. The iShares TIPS Bond ETF (ticker: TIP), with over $30 billion in assets, is a popular option. This ETF has performed notably better than a broad bond benchmark, like the iShares Core U.S. Aggregate Bond ETF (ticker: AGG), as the chart below illustrates. Note that while TIP has slightly higher volatility than AGG, it performance in 2021 is noticably better. In fact, according to ETFReplay.com, the 2021 year-to-date return of TIP is 5.4%, versus -1.0% for AGG.

Commodities

There are certainly other options investors can consider. For example, investors often seek commodity investments when inflation rises. This recent study by Vanguard indicated that a 1% rise in inflation could produce a 7-9% rise in commodities. This estimate looks surprisingly accurate, as the ETF DBC (PowerShares DB Commodity Index) should be up 28-36% in 2021, given the inflation rate increase this year from 2% to 6%. In fact, DBC is up 32.7% in 2021, according to ETFReplay.com

Updated optimal portfolios

For subscribers of our ETF optimal portfolios, we encourage you to log in to see the latest updates. Note that, based on our latest backtesting, monthly portfolios change more quickly now to respond to market dynamics.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

November 13, 2021November 13, 2021

Inflation and Tax Brackets

Inflation has been in the news quite a bit lately, as the CPI (Consumer Price Index) has shown a year-over-year increase of over 5% since June of 2021. Higher inflation means a loss of buying power. Fortunately, the U.S. tax system does take inflation into account when tax brackets are updated each year. In this post, we discuss the implications of updated tax brackets for 2022 due to inflation.

quote board on top of cash bills — Photo by Karolina Grabowska on Pexels.com

Note:  This post has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Income Tax

Income tax brackets determine what tax rates apply to each additional dollar of taxable income. These rates are especially important for retirees. Below are the 2021 and 2022 tax brackets. As you can see, the Internal Revenue Service has increased the income limits up for all rates and for all types of tax filers. Thus, if your taxable income did not change from 2021 to 2022, your after-tax income will likely increase.

Capital Gains Tax and Standard Deductions

Capital gains taxes, as well as the standard deduction, also have increased from 2021 to 2022 tax years. The increase in standard deductions is $400 for single filers and $800 for married individuals filing a joint tax return. These higher deductions mean that, all else being equal, a taxpayer will likely have lower taxable income, and higher after-tax income and gains. Also, higher income limits for capital gains mean that qualified dividends and long-term realized capital gains on most investments should produce fewer capital gains taxes.

Other Changes

While there are quite a few other changes to taxes in 2022, there is no change to the contribution to Individual Retirement Accounts. But, for those with access to workplace retirement plans, like 401(k)s, 403(b)s, and 457 plans, individuals can contribute $20,500 in 2022, an increase of $1,000 from 2021. While such a decision will defer taxes and should lead to higher account values in the future, anyone concerned about future tax increases may wish to consider contributing to Roth 401(k)s and Roth 403(b)s if their workplace makes them available. You may also wish to use our free online calculator to forecast your taxable and retirement assets in retirement.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

October 17, 2021October 17, 2021

Bitcoin ETFs may arrive soon, but returns may surprise ETF investors

Investor interest in cryptocurrency and bitcoin remains high. This week, ETF investors may see the first futures-based bitcoin ETFs. Here, we discuss the introduction of bitcoin ETFs, and why they may not perform as ETF investors expect.

person putting bitcoin in a piggy bank — Photo by Alesia Kozik on Pexels.com

Set to debut this week and next week

According to this ETF.com article, October 18th could be the first effective date that two bitcoin ETFs are set to debut. And, another bitcoin ETF could become available a week later, on October 23rd, and a fourth potentially available on October 25th. But, its important to note that each of these ETFs depend on futures contracts for their bitcoin exposure. Therefore, none of them hold bitcoin to provide direct exposure to the spot market. Instead, the most direct exposure for investors seeking bitcoin remains the Grayscale Bitcoin Trust (GBTC), which typically trades at a premium. In fact, we wrote about the risks and taxation of GBTC earlier this year.

What can happen with futures-based ETFs?

Sadly, futures-based ETFs can often not match the corresponding price performance of the spot market. For example, ETF investors wishing exposure to West Texas Intermediate crude oil price changes could buy the United States Oil Fund ETF (ticker: USO) Unfortunately, a phenomenan called “contango” can occur when the price of the futures contract exceeds the expected future spot price. So, the fund loses money when it replaces expiring contracts with near-term future contracts. Consequently, over time, futures-based ETFs tend to underperform the spot price market.

“These kinds of vehicles are primarily meant to be used by active traders to hedge or short positions. They are not meant as long-term buy and hold vehicles.”
source: CNBC.com.

A better way to track bitcoin in an ETF

Fortunately, there is some good news about bitcoin ETFs. Greyscale has indicated it may convert its current bitcoin fund into an ETF. If they do, this ETF’s investment returns wouldn’t be subject to contango, and won’t suffer from the return drag of futures-based bitcoin ETFs. However, the Securities and Exchange Commission (SEC) current commissioner has stated he prefers approving ETFs backed by bitcoin futures. So, ETF investors interested in bitcoin may wish to continue to wait or seek alternatives outside the ETF space.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

October 3, 2021October 3, 2021

The latest news on proposed tax changes

There is good and bad news on the latest proposal for tax changes on investments. In this post, we summarize the latest in a developing set of changes to future taxes on long-term investment gains.

Good news on proposed tax changes

According to the WSJ, the House Ways and Means Committee will not raise taxes on long-term capital gains to over 40%, as proposed by the Biden administration. So, an ETF investor should hopefully not see their long-term capital gains tax nearly double by realizing them.

Instead, the current rate of 23.8% would increase by 5% to 28.8%. This rate typically applies to qualified dividends too, such as those produced by an S&P 500 index fund like IVV. Additionally, lawmakers appear to be preserving the step-up in cost basis for inherited assets. This is good news for ETF investors, as we noted previously.

quote box ontop of stack of paper bills — Photo by Karolina Grabowska on Pexels.com

Bad news

Unfortunately, the proposed tax changes can have a significant impact on the windfall resulting from the sale of a home or business. Home sellers do have an exemption, but these limits can easily be exceeded for those living in high cost of living areas. And, since some home sellers may be recently widowed, these individuals would be even more adversely affected. Recently widowed individuals will see their exemption cut in half as they can no longer file their tax returns as married. For business sellers who may have invested much of their nest egg into building their business, this additional tax could significantly reduce the after-tax value of their sale.

Updated optimal portfolios

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

September 19, 2021September 19, 2021

Retirement tax alpha and optimal retirement drawdowns

Tax alpha refers to the additional rate of return generated by making tax-efficient investment decisions. For retirees, we provide an optimal retirement income calculator that models the U.S. tax code and determines an optimal drawdown strategy. Here, we discuss a recent upgrade to this calculator that quantifies your potential retirement tax alpha using an optimal drawdown strategy.

retirement tax alpha and your optimal retirement income strategy — Retirement tax alpha and your optimal retirement income strategy
Photo by Nataliya Vaitkevich on Pexels.com

What is alpha?

In the investment world, the return not captured by the movement in the broad market is alpha. Thus, for many investors, it means a risk-less return. In fact, we’ve even talked about it before in the context of CAPM and its counterpart, beta. Alpha and beta provide portfolio statistics important for consideration by any investor.

What is tax alpha?

Tax alpha is a relatively new term and may differ based on the source. We like the following definition.

If “alpha” is the return generated by an advisor’s skill in picking and managing investments, then “tax alpha” protects that return and generates a boost by making sure that taxes don’t eat away more of a client’s wealth than absolutely necessary.”
Source: https://www.atstax.com/p/what-is-tax-alpha

What about in retirement?

In retirement, tax alpha focuses on tax-efficient drawdowns. In addition, the industry standard for retirement income drawdowns from taxable, tax-deferred, and tax-exempt accounts is the Common Rule. The image below shows a summary of the default case used in our optimal calculator, which compares its results with those from the Common Rule.

Summary of Optimal Retirement Calculator. Source: https://app.etfmathguy.com/

This last line (line 4) indicates the value of tax-alpha of 0.57%. That is, a retiree would need to generate pre-tax returns 0.57% higher using the Common Rule to generate the same after-tax inheritance for their heirs. Therefore, by making optimal drawdown decisions in retirement, a retiree can expect to increase their investment returns using the Common Rule. Interested in seeing the details of this example or inputting your own assumptions for retirement? If so, please try our free online calculator.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

September 4, 2021September 4, 2021

Backtesting for 2021 and ETFMathGuy portfolio enhancements

Due to portfolio performance not meeting our recent expectations, we revisited our backtesting results from August 2018 and produced important new insights and portfolio construction enhancements. We discovered that a longer sample period, identified previously, no longer applied. The image below shows that a three-month sample period produced the best returns from January 2020 to August 27, 2021. Each point on this line plot represents annualized backtested performance for 19 monthly portfolios over this testing period.

Backtesting for 2021 to find the optimal sample period (months) for ETFMathGuy Portfolio Construction

What performance predictions occurred with this shorter sample period?

Using this shorter sample period, we produced the plot below of total return since January of 2020. We chose this time period to include the full pre and post-term effects of the coronavirus on the world economy. In addition, and based on subscriber feedback, we now exclude ETFs that issue K-1 tax forms to investors. We made this decision because these 22 ETFs had a marginal effect on backtested performance that used over 1,000 other ETFs that do not issue K-1s. We also increased our ETF filter threshold of median volume to improve liquidity for future portfolios that will likely have a higher turnover rate. The consequences of these decisions on backtested performance appear below.

Backtested Returns from 2020-2021 of the ETFMathGuy Optimal Portfolios

Future ETFMathGuy portfolios

Given the improvement potential identified from this updated backtesting for 2021, all portfolios published in September 2021 and later will follow these updated findings. This update for the September portfolios will likely indicate a significant change from the August portfolios. However, future monthly portfolios will change less significantly. So, we encourage subscribers to log in and see the September ETFMathGuy portfolios that are based on this evidence-based analysis.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

August 1, 2021August 1, 2021

Taxes on Cryptocurrencies

In our post last week, we showed how the risk of cryptocurrencies appears much higher than the risk of stocks and bonds. This week, we will discuss some of the taxes on cryptocurrencies, and how they differ from buying and selling an ETF.

various cryptocurrency on table — Photo by Roger Brown on Pexels.com

Taxing gains and losses

When trading an ETF in a taxable account (e.g. not an IRA or Roth IRA account), trades are generally subject to taxes much like that of a stock. So, gains that are realized after holding for less than a year are taxable as ordinary income. However, to reduce taxes owed on these gains, an investor can offset them with realized losses on other ETFs. Termed tax-loss harvesting, such an approach can have significant economic benefits. But, what if the investor wishes to buy these ETFs they just sold because they anticipate it to appreciate again?

Wash Sale Rules

Selling, then rebuying, an ETF within 30 days violates the Wash Sale Rule. Consequently, such a violation means that the loss on the ETF investment can not be claimed for tax reasons, effectively eliminating the opportunity to tax-loss harvest. But, based on experts cited in this recent CNBC article, wash sale rules do not apply to taxes on cryptocurrencies. The article does caution that some caveats do apply. It suggests that selling a cryptocurrency one day and buying it again the next could still enable tax-loss harvesting. Given the recent wild swings in cryptocurrency prices, and recent gains in some ETFs, investors may wish to consider this tax-loss harvesting approach.

Free and Premium Portfolios Now Available

Lastly, this post is a reminder that the latest free and premium optimal portfolios are now available for your review. So, please log in and see how the latest market conditions have affected these ETF portfolios.

Note:  This post has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

July 18, 2021July 18, 2021

Measuring cryptocurrency risk

Cryptocurrency risk is well known to be very high for many reasons. However, both individual and institutional investors continue to evaluate it as part of their investment portfolios. This post discusses recent cryptocurrency trends in a diversified portfolio and how the risks of this alternative investment compare to mainstream investments like stocks and bonds.

Volatility estimates

Volatility is one common way of assessing the risk of any investment. For the stock market, we provide a historical perspective, updated daily, to see how volatility changes over time for the stock market. But, how does this volatility compare to investments in cryptocurrency? The chart below shows a 3-month annualized volatility for the last several years of the stock market, measured with the ETF IVV, the bond market, measured by the ETF AGG, and the crypto market, measured by the Grayscale Bitcoin Trust (GBTC). As this chart shows, bond volatility is the lowest, averaging between 3-4%. Stock volatility is higher, averaging between 15 – 20%. Cryptocurrency risk is about five times higher than stocks, with average volatility between 90-100%.

3-Month Annualized Volatility of the stock, bond, and cryptocurrency markets. Source: ETFMathGuy.com — 3-Month annualized volatility of the stock, bond, and cryptocurrency markets. Source: ETFMathGuy.com

How much to allocate to cryptocurrency?

This recent WSJ article provided some guidance for individual investors interested in investing in cryptocurrency. While the answers to this question really depend on the individual’s risk tolerance, this article suggested between 1-2%. So, even if the value of the crypto investment hits $0, the investor limits their loss to this original investment amount. But, given the high levels of volatility, more frequent rebalancing may be prudent. Thus, if there is a substantial increase in the price of a crypto investment, the targeted 1-2% allocation would most likely require selling some of the crypto gains.

Unfortunately, selling short-term gains can be “expensive”, especially for those individual investors in a higher income tax bracket. In this case, the use of a Roth IRA may be the best approach. Why? An investor can realize Roth IRA gains tax-free if taken after age 59 1/2 from an account open for more than five years.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

July 5, 2021July 5, 2021

Recap of the first half of 2021

Greeting ETFMathGuy subscribers! This post is a reminder that the latest free and premium optimal portfolios are now available for your review. So, please log in and see how the latest market conditions have affected these ETF portfolios. To begin, we discuss value versus growth ETFs and recent trends in their returns.

Recent returns on value investing leveling off?

A few months ago, we wrote about how value-driven ETFs returned about 5% more in the first quarter than growth ETFs. Revisiting the returns of the ETFs IVV, VUG, and VTV for the first half of 2021 shows this gap has shrunk to 3% after growing to more than 10%. In fact, as the chart here shows, the value ETF is below its early May high, while the growth ETF appears to have begun a new upward trend.

Total returns of value and growth ETFs. — The total return of value and growth ETFs in the first half of 2021. Source: www.ETFReplay.com

Is the relationship between value and growth ETFs typical?

The relationship between two variables can be directly measured using correlation which varies between 1 and -1. So, a correlation of 1 between two investment returns indicates their returns are identical. Traditionally, the correlation between value and growth investments was around 75%. However, as this Wall Street Journal article highlights, the current correlation between growth and value is now below 25%.

Correlation between value and growth returns. — Source: Wall Street Journal, June 28, 2021, by James Mackintosh

Performance of the ETFMathGuy Premium Portfolios

Based on actual investment performance, the risk and return of the moderate and aggressive portfolios over the last 18 months appear below. Consequently, this period includes all of the calendar year 2020, and the first half of 2021.

	Moderate	Aggressive	S&P 500 (IVV)
volatility (risk, annualized)	19.5%	22.5%	21.2%
total return	23.9%	32.7%	36.4%

Annualized risk and total return of the ETFMathGuy portfolios, 2020-2021 (18 months).

We will continue to update our ETFMathGuy portfolios with current market conditions using our updated backtesting calibration results. So, time will tell if value ETF investing continues to outperform growth ETF investing.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

New Priorities

Coming soon

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Historical Inflation Trend

Treasury inflation-Protected Securities (TIPS)

Commodities

Updated optimal portfolios

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Income Tax

Capital Gains Tax and Standard Deductions

Other Changes

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Set to debut this week and next week

What can happen with futures-based ETFs?

A better way to track bitcoin in an ETF

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Good news on proposed tax changes

Bad news

Updated optimal portfolios

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What is alpha?

What is tax alpha?

What about in retirement?

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What performance predictions occurred with this shorter sample period?

Future ETFMathGuy portfolios

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Taxing gains and losses

Wash Sale Rules

Free and Premium Portfolios Now Available

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Volatility estimates

How much to allocate to cryptocurrency?

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Recent returns on value investing leveling off?

Is the relationship between value and growth ETFs typical?

Performance of the ETFMathGuy Premium Portfolios

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