Keep it simple with bonds and ETFs

0:10Rob Isbitts:Rob Isbitts from Sun Garden Investment Publishing and his investing group, Sun Garden Investors Club. Welcome back to Investing Experts. Great to have you back on. Hey, it's great to be here again, Rena. And this actually comes at a pretty opportune time, not just because it's the end of the year. And I also just hit a pretty significant milestone at Seeking Alpha, 10 ,000 followers. It's been about three years on the platform. And I just wanted to thank everybody at Seeking Alpha and the audience. I can sometimes be an acquired taste. I'm not for everybody, but the mission was to try to use this part of my semi-retired life to get to a wider audience.

0:51And I think that round number is pretty good validation. That's awesome.

0:56Rob Isbitts:10 ,000 followers is nothing to sneeze at. So talk to us. How are you looking at these markets? What are you thinking about? You were on a few weeks ago with the NextGen investors, Julia Ostia and Kenny Ofontes and Jack Bowman. And so you were sharing some of your thoughts then. What would you say if you could synthesize it into your top three things that you're thinking? I would start with the idea that what they call the passive bid or index investing has really become the 800 pound gorilla for this market. And it's frankly made it so that it is really difficult, I think, to make a case that investing has to be nearly as complex as it used to be.

1:40It doesn't mean that we don't need to do deep research. We do. But and I think the other two things are kind of related to that. So it's it's the indexation of the markets, the fact that So much money is chasing the same trade, if you will, but it's a long-term trade for a lot of people. And that's the S &P 500. It's kind of sucking up all the air in the room. And I think the second thing would be that I believe that risk management is even more important because of that going into 2026. Because it's a very deceiving market, being very crowded at the top with stocks. And the third thing has nothing to do with the stock market, even though it does influence the stock market.

2:24And I think it's going to be a big influencer in 2026. And that is the bond market, specifically the treasury yield curve. We've gotten very used to years of zero interest rates going back to the global financial crisis in 08, 09. But since that time, rates were really suppressed for a while. Well, 2022, they popped up, they've stayed up. And where has that led me in my own portfolio? As I've written in some, I think, fairly popular articles, kind of got a lot of folks off of the bench, if you will. The subject was not the stock market or necessarily trading or even long-term investing fundamental tactics.

3:10It was the simplicity of building a bond ladder using zero-coupon treasuries, which I've done, and I talk pretty liberally about what I did, why I've done it. I'll continue to do that because the comments have just been through the moon great in terms of making me realize that, you know, there's a whole generation of investors of different ages who've never had to care about bonds before and never saw the need for them. And there's something about the simplicity of saying, you know what, I've got X amount of money coming due every year, the years I choose, the dates I choose. And and if rates and inflation go up, I can hedge it.

3:56And it's what I call treasuries plus. So it's become a big sleep well at night thing for me personally. And look, this is what I write about at Seeking Alpha, what I'm doing personally.

4:08Rob Isbitts:We had Michael Kramer on talking about the bond market, and he was talking about how the startling thing about the rates going down is that he feels like not enough people are talking about the fact that the 10-year rate has not gone down with it, along with the 30-year rate. What is your thought on the bond market as it pertains to the interest rate conversation? And then also, as you talk about recommending or encouraging investors to think about bonds, what does that mean exactly? Yeah, I'm a big fan of Michael's work, and I'll take it from the different angle. He's talking about rates have not gone down, and I'm looking at where they've come from.

4:47This is the highest rate that I believe we've seen for at least the 10 to 30-year part of the Treasury curve, maybe five or seven years out as well. These are the highest rates we've seen just about since probably 20 years ago. And it's also not lost on me the fact that rates had a similar looking rise, peak, stagnation period event, if you will, around the time of the dot-com bubble, which I think this environment reminds me of a lot, even though it's not the same. It rhymes like crazy. So I look at it and I say, you know, there's a limited amount of time, I think, for people to really lock in.

5:38I mean, my own ladder starts at five years, goes about 20 years, going to last me until I'm 80 years old and I'll work on 80 to 90 eventually. But there's something about that that I just don't think people get because when it comes to, I mean, there's two ways you can take it. I look at a bond ladder and the bond market in general as a level of certainty. Now, we have to be careful because nothing in investing is certain. But to the extent that T-bills may be considered the risk-free asset, right? Always have been, I think, or for a long time, many, many decades. But the bond market and the treasury market, yes, there's always the possibility, maybe a little bit more now than ever, a sneaking suspicion that, you know, investors are going to lose their confidence in the U.S.

6:30Congress in particular to be able to regulate their debt and rein it in. Nobody wants to cut spending, and this could be a long-term problem. You know, Japan's had their own issues with that over a few decades. That didn't turn out well either, aging population and all that. So there's some similarities, but I think the bottom line and and why it leads me to this now, say, OK, after the stock market run, at least at the top, not just this year, but for the last decade or so, where can you go to get, let's call it a four and a half percent, give or take return, where you are locking in nominal dollar amounts that you're going to receive, almost like a second Social Security payment or a pension.

7:19but that you don't put all your money in it. There's stock portfolio, ETFs, options, whatever, and other ways to hedge interest rates. But if rates were to plummet, which is entirely possible, people may forget about the U.S. debt for a minute and just go flight to quality as has happened before. I mean, I'm kind of open to anything with this now that it's structured. But if you've got 4.5%, give or take, out several years. Rates go up, you can hedge. Rates go down, pardon the expression, but investors will crush it in a way that they probably never even seen from things like dividend stocks and certainly lower quality bonds.

8:07I think everything has risk to it, but I'll take the risk that the U.S. government won't be able to pay me over time. It may be with inflated dollars. And like I said, again, you can hedge that and I have a lot of ways to hedge it. We can discuss that. But that really, to me, is like, why not anchor this, especially when some of the, I think, most noted, tenured investors are talking about a possibility of somewhere between a lost decade and very modest, positive returns for the equity market. it. And I'm not going to sit here and try to predict the future. I just know there's a very high risk that equities are not going to make huge strides for the next five years the way they have the last five.

8:58Rob Isbitts:So you have a series of ETFs that allows you to play offense. And then the hedge on the other side is the defensive ETFs. Do you want to go through that? Maybe share with investors why those ETFs specifically and why the individual allotment or why the respective allotment per ETF or per theme? Sure. And if I can, you know, going back to kind of the order in which we spoke about this, I think that the subject matter here is simplicity. I think a lot of investors, especially self-directed types, are really overthinking this. And it's not a flaw of theirs. It's maybe lack of recognition that the markets have become so binary.

9:41I mean, the stock market is almost like one risk on, risk off trade. I've heard the market with all the speculation referred to as a casino, but with better lighting. To me, that means that we have to start with, let's spend most of our effort trying to do more with fewer items. So it starts with simplicity. The bonds are kind of a side saddle part of that for those who believe like I do, that it'd be nice to have a fixed return that can be hedged or can profit from lower rates and kind of gives you some flexibility there. Bonds are almost like the somewhat static anchor piece. The rest of it is, OK, what are you going to do with the rest of the money?

10:31It's not all in a bond ladder like I have, even though it is the biggest part of my portfolio. But look, I love ETFs. I used to love stock picking, but now I think it's not useless, but it's a lot less useful than it used to be because of algorithms, indexation, crowded trade, whatever you want to call it. So here's what I did for the folks at SunGuard Investors Club. I refer to this now as the weekly ROAR, and we talked about ROAR a little bit before. It's my reward opportunity and risk proprietary indicator, which basically says anything can go up at any time for any reason, but how much risk of major loss are you taking on?

11:11I always look at it as how much risk am I taking? Once the coast is clear, now I can try to invest and make as much as I can, but risk management is first. And, you know, the whole ROAR idea started about four years ago, I started writing about this. The simple idea was what you see in the top two here.

11:32Rob Isbitts:And what are those top two, just for those listening? Oh, yeah, sure. The S &P 500 ETF SPY and whatever your favorite short-term T-bill ETF is. I use bill because it's an easy ticker. Some people use S-gov, et cetera. So they're interchangeable. So there's SPY at the top and bill, you know, for the defense. I think most investors have learned how to play offense. Very few have learned how to play defense alongside it. And there's a lot of sports analogies that I will skip over for today, but I've written about a lot of them. You know, it starts with the idea that, look, you, the way markets have evolved now, T-bills being pretty competitive with yield and the S &P 500, again, kind of, you know, soaking up all the air in the room to the point where, sure, you can beat it and stock picking and all that.

12:27But there are so many investors that I think are either learning or relearning things like risk management, how to incorporate things other than stocks. And all I keep looking at in every study I do is that a big portion of the stock market has gone kind of nowhere for several years. So we might as well start at the beginning, as they say, with, okay, a very straightforward spy and bill portfolio. And for the last four years, I have run just that with one of my accounts. And it's not only one of my best performing accounts, personally, it's beaten a very long list of things that you wouldn't think it has any right to beat.

13:17Basically, anything all the way up to, let's say, a 60-40 and beyond bond, more so than a lot of dividend ETFs, more so than the JEPIs of the world, you know, coming in at about a 8 % return, but with a standard deviation under three. For those who understand standard deviation, that is what I call getting a lot of bang for your buck or first managing risk almost to a fault and then trying to make as much as you can. And so all I was able to do to generate that, which I published about a lot and I will some more, is SPY bill. That's all I used. No stocks, no other ETFs, SPY bill, and my ROAR score, which every Tuesday I publish for subscribers.

14:11And I simply say, this is how much is in SPY and this is how much is in Bill, because the ROAR score, which is a number from zero to 100, 100's maximum risk willing to take because the market is easy, which almost never happens. And zero, which it's been a little bit in some past crises, zero basically means I don't want any stock market related risk. So I start with how risky is the stock market, not for a little short-term pullbacks, but major loss. And the number has been fairly low for much of this year. And even though the S &P has done pretty well, you know, the average stock, I think it's up maybe 4 % in 13 months.

15:01The RSP is the ETF. So what do I do with this group? I start with offense and defense. Just let's put labels on it like that. And SPY bill for a newer investor or somebody who's newer to ETFs or somebody who's just looking for, let's say, a ballast in their portfolio. I've got two ballasts here. I've got SPY bill to ETF portfolio run by the ROAR score, and I've got the aforementioned bond ladder. But the next set of questions I would get from people is, oh, well, what about this ETF, that ETF. I said, you know, so many market segments move in sync. If the big drug stocks move, there's a good chance health care is moving.

15:53But not every time and not during earnings, but in broad strokes, you know, again, trying to keep it simple. There's just way too much. I mean, I call it correlation nation. The U.S. stock market has become correlation nation. Things are too highly correlated to want to go way outside the box. It doesn't mean that every day there aren't great stocks to pick. But the problem is with the algorithms and the indexation being these sort of indifferent, somewhat passive forces that don't care where they're buying and selling. We've talked about this before. With so much of the money being run that way, I think it's something like 70 to 90 percent of of stock market trading activity every day doesn't care what is buying or selling.

16:44It's doing it because of some rule, because it has to fill an index portfolio. And to me, if we don't adapt as investors to that modern reality, then we are just tempting fate. So what I did with Spy Bill is I said, OK, let me expand the list. Let me expand the offense and the defense from one choice each for the simplest yet very effective portfolio over the last four years to six of each. I could go to 100 of each, but the problem would be, and I know this from being a lifelong chartist, I can chart them all week after week and so many of them look the same. So I'm happy for subscribers to comment on anything they want to talk about in our live meetings and et cetera.

17:32So on the offense, it starts with SPY, but in reality, one of the other little, what do they call us, hacks, like a stock market hack, you know what I mean? Beyond SPY, there's the Qs, you know, QQQ, NASDAQ 100, and the Dow. Because as time has gone on, a lot more money has gone into the Qs from indexing than the Dow. The Qs have started to look like the SPY. The Dow correlates highly, but sometimes it goes its own way. It's almost like it's the defensive version of large cap stocks. So what I will sometimes do is say, OK, SPY is a possibility. But if you want to add a little bit more nuance to it, you can allocate between Qs and DIA.

18:23If you want to get a step further and start to increase, let's say, the depth of market cap you look at, there's RSP, which is the equal weighted S &P 500, which, by the way, is now at a historic underperformance of SPY. So let me repeat that, if I may. SPY is the S &P 500, all 500 stocks. RRSP is the S &P 500, all 500 stocks. If you look at a list of the two, unless there's some time error in terms of they're on the wrong dates, you're going to see the same 500 stocks. However, SPY is crowded at the top with something like 20 stocks occupying nearly half the index. What about the other 480? Well, I mean, you get captured, you capture those in RSP because every stock is the same.

19:21Every stock is one fifth of 1 % as opposed to NVIDIA, which is like 8%. So it's the same index, it's the same stocks, but the weighting is so different. And that is one of the things that I try to use this as a teaching tool, people can then take it and do what they like because they're self-directed investors. But even those first four, SPY is what everybody knows. Qs and DIA, to some extent, are complements to each other, a little more of one, a little less of the other. It's not either or. It's not timing strategy. And RSP and SPY are also kind of different ends of the same spectrum, Same stocks, completely different weighting.

20:04And RSP is underperforming mightily, which also has bled into the mid cap and the small cap underperformance. I don't know if it will change, but if it does, I believe it will show up in my chart work. And that's kind of what I keep people on the pulse of every week. So that's the offense. And I throw in oil and Bitcoin, which I'm not the biggest fan of, but hey, I'm a fan of making money and there's enough volatility there to create opportunity. So that's the offensive set. Any questions on that? Otherwise, we can run through the defense.

20:38Rob Isbitts:No, yeah, let's hit the defense. All right. Great. You've got Bill on the defense. Well, what else can you do that is defensive? I've talked about it before. You have a laddered bond portfolio. Well, mine's a zero coupon ladder, but there is a security I've used a lot tactically. symbol is G-O-V-I. And it is one to 30 year treasuries, about 3.3 percent weighted into each one of them. And so it is a ladder. Now, yeah, sure, the bonds mature and all that, but it's going to be different. It's not your money that matures in the amount you want on a specific date and time. So it's ladder format, but it's not the same as a as a specific ladder that that I teach people to build themselves like the one I built.

21:32And so but Govy at least gets you beyond the T-bills. Now you've got sort of a little taste of everything. It probably averages to about a seven to 10, 12, 12 year fixed income security issued by U.S. government. Then you've got gold, which I consider it defensive. I think it's kind of amorphous, but I put it in the gold in that category. So the offense has oil and Bitcoin and the defense has gold. And that's how I cover sort of commodities and crypto in this sort of next level basic ETF basket to allocate among. And then there's three more. And they all have to do with hedging or profiting from down markets.

22:21One, and this is at least a threat, don't think it's going to go this way, but it might. if the global bond market loses, if the U.S. loses credibility in the eyes of the global bond market. There may be no better way to take advantage of spiking inflation and spiking U.S. long-term bond yields than ticker TBF. There are double and triple lever versions of it as well. You know, people say to me, well, but if rates go up, your bond portfolio is, you know, is screwed. completely wrong. That was the case maybe 20, 25 years ago when we didn't really have as many tools. This is my whole thing, Rena.

23:05The tool set has expanded greatly, and that's why we have to kind of meet that complexity without overdoing it by owning 200 stocks in our portfolio, all of which are going to move together. So TBF, all it does is it shorts the long treasury. In 2022, if you look back when rates were going up, up, up, so was TBF. And so to me, it's an easy way to hedge my ladder. It's also an easy way to hedge even the Govi portfolio. So teaching people how to use these basic ETF tools together. And the last two, I need an equity inverse, and technically it could be any one. I mean, I teach people that I go beyond this.

23:53RWM is inverse small caps. The Russell 2000 that the IWM is based on, RWM is the opposite of that. There are levered versions, but this isn't one just negative one times. So when small caps go down, this goes up. The Russell 2000, as I think I've heard your other guests say, something like 40 % of the companies are only surviving to their next debt refinancing. And so to me, small caps are always sort of the punching bag and the easy way to go to say if the market in general is going to fall, the small caps are going to get it much worse. And lastly, I have kind of what I call a wild card spot.

24:36right now, what's in there, it's one security that I say, you know what, you're probably never going to own even 5 % of this thing, maybe at most 5 % of your total ETF portfolio. And so you want it to be something that is going to be tactical. You're not going to use it for very long, but it could be a huge difference maker either in a straight up market or a straight down market blowout, kind of like we had last April and in 2020 and all that flash crash, if you will. And right now, what's sitting in the wildcard spot is UVIX. It is twice the movement of the VIX, the volatility index. Suffice it to say, if the VIX is sitting at 15 to 20 and it doesn't move much, UVIX will just keep losing value.

25:28But if I have a small position, I'm OK. If you get another April, you will see something like UVIX double the VIX, and the VIX goes from 15 to 20 range where it's been sitting the last several years to 30, 40, maybe 60 or even 80. Well, I have personally owned UVIX and others like it when these things have gone up like five, 600 percent in a matter of a couple of months. and then just as quickly they can give it all back. So for those who don't want to get maybe as wonky as I tend to sometimes with options and collars and things like that, the volatility ETFs are about the best thing I have found as an option surrogate.

26:19So UVIX would be almost like instead of a put option, you want to own something in ETF, but it is going to waste away in value the way an option does if things don't go well. is that. SVIX is on the opposite side of that. I believe that's an unlevered. But there's a basket of these. And I try to write about them. I certainly cover them in the Investors Club.

26:41Rob Isbitts:Do you have any thoughts to share about things of value that investors could keep in mind with all the noise coming at them? As I see it, what's happening the last few weeks in the markets, let's say late November into early December here, is just, it's so typical of how markets work. Ooh, the Fed's coming. Powell's going to speak. The market's going to move. It's going to move the other way. Then it's going to move the way it really wants to move. And I'll capture a lot of this in the charts, but in the same way that you have, let's say earnings for NVIDIA or the other Mag7, Everything just stops.

27:24And so I'm sitting here as we're recording this, I'm a few hours from my next weekly live session with the group and I put out my weekly roar to the group subscribers on Tuesdays. And I'm sitting here saying, you know, I think I want to take like a 24 to 48 hour hold because Tuesday is not an action day when Wednesday is a Fed meeting because nothing is moving. Everything flattens out. It gets like so quiet you can hear a pin drop and the Nasdaq is moving in like a few point range. OK, nothing interesting is happening. So what do you do about that? What do you do about the fact that the markets have changed?

28:06Well, first of all, there's no reason to push and jump the gun. It's another reason why having a portfolio that is very sort of simplified and static and then you can trade around it as much as you like, because that's what I do. I do a lot of trading, but it's with smaller amounts of money. And, you know, so honestly, I mean, what's the Fed going to do? Doesn't really matter to me. What the market's going to do in reaction to that, that matters to me, but I'm not going to try to guess it. I gave up trying to become a professional guesser on time ago, but I will tell you what I'm focused on. And what I'm focused on is the aforementioned 10 to 30 year part of the treasury curve, because one of two things is likely to happen.

28:53Maybe not this week or even this month or even this year because we're going into January of 26. But I would guess that sometime within the first quarter of next year, the bond market is going to tell the stock market what to do because it usually does when the rubber meets the road, as they say. One of two things is going to happen. And there may be some things in between, but these are the two likely candidates. OK, these are two major parties, if you will. The the long bond, 10 to 30 year, is going to react to the fact that they do not think that the U.S. is getting its fiscal house in order.