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You Must Be Crazy High Yield Portfolio - 1st Half 2014

In this blog post I introduced readers to a real money portfolio I created using UBS 2x ETN's (http://seekingalpha.com/instablog/379412-darren-mccammon/2860573-a-high-yield-portfolio-using-ubs-2x-etns). Due to the high yield and leveraged nature of the portfolio I called it the You Must Be Crazy (YMBC) High Yield Portfolio. This is an update of that portfolio through the first half of the year:

As you can see, so far so good. The chart of the portfolio goes upward and to the right at a fairly steady pace outperforming the S&P 500 by 14% YTD.

During the quarter two transactions were made in the portfolio. Per plan, Q1 dividends were re-invested in whichever component had performed the worst up to that point in time; BDCL in this case. Second when MORL climbed over 20% in price, significantly reducing its' discount to NAV, that components' allocation was reduced back to normal (see comments section of previous post linked above). The proceeds were invested in EFF. This both reduces the expected yield of the portfolio to 14.7% and reduces it's overall risk (EFF is the only non-leveraged component of the portfolio and unlike the other components, benefits from short term interest rate increases).

The portfolio as of June 30th:

As far as risk goes, as I indicated the line in the chart above moves up and to the right at a fairly steady pace. However, to be more formal:

  • Annualized Volatility: 10% for YMBC vs. 10.7% for SPY
  • Daily VaR (99%): 1.5% for YMBC vs. 1.6% for SPY
  • Beta: .71 for YMBC vs. 1.0 for SPY

http://bit.ly/1sFvKv7

1 year annualized volatility, Value at Risk, and Beta scores all came out less risky than the SPY. So by common measures the YMBC portfolio is proving less risky than the S&P 500 despite utilizing 2x leveraged ETN's and having a very high yield. The greatest contributors to reducing market risk in my opinion are EFF and MORL, both of which have essentially no correlation to SPY (.3 to -.3 depending on what period of time and frequency you choose to utilize for the calculation).

Also of note, during the quarter I did an analysis of the risk inherent in the MORL component vs. your average mREIT.

Something to think about:

  • NLY: Dividend 10.3%, Volatility* 12.9
  • AGNC: Dividend 11.0%, Volatility* 12.3
  • CYS: Dividend 14.5%, Volatility* 17.3
  • WMC: Dividend 17.9%, Volatility* 21.8
  • MORL: Dividend 24.5%, Volatility* 13.9

* http://bit.ly/1pQW3MU

My conclusion is the added diversification of MORL appears to be significantly offsetting the 2x leverage risk. To date we are getting 2x the dividends without more volatility than the average mREIT.

Disclosure: The author is long MORL, CEFL, BDCL, SDYL, DVHL, EFF.

Additional disclosure: As I am not aware of your personal financial situation, this is not a recommendation for purchase or sale of any security. Please do your own due diligence. Equities discussed may be thinly traded, if you do decide to buy shares you may wish to consider using a limit order.

Stocks: MORL, CEFL, BDCL, SDYL, DVHL, EFF