BTAL: A Wonderful ETF For Bear Markets… But There’s A Catch (NYSEARCA:BTAL)

For this week’s ETF review, I want to cover an ETF several have asked about recently.

• AGF U.S. Market Neutral Anti-Beta Fund ETF (NYSEARCA:BTAL)

After studying this ETF, I have concluded that it’s potentially a wonderful investment for bear markets. However, I would not personally own it because the KraneShares Mount Lucas Managed Futures Index Strategy ETF (KMLM) and Simplify Managed Futures Strategy ETF (CTA) are superior alternatives.

What do these ETFs have in common? They use alternative asset strategies to deliver critical diversification, improve volatility-adjusted returns, and help you sleep well at night.

Alternative Asset ETFs: A Potentially Valuable Source of Diversification

Stocks and bonds are the two most popular asset classes, but there are alternatives to those that offer diversification benefits.

Ray Dalio calls diversification “the holy grail” of investing because using enough non-correlated asset classes can theoretically achieve the same return level but with 80% less volatility.

Diversification is the “only free lunch” on Wall Street because rebalancing non-correlated assets that don’t change in value long term can still generate 1% to 3% annual returns from harvesting volatility.

In other words, even without long-term capital appreciation in any asset, about 2% free returns can still be created because some assets go up while others go down.

A 2% performance boost might not sound like much.

However, during the last 21 years, the best fund manager in the country beat the S&P by 1.8% per year, and the 40 others that managed that feat (out of 3,220 funds) outperformed by an average of 0.3% per year.

Diversification has some merit, at least on paper, but what about these three funds? Let’s look:

BTAL: An Interesting ETF That Seems Crazy At First

BTAL is a “market-neutral” ETF.

Market-neutral funds are an investment strategy designed to generate returns largely independent of overall market movements.

These funds aim to profit in rising and falling market conditions by offsetting long and short positions in different securities, thereby minimizing their exposure to market risk.

In other words, like the traditional hedge fund manager, market-neutral funds are stock picking, shorting some stocks, and going long others. Theoretically, you can suffer smaller declines in market corrections or even generate positive returns across all market cycles.

BTAL’s objective is to consistently provide negative beta exposure to the U.S. equity market. It strives to achieve this objective by investing primarily in long positions in low-beta U.S. equities and short positions in high-beta U.S. equities on a dollar-neutral basis within sectors.” AGF

BTAL applies a unique take to market neutrality that might appeal to some deep-value investors, though I caution you that it’s likely a flawed strategy.

It goes long low-volatility stocks and shorts high-volatility stocks.

The portfolio is 62% long and 43% short, and it’s 200 companies with a weighted beta (volatility vs. S&P) of 0.74.

It’s short companies with a 1.44 weighted beta (growth stocks).

The portfolio is diversified and does not resemble the S&P. The largest single holding is Texas Pacific Land Corp. (TPL), which has a 0.6% weighting.

It owns many lower-quality value traps, such as V.F. Corp. (VFC), though also higher-quality aristocrats, like Erie Indemnity (ERIE) and AbbVie (ABBV).

Most of its long positions average 0.31% positions.

The short portfolio includes companies like Zscaler, non-growth stocks like storage REITs, and blue chips that have fallen on hard times and entered bear markets (like Estee Lauder).

3 Reasons This ETF Seems Crazy

I see three major issues with BTAL’s strategy that make me question whether it will ever deliver strong enough returns to justify owning a position.

• A mixed value strategy that targets the wrong metrics.
• “De-worsification” means a quant strategy, but one that’s likely to deliver terrible returns.
• High turnover, taxes, and fees.

Beta, the most popular proxy for volatility, is associated with certain sectors and investing strategies.

For example, growth stocks tend to have a higher volatility

Historical Statistics Since 1999

For example, the Nasdaq is historically 29% more volatile than the S&P, and this higher volatility mainly explains the slightly better returns.

However, the major problem with BTAL’s approach is that it’s going long (62% of the portfolio), slow-growing, low-volatility stocks, and then going short (43%), faster-growing, higher volatility stocks.

I understand the goal of minimizing volatility, but shorting growth stocks is a long-term losing strategy, especially with a 200-stock growth portfolio.

Imagine a 62% long REITs, consumer staples, and utilities, and 43% short the Nasdaq.

The ETF uses 100% equities, with no other asset classes. It’s simply trying to stock pick its way to superior volatility-adjusted returns.

However, with 0.25% to 0.3% average position sizes, it’s not a stock-picking portfolio.

It’s likely a quant fund, with management selecting the stocks purely based on rules using screeners.

This makes BTAL even more like going long low volatility ETFs and short the Nasdaq, which is not a winning long-term strategy.

BTAL’s average short has a market cap under $10 billion, not even large caps.

In other words, BTAL isn’t shorting high-valuation growth giants that might crash in a bear market but lower-valuation growth stocks.

Bottom Line? By targeting volatility instead of valuation growth or income, BTAL is trying to go long and short an assortment of stocks with a diversified portfolio. Even if one of its holdings becomes a rock star, it won’t matter.

The 118% annual turnover rate is similar to what quant value ETFs like COWZ and VFLO use, which are quarterly rebalancing ETFs.

In other words, BTAL uses a strategy that sounds good on paper but is a very tax-inefficient approach.

ETF	Pre-Tax Annual Return Since Inception	Post-Tax Return	Tax Expense Ratio	% Of Returns Eaten By Taxes
COWZ (FCF Yield, Deep Value)	13.53%	12.72%	0.81%	6%
JEPQ	16.87%	11.82%	5.05%	30%
SCHD	12.80%	11.72%	1.08%	8%
SPY (S&P)	10.13%	9.48%	0.65%	6%
QQQ (Nasdaq)	9.74%	9.21%	0.53%	5%
VYM	8.33%	7.41%	0.92%	11%
VNQ (REITs)	7.48%	5.63%	1.85%	25%
SVOL	12.14%	5.60%	6.54%	54%
BAGPX (60-40)	6.02%	4.51%	1.51%	25%
JEPI	8.36%	4.29%	4.07%	49%
AGG (Bonds)	3.07%	1.87%	1.20%	39%
BTAL	-1.11%	-1.40%	0.29%	-26%

Click to enlarge

(Source: Morningstar)

BTAL has generated negative returns since its 2011 inception.

Statistically, any negative fund over 13 years is 90% likely to be fundamentally flawed.

Over the last 10 years, BTAL has been in the bottom 9% of market-natural (long/short) funds.

In the last five years, it’s in the bottom 1%.

-38% Inflation-Adjusted Returns Over 13 Years

Losing 38% of investors’ money over 13 years when the 60-40 delivered 120% inflation-adjusted total returns and the S&P more than quadrupled.

The tax bill is 0.3% per year on an ETF that loses money even before inflation over 13 years.

BTAL has been down in eight of the last 13 years.

The expense ratio is 1.43% plus a 0.29% historical tax expense ratio for a total expense ratio of 1.72%.

Why is something losing money over time and charging almost 2% fees still around?

Why BTAL Is Actually Crazy Like A Fox

BTAL is an unsuitable ETF if you assume its goal is to be a single ticker portfolio solution.

In other words, the S&P 500 or SCHG or SCHD? Can you safely own it as 100% of your portfolio forever? Yes, though it will have higher volatility.

A 60-40 ETF like BAGPX? Yes, that is a single ticker solution, a 60-40 stock/bond portfolio, the simplest form of a hedge fund.

BTAL Is A Hedging Asset: Not An ETF Designed For Strong Returns

BTAL has a negative correlation to the stock market, meaning that historically, when stocks have been rising, they have been falling.

Adjusted for its negative beta, it’s delivered 9% annualized alpha.

Alpha is volatility-adjusted expected returns vs. actual returns.

For example, since 2011, the 60-40 has had a beta of 0.68. The S&P delivered 15% annual returns, so based on volatility, you would have expected a 60-40 to deliver returns of 68% as good.

The 60-40 underperformed its expected returns by 1.3% since 2011, or -1.3% alpha.

Or, to put it another way, BTAL outperformed it by almost 10% its expected returns because it’s not designed for positive returns; it’s designed for bear markets.

BTAL is down 33% when stocks are rising, as much as the S&P is rising.

When the S&P is falling, BTAL is rising 83% as much as the S&P.

The Right Way To Use BTAL

The wrong way to buy BTAL is to think, “Market neutral = I’ll make money in all markets.”

The right way to think of BTAL is as a hedging asset that you expect to drive negative long-term returns, like put options.

Put options are portfolio insurance. You don’t expect to make money on insurance.

Historical Total Returns Since 2011

Look what happens when we replace 40% of a pure stock portfolio with BTAL, just like 60-40 replaces 40% with bonds.

Suddenly, we have a portfolio that’s keeping up, even beating the 60-40 over time, but with less than 7% annual volatility.

BTAL is not designed to make money in the long term. But when combined with stocks that are, it suddenly can deliver superior returns to the 60-40 and with far better consistency.

BTAL is a bond alternative, even though it’s technically 100% stocks, just long some and short others.

When bonds failed, BTAL didn’t.

The 5% of the worst months for the S&P since 2011 were -9% average losses.

The 60-40’s worst 5% of months were -6.3% average monthly losses.

The 5% of worst months for a 60% S&P 40% BTAL portfolio fell just 3.37%.

When the market rose, the 60-40 rose 63% as much and fell 74% as much in falling markets.

Replacing bonds with BTAL in a 60-40 means 43% of the market’s upside and 30% of the downside.

Worst 10% Of S&P Months Since 2011

		BTAL	60% S&P 40% BTAL	60-40	Vanguard 500 Index Investor
Year	Month	Return	Return	Return	Return
2020	3	9.27%	-3.02%	-9.32%	-12.37%
2022	9	2.78%	-3.60%	-7.51%	-9.22%
2018	12	4.31%	-3.39%	-4.73%	-9.04%
2022	4	8.51%	-1.54%	-6.47%	-8.73%
2022	6	7.56%	-0.89%	-6.31%	-8.27%
2020	2	0.43%	-4.47%	-4.10%	-8.24%
2018	10	5.59%	-2.06%	-5.33%	-6.85%
2019	5	6.72%	-1.77%	-2.81%	-6.36%
2015	8	2.51%	-2.79%	-4.07%	-6.05%
2012	5	7.51%	-1.20%	-6.71%	-6.02%
2022	12	3.68%	-1.31%	-3.18%	-5.77%
2022	1	5.23%	-1.07%	-3.65%	-5.19%
2016	1	9.48%	0.80%	-3.33%	-4.98%
2023	9	5.64%	-1.29%	-3.71%	-4.78%
2021	9	-0.35%	-3.24%	-2.55%	-4.66%
2024	4	5.55%	-0.29%	-3.44%	-4.10%
Average		5.28%	-1.95%	-4.83%	-6.91%
Median		5.57%	-1.66%	-4.09%	-6.21%

Click to enlarge

(Source: Portfolio Visualizer)

BTAL has remarkable consistency, generating positive returns in 15/16 of the market’s worst months since 2011. Replacing bonds with BTAL in a 60-40 portfolio design cut the worst monthly losses by over 50%.

Imagine the emotional benefits of the market falling 7% while your portfolio is down just 2%. That’s what BTAL is all about—an ingredient in a SWAN portfolio soup.

Of course, that means it does very poorly in the market’s best months.

Best 10% Of S&P Months Since 2011

		BTAL	60% S&P 40% BTAL	60-40	Vanguard 500 Index Investor
Year	Month	Return	Return	Return	Return
2020	4	-3.39%	4.82%	7.88%	12.81%
2020	11	-14.96%	0.53%	7.85%	10.94%
2011	10	-13.85%	1.01%	8.94%	10.91%
2022	7	-8.40%	0.31%	5.59%	9.21%
2023	11	-4.84%	3.90%	7.28%	9.12%
2015	10	-5.18%	2.75%	4.26%	8.42%
2022	10	1.92%	5.02%	3.73%	8.08%
2019	1	-4.03%	3.19%	5.40%	8.00%
2020	8	-5.29%	1.79%	3.52%	7.18%
2019	6	-3.48%	2.97%	4.42%	7.03%
2021	10	-1.41%	4.16%	3.61%	6.99%
2016	3	-2.21%	2.84%	4.11%	6.78%
2023	6	-5.30%	2.22%	3.47%	6.60%
2023	1	-6.36%	1.23%	5.39%	6.27%
2015	2	-5.68%	0.93%	5.43%	5.74%
2018	1	-3.27%	2.07%	2.98%	5.71%
Average		-5.36%	2.48%	5.24%	8.11%
Median		-5.01%	2.49%	4.91%	7.59%

Click to enlarge

(Source: Portfolio Visualizer)

The downside of replacing bonds with BTAL is that lower volatility in downturns means lower returns in recoveries.

Even though 60% S&P and 40% BTAL outperformed the 60% S&P and 40% bond portfolio over the last 13 years, there were many periods when it was lagging.

Replacing bonds (or any part of your heading bucket) with BTAL means there will be long periods, up to three years when you’re underperforming a 60-40, and of course, you’ll always underperform the S&P.

BTAL is a hedging asset that will rarely outperform the best-performing asset class in history.

So BTAL is a great hedging asset, and it’s time to buy it, right? Not necessarily.

KMLM and CTA: Far Superior Alternatives To BTAL

• KMLM: 5 Reasons You Might Want To Buy This 8.2% Yielding ETF
• CTA: 5 Reasons I Added This 7.6% Yielding ETF To My Portfolio

BTAL has a powerful ability to hedge by having a negative correlation to stocks.

Historical Returns Since 2011

However, long-term bonds are negatively correlated with stocks, as are managed futures.

Both of which are assets that deliver historically positive returns.

The 2010s were the worst-performing decade in managed futures history, yet they still delivered about 3.5% annual returns.

The average 12-month return for BTAL is negative. For bonds, it’s equal to long-term interest rates (4% bond market consensus in the future).

Managed futures averaged 5.5% returns in the “lost decade,” for managed futures and long-term tend to generate around 9% to 10% returns pre-expenses.

Mount Lucas has generated 9.1% returns since 1988, meaning KMLM would have delivered about 8.2% after expenses.

That’s twice the historical return of bonds and consistent with the average long-term returns of trend-following strategies going back to 1928 or even 800 years.

The Mount Lucas index has been the gold standard of hedging strategies since 1988.

In the six bear markets in that time, it averaged 32% gains when the S&P fell 32% on average.

Its correlation to the S&P during the market bottom, times of peak panic, was -0.82.

This is what different S&P and Mount Lucas index allocations would have done in the average bear market since 1985.

Historical Returns Since 2021

As expected, KMLM has delivered around 8% returns since inception and outperformed BTAL.

Since its inception, KMLM’s alpha has been 15% annualized, beating BTAL’s impressive 12% annual alpha.

BTAL’s downside capture ratio is better than KMLM’s since 2021, at -79% vs -67%.

That means when the S&P fell 10%, BTAL was up 7.9%, and KMLM was up 6.7%.

However, when the market rose, KMLM captured 7% of those gains while BTAL lost 24%, as much as the market grew.

		BTAL	KMLM	Vanguard 500 Index Investor
Year	Month	Return	Return	Return
2022	9	2.78%	3.98%	-9.22%
2022	4	8.51%	9.75%	-8.73%
2022	6	7.56%	-1.44%	-8.27%
2022	12	3.68%	1.55%	-5.77%
2022	1	5.23%	5.04%	-5.19%
2023	9	5.64%	4.63%	-4.78%
2021	9	-0.35%	2.48%	-4.66%
2024	4	5.55%	4.18%	-4.10%
2022	8	-0.85%	8.69%	-4.09%
2022	2	-4.49%	3.95%	-3.00%
2023	2	-0.55%	1.75%	-2.45%
2023	10	6.19%	-0.68%	-2.12%
2023	8	5.38%	1.47%	-1.60%
2021	1	1.42%	0.58%	-1.02%
2021	11	1.91%	-5.36%	-0.71%
Average		3.17%	2.70%	-4.38%
Median		3.68%	2.48%	-4.10%

Click to enlarge

(Source: Portfolio Visualizer)

BTAL’s median gains in down months for stocks are better, though its ability to hedge in more extended bear markets (2022) is far worse.

• In bear markets, stock correlations tend to approach 1.
• So, long volatility stocks won’t be as beneficial as trend following.

Historical Returns Since 2021

Remember that hedging assets are not meant to replace the stock portion of your portfolio but the bond portion of a diversified portfolio like a 60-40.

In other words, in a 60-40 portfolio, you can replace 40% of stocks with bonds, KMLM, or BTAL.

When you do, you can see that volatility decreases significantly.

However, BTAL is generating negative long-term returns that weigh on long-term returns.

While BTAL did well in 2022, it wasn’t trending, following short bonds, long the dollar, and long commodities, which is why KMLM was up 48% in that bear market.

That’s why the peak decline of a 60-40 using KMLM was 5%, 5X less than the S&P, 4X less than the traditional 60-40, and 2X better than a portfolio using BTAL.

What About Simplify Managed Futures ETF?

Historical Returns Since April 2022

CTA is designed to optimize long-term trend-following returns by using just two assets (bonds and commodities).

KMLM also uses currencies, with both ETFs avoiding stock futures to achieve maximum negative correlation to stocks in corrections.

CTA’s alpha since inception is 16% per year, slightly better than BTAL and KMLM’s 9.5%.

CTA’s downside capture ratio is superior to KMLM. Combining the two improves KMLM’s historically strong hedging results.

Returns In Down Months For The S&P Since April 2022

		BTAL	KMLM	CTA	Vanguard 500 Index Investor
Year	Month	Return	Return	Return	Return
2022	9	2.78%	3.98%	-0.08%	-9.22%
2022	4	8.51%	9.75%	8.96%	-8.73%
2022	6	7.56%	-1.44%	3.47%	-8.27%
2022	12	3.68%	1.55%	-1.42%	-5.77%
2023	9	5.64%	4.63%	8.99%	-4.78%
2024	4	5.55%	4.18%	9.78%	-4.10%
2022	8	-0.85%	8.69%	4.23%	-4.09%
2023	2	-0.55%	1.75%	9.28%	-2.45%
2023	10	6.19%	-0.68%	-4.10%	-2.12%
2023	8	5.38%	1.47%	-1.13%	-1.60%
Average		4.39%	3.39%	3.80%	-5.11%
Median		5.47%	2.87%	3.85%	-4.44%

Click to enlarge

(Source: Portfolio Visualizer)

BTAL is impressive in down months. Since April 2022, it has been a nearly perfect hedge, with a -97% downside capture ratio.

Returns In Up Months For The S&P Since April 2022

		BTAL	KMLM	CTA	Vanguard 500 Index Investor
Year	Month	Return	Return	Return	Return
2022	7	-8.40%	-2.50%	3.68%	9.21%
2023	11	-4.84%	-5.90%	-2.76%	9.12%
2022	10	1.92%	-1.41%	1.78%	8.08%
2023	6	-5.30%	-2.53%	0.43%	6.60%
2023	1	-6.36%	-2.88%	-4.09%	6.27%
2022	11	-0.29%	-10.05%	-6.88%	5.58%
2024	2	-1.09%	2.38%	5.97%	5.33%
2024	5	1.31%	-4.95%	-0.33%	4.95%
2023	12	-10.28%	-5.32%	-1.78%	4.53%
2023	3	3.29%	-2.35%	-14.09%	3.66%
2024	6	1.82%	-1.49%	-0.84%	3.58%
2024	3	-0.72%	2.33%	-0.36%	3.21%
2023	7	-4.90%	0.70%	0.63%	3.20%
2024	1	8.26%	-1.01%	0.72%	1.67%
2023	4	2.70%	4.55%	6.75%	1.55%
2024	8	4.28%	-1.18%	1.36%	1.38%
2024	7	-1.27%	1.92%	-4.16%	1.20%
2023	5	-5.44%	1.43%	1.96%	0.42%
2022	5	1.76%	1.91%	1.13%	0.17%
Average		-1.24%	-1.39%	-0.57%	4.20%
Median		-0.72%	-1.41%	0.43%	3.66%

Click to enlarge

(Source: Portfolio Visualizer)

CTA has historically (though it’s a short history) delivered the best mix of strong downside protection in down months with positive gains when the market recovers.

Since April 2022

Since its inception, CTA has been a powerful hedge while generating double-digit absolute returns, resulting in a 60-40 stock/CTA portfolio that actually outperforms the S&P.

It also had the smallest peak decline, just 5%.

CTA can cut the downside capture ratio to 30% when placed into a diversified portfolio.

That helps increase the safe perpetual withdrawal rate to 8%, more than double that of a 60-40.

Returns During Months When S&P Is Down Since April 2022

		60% S&P 40% BTAL	60% S&P 40% Bonds	60% S&P 40% CTA	Vanguard 500 Index Investor
Year	Month	Return	Return	Return	Return
2022	9	-3.83%	-7.11%	-4.81%	-9.22%
2022	4	-1.86%	-6.79%	-1.68%	-8.73%
2022	6	-1.20%	-5.47%	-3.03%	-8.27%
2022	12	-1.49%	-3.78%	-3.76%	-5.77%
2023	9	-1.29%	-3.96%	0.13%	-4.78%
2024	4	-0.29%	-3.45%	1.37%	-4.10%
2022	8	-2.65%	-3.65%	-0.24%	-4.09%
2023	2	-1.79%	-2.57%	1.92%	-2.45%
2023	10	0.80%	-1.95%	-2.92%	-2.12%
2023	8	0.60%	-1.27%	-1.45%	-1.60%
Average		-1.30%	-4.00%	-1.45%	-5.11%
Median		-1.39%	-3.72%	-1.57%	-4.44%

Click to enlarge

(Source: Portfolio Visualizer)

Better long-term returns and hedging power are just as strong.

Bottom Line: Alternative Funds Can Be Useful But Don’t Fall Into The “De-Worsification” Trap

BTAL is a wonderful hedging asset and a terrible standalone ETF.

Its design is very good at generating positive returns in a fast correction and usually during a prolonged bear market as well.

However, its downside, specifically that it’s designed for negative long-term returns, means that while it can be a bond alternative in a diversified portfolio, bonds, and managed futures are superior alternatives in future downturns.

BTAL is designed for -1% long-term returns, while bonds are expected to deliver 4% to 5% and managed futures 8% to 9%.

And since BTAL doesn’t generate superior portfolio results during downturns, its downsides outweigh its upsides.

What about combining BTAL CTA or KMLM in a portfolio?

Historical Returns Since April 2022

Yes, you can do that, and it does have some minor benefits to negative volatility-adjusted returns.

However, ultimately, it’s up to investors whether they believe the higher fees of BTAL and negative long-term returns are worth it as part of their long-term portfolios.