Investment Concepts Archives - Aptus Capital Advisors

Rethinking Fixed Income: Why Return Matters More Than Yield

Brian Jacobs — Mon, 19 May 2025 22:41:22 +0000

When investors evaluate fixed income strategies, the first question is usually about yield. What’s the income? What’s the payout? That focus is understandable. Yield is easy to measure, and there’s a certain comfort in seeing income show up regularly.

But in taxable accounts, that perspective can be misleading. What ultimately matters isn’t the size of the coupon. It’s how much return you actually keep, and how much control you have over when taxes are paid.

Let’s look at three common paths in fixed income to illustrate why structure and timing make such a difference in outcomes.

Three Paths, Three Very Different Outcomes

Let’s walk through three examples to highlight how the structure of returns impacts what you actually take home.

First, municipal bonds. They offer tax-exempt income. If you earn 3.5%, you keep 3.5%. That simplicity has made them a staple for high-income investors. But the tradeoff is relatively low absolute returns, especially in today’s tight-spread environment.

Now,take traditional taxable bond funds. These might offer a 4.8% yield, but that’s before taxes. At a 33% marginal rate, that return drops to just 3.2% after tax. Worse, taxes are paid annually, which interrupts the compounding process and drags on long-term results.

Now consider a strategy that generates the same 4.8% return but defers gains for 10 years, taxing them at a 20% long-term capital gains rate. The after-tax return rises to 4.0% as each dollar compounds at 4.8% for 10 years before taxes are paid. If the gains are deferred for 20 years, the after-tax return improves to 4.2%. This ability to delay taxes and pay them at a lower rate enhances long-term compounding in a meaningful way.

What You Keep Matters More Than What You Earn

Here’s the kicker: to match the 4.0% post-tax return in the deferred example above using traditional taxable bonds, you’d need a 6% return / yield. That’s because every dollar earned is taxed annually at a higher rate, making it harder to reach the same result.

For investors who are reinvesting income rather than living off it, the structure of the return can be more important than the size of the yield.

Below is a chart highlighting that an investor who receives 4.8% / year taxed at a 33% short-term rate would compound their wealth to significantly less money than an investor who receives the same 4.8% return deferred for 10 years.

And that difference grows over longer periods.

A Shift in Asset Location Strategy

An investment approach that focuses on total return while limiting taxable distributions also opens the door for better portfolio construction across taxable and tax-advantaged accounts. Today, many advisors face a tradeoff:

- Hold fixed income in taxable accounts and lose return to taxes, or
- Place it in IRAs and Roth accounts, sacrificing those valuable slots for investments with likely lower return potential than equities

But if a stable allocation typically used for traditional, tax-inefficient fixed income can be structured in a way that defers income payouts and taxes to improve after-tax return, it becomes more viable in taxable accounts. That frees up space in IRAs and Roths to hold higher-growth assets like equities, potentially enhancing overall wealth accumulation without increasing risk.

That’s why investors should look beyond the size of the coupon and think instead about how, and when, those returns are realized. The desire for yield often stems from the sense of certainty it provides, but many investors aren’t living off their bond income. They’re reinvesting it. And if that’s the case, capturing returns through appreciation instead of income offers a better path.

Tax Timing = Control = Opportunity

When returns come in the form of income, taxes are due whether you need the cash or not. But when returns are embedded in price appreciation, you gain control. You decide when to realize gains, whether to offset them with losses, and potentially how much tax to pay. That kind of flexibility is difficult to find in traditional fixed income strategies.

If you’re going to earn a return either way, would you rather have it taxed every year, or let it grow uninterrupted and pay tax only when it makes the most sense for you?

The Bottom Line

In today’s environment of compressed spreads and rising tax awareness, it’s not just about how much income your bond portfolio generates. It’s about how efficiently you earn your return. Deferring gains isn’t a trick. It’s a smarter way to compound wealth, reduce drag, and give investors greater control over outcomes.

Disclosures

Past performance is not indicative of future results. This material is not financial or tax advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed and all calculations may change due to changes in facts and circumstances.

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.

Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2505-17.

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From Oracle to Orange Pill: Is Buffett the New Bitcoin Convert?

Brian Jacobs — Thu, 15 May 2025 13:29:52 +0000

Warren Buffett has never been shy about his skepticism toward Bitcoin. He’s famously called it “rat poison squared” and dismissed it as a non-productive asset. But at the 2025 Berkshire Hathaway annual meeting, his final as CEO, Buffett issued a series of warnings that have some wondering: Is the Oracle of Omaha starting to see the case for Bitcoin? Probably not. But his message offers a clear framework for investors concerned about preserving purchasing power in an increasingly unstable fiscal environment. And there are several ways, beyond Bitcoin, to position portfolios accordingly.

“Scary” Fiscal Policy

In front of tens of thousands of shareholders in Omaha, Buffett delivered a sobering assessment of U.S. fiscal health. He described current fiscal policy as “scary,” citing the federal government’s roughly 7% deficit, more than double what he views as sustainable. Left unchecked, he warned, this trajectory could become “uncontrollable” as soon as 2027. His concern wasn’t just about numbers on a balance sheet. It was about the future purchasing power of the U.S. dollar.

The Inevitable Devaluation of Fiat?

Buffett acknowledged something crypto enthusiasts (and we at Aptus) have long warned about: the structural tendency of governments to erode the value of their currencies. Not out of malice, but out of political necessity. “The natural course of government,” he said, “is to make the currency worth less,” especially when debt obligations pile up faster than tax receipts.

That’s the crux of the Bitcoin thesis. And it’s also a core part of our argument for rethinking traditional portfolio design in this environment.

A Shift in Tone, If Not in Portfolio

Let’s be clear: Buffett didn’t reverse course and endorse Bitcoin. But his message in 2025 landed differently. With inflation still sticky, debt mounting, and political will lacking, Buffett’s remarks echoed many of the arguments made by Bitcoiners and real asset advocates. Some even dubbed it his “orange pill” moment—Bitcoin slang for waking up to the risks of fiat debasement.

Opportunities Outside of Bitcoin: What We’ve Been Saying

Whether or not you buy into Bitcoin, Buffett’s concerns support a broader rethink of portfolio construction. We’ve been calling attention to the same risks, and proposing practical solutions:

- More Stocks, Less Bonds, Risk Neutral: In a world of structural inflation and fiscal recklessness, cash and fixed-rate bonds are melting ice cubes. We’ve consistently argued that equity exposure, paired with downside protection through options, is the best way to preserve and grow wealth in real terms.

- Nominal Bonds Can’t Keep Up: Even before Buffett’s remarks, the math was clear: after inflation and taxes, nominal bonds often fail to deliver real returns. In many cases, they quietly guarantee a loss of purchasing power. That’s not defense, it’s decay.

- The Opportunity with TIPS: If inflation is persistent and deficits remain high, nominal bonds are a losing game, especially after taxes. TIPS, which adjust with inflation, offer investors protection that’s anchored in real purchasing power.

- Tax Efficiency Matters More Than Ever: With rising deficits, future tax burdens are unlikely to shrink. That’s why we focus on tax-aware investment solutions because real returns only matter if you get to keep them.

Final Thoughts

Buffett built his legacy on owning quality businesses with durable moats. But his final message as CEO wasn’t about balance sheets or competitive advantage. It was a warning: the biggest threat to long-term wealth may no longer be market volatility, but the steady erosion of the dollar’s purchasing power.

No, he’s not buying Bitcoin. But for someone who once scoffed at it, Buffett’s concerns echo many of the same truths: fiat currency is fragile, fiscal policy is broken, and investors need to rethink how they protect their future.

Disclosures

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TIPS vs. Treasuries: Real Yield Is Back?

Brian Jacobs — Mon, 05 May 2025 12:18:34 +0000

For over a decade, Treasury Inflation-Protected Securities (TIPS) offered little appeal—real yields were near zero, and inflation felt like a distant threat. Fast forward to today, and the landscape has changed meaningfully. Real yields on TIPS are now above 2%, making them one of the more compelling opportunities in fixed income.

And it’s not just about the higher yield. It’s about the shape of possible outcomes. With rising uncertainty around U.S. fiscal policy (tariffs, tax cuts, and shifting government spending patterns) there’s a growing case for both inflationary and deflationary risks. TIPS happen to hedge both ends, unlike traditional Treasuries.

What Are TIPS?

TIPS are government-issued bonds that offer a real yield (i.e., a return after inflation). Unlike nominal Treasuries, which pay a fixed coupon, TIPS adjust their principal based on the Consumer Price Index (CPI). If inflation rises, the principal increases; if there’s deflation, the principal can decrease, but only temporarily.

At maturity, TIPS are guaranteed to return at least their original principal (typically $100 per bond), even if there is cumulative deflation over the life of the bond. This deflation floor provides downside protection in a deflationary environment along with the inflation protection that nominal Treasuries don’t offer.

Here’s the relationship to keep in mind:

Nominal Treasury yield = Real TIPS yield + Break-even inflation

So if 10-year Treasuries yield 4.3% and TIPS offer a real yield of 2.0%, the market-implied break-even inflation is around 2.3%. If inflation ends up being higher than that, TIPS win. If it’s lower, nominal Treasuries win, but only by a maximum of 2.3% / year given the floor.

Return Profile: Nominal Treasuries vs. TIPS

Nominal Treasuries

Let’s say you buy a 10-year Treasury yielding 4.3%. That’s roughly what you’ll earn annually in nominal terms over the duration of the bond, irrespective of how inflation evolves. If inflation averages 3%, your real return is just 1.3%. If inflation spikes to 5%, your real return turns negative. If we enter a deflationary world, your real return increases.

TIPS

Today’s 10-year TIPS offer a 2.0% real yield. That means you’re earning 2.0% above inflation, irrespective of what inflation turns out to be. If inflation averages 3%, your nominal return will be 5.5%. If inflation is only 1%, your nominal return will be 3.5%. If deflation hits, TIPS have an embedded deflation floor: you’ll receive at least your original principal back at maturity, cushioning downside risk and maintaining a positive real return.

Why the Case for TIPS Looks Better Now

Just five years ago, TIPS were mostly a hedge against inflation with negative real yields guaranteeing a loss in purchasing power in real terms. Today, they’re a hedge with a positive carry. The case for owning them rests on three dynamics:

1. Real yields are attractive: 2.0% real is compelling by most historical standards, offering positive real returns with bond-like risk.

2. Tail hedging in both directions: With fiscal dynamics in flux (tariffs, tax policy, and large public debt) it’s reasonable to believe the tails (inflation or deflation) are fatter. TIPS offer some protection in both directions.

3. Break-even levels are modest: Markets aren’t priced for runaway inflation. If inflation surprises to the upside, TIPS benefit. If not, you’re still locking in a strong real return.

Conclusion

From the aftermath of the global financial crisis and all the way through the COVID era, TIPS were mostly about potential protection. Now, they’re about return and protection.

If you believe there’s a higher chance of policy-driven inflation, or if you’re just looking for a durable real return with low correlation to risk assets, TIPS deserve a fresh look. The current setup seems to offer one of the most asymmetric opportunities in bonds today.

Disclosures

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed.

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What Exactly Does the VIX Tell Us?

Brian Jacobs — Mon, 28 Apr 2025 16:11:14 +0000

Over the past month, the VIX Index has been making headlines, first spiking, then crashing in dramatic fashion at times just a day apart.

While many investors recognize the VIX as “the fear gauge,” far fewer understand what it actually measures and how to interpret it. The VIX reflects the market’s expectations for near-term volatility, but its value goes far beyond periods of panic. It offers insight into how investors are pricing risk, and what that implies for future market behavior.

What Is the VIX?

Launched by the CBOE in 1993 and updated in 2003, the VIX tracks the implied volatility of the S&P 500 over the next 30 days. Unlike historical volatility, which looks backward, the VIX is derived from real-time S&P 500 option prices. These prices reflect the premiums investors are paying for protection (i.e., essentially, the cost of insurance against market swings). That’s why the VIX is such a powerful signal: it’s driven by forward-looking sentiment, not backward-looking data.

How to Interpret VIX Levels

Because the VIX is an annualized figure, you can translate it into a one-month expected range using simple math. Divide the VIX by the square root of 12 (√12 = ~3.46) to get the one standard deviation range for the next 30 days. For example, if the VIX is 18… 18 ÷ 3.46 ≈ 5.2%.

That suggests the market is pricing in a 68% (one standard deviation) chance that the S&P 500 will move +/- 5.2% over the next month. Want to expand that to a 95% confidence range? Multiply the VIX by 0.57 (1.96 ÷ √12) = 18 × 0.57 = 10.3%, meaning 95% of expected one-month returns fall within +/-10.3%.

And when the VIX recently hit 60? A one standard deviation move implies 60 ÷ 3.46 = +/- 17.3%!

Is the VIX Accurate?

Generally, yes, though with a tendency to overestimate risk in the wake of spikes. That’s because volatility often mean-reverts after extreme moves, leading investors to overpay for protection just after it was most needed.

For Illustrative Purposes Only

This behavioral pattern creates opportunity. At Aptus, we’ve long advocated for thoughtful volatility strategies, such as owning more optionality during calm markets, and harvesting it when expectations become inflated. If done right, managing volatility exposure based on opportunity, rather not just blindly owning or selling options, can lead to better risk-adjusted outcomes and even more tax-efficient protection than traditional fixed income.

Bottom Line

The VIX is not a forecast, but it is a signal. It tells us how nervous investors are and how much they’re willing to pay for insurance. While it often overshoots during stressful periods, that overreaction can be a source of return for active investors.

For investors, the lesson is this: Use the VIX to understand potential short-term ranges and stress scenarios. But if you consistently buy volatility at any price, you’re probably paying too much for something the market may have already overpriced.

Disclosures

The post What Exactly Does the VIX Tell Us? appeared first on Aptus Capital Advisors.

How Tax Efficiency Can Smooth Returns, Not Just Boost Them

Brian Jacobs — Thu, 17 Apr 2025 15:40:08 +0000

Most discussions about tax efficiency focus on maximizing after tax returns, and for good reason. The math is compelling. Consider a 10% pretax return: at a 33% short term tax rate, it becomes 6.7% after taxes if taxed annually. If held for just over a year and taxed at the 20% long term rate, that same return becomes 8.0%. Defer taxes for a decade, and the 20% rate applied at the end turns the 10% pretax return into an 8.6% annualized post tax return, thanks to tax deferred compounding. And if taxes are deferred indefinitely, a 10% pretax return remains a full 10% post tax.

*Aptus Conceptual Illustration

Yet tax aware strategies offer another, often overlooked benefit: they can reduce portfolio volatility, particularly during market downturns. This insight is clearly articulated in Partners Capital’s white paper, The After-Tax Investment Lens: The Key to Tax Efficient Investing. For high tax rate investors, controlling the timing of gains and losses can make after-tax cash flows significantly less volatile than pretax returns. This concept builds on our previous posts about how tax deferral enhances compounding, but here we take it a step further by showing how it also improves the investment experience.

The Symmetry of Traditional Taxation

Under many circumstances, taxes reduce both gains and losses. If you make $100,000 and pay a 33% tax rate, you net $67,000. If you lose $100,000, you have the potential to offset $33,000 of taxes on existing or future gains at the same rate through a tax credit over any subsequent years in which you have realized gains. This symmetry helps soften both sides of the return profile, reducing what you keep in up years, but also cushioning the blow in down years. Partners Capital illustrates this with a taxable California investor. A portfolio with a 13% maximum pre-tax drawdown may only result in a 7% after-tax decline in relative cash flow. That’s a meaningful reduction in felt volatility.

Making the Tax Impact Asymmetric

Tax-deferral strategies can disrupt this symmetry in a favorable way. They allow investors to realize gains at their discretion, often years later or when an investor can offset these gains with harvested losses when they are most beneficial, while taking losses to be used to offset gains elsewhere in a portfolio. This optionality creates an after-tax asymmetry: winners can potentially compound untaxed for years, while losses may provide immediate tax relief. The IRS doesn’t take a share of gains until you sell, but it effectively subsidizes part of your losses the moment you realize them if used to offset gains.

The result is a more balanced risk return profile. Investors retain full upside exposure while receiving tax relief on the downside, tilting the tradeoff in their favor.

A Simple Illustration

Let’s compare two strategies that each return either +10% or -10% in a given year.

Strategy A: Deferred Gains

- Gains are taxed at an assumed 20% rate when realized over a period of more than one year
- Losses used to offset gains that would otherwise be taxed at an assumed 33% rate when realized over a period of less than one year

After tax, a +10% gain becomes +8% if deferred to long-term rates, 8.6% if deferred for 10 years, or 10% if deferred indefinitely. Meanwhile, a 10% loss effectively feels like 6.7% after tax if used to offset short-term gains.

Strategy B: Tax-Inefficient (e.g. Bonds)

- 10% yield is taxed annually at 33% when received in a 10% return year
- 10% yield and -20% price return in a -10% return year

Here, a +10% return becomes roughly +6.7% after tax. But in a 10% loss year, the 10% coupon is still taxed at the short-term rate, and given capital losses cannot offset more than $3,000 of income annually the investor must find offsetting gains for the full 20% price decline (versus the 10% loss in the tax efficient scenario) to match Strategy A’s 6.7% after tax impact.

A simplified chart demonstrates how deferring gains while harvesting losses creates an asymmetric benefit: it increases the return on the upside by the tax savings, while on the downside it captures the full tax credit of a loss, even the ability to offset short-term gains that would otherwise be taxed at a higher tax rate).

*Aptus Conceptual Illustration

In other words, a strategy that can defer gains can offset similar (or more) of the tax downside than it sacrifices on the upside. That’s the asymmetry.

Why It Matters

For investors, it’s not just about total return. The path matters too. A strategy that generates tax assets in bad years while letting winners run untouched creates a smoother after-tax experience. While pre-tax volatility may remain unchanged, the actual impact on an investor’s wealth is reduced. Partners Capital argues this effect is so powerful that taxable investors can justify a higher equity allocation. The example they use is increasing equity-like exposure from 63% to 80%, given the muted after-tax drawdowns. In other words, taxes may allow for greater risk taking if losses are effectively monetized.

When combined with the compounding benefits of tax deferral, the case for tax-efficient strategies grows even stronger. Investors benefit from both enhanced growth and a potentially smoother ride.

Final Thought

Tax efficiency isn’t just a return enhancer. It’s a way to manage risk more effectively by increasing the control an investor has in taking (or deferring) gains and losses. The ability to defer gains and harvest losses creates a better after-tax outcome on both ends of the spectrum.

Disclosures

*Aptus Conceptual Illustration: Information presented in the above charts are for illustrative purposes only and should not be interpreted as actual performance of any investor’s account. As these are not actual results and completely assumed, they should not be relied upon for investment decisions. Actual results of individual investors will differ due to many factors, including individual investments and fees, client restrictions, and the timing of investments and cash flows.

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Disappearing Return: Why a 4.4% Yield Might Barely Deliver

Brian Jacobs — Thu, 27 Mar 2025 19:09:59 +0000

Fixed-income investors have faced a brutal reality since bond rates bottomed in August 2020. Long-dated Treasuries (20+ years) remain down 40% from their peaks, requiring nearly nine years of coupon payments just to break even. While short-duration bond investors have managed nominal gains, even those returns disappear after inflation and taxes.

The good news that I’ve heard outlined is the “pain” experienced has finally led to today’s higher yields, now above 4% across the curve, signaling brighter days ahead. But that optimism may be misguided.

The Illusion of “Safe” Returns

At first glance, a 4.4% bond yield seems attractive, especially after years of near-zero interest rates. But hidden beneath the surface, taxes and inflation are silently eroding your returns. By the time they take their cut, that “safe” yield could leave you with nothing—or worse, less than you started with.

This isn’t speculation; it’s simple math. And too many investors are missing it.

How a 4.4% Yield Turns to Barely Scraping By

Let’s break it down with the following starting assumptions:

1. Nominal Yield: 4.4%

2. Marginal Tax Rate: 32% (note tax rates vary by individual, thus applicable rate may be higher or lower)

3. Inflation: 3%

Here’s what happens:

- After Taxes: 4.4% yield × (1 – 0.32) = 3.0%

- After Inflation: 3.0% – 3% = 0.0 real return

That’s right; your “return” is effectively zero after accounting for taxes and inflation.

The situation worsens if inflation rises or additional taxes are applied. At 4% inflation, investors would lose 1% annually in real terms. For those in states with income taxes, the after-tax return shrinks even further. What appears as a low-risk investment can become a gradual erosion of wealth.

What Should Investors Do?

This doesn’t mean bonds are worthless, but it does mean investors need to look beyond nominal yields, especially for long-term allocations. Real wealth growth requires strategies that:

- Outpace inflation

- Generate tax-efficient returns

- Balance safety with growth

The Bottom Line: Don’t Be Fooled by the Number

In today’s world, where inflation lingers and taxes are inevitable, a 4.4% yield isn’t what it seems. Before settling for “safe” fixed income, look deeper. Because in real terms, your returns might already be disappearing.

Disclosures

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Can Lower Rates Be Disinflationary?

Brian Jacobs — Tue, 11 Mar 2025 15:51:23 +0000

If you ask most people whether increasing the supply of goods over time helps reduce inflation, the overwhelming answer is “yes.” After all, more supply means less scarcity, which should ease price pressures. Similarly, if you ask whether companies are more likely to invest in long-term projects when they can borrow at lower interest rates, most people would again say “yes.” Cheaper capital means more investment, which leads to greater production capacity.

Yet, when the conversation shifts to interest rates and inflation, many of those same people argue that raising rates is the most obvious way to reduce inflation. The contradiction is striking. If increasing supply is a long-term solution to inflation, and lower rates encourage investment in supply, why do so many believe that higher rates were the only appropriate response for the post-COVID inflationary environment?

The Demand-Side vs Supply-Side Assumption

The prevailing belief among policymakers is that inflation is primarily a demand problem. When interest rates rise, borrowing becomes more expensive, reducing consumer spending and business investment. This demand suppression, in theory, should cool inflation. But what if inflation isn’t just a demand-side issue?

The inflation we experienced in recent years can, at least in part, be attributed to supply challenges. Housing shortages, energy constraints, labor market tightness, and supply chain disruptions were all major inflationary forces. Yet raising interest rates to curb demand also discourages investment in these critical areas, making supply issues potentially worse.

Take housing as an example. The Federal Reserve has explicitly stated its goal of making home prices and rents more affordable. However, higher interest rates increase financing costs for homebuilders, reducing new construction. At the same time, higher interest rates clearly increase mortgage payments and with so many homeowners locked into low mortgage rates from our Zero Interest Rate Policy (ZIRP) era less likely to sell, housing mobility is preventing supply from efficiently meeting demand in many parts of the country. The result? Elevated home prices even as demand weakens.

The Onshoring Boom and the Role of Interest Rates

The push to reshore manufacturing and supply chains to the U.S. is viewed as critical for economic resilience but faces significant challenges. Building semiconductor fabs, clean energy projects, and new manufacturing plants requires massive upfront investments, which are highly sensitive to borrowing costs. Elevated interest rates raise the return hurdle for these long-term projects, potentially slowing onshoring and prolonging (or even increasing) supply constraints.

To address these challenges, policymakers are reducing regulatory burdens, offering tax incentives, and allocating billions in government funding to support critical projects. While these measures help offset costs and improve project economics, interest rates still play a pivotal role. For onshoring to succeed, a combination of favorable policies and a supportive interest rate environment is likely essential.

Interest Rates as an Investment Tax

Interest rates should at least be at a level where there is a meaningful cost of capital, ensuring that capital is allocated productively. The era of free money, through ZIRP, was not a sustainable or effective policy. Instead, rates should be set at a level high enough to deter speculative behavior and gambling in financial markets, but reasonable enough to encourage productive private investment, especially when paired with tax incentives and deregulation.

A useful way to think about interest rates is as a tax on investment, collected by savers at the expense of borrowers. Businesses make investment decisions based on their cost of capital and expected demand. When borrowing costs surge, new projects must clear a much higher profitability threshold, which can stifle innovation and growth. This is particularly problematic in industries that require long-term investments in supply, such as housing, energy, and manufacturing. When capital becomes too expensive, companies don’t build more… they build less. This further constrains supply, which can counteract the intended disinflationary effects of higher interest rates.

Therefore, the goal should be to strike a balance: rates should be high enough to prevent reckless speculation but low enough to avoid stifling productive investment. This balance, combined with supportive policies like tax incentives and deregulation, can create an environment where capital is allocated efficiently, fostering sustainable economic growth.

Rates Are Likely Moving Lower: The Case for Cuts

Given the current economic landscape, there is a strong argument that interest rates are likely to trend lower, irrespective of whether one views lower rates as inherently disinflationary. With the lagging effects of monetary policy, there is a growing risk that the Federal Reserve could fall behind the curve if it fails to act decisively. This would not only help prevent destabilization of the financial system but also support broader economic expansion.

Putting it All Together

While higher interest rates may effectively suppress demand, they can also undermine the supply-side investments essential for addressing inflation sustainably. A more balanced and nuanced strategy, one that combines demand management with policies aimed at boosting supply, could provide a more effective pathway to achieving long-term price stability and economic growth as the economy rebalances.

Disclosures

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Avoid This Tax Mistake: Treasury Income is State-Exempt

Brian Jacobs — Tue, 18 Feb 2025 16:31:36 +0000

With Treasury yields at multi-year highs, many investors are turning to Treasury-focused ETFs, money market funds, and broad bond index funds to capture attractive returns. However, a common tax reporting issue could cost you: misreported Treasury distributions. If you live in a state with income taxes, failing to properly categorize Treasury income could mean overpaying. Here’s how to avoid this mistake.

The Problem: Treasury Distributions Are Often Misreported

Interest from Treasury securities (T-bills, T-notes, T-bonds) is exempt from state and local taxes under federal law. This exemption applies to distributions from ETFs and money market funds that primarily invest in Treasuries.

However, fund distributions don’t always isolate the Treasury-derived portion on 1099 tax forms. Custodians rely on fund companies to classify income based on IRS categories (e.g., qualified dividends, non-qualified dividends, short-term capital gains), and there is currently no mechanism to report Treasury income separately within this system. As a result, investors may end up paying unnecessary state taxes, particularly in high-tax states like California, New York, and Connecticut, which require at least 50% of a fund’s holdings to be in Treasuries for state tax exemption.

For example, if you’re earning a 5% yield on Treasury bills but the income is not separately reported as Treasury income, you could end up paying an extra 50+ basis points in state taxes in a state like California; money that should stay in your pocket. Even diversified bond funds with Treasuries, as well as alternative funds that use T-bills as collateral, may include income that should be state-tax-exempt, but the burden is on investors to adjust for this on their returns.

Why This Happens

Fund Distributions Are Not Automatically Separated: Custodians report fund income as categorized by the fund companies themselves, and there’s currently no IRS-mandated way to separately track Treasury-derived distributions.
Mixed Fund Holdings: Some ETFs and money market funds contain both Treasury and non-Treasury securities, making it harder to isolate the tax-exempt portion.
Investors Unaware: Fund names don’t always reflect tax treatment. For example, there is a fund company with a “U.S. Treasury Money Fund” that is almost purely Treasury income, but its “Treasury Obligations Money Fund” only qualifies ~30% of its income as government obligations with the rest is in repos (which don’t count as Treasuries for tax purposes).

How to Fix This When Filing Your Taxes

To ensure you’re not overpaying, manually separate Treasury income from other taxable distributions. Here’s how:

Review Your 1099 Forms: Check your 1099-DIV or 1099-INT for distributions from Treasury ETFs, money market funds, or bond index funds.
Check Fund Documentation: Funds often provide a tax supplement or website breakdown showing the percentage of income from Treasuries (states like California, New York, and Connecticut require a 50%+ allocation within a fund to Treasuries for tax-exempt treatment, where other states may provide partial exemption).
Calculate the Exempt Portion: Multiply your total distribution by the Treasury income percentage. Example: If you received $1,000 in distributions and 55% came from Treasuries, then $550 is potentially state-tax-exempt.
Report Correctly on Your State Return: Most states have a specific line or schedule for exempt income. Be sure to report the Treasury portion separately.
DIY Software & Tax Preparers: If using TurboTax or other tax software, look for prompts to input Treasury income details. Many tax professionals miss this detail, so it’s worth verifying their work.

Pro Tip: Keep Detailed Records

To make this process easier, maintain detailed records of your investments and the tax-exempt percentages provided by your funds. This will save you time and ensure accuracy when filing.

Other Bonds With Similar Tax Treatment

Though this article focuses on Treasuries, other government-backed bonds receive the same state tax exemption. U.S. Savings Bonds, as well as debt issued by Federal Farm Credit Banks, Federal Home Loan Banks, the Student Loan Marketing Association (Sallie Mae), and the Tennessee Valley Authority (TVA), also qualify for this treatment. TVA even highlights this exemption in its investor materials, making it worthwhile to check whether your holdings qualify.

The Bottom Line

With Treasury yields elevated, it’s critical to ensure you’re not overpaying state taxes due to reporting errors. Manually separating Treasury distributions, even from broader bond index funds, can save you hundreds or even thousands of dollars, especially in high-tax states.

Review your tax documents carefully, check fund reports, and consult a tax professional if needed. A little extra effort now could lead to significant savings.

Special thanks to Mike Lambrakis for his help reviewing this piece. Follow him on LinkedIn.

Disclaimer: This blog post is for informational purposes only and does not constitute tax advice. Please consult a qualified tax professional for guidance specific to your situation.

Disclosures

The post Avoid This Tax Mistake: Treasury Income is State-Exempt appeared first on Aptus Capital Advisors.

Leveraged ETFs: The Hidden Costs of Volatility Drag

Brian Jacobs — Mon, 10 Feb 2025 16:01:12 +0000

Daily leveraged ETFs aim to magnify the returns of an underlying asset or index, often by 2x or -2x the daily return. While appealing for short-term trading, their mechanics often lead to lower long-term returns despite higher risk. Inspired by Corey Hoffstein’s recent blog post, The “Rebalance Drag” Myth in Leveraged ETFs: What Advisors Need to Know^1,this post explores why all leverage is not created equal.

Understanding Volatility Drag

The difference between arithmetic and geometric returns helps explain why leveraged ETFs often underperform expectations. Here are some examples of how each is calculated:

Arithmetic Return: A simple average of returns, which does not account for compounding.

- Example: The arithmetic return of -10% and +10% is: (−10%+10%) / 2 = 0%

Geometric Return (CAGR): Incorporates compounding and represents the true growth rate of an investment.

- Example: The geometric return of -10% followed by +10% is: (1−10%)×(1+10%)=0.99−1=−1%

Since geometric returns account for the compounding effect, volatility negatively impacts long-term performance—this phenomenon is known as volatility drag and is especially relevant for leveraged ETFs.

A simplified formula for the geometric mean return is: Geometric mean = Arithmetic mean – (StdDev² / 2)

Volatility creates a “drag” on returns, which worsens with higher leverage. An example for an asset with 50% volatility:

- Unlevered: 50%² / 2 = 12.5% drag

- Daily leverage: (50% x 2) = 100%² / 2 = 50% drag

In this example, with 2x leverage the drag quadruples, require exceptionally high arithmetic returns to offset it.

Source: Aptus Conceptual Illustration. See Disclosure for more information*

A Real-World Example: 2x MicroStrategy

Relatively new leveraged single name ETFs provide a case study on the implications of volatility drag with leverage. Let’s look at modeled 5-year annualized returns of Microstrategy (a stock with very popular levered ETFs) with 2x daily leverage, assuming no financing costs or friction as of 1/31/2025:

- MSTR (unlevered): 87% annualized return

- MSTR (2x leveraged): 44% annualized return

I would note inversing (i.e. shorting) Microstrategy at 2x leverage (yes, there is an ETF for that as well) would have lost an investor -98% of their investment annualized. But focusing on the 2x leveraged long model results; Despite MSTR’s strong arithmetic returns, 2x leverage cuts the levered return by half and nearly eliminates the inverse leveraged return.

Source: Bloomberg, Aptus as of 01.31.2025

Key Takeaways for Investors

Leveraged concentrated or non-diversified ETFs can be useful for short-term trading, but they are generally ill-suited for long-term investing. Their underperformance is primarily due to volatility drag—a natural result of compounding returns in volatile markets. This issue is amplified when leveraging highly volatile assets, as the drag increases disproportionately with higher leverage.

However, not all leverage is the same. The impact of volatility drag depends on how it’s applied: leveraging a single asset amplifies both returns and volatility, leading to significant drag over time, while leveraging diversifying strategies (e.g., combining uncorrelated return streams) can help mitigate this issue.

For leveraged ETFs to succeed, the underlying asset’s returns must be high enough to overcome the drag—higher for for more volatile and less diversified strategies. Without understanding these dynamics, investors risk holding high-risk products that fail to deliver higher returns.

Footnotes

The “Rebalance Drag” Myth: Leveraged ETFs underperform not because of “rebalance drag,” but due to volatility drag—a natural result of compounding returns in volatile markets. The impact of volatility drag depends on how leverage is applied:

- Leveraging a single asset amplifies both returns and volatility, leading to significant drag over time.
- Leveraging diversifying strategies can mitigate this issue. Combining uncorrelated assets reduces overall portfolio volatility, cushioning the drag.

Visit Corey Hoffstein’s blog post for a much more detailed explanation.

Disclosures

*Conceptual Illustration – Information presented in the above charts are for illustrative purposes only and should not be interpreted as actual performance of any investor’s account. As these are not actual results and are examples of incremental volatility drag, they should not be relied upon for investment decisions. Actual results of individual investors will differ due to many factors, including individual investments and fees, client restrictions, different facts and circumstances and the timing of investments and cash flows.

The post Leveraged ETFs: The Hidden Costs of Volatility Drag appeared first on Aptus Capital Advisors.

Never Go Full Degen

John Archbold — Thu, 30 Jan 2025 15:37:26 +0000

Speedman: In a weird way, I had to sort of just free myself up to believe that it was okay to be stupid or dumb.

Lazarus: To be a moron.

Speedman: Yeah.

Lazarus: To be moronical.

Speedman: Exactly, to be a moron.

Lazarus: An imbecile.

Speedman: Yeah.

Lazarus: Like the dumbest dude that ever lived.

Speedman: When I was playing the character.

Lazarus: When you was the character.

Speedman: Yeah, as Jack, definitely.

Lazarus: Jack, stupid Jack. Trying to come back from that.

Speedman: In a weird way it was almost like I had to sort of fool my mind into believing that it wasn’t stupid, and by the end of the whole thing, I was like, “Wait a minute, I flushed so much out, how am I gonna jumpstart it up again?” It’s just like… Right?

Lazarus: You was farting in bathtubs and laughing your ass off. Yeah. But Simple Jack thought he was smart, or rather, didn’t think he was stupid, so you can’t afford to play stupid, being a smart actor. Playing a guy who ain’t smart but thinks he is, that’s tricky.

Speedman: Hm. Tricky.

Lazarus: It’s like working with mercury. It’s high science, man. It’s an art form.

Speedman: Yeah.

Lazarus: You an artist.

Speedman: Hm. That’s what we do, right? Yeah.

Lazarus: Hats off for going there, especially knowing how the Academy is about that stuff.

–Tropic Thunder (2008)

As I type this, I’m looking out the window of the new Aptus headquarters where the heaviest snowstorm in over a century is falling with remarkable volume. I suppose that is fair karmic payback for leaving my wife alone with the kid and dog in the arctic environs of the northeast. Still, since I’ve joined Aptus back in May, I’ve quickly come to adopt Fairhope as my home away from home. It’s a wonderful town, with even better people. When I rolled into town on Sunday, I swung into McSherry’s to catch the second half of the Eagles game where I had a great conversation with one of the locals, Bryce, who was sitting next to me. While Saquon Barkley got past his lead blockers to take his now iconic run into the endzone, Bryce asked me what I did for a living. When I told him, he immediately wanted to talk crypto.

Bryce had a very interesting view on crypto that I have to say I heartily agreed with, he flat out stated “I’m a trader, not an investor. If I was an investor, I’d just buy Apple or Coke. With crypto, I trade it. I don’t invest in it. I know I’m being a bit of a degenerate doing it but I’m always thinking about how I can get my money out the door if I need to.” Honestly, yes, that right there. Bryce has got it figured out and he also inspired this missive. A great trader always knows where their exit liquidity is. If you’re going to be in crypto, a little bit of degen behavior is fine, just don’t ever go full degen.

What is full degen? Full degen means you naively think price rocketing up is a sign of strength and that cryptocurrency is actually currency. I have zero qualms if you’re trading like Bryce, I say more power to you. It is risky sure and could accurately be called gambling, but if you are thinking through your max profit and making sure you can get your money out when you need to…that ain’t full degen. Unfortunately, the legacy financial media, what Marc Cohodes accurately describes as the Cartoon Network, reinforces the full degen mindset. In my deservedly humble opinion, that has harmed a large number of investors chasing those ever elusive returns. My little rant here is my best attempt at public service.

Let’s address the most important point up front, the monetary terms that are thrown around in relation to crypto are a red herring. Terms like memecoins, stablecoins, cryptocurrency, etc. are just misdirection. These are simply digital tokens that are traded on unregulated exchanges. That’s it. They are not money. Money is a legal framework that allows for the settlement of debt. As a US citizen, my debts are denominated in dollars. I pay my mortgage in dollars, my taxes in dollars, and my son’s school in dollars. The only reason I would get into crypto would be to hopefully pull more dollars my way. The entire crypto universe revolves around the dollar. If you’re buying into the hype that somehow any of this stuff is going to replace the dollar, you just went full degen. It is the other way around.

Now the argument is often made that crypto can be an effective tool for someone in a country that is experiencing hyperinflation and needs some way of protecting their wealth. I won’t argue that point, if I was a Turkish or Venezuelan citizen, I’d likely be desperate enough to try anything. My contention though would be that if I was in that situation, my thought process would be that crypto is an end around for me to get into the dollar system via stablecoins like Tether or USDC if I can’t access dollars in my home country to get relief. Crypto needs the dollar. The dollar does not need crypto.

Which brings us to our next important concept that our own Brian Jacobs beautifully illustrated in a recent blog post. Namely, that crypto has not created one penny in new wealth. Hear Brian now, believe him later. Have some people gotten rich from crypto? Absolutely, but the overall wealth in the economy did not change. The amount of dollars held in the economy stayed the same, one person exchanged those dollars for crypto and the other person sold the crypto. The cash does not change. Cash is like matter, it cannot be created nor destroyed. Only God has the power to create or destroy matter and in the case of the economy, God happens to be the Fed and the US Treasury.

Money is created in the US economy via lending. The government issues bonds and those bonds pay interest which goes into the pockets of the bond holders. The interest payments reflect true money creation. Mortgages are another example of this. When you buy a home, you give your down payment, and the bank creates the rest of the money which goes to the seller. That loan is new money and is actual wealth creation for the person selling the home. That is how the system works. To the argument that nothing backs the dollar since we went off the gold standard, allow me to introduce you to SEAL Team Six. What would you rather have to back your currency? A hunk of metal or five aircraft carrier groups and the nuclear arsenal?

Why does this matter for crypto? It speaks to another aspect of the space that is often misrepresented on the Cartoon Network, namely that a rising price means that the underlying asset is getting stronger. Nope, it is in fact the other way around. The higher the price goes, the greater the price fragility of the token. Remember, as crypto values go up the amount of dollars in the system relative to crypto stay the same. Which means that it gets increasingly difficult to sustain liquidity as prices go higher. If you fail to recognize that dynamic, you’re setting yourself up for FOMO buying which never ends well.

One of the things I see all over financial social media are statements such as “If you had just bought $X of X coin on this date, you would have *insert ridiculous number here* today.” Nope, that is not even close to being right. Let’s paint the picture of the perfect scenario for you. Imagine that you had the stomach to throw your 401k at the Moo Deng coin last September, call it $250,000, and by some miracle your spouse didn’t divorce you. Today that would be worth over 583 million dollars…right? Unfortunately, that is very wrong. You couldn’t go and just dump that much Moo Deng without crashing the price. Unless you know someone that has 583 million dollars and wants to be your bid, you’re stuck. You’re going to find yourself with a Sylvester the Cat problem. Namely, stranded on an island with more canned food than you could ever eat…if only you had a can opener. Unfortunately, we see so many investors plowing into crypto in the hopes of getting inordinately rich without ever considering how they are going to get that money out.

While this piece is meant to shatter a few myths around crypto, it is not meant to state that there is no reason to invest in the category at all. If you’re like my friend Bryce and have a well thought out process and risk controls in place, far be it from me to tell anyone how to make a living. Rather, we want to arm investors with some key concepts to think about some of risks in naively trading in an unregulated market. If they’re not thinking through their position sizing or how they are planning to exit back into the dollar system, they’re going full degen. Remember, all of this is incredibly hard. It isn’t supposed to be easy. If you’re going to play a zero-sum game, always bear in mind that if you can’t spot the degen at the table, you are the degen.

Disclosures

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