Rebalance Rationales Archives - Aptus Capital Advisors

May 2025 Rebalance Rationale

Aptus PM Team — Thu, 29 May 2025 18:04:26 +0000

In this rebalance, we’re tackling a challenge that has become especially acute in recent months: insufficient return potential in bonds. While credit spreads are meant to compensate investors above the risk-free rate of Treasuries, the current compensation is even less than the generally low levels of much of the past decade.

The other inherent challenge for (non-municipal) bonds is the poor tax treatment. Income is taxed at the highest levels possible, further eating into investor returns. Solving both the return challenge and the tax challenge in a single strategy has been elusive, but we feel confident in our newfound ability to accomplish exactly this.

This rebalance is focused on our models at the moderate risk level and below, as an opportunity to enhance portfolio returns while maintaining a risk and diversification profile similar to traditional core bonds. With it, we’ll introduce a new exposure within our fixed income allocation: the Aptus Deferred Income ETF (DEFR), replacing some of the exposures we get from traditional core bonds (BKAG) and shorter-duration enhanced yield (JUCY).

Why We Are Making This Change

Since its inception, the Bloomberg U.S. Aggregate Bond Index has produced a modest annualized return of approximately 0.3% above comparable duration Treasuries. This incremental return, derived from credit spread exposure, has come with increased correlation to equities, limited risk adjusted returns, and harsher tax treatment under short term income tax rates in taxable accounts. In reducing exposure to traditional bonds, we aim to enhance growth potential while managing risk, creating a foundation for sustainable wealth. You can see the changes here:

Introducing the Aptus Deferred Income ETF

DEFR is an innovative fixed income solution that manages around the duration and risk characteristics of the Bloomberg U.S. Aggregate Bond Index through tax efficient Treasury exposure. It then adds a secondary return stream by dynamically selling S&P 500 put options at a risk level comparable to the incremental risk of the spread component of the Agg relative to Treasuries. This strategy aims to deliver risk characteristics similar to Agg bonds but with improved performance and more favorable tax treatment.

While DEFR’s tax efficiency is a clear advantage in taxable accounts, the core value proposition extends well beyond taxes. The strategy’s return-enhancing design and flexible duration management make it compelling in all account types, including qualified retirement accounts. In fact, we built DEFR primarily to improve the risk/return tradeoff in fixed income with the tax benefits engineered later, once we had conviction in the underlying approach.

DEFR challenges the traditional bond framework by offering a modern approach to fixed income. It preserves the role of bonds in diversification and downside protection while upgrading the return profile through a dynamic allocation to equity option to collect premiums, which correlate to the spread component of Agg bonds. This strategy is designed to benefit all clients, including those in qualified accounts, by improving capital efficiency and long-term growth potential.

Portfolio Impact

This rebalance is not a wholesale change to our bond exposure but a reallocation of a portion of traditional fixed income into DEFR. The objective is to improve the portfolio’s expected return without sacrificing the defensive role bonds play. From a risk standpoint, DEFR is structured to track the behavior of bonds, not equities, ensuring alignment with our broader mandate: to manage risk intelligently and seek better outcomes for clients over the long term.

As the table above shows, some of the new DEFR allocation will come from Core Bond (BKAG), but we’ll also pull from our Enhanced Yield ETF (JUCY). While we generally find credit unattractive, there’s no denying the overall higher yield environment. An incremental move from JUCY to DEFR adds a bit of duration from our long-standing underweight, with the added flexibility of adjusting as conditions change.

Adding UPSD in Moderate Portfolios

We’re also adding a 4% allocation to the Aptus Large Cap Upside ETF (UPSD) in the Moderate allocations, funded by trimming both the S&P 500 ETF and DUBS (our covered call strategy) 2% each.

UPSD provides dynamic equity exposure that adjusts based on market trends, dialing up beta during strength and pulling back in periods of weakness. This flexibility contrasts with DUBS, which is designed to deliver a consistent option premium to cushion volatility at the cost of capped upside, making UPSD more responsive in trending markets.

Beyond its risk management overlay, UPSD also offers differentiated stock selection. It starts with a low-volatility portfolio and screens for quality, growth, valuation, and momentum, resulting in a core equity allocation that looks and feels different than the S&P 500. The trend overlay then adds back S&P 500 exposure when trends are favorable for that allocation. We view this as a great way to participate a bit more in healthy equity market conditions.

Final Thought

Longevity risk, the risk of outliving one’s assets, is one of the greatest challenges investors face. With inflation and longer lifespans, focusing on real, compounded returns is crucial. Higher returns optimized for tax efficiency are essential to meeting these needs, preserving purchasing power and offsetting rising costs.

Our goal with the Impact Series remains the same: to compound capital over time as efficiently as possible. We think these tweaks give the portfolios an ability to mitigate downside while improving upside return potential.

Thank you for trusting Aptus with your investments. We are happy to discuss the role of DEFR in more detail, including how it complements other fixed income allocations in both qualified and non-qualified portfolios.

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.

Please carefully consider the fund’s objectives, risks, charges, and expenses before investing. The statutory or summary prospectus contains this and other important information about the investment company. For more information, or a copy of the full or summary prospectus, visit www.aptusetfs.com, or call (251) 517-7198. Read carefully before investing.

Investing involves risk. Principal loss is possible.

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.

This content or when a page is marked “Advisor Use Only” or “For Institutional Use”, the content is only intended for financial advisors, consultants, or existing and prospective institutional investors of Aptus. These materials have not been written or approved for a retail audience or use in mind and should not be distributed to retail investors. Any distribution to retail investors by a registered investment adviser may violate the new Marketing Rule under the Investment Advisers Act. If you choose to utilize or cite material we recommend the citation, be presented in context, with similar footnotes in the material and appropriate sourcing to Aptus and/or any other author or source references. This is notwithstanding any considerations or customizations with regards to your operations, based on your own compliance process, and compliance review with the marketing rule effective November 4, 2022.

Advisory services offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level of 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.

The Funds are distributed by Quasar Distributors LLC, which is not affiliated with Aptus Capital Advisors, LLC. ACA-2506-17.

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December 2024 Aptus Compounders Trade Rationale

Aptus PM Team — Wed, 18 Dec 2024 15:50:08 +0000

Aptus Compounder Update

The Aptus Compounder Stock Sleeve is designed to provide equity exposure to a carefully selected group of individual stocks that offer attractive prospects through a combination of yield, growth, quality, and reasonable valuations relative to large-cap peers.

Strategic Context

Given the concentration of its U.S. Large Cap benchmark, the S&P 500, the Aptus Compounders strategy maintains exposure to a few of the “Mega-Cap” stocks to minimize the risk of underperformance should the weighting of the constituents narrow. Periodically, we cycle through a few of our highest-conviction mega-cap names to maintain exposure and minimize tracking error. This update reflects this process.

Sale: Broadcom Inc. (AVGO)

We believe that Hock Tan (CEO of AVGO) and Jensen Huang (CEO of NVDA) both deserve to wear leather jackets with the former having now reached a market capitalization greater than $1T. In March 2023, Aptus Compounders swapped NVIDIA Corporation for Broadcom Inc. (AVGO), viewing AVGO as a more efficient and valuation-friendly way to play the artificial intelligence (“AI”) craze, particularly given any concerns about cyclicality. Since the purchase of AVGO, which was trading at the time at ~18x forward earnings, AVGO has delivered an almost 290% return, well above the return of the S&P 500’s 53.8% return over the same period.

Broadcom has historically sported a lower valuation than NVIDIA. At time of purchase, in March 2023, Broadcom was trading at 18x and NVDA was closer to 53x. Fast forward to today, this metric has flipped – AVGO now trades at a premium to NVDA. While we believe that there is merit to having AVGO trade at a higher valuation, we don’t believe the premium is justified.

We remain positive on AVGO, particularly given the company’s compelling growth narrative during its last earnings report. The company painted a beautiful 3-year (2027) picture, projecting a potential $60B – $90B AI revenue opportunity, which points to material upside vs. current AI expectations for the company. While the AI story for AVGO continues to be in full steam, we prefer to recycle capital elsewhere after the recent rally.

Purchase: NVIDIA Corporation (NVDA)

The Aptus Compounders reallocated capital from the sale of Broadcom Inc. to purchase NVIDIA Corporation (NVDA), driven by both fundamental conviction and portfolio considerations.

From a fundamental view, NVDA remains at the forefront of the 4th tectonic shift in computing, where parallel processing captures a share of the computing market. We believe that the market underappreciates NVDA’s business and its transformation from a traditional PC graphics chip vendor into a supplier, into high-end gaming, enterprise graphics, cloud, accelerated computing, and automotive markets. The company has executed consistently and has a solid balance sheet with what we believe to be a demonstrated commitment to capital return. While we understand the geopolitical challenges, such as U.S.-China restrictions, we believe these are manageable over time.

From a construction perspective, this trade enhances our AI exposure, complementing recent additions such as Quanta Services (PWR). Our initiation weight into these names within the Aptus Compounders is very close to the current weight of NVDA in the S&P 500, which should help the strategy maintain a long-term correlation to the S&P 500 while leveraging other aspects of the portfolio to add incremental value.

While NVDA trades at 33.7x forward earnings, this is lower than most of its Mega-Cap peers (AMZN = 38.9x, MSFT = 33.9x, AAPL = 33.8x, AVGO = 37.6x, & TSLA = 137.9x).

Thank you for your trust.

Disclosures

Information presented in this commentary is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Information specific to the underlying securities making up the portfolios can be found in the Funds’ prospectuses. Please carefully read the prospectus before making an investment decision. 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.

The company identified above is an example of a holding and is subject to change without notice. The company has been selected to help illustrate the investment process described herein. A complete list of holdings is available upon request. This information should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the holdings listed have been or will be profitable, or that investment recommendations or decisions we make in the future will be profitable.

The S&P 500® Index is the Standard & Poor’s Composite Index and is widely regarded as a single gauge of large cap U.S. equities. It is market cap weighted and includes 500 leading companies, capturing approximately 80% coverage of available market capitalization.

The content and/or when a page is marked “Advisor Use Only” or “For Institutional Use”, the content is only intended for financial advisors, consultants, or existing and prospective institutional investors of Aptus. These materials have not been written or approved for a retail audience or use in mind and should not be distributed to retail investors. Any distribution to retail investors by a registered investment adviser may violate the new Marketing Rule under the Investment Advisers Act. If you choose to utilize or cite material, we recommend the citation be presented in context, with similar footnotes in the material and appropriate sourcing to Aptus and/or any other author or source references. This is notwithstanding any considerations or customizations with regards to your operations, based on your own compliance process, and compliance review with the marketing rule effective November 4, 2022.

Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. For more information about our firm, or to receive a copy of our disclosure Form ADV and Privacy Policy call (251) 517-7198. ACA-2412-13.

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November 2024 Rebalance Rationale

Marketing — Mon, 18 Nov 2024 16:34:35 +0000

Our primary objective is to compound capital efficiently for long-term growth. In this rebalance, which applies exclusively to our Growth and Aggressive Growth models, we are introducing the Aptus Large Cap Equity Upside ETF (UPSD) to enhance equity exposure. UPSD aligns with our philosophy, offering high return potential with a long-term risk profile similar to traditional equities while avoiding the concentrated risks of heavily weighted large-cap names in the S&P 500 or Nasdaq 100.

With UPSD, we aim to create a more balanced, diversified low volatility equity exposure that expands the risk budget to capture additional growth and returns, while managing risk. This new ETF will play a pivotal role in refining our asset allocation strategy, providing the potential for improved risk-adjusted returns over time.

UPSD Supports Our Strategy

UPSD aligns with three key aspects of our investment strategy that help drive long-term success: sound asset allocation, optimizing yield + growth (Y+G), and preparing for market extremes:

Asset Allocation Decisions: Strategic allocation decisions remain the cornerstone of building wealth over time. UPSD strengthens the ability to compound efficiently.

Improving the “Y+G”: UPSD’s capital-efficient design contributes to a stronger Y+G foundation for the portfolio.

Better in the Tails: By integrating UPSD, we gain the flexibility to capture growth during favorable conditions while mitigating drawdown risks during volatility.

What You’ll See in this Rebalance at the Portfolio Level

Diversification of Equity Exposure to UPSD: UPSD provides a more balanced stock selection, reducing the portfolio’s reliance on a small group of large-cap names while broadening exposure to high-quality, low-volatility stocks.

Continued Risk Management with Upside Potential: UPSD enhances the portfolio’s ability to adapt to market conditions, aiming for growth in favorable markets while providing stability during downturns.

Why We’re Adding UPSD

Reduced Concentration Risk: By diversifying across a broad selection of high-quality stocks, UPSD minimizes the outsized impact of mega-cap trends on the portfolio.

Dynamic Risk Management: UPSD’s allows for responsive risk management, increasing exposure during favorable market conditions while mitigating risks in downturns.

Efficient Use of Risk Budget: Its low-volatility strategy and capital-efficient structure aim to deliver consistent returns without significantly increasing portfolio risk, supporting long-term compounding objectives.

Final Thoughts

We view longevity risk—the risk of outliving one’s assets—as one of the greatest challenges investors face. With inflation and longer lifespans, it’s crucial to focus on real, compounded returns. Equity exposure is essential in meeting these needs, providing the long-term growth potential needed to offset rising costs and preserve purchasing power.

By adding UPSD, we’re enhancing growth potential while managing risk, creating a foundation for sustainable wealth.

Thank you for trusting Aptus with your investments. We’re here to discuss how our strategy supports your long-term goals.

Disclosures

Please carefully consider the funds objectives, risks, charges, and expenses before investing. The statutory or summary prospectus contains this and other important information about the investment company. For more information, or a copy of the full or summary prospectus, visit www.aptusetfs.com, or call (251) 517-7198. Read carefully before investing.

Investing involves risk. Principal loss is possible.

Advisory services 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.

The Funds are distributed by Quasar Distributors LLC , which is not affiliated with Aptus Capital Advisors, LLC.

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September 2024 Aptus Compounders Trade Rationale

Aptus PM Team — Tue, 24 Sep 2024 06:37:16 +0000

Aptus Compounder Update

The Aptus Compounder Stock Sleeve is designed to give equity exposure to a group of individual stocks that we think offer attractive prospects through a combination of yield, growth, quality, and reasonable valuations relative to large cap peers.

Overall

Given the concentration of the U.S. Large Cap benchmark (S&P 500), the Aptus Compounders strategy tends to own a few of the “Mega-Cap” names to bear some exposure, with the intent to minimize the risk of underperformance in case the weighting of the constituents narrows. Periodically, we cycle through a few of our most convicted mega-cap names, while always maintaining exposure to minimize tracking error.

Sale

The strategy has held Alphabet, Inc. Class A (GOOGL) since the global pandemic, as we swapped the company with Apple Inc. (AAPL) on 8/8/2020. Since purchase, GOOGL has outperformed AAPL by a few percentage points, while outpacing the strategy’s benchmark, the S&P 500, by over 35% (As of 9/20/2024). Thus, we believe that it has been a successful trade.

Even though we’d consider this to be a successful trade, it doesn’t mean that it has been smooth sailing during the strategy’s ownership of Alphabet – especially as of late. Our equity team is a firm believer that Alphabet, Inc. embodies all of the characteristics of ownership in the strategy – competitive moat, pricing inelasticity, and a reasonable valuation. The company has great businesses underneath its umbrella: YouTube, Waymo, etc.

But, as of late, there have been a few exogenous events that have made us believe that it may be difficult to get any kind of valuation expansion out of the stock moving into the future. Simply said, between the Artificial Intelligence (“AI”) search threat and the U.S. government’s actions against the company, we are tossing in the towel, as it has become one of the most frustrating positions to own in the portfolio. We believe in the company’s business, but like the Roman Empire, time remains undefeated, and the government barbarians are at Google’s gate. It’s hard to envision Google escaping the battles unscathed. Thus, we are cycling capital elsewhere.

Purchase

We believe that Amazon.com, Inc. (AMZN) is a fundamentally sound business, the company owns one of the most powerful brands in the world, and it has an unparalleled logistics and distribution network setting it apart from other players in online commerce. Massive scale provides cost advantages in both e-commerce and cloud computing, generating an additional layer of competitive strength for the business. In our opinion, we believe that management has demonstrated an exceptional track record of successful innovation and sustained growth over the long term.

The investment thesis on AMZN is still centered on 1) retail margin expansion, and 2) AWS acceleration. We believe there is runway in both, but the magnitude is likely to moderate compared to trends over the past two years, and the path is unlikely to be linear going forward. That said, AMZN’s dominant competitive position in two large consumer and software end-markets with its retail and cloud businesses provides a lot to be bullish about over the next 12-18 months.

Disclosures

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August 2024 Aptus Compounders Trade Rationale

Aptus PM Team — Wed, 07 Aug 2024 18:05:17 +0000

Aptus Compounder Update

Overall

It has been a while since Aptus Compounders has had a trade – this has been purposeful. Behaviorally, investors want trades, especially during periods when the market is going straight up or witnessing some volatility. But, truthfully, sometimes no trade is the best trade. There is a substantial amount of work that goes on behind the scenes vetting each one of these companies to make sure that we have full conviction in the management team to execute their strategy over longer periods of time. As we’ve always said, the best way to win over longer periods of time is to utilize time to your advantage. And that’s the most important elixir for these stocks to succeed – the namesake of this strategy is to increase one’s odds of successfully compounding capital, and we believe that all of the current holdings exhibit characteristics that can allow them to do so.

Patience is necessary. I’ve continued to say that it pays more to be patient than clever, and for the most part of this year, the strategy has been underperforming its benchmark, the S&P 500. Solely due to not owning NVIDIA Corp. (NVDA). As of 08/02/2024, the strategy started outperforming the benchmark, as we patiently waited for the most opportune time to make a trade.

Sale

The strategy has held Adobe, Inc. (ADBE) for almost four years, as it has served as a pivotal position in helping the strategy correlate in the Technology sector. The overall transition to a subscription-based model for ADBE has been very instrumental to owning this name and considering it a compounder – the management team, led by Shantanu Narayen, has done a great job internally positioning the company for success, i.e., bringing Firefly, its AI-based program, to the market in very quick fashion. Unfortunately, we believe that there are some exogenous forces that can potentially disintermediate the company in the future. The company showed their cards with the multiple they were willing to pay for their now failed acquisition of FIGMA (50x Revenue) and news that FIGMA’s most recent round of fundraising came in 40% below that attempted acquisition price tag does not reflect well on management either. ADBE’s reluctance to build a web app to challenge FIGMA, the aggressiveness of Canva to enhance their AI capabilities with an AI startup acquisition (Leonardo.ai), and constant new competition in the AI space from the likes of tech giants like Microsoft provide a great deal of concern for the competitive edge that enticed us to purchase ADBE in the first place.

Purchase

After the recent pullback in Quanta Services, Inc. (PWR), a name that we have followed for a very long time, we finally believe it is an opportune time to initiate a position in the Aptus Compounders portfolio. PWR is a core holding for energy transition portfolios as the go-to picks & shovels pure play for domestic energy transmission and communications infrastructure. As the leading specialty construction services franchise in this field, we are attracted to PWR’s alignment with the electrification of everything megatrend, which overlays a commendable track record of consistent earnings growth, ROCE, and shareholder returns. Present valuation, not surprisingly toward the upper end of historic ranges, aptly reflects the scarcity of PWR’s enviable thematic alignment with a blue-chip earnings/cash flow pedigree.

Disclosures

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February 2024 Rebalance Rationale

Aptus PM Team — Wed, 07 Feb 2024 15:44:28 +0000

Investors should have one goal – to compound capital. A sufficient compounded return is at the heart of all things related to financial goals. The main objective of our investment team is delivering sufficient compound returns for our clients while maintaining a level of volatility they can tolerate. We believe our allocations deliver an innovative way to invest your hard-earned capital, given an uncertain short-term outlook for markets.

Our Message

Our message consistently reiterates the importance of asset allocation decisions, improving yield plus growth (Y+G), and being better in the tails.

- Asset Allocation Decisions drive 92%+ of long-term success.

- Improving the “Y+G” of your portfolio improves the compounded return.

- Better in the tails (via tackling Longevity Risk & Drawdown Risk)

3 Pillars to Control the Asset Allocation

- Stock/ Bond allocation → We want to overweight stocks versus a comparative benchmark allocation. We give our portfolios a better engine.

- Exposure to Risk Mitigation → This is two-fold; risk mitigation enables us to allocate to more stocks but also presents the opportunity to create capital to redeploy after markets trade lower (and future return potential is higher). This rebalance will slightly increase our hedged exposure.

- Enhanced Income → In contrast to the above statement on risk management, the ability to enhance yield is currently less attractive given muted volatility. As market environments change, your investment team is on the front lines to make slight tweaks to the allocations in response.

What You’ll See in this Rebalance

Continue to Implement a Structure of More Stocks & Less Bonds.

Slight Increase to the Average Stock and Quality Small caps.

Lean into Volatility, as we believe the current cost of hedging is attractive.

Average Stock is Attractive

Source: Bank of America as of 01.19.2024

We believe only some parts of the equity market are priced for Fed dovishness. For equities, lower rates mechanically mean future cash flows are discounted at a lower discount rate, which increases the present value of assets. With the S&P currently at an expensive valuation, it could appear on the surface that cuts are already fully priced in.

However, the Mag7 were responsible for the majority of 2023 gains (~70%). We think there is an opportunity in the parts of the stock market that are still pricing in recession risk, like Small caps as well as the average stock. We believe those factors could outperform if recession is averted.

Ultimately, growth matters for equities. If the Fed fails to deliver cuts because growth remains robust, the growth upside surprise should be positive for earnings and thus equities. In line with this, equities have historically done well in soft or soft-ish landings.

- 2023 was a record-breaking year for bad market breadth. Historically, improving breadth has been bullish for small caps. Small caps have historically led following narrow markets.

- Profits look to be bottoming – which typically favors small caps.

- Macro support: Small caps / the Average Stock should benefit from Fed rate cuts.

- Small caps trade at a 25% historical discount to large caps. We believe our focus on valuation and quality can improve our allocations.

And while we don’t invest based on politics, small caps have historically done well between midterm and general elections so some pent-up buying could be lurking.

Cost of Hedging is Near Recent History Lows

The cost of hedging is back down to levels we haven’t seen since 2017. The graphic below shows the premium cost for a 1-month out, 5% Out of the Money (OTM) Put contract on the S&P 500 Index. The smaller the Premium % (measured by the blue bars in the chart below), the cheaper the cost of protection.

Source: Aptus Research as of 01.19.2024

Given the cost of protection is inexpensive compared to recent history, we are confident in our ability to protect against left-tail market environments.

With this rebalance we will slightly increase risk-managed exposure at the expense of strategies focused on enhancing income. This is a small tweak, but we believe offers an opportunity for our portfolio to maintain the strategic overweight to stocks while maintaining guardrails to protect against the unknown.

Final Thoughts

We believe longevity risk is the biggest risk most investors face, often without them realizing it. Investors should focus on real returns, not nominal returns. The willingness to forgo equity risk in favor of perceived safety will have implications for the ultimate compounded return achieved.

We make asset allocation decisions that give us the best chance to produce real, sufficient, compounded returns into the future. We believe investors will be rewarded for taking on equity risk. In fact, we think equity risk is a necessity, and portfolios positioned based on the golden age of bonds are introducing longevity risk. We have attempted to challenge the status quo and improve our allocations by focusing on Y+G and being better in the tails.

We believe the Three Pillars of our Investment Methodology best prepare us to navigate markets and keep clients invested in an allocation that gives them the best opportunity to reach their long-term goals.

Please ask us for our recent asset allocation presentation (kudos to Dave!) where we deep dive into our differentiated story on portfolio construction.

As always, we thank you for trusting Aptus with your investments. Please let us know how we can help!

Disclosures

Advisory services 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-2401-36.

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October 2023 Aptus Compounders Trade Rationale

Aptus PM Team — Thu, 12 Oct 2023 20:50:04 +0000

Aptus Compounder Update

Sell

We are happy to announce that one of the holdings within the Aptus Compounders strategy was officially acquired by Exxon Mobil Corp. (XOM) on 10/11/2023, thus we are selling Pioneer Natural Resources Company (PXD), as we believe that the upside is now limited.

The ownership of PXD has been a great example that return can come from something besides valuation expansion. In fact, during our holding period, the stock has basically had no change in valuation. Yet, since the original purchase of PXD in the strategy on 9/1/2021, the stock has returned 95.71%, with 1/3 of that coming from dividends (remainder from growth). In fact, PXD has outpaced our benchmark, the S&P 500, by 95.69% during this timeframe – the benchmark has essentially been flat since the PXD purchase.

We are not surprised that PXD was purchased, as Scott Sheffield, the current CEO, has a history of selling E&P companies. Moreso, there has been an outstanding rumor since April 2023 that this acquisition could occur. A potential acquisition was part of our thesis, but by no means did ownership hinge on this occurring. If we were to continue holding PXD, shareholders would ultimately receive shares in lieu, which would still yield an energy exposure through XOM, but we decided to redeploy the capital instead.

Purchase

It should come to no surprise that we will take the proceeds from the sale and keep the capital in the Energy sector. We believe that there is a structural disconnect between the continued need for fossil fuels and the amount of investment capital flowing into the space. We are purchasing Diamondback Energy, Inc. (FANG).

We believe that FANG is poised to generate robust free cash flow (“FCF”) in the current cycle, the balance sheet is well positioned, and returns to shareholders are supportive of a higher valuation (at least 75% of FCF will be returned to investors). The management team has been a leader with respect to growth discipline and return of capital. We believe FANG will continue to opportunistically focus on incremental M&A assuming the deals are accretive. Not to mention, the management team, much like PXD, has a strong history of execution.

FANG recently accelerated shareholder returns to an impressive ‘at least 75% of FCF. We like the balanced returns approach that includes a base dividend, along with variable dividend and share repurchases (allocation between the two depending on the market conditions). More recently, the company has favored share repurchases, but we believe that this could switch to an increase in their variable dividend – this is already after a recent 5% bump to the base dividend.

We continue to believe that the landscape for Energy companies is changing and that the market will soon reward these companies with a higher valuation.

Disclosures

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September 2023 Aptus Compounders Trade Rationale

Aptus PM Team — Wed, 20 Sep 2023 14:01:54 +0000

Aptus Compounder Update

Sell

We have held Dollar General (DG) for over three years now, as it served a pivotal holding in our portfolio construction process to help buoy performance during bouts of volatility. The stock did just that in 2022. Unfortunately, the majority of the stock’s holding period occurred during a risk-on rally, thus underperforming over the cycle.

The final straw that broke the camel’s back was during its last earnings report, which happened to be its second poor report in a row. DG has dealt with a number of near-term headwinds that have impacted sales and profitability, thus weighing on shares. We have difficulty owning this name in a decelerating comp environment. Not to mention the wage pressures and traffic recovery also present risks to DG.

Where we got this security wrong was at the end of the holding period as we believed that valuation was pricing in a lot of negative expectations. Given slowing traffic and continued investments, the company’s return on invested capital (“ROIC”) started to trend lower, as did the multiple. Unless ROIC significantly improves, we realize that there isn’t much upside to the multiple and we don’t see stability in profitability occurring in the near future. Moreover, after the recent company commentary, we don’t believe that there is much growth to earnings either. Thus, we decided to sell the name.

Purchase

Understanding the importance of portfolio construction and the necessity to protect capital during down markets, especially given the concentrated nature of the strategy, we are purchasing a name that is also a Consumer Staple. We believe that Walmart Inc. (WMT) fits that bill on all of the portfolio construction requirements, alongside our stringent Yield + Growth Framework.

Our view on WMT is subject to a number of macroeconomic and company specific factors that, on the upside, include better-than-expected top-line growth and/or margin expansion in the U.S. stemming from its strategic initiatives; International operating margin and/or ROIC that improves faster than our forecast; and higher-than expected square footage growth in the U.S. and/or abroad. Moreover, a recession could drive an investor flight to safety, positively impacting WMT’s stock performance via absolute and / or relative P/E multiple expansion.

We believe that owning WMT benefits the portfolio holistically, as we have the ability to own more growth per unit (EPS) of valuation (P/E), increasing our Y + G.

Disclosures

The post September 2023 Aptus Compounders Trade Rationale appeared first on Aptus Capital Advisors.

July 2023 Rebalance Rationale

Aptus PM Team — Wed, 02 Aug 2023 18:11:12 +0000

The first half of 2023 was wild, and far from most expectations. Risk assets sold off during the Silicon Valley Bank collapse in March, then rose just as quickly. Through its resolution, and onto the First Republic collapse and fears of the Debt Ceiling debate, a handful of large tech stocks raced higher.

In general, the fear of these events packed more punch than reality. Investors were caught offsides and generally under-positioned to risk assets, likely spurring the chase higher in stocks. From March through May, the market experienced a massive rally on the heels of a few AI-centric technology stocks.

We will say it’s nice to see more than seven stocks driving the market higher, as the rally has finally expanded to the broader market…see the distinction in the “Other 493” before and after Memorial Day:

Source: Bianco Research as of 07.17.2023

At the macro level, economic data remains strong as the consumer is healthy and the jobs market remains resilient, supporting markets. The economy seems to be adjusting to the higher interest rate environment while maintaining a more sustainable level of growth, as inflation continues to slide lower (although still above target) and pockets of speculation recede.

High Level Thoughts

We want to use this model rebalance to remind you of the investment philosophy guiding your portfolios, and emphasize the confidence that we have in our process and allocations.

Asset allocation decisions define about 90% of long-term investment outcomes. As we have always said, we believe that equities are better wealth accumulation vehicles than bonds or cash. Successful long-term outcomes are mostly dependent on 4 things:

Creating a plan/budget and sticking to it

Allocating to a diversified mix of quality assets

Putting time on our side (i.e., time in the market, not timing the market)

Minimizing large portfolio losses that can destabilize portfolios

The biggest risk we see in portfolios is the disregard of longevity risk. Longevity risk is the risk of running out of money or having to make lifestyle changes due to the under accumulation of wealth. Given the likelihood of higher structural inflation and negative real (after inflation) returns from traditional fixed income, we believe the traditional approach to asset allocation (balancing stocks and bonds) must be reconsidered.

Within our allocations, we like David Dredge’s simple race car analogy. The car that wins the race has a strong engine, but equally important, it has great brakes. We can improve the long-term return potential of portfolios by owning more stocks (stronger engine), but our ability to own volatility as an asset class (better brakes) is what allows us to manage the turns.

We implement distinct types of hedging across portfolios, which helps create a path to success whether markets are rising, choppy or flat out ugly. It is like fire insurance; you do not buy it after your house burned down…you buy it beforehand just in case something bad does happen.

The design is to participate in a rising market due to an overweight to equities, and to protect when things get scary through active hedges.

The “volatility as an asset class” theme extends to our yield + growth framework, beyond risk mitigation. Volatility can be viewed as a tool to enhance yield. It’s the combination of enhanced yield and risk mitigation that improves the yield + growth outlook of our portfolio construction process.

Model Rebalance

We are excited for the opportunity to rebalance the portfolios given the changes in markets thus far in 2023. We think the rebalance will serve allocations well, given our market outlook and the suppressed (cheap!) volatility. Below you will find the rationale regarding the trades, and color on how it will impact your portfolios.

Replace TDVG with DUBS/RSP

We believe that portfolio yield in the next cycle will likely matter more than it has in the last 10 years. Our newest ETF, the Aptus Large Cap Enhanced Yield (DUBS), gives us another lever to pull across the portfolios, with direct beta but double the yield. Within our equity exposure, DUBS gives us the opportunity to maintain a neutral stance versus the S&P 500 (no factor tilts) and still maintain our objective of higher portfolio income.

While we think the T. Rowe Price fund is a solid fund, its quality and dividend growth can be a drag. In this rebalance we want to reiterate the point of letting our stocks be stocks, and add the ancillary performance that comes from the options overlay, in this case the Fund strategy aims to earn 2x the S&P 500 income without the factor tilt.

Add BKAG to Preserve, Conservative & Moderate Given Increase in Yields

Our Fixed Income portfolio duration has been significantly shorter than our benchmark since late 2020. This has been timely, as bonds have performed poorly given the Federal Reserve’s aggressive interest rate hikes.

As yields have shifted higher and the FOMC has made progress on bringing inflation lower, we are marginally lightening our duration underweight. While it is possible that fixed income could underperform in real terms (after accounting for inflation), we cannot deny that on a nominal basis yields are as high as they’ve been in ~15 years.

Small Trim of OSCV

Our portfolios have been overweight Small Cap stocks for some time. We have shown a multitude of graphics that display the effectiveness of small caps during inflationary periods. We are keeping the overweight to Small Caps but using the run-up in markets plus the repricing of volatility (lower cost to hedge), to trim a bit in favor of more hedged equity.

Shift INFL into RSP/DUBS

Similar to the commentary on OSCV, we have favored cash-flowing businesses given the higher inflationary regime. INFL filled a portfolio void the last couple years where we wanted additional inflation protection, but in an untraditional way (i.e., other than TIPS/Gold). While structural inflation is likely to persist into the future, we expect the volatility of inflation to remain high, which favors more options-based strategies that can better take advantage.

Source: Aptus Research as of 07.20.2023

Add RSP to Equity Lineup

Long-term clients may remember a similar situation in late 2020 where the S&P 500, led by a few high-growth stocks, substantially outperformed the aggregate market (equal weight S&P 500). We added a slug of RSP into the portfolios following that growth runup, and given the multiple of the “S&P 493” (~15x earnings) vs the “S&P 7” at 36x earnings, we now see another opportunity to get better exposure via the same name.

Utilize IDUB

Similar commentary as DUBS, we believe that portfolio yield in the next cycle with likely matter more than it has in the last 10 years. IDUB gives us another lever to pull across the portfolios, improving our beta exposure to Developed & Emerging markets with double the income versus the benchmark.

Sell out of VDE in Growth & Aggressive Growth

VDE is a position that we’ve liked the last couple of years where we thought energy had structural tailwinds given the supply and demand dynamics. While we do continue to like energy over the medium term, we have been somewhat disappointed with the performance of energy stocks given the firmness of oil prices in the low $70s. While we will continue to favor energy in other manners (inside our funds), we are moving this explicit overweight back into our core equity holdings.

To Conclude

As always, we want to thank you for your trust in stewarding your clients’ hard-earned savings. We believe the way we continue to innovatively allocate your capital will have long-term positive results on their wealth. An outside-the-box manner of thinking is necessary to navigate the challenging market landscape we face.

Equity markets can be choppy over brief time horizons but historically rise, and we want our portfolios to have a stronger engine (more stocks) to participate in market upside, and better brakes (hedges) to protect against the unknown. We believe this combination should allow clients to be confidently prepared for any type of market environment.

Disclosures

When a page is marked “Advisor Use Only” or “For Institutional Use”, the content is only intended for financial advisors, consultants, or existing and prospective institutional investors of Aptus. These materials have not been written or approved for a retail audience or use in mind and should not be distributed to retail investors. Any distribution to retail investors by a registered investment adviser may violate the new Marketing Rule under the Investment Advisers Act. If you choose to utilize or cite material we recommend the citation, be presented in context, with similar footnotes in the material and appropriate sourcing to Aptus and/or any other author or source references. This is notwithstanding any considerations or customizations with regards to your operations, based on your own compliance process, and compliance review with the marketing rule effective November 4, 2022.

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

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-2307-28.

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April 2023 Rebalance Rationale

Aptus PM Team — Tue, 25 Apr 2023 13:14:45 +0000

The first quarter of 2023 started out with a bang. Q1 experienced what felt like three distinct market cycles condensed into three months. January experienced a perceived “Soft Landing” where inflation was seen as falling quickly while the economic data was on the softer side. The market interpreted this as ammunition for a lower terminal rate and quick Fed Pivot, stocks and bonds rallied.

February turned into the “No Landing” scenario where inflation and employment data firmed. The market began pricing a higher terminal rate and a higher for longer fed given a resilient “Goldilocks” economy.

Finally, with March came a higher likelihood of a “Hard Landing” scenario following the collapse of several banking institutions and the freezing of some credit markets. This led the market to anticipate quick Fed cuts. The perception of Fed balance sheet expansion and rate cuts led to a return to the preference of growth assets. The Nasdaq Index (NDX Index), led by mega- tech was up 20.77% for the quarter with an impressive 11.39% rally in the last 2 weeks of March.

Source: Bianco. As of 3/31/23.

Model Rebalance

We have a small rebalance across the board (all models) which we think will serve portfolios well given the market outlook and present (and ongoing) volatility. In line with our theme for 2023 “Year of the Yield”, we’re slightly increasing our JUCY allocation. The increase is funded by trimming 1-2% each of our holdings of DRSK, ADME and SPLG.

Bump up JUCY

Back in November we launched JUCY. It’s our take on a combo of treasuries and an option overlay to provide real positive yield without the credit or duration risk typical to most high yielding vehicles. We are beyond excited by the prospects of this fund and how it impacts the hurdle rate set for other investments within our portfolios.

Valuations, Tradeoffs, and Our Portfolios

The market seems to be priced for a soft landing and no recession.

We’ve recently asked audiences for their estimate for 2023 earnings per share, and a multiple on those earnings. (Saying a company earns $2 to the bottom line and trades at a 10x multiple means it has a stock price of $20 (2 x 10). You can do the same thing with the overall S&P 500.)

The answers have been ~ $215 for earnings and ~ 18x on the multiple. That simple math of multiplying earnings by the multiple paid on those earnings (18 x 215) would put the S&P 500 Index at 3,870 – roughly 6% BELOW today’s price of 4,115 as I type.

The simple example above assumed earnings remain close to current estimates and multiples remain elevated relative to history. Both ‘cup half-full’ estimates.

JD mentioned in his most recent note JD March 2023 Note, when you look at the simple math of the earnings and multiples on S&P 500, it’s hard to get excited about the near term prospects for returns.

Returns are generated from Yield, Growth and Valuation expansion/contraction. We now have an investment option that pays a double-digit yield with 1-3YR Treasury type volatility (SHY ETF). To us it makes sense to hunker down and collect the yield versus the alternative of banking on earnings resiliency and a continuation of heightened multiples.

We are bumping up our yield across the portfolios. The increase is funded by trimming a 1-2% of other fixed income exposure and 2-4% in equities depending on the composite.

Tax Loss Harvest IDME

We will also be taking the opportunity to selectively tax loss harvest (“TLH”) IDME in non-qualified accounts as we make the conversion to IDUB. We will be using the iShares Core MSCI Total International Stock ETC (IXUS) as a proxy. For those accounts with gains, as we recently did an exercise to opportunistically TLH in November, it is important to know that there is no action required. The strategy will seamlessly transition from IDME to IDUB. For more information on the strategy change, please click here.

To Conclude

We are excited for the opportunity to tactically bump up the JUCY allocation across our portfolios. We believe JUCY enhances the yield profile and dampens the volatility of our overall allocation. The addition takes advantage of higher market yields and higher market volatility (which equates to more income from the options overlay) to provide more income return across the allocations.

Disclosures

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