How might an investor construct a portfolio of very risky assets? To investigate, we revisit ideas first considered six years ago:
- First, diversify with monthly rebalancing of:
- Grayscale Bitcoin Trust ETF (GBTC), an indirect Bitcoin holding.
- SPDR Gold Shares (GLD), an indirect gold holding.
- ProShares Short VIX Short-Term Futures ETF (SVXY), to capture part of the U.S. stock market volatility risk premium by shorting short-term VIX futures.
- Second, capturing upside volatility and managing drawdown of this portfolio via gain-skimming to a cash position.
We assume equal initial allocations of $10,000 to each of the three assets. We perform a monthly skim as follows: (1) if the risky assets have month-end combined value less than combined initial allocations ($30,000), we rebalance to equal weights for next month; or, (2) if the risky assets have combined month-end value greater than combined initial allocations, we rebalance to initial allocations and move the excess permanently (skim) to cash. We very conservatively assume monthly portfolio reformation frictions of 1% of month-end combined value of risky assets. We assume accrued skimmed cash earns the 3-month U.S. Treasury bill (T-bill) yield. Using monthly prices of GBTC, GLD and SVXY adjusted for splits/dividends and monthly T-bill yield during May 2015 (limited by GBTC) through July 2026, we find that:
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