In many ways, the topic of conversation for this episode revolves around what ultimately amounts to a fairly vanilla, almost-index like portfolio.
The asset class in question, however, may verge on the exotic for listeners with less fluency in the field of derivatives.
My guest is Eric Ervin, President and CEO of Reality Shares, and he has joined me to discuss their flagship ETF DIVY. I would argue that DIVY is one of the few exposures that fits the definition of both being liquid and alternative. By tapping into the OTC market, Eric and his team build a portfolio of 1-to-5 year dividend swaps, which have historically earned investors a unique return known as the dividend risk premium.
Eric’s confidence to bring such a unique product into the market was borne from his experience as an advisor, where he utilized alternatives extensively with his clientele. Learning more about this experience in evaluating alternatives and the mental framework he used that allowed him to allocate upwards of 50% of client portfolios to alternatives is where we begin our conversation.
You can find more of Eric on Twitter (@eervin1) and learn about Reality Shares’ ETFs on their website.
If you are not already, subscribe to Flirting with Models here:
Show Notes
3:12 – Eric talks about his background as a financial advisor and trying to build absolute return strategies for his clients.
5:53 – Eric introduces his mental framework of breaking down the alternatives universe into “risk reducers” and “return enhancers.”
7:22 – The importance of understanding the difference between assets and strategies in the alternatives space.
9:39 – Addressing the behavioral issues of placing 50-60% of a client portfolio into alternatives.
12:13 – Shorting the subprime market and building conviction in the trade.
15:20 – Eric’s approach to building a portfolio out of alternative investments.
19:42 – The red flags Eric has identified in the alternative space.
22:07 – The launch of Reality Shares in 2011 and the Dividend Swap ETF, DIVY.
24:26 – A basic overview of swaps in general, and more specifically dividend swaps.
27:02 – Corey takes a step back from the discussion to discuss his mental model for exploring new ideas by thinking about the extremes of the problem.
29:06 – What is the dividend risk premium?
33:58 – Eric discusses expectations for the level of return and volatility associated with the dividend risk premium.
38:00 – If dividend expectations are well established a year out, why does the dividend risk premium exist?
42:44 – How does the increasing scope of buybacks affect dividend swaps going forward?
45:09 – Why growth in dividends can be negative but the dividend risk premium can still be positive.
48:05 – Corey asks Eric to walk through his own framework for evaluating and incorporating alternatives with respect to DIVY.
56:12 – If you were an investment strategy, what investment strategy would you be and why?
