Brian Jacobs on Bond Myths, Tax Strategies, Home-Ownership and Dynamic Investment Strategies for Today's Market | Aptus Capital Advisors | #569

Episode Summary

Executive Summary: Meb Faber and Brian Jacobs of Aptus debated the limits of traditional fixed income, tax efficiency, and how options can be used to reshape portfolio outcomes. Jacobs explained Aptus’s dynamic ETF lineup—hedged equity, bond alternatives, and minimum-volatility/trend hybrids—while both agreed taxes, implementation, and behavioral discipline matter as much as raw return forecasts.

Main Topics: Why traditional bonds may be a poor long-term allocator (Priority: 5/5): Jacobs argued nominal bond yields often fail to compensate for inflation, taxes, and fees, leaving long-run real after-tax returns near zero; he favors replacing some fixed income with equity/option-based structures that can improve tax efficiency and return potential. Aptus ETF design and dynamic options usage (Priority: 5/5): Jacobs outlined Aptus’s options-oriented ETF platform, including hedged equity (ACIO), a fixed-income alternative (D-risk), and the new defer strategy. The firm adjusts exposure based on volatility and market conditions rather than applying a static options rule. Minimum-volatility plus trend-following in UPSD (Priority: 4/5): UPSD combines minimum-volatility equity selection with trend overlays to create a portfolio that can be more defensive in downtrends but still capture more upside than a plain low-vol fund; the goal is to reduce behavioral pain versus pure trend-following. Taxes, account location, and after-tax investing (Priority: 5/5): The conversation repeatedly emphasized that pre-tax return comparisons are misleading. They discussed how bonds, ETFs, SMAs, and homeownership should all be evaluated on after-tax, after-inflation, and cash-flow-adjusted bases. Valuation debates: CAPE, forward P/E, and market extremes (Priority: 4/5): Faber and Jacobs debated the usefulness of the CAPE ratio, with Jacobs arguing it is flawed by buybacks, EPS methodology, and growth effects. They agreed that valuation metrics matter most at extremes, though different measures often point to similar conclusions. Homeownership, mortgages, and forced savings (Priority: 3/5): Jacobs shared his view that a low-rate mortgage is a powerful inflation hedge and that homeownership is often mis-evaluated because people ignore the consumption value, tax benefits, and opportunity cost of renting versus owning. Behavioral challenges and implementation discipline (Priority: 4/5): Both speakers stressed that many strategies fail not because of theory but because clients and advisors can’t stick with them. They argued that embedding rules inside funds can be easier than making discretionary tactical decisions in client accounts.

Key Arguments: Bond returns have historically looked better before inflation and taxes; after both, long-term real returns can be close to zero, making traditional fixed income a weak default allocation. High-yield and credit often do not compensate investors for the risk taken, especially when spreads are tight; dynamic, opportunistic use of credit may be better than a strategic permanent allocation. Options can be used in multiple ways—buying puts, selling calls, writing puts dynamically—to engineer more favorable risk/return profiles than static bond portfolios. ACIO is designed to hedge equity downside by buying puts and financing them with calls, with the call-overwrite level changing based on volatility and market conditions. D-risk aims to replace some fixed income exposure with a bond-plus-equity-options structure that can participate in equity upside while limiting downside through options. UPSD seeks lower volatility through a minimum-volatility equity core plus trend-following overlays, which may improve investor stickiness compared with pure trend strategies. The CAPE ratio is, in Jacobs’s view, unreliable for practical allocation decisions because it uses EPS, ignores buybacks, and can overstate or understate valuation depending on regime and index composition. Homeownership should be analyzed with all cash flows included—mortgage costs, avoided rent, taxes, and consumption value—rather than only price appreciation. Taxes can be as important as gross returns; similar exposures should generally be held in the most tax-efficient structure available. Buybacks are not clearly good or bad in aggregate: they transfer value between continuing and exiting shareholders, so the net effect depends on the holder’s perspective. Behaviorally, clients are more likely to stick with embedded systematic strategies inside a fund than with advisors who trade around signals in public view. Valuation tools matter most when markets are at extremes, and different metrics often converge even if they disagree on magnitude or timing.

Data Points: AcreTrader farmland access minimum: $15,000 - Promotional intro noted passive farmland investing minimums through AcreTrader. Cropland lost to urbanization: 4.8 acres per minute - Intro cited farmland disappearing between 1997 and 2022. Bond long-run real after-tax return: ~0% over 100 years - Jacobs argued bonds have produced roughly zero after-inflation, after-tax return over a century. Aptus ETFs: 8 ETFs now, likely 9 within months - Jacobs gave an update on the firm’s product count. Aptus assets under management: north of $4 billion - Jacobs said the firm had a strong 2024 and reached roughly this scale. ACIO asset size: north of $1.5 billion - Jacobs described the firm’s flagship hedged equity ETF. ACIO downside hedge: About 5% down via puts - He explained the starting structure of the hedged equity portfolio. Minimum-volatility estimate: 25–30% lower standard deviation - Jacobs said UPSD’s core had been back-tested at materially lower volatility than the broad market. AG index outperformance vs Treasuries: About 0.3% per year - Jacobs said the Bloomberg Aggregate only modestly beat a duration-matched Treasury portfolio since 1976. Target risk of AG spread component: About 2% risk per year - Used to frame defer’s put-writing overlay relative to the aggregate bond spread component. China index return through recent years: Zero total return from 1992 inception through about two years ago - Jacobs noted MSCI China had produced no total return for decades before turning slightly positive. Mortgage rate example: 2.5% - Faber and Jacobs used this as an example of a powerful inflation hedge and favorable financing. CAPE evaluation horizon: 10-year rolling forecasts - Jacobs criticized CAPE for missing projected returns by 5% to 10%+ over rolling 10-year periods.

Pivotal Quotes: "“A century of no returns.”" — Meb Faber: Reaction to Jacobs’s claim that bonds can deliver about zero real after-tax return over long horizons. "“The best time to be writing puts on the market from a return standpoint are when volatility is high, but when volatility is trending lower.”" — Brian Jacobs: Explaining the counterintuitive timing logic behind defer’s dynamic put-writing process. "“The CAPE ratio makes no logical sense.”" — Brian Jacobs: Jacobs’s blunt critique of using CAPE as a practical valuation tool for allocation decisions.

Implications: Listeners should judge portfolios on after-tax, after-inflation outcomes and pay close attention to implementation. The episode argues for dynamic, options-based solutions, tax-aware asset location, and skepticism toward static bond and valuation dogma.