At The Money: Finding Alpha via Unique ETF Strategies

What It Covers

Barry Ritholtz interviews Alpha Architect's Wes Gray on pursuing alpha through specialized ETFs. Gray covers factor-based strategies (value, momentum), box spread ETFs approaching $10B AUM, tail risk protection via CAOS, and inflation/deflation hedging via HIDE — all positioned as satellite holdings around a passive core index portfolio.

Key Questions Answered

• •Factor Alpha Persistence: Value and momentum factors remain exploitable not because they're unknown, but because they're psychologically brutal to hold. Value can underperform benchmarks for 10–20 consecutive years, causing career risk and investor abandonment. The edge survives precisely because discipline required to maintain exposure through prolonged drawdowns exceeds what most investors and fund managers can sustain.
• •Backtest Evaluation Framework: Treat any backtest produced by a firm selling the product with near-zero credibility — Gray compares it to Pfizer-funded drug studies. A credible backtest must explicitly show why the strategy is painful: extended underperformance, career risk, and benchmark deviation. If a backtest only shows upside with no mechanism for suffering, reject it outright.
• •BOXX Box Spread Strategy: The BOXX ETF accesses the implied risk-free rate through options box spreads in broker-dealer funding markets rather than Treasury markets, targeting 1–3 month duration. This structure historically delivers returns above equivalent T-bill exposure after fees and taxes, exploiting a structural inefficiency in how funding markets price short-term capital versus government securities.
• •CAOS Tail Risk Trade-off: CAOS funds deep tail protection by simultaneously selling put spreads, meaning it does NOT protect against gradual 0–20% drawdowns — only sharp crashes where VIX spikes dramatically. During Q1 2020, the fund gained approximately 25–30%. Investors should understand they absorb small-to-moderate losses in exchange for outsized protection during severe, rapid market dislocations.
• •HIDE Inflation/Deflation Hedge: HIDE uses trend-following across three asset classes — bonds (deflation hedge), commodities (inflation hedge), and real estate (intermediate exposure) — at 29 basis points. When bonds trend up, it overweights bonds; when commodities trend up, it overweights commodities; when neither trends, it holds cash. It functions as low-cost managed futures exposure for retail portfolios.