The SVOL Vacation is Over

SPYI: Reduced Allocation from 6.69% to 5.09% 

I like SPYI, but I temporarily over-allocated to it. My normal cap is 5% in any one position. The cash from selling SVOL last month needed a place to park, and SPYI did the job. Now it’s back to “normal”.

QQQI: Reduced Allocation from 5.85% to 5.06%

Same situation as SPYI explained above.

EICC: Reduced Allocation from 2% to 1.02%

Nothing wrong with this preferred share, so I’ll keep a small allocation. Returning some of the capital to SVOL for the higher yield.

PFFA: Reduced Allocation from 5.36% to 4.97%

Just some light trimming to bring it closer to a 5% weighting.

SVOL: Bought (4.24% Allocation)

SVOL generates income by trading VIX futures contracts. They sell contracts further out at a high price, then buy them back at a lower price. This model relies on the price of those futures being higher for the futures dated further out, than the futures dated closer to the present day. 

It’s easier to see visually on a VIX Term Structure chart. If the line slopes down, it is difficult for SVOL to generate income (“Backwardation”). If the line slops up and to the right, it’s easy for SVOL to generate income (also known as “Contango”).

If you’d like to learn more about how SVOL generates income by trading VIX Futures Contracts, it’s explained in this video, linked here.

My SVOL position is slightly smaller than it was previously, as the fund’s holdings have changed (yet again), and I want to see how it behaves before increasing the allocation further. 

Also note that SVOL generates some of its income from Treasuries, and other fixed income instruments. The Fed’s recent rate cut reduced the income from these holdings, which in turn reduced the income for SVOL. If interest rate cuts continue, expect SVOL’s income to fall further. There’s no such thing as a 16% income investment that lasts forever, and doesn’t come with risk.

If you understand this complex investment, and are comfortable investing in it, I suggest keeping an eye on the VIX, and on the VIX Term Structure. You can access updated VIX Term Structure charts by clicking here.