Investing in T-bills (Part 19)

I’ve covered a lot of quality detail in this mini-series involving T-bill investing, option trading, municipal bonds, and margin requirements. I will finish today tying up a few other loose ends.

Despite the title “Investing in T-bills,” some may actually consider it trading. As discussed in the fourth paragraph of Part 12, my bond-ladder structure requires a T-bill purchase every week. This may be deemed frequent for those who associate “investing” with long-term buy-and-hold (i.e. few required and/or infrequent transactions). I consider it investing in terms of maintaining an interest-generating vehicle over a longer-term period, but it does require a minimal time commitment.

Prior to the Part 8 revelation that overall option decay of synthetic long stock (SLS) substantially weakens its candidacy as a proxy for long shares, I had two other thoughts about taking advantage.

First, using only long calls instead of [together with short puts to form] SLS would limit the unlimited [to zero] downside risk. Something similar can be accomplished by purchasing roughly half the number of shares and using remaining free cash to invest in T-bills. The capital requirement of half the shares would still be greater than either long calls or SLS, but shares are not subject to the additional payment for time premium.*

Despite the weakened candidacy mentioned above, long calls carry a different risk profile than [SLS or] long stock; backtesting could be used to determine what strategy might be superior.

Second, SPX SLS may be a good proxy for any large-cap ETF or mutual fund. Edge realized by large-cap ETFs or mutual funds that beat the S&P 500 [in some years, at least] would be more than offset by the additional 5.0% return on capital saved by trading SLS instead of long shares.

The Dimensional US Large Company Portfolio (DFUSX) is one such example that does not bear out as advertised. A couple years ago, I spoke with an investment adviser (IA) who uses Dimensional Funds for clients. By retaining most benchmark components while excluding just a few, he said, Dimensional funds outperform. On 4/11/24, I looked at DFUSX holdings (as of 2/29/24) to find 504 stock holdings. The most-recent S&P 500 update I can find (Investopedia from 9/26/23) reports 500 companies have issued 503 total stocks. At 504, DFUSX has added and either not excluded or substituted thereby contradicting the IA. DFUSX also has a somewhat-perplexing 505th position: S&P 500 futures. With stock futures usually in contango, this represents a slight drag over time.

SLS no longer seems like a good proxy for DFUSX given the weakened candidacy mentioned five paragraphs above.

In summary, I would avoid SLS as a proxy for long shares to be used for non-option traders [paying an option-trading IA to manage]. While I think T-bills [or something comparable] are a necessary component to supplement an option portfolio, SLS may be a poor proxy even for option traders given the additional expenses related to taxes and transaction fees.**

* — Suggesting that even before the Part 8 discovery, I knew about the time premium expense—
       just not how much more time premium is lost by the long call than gained by the short put.
** — As mentioned in this second paragraph, I need to expand the sample to verify the ~0.5%
         SLS edge.