Model Portfolio Quarterly Update –

In April 2022, I introduced on this blog The Italian Leather Sofa Model Portfolio. As a reminder, here is the portfolio composition:

60% stocks (via NTSX)
40% bonds (via NTSX)
20% trend (via DBMF)
10% commodities trend (via COM)
4% Tail risk (via TAIL)
-34% cash

The idea behind the portfolio is stolen from here. The link offers the best explanation of what I think is the most common question related to it, i.e. why the portfolio uses leverage (and why, in this context, leverage decreases risk).

It represents a simplified version of the portfolio I have been building since I moved to Switzerland: here you can find details about the “enhancements” to this model.

Please note that the returns you find in the Model Portfolio series will always reflect the point of view of a USD-based investor. The ETFs are priced in USD and Testfol.io, the app I use to track the portfolio, does not allow me to change the reference currency.

Besides these ‘technicalities’, the focus of this series is on how to build a great and simple permanent portfolio. There are various solutions an investor can employ if they do not have the USD as their base currency and want to eliminate the FX volatility. As I wrote here about the All Weather Portfolio, I am not bothered by the FX risk, given my investment horizon and the fact that I do not consider myself a CHF-based investor even if I live in Zurich. Plus, I do not have any currency-specific audience that would make this series more helpful if run in EUR, CHF or GBP (if you want a deeper dive into FX risk, I wrote this).

After losing 2.04% in Q1-25, the portfolio increased by 6.88% in Q2-25:

Since Inception, including a backtest period

The blue line represents the Model Portfolio, while the other two are functional references (I cannot really call them benchmarks): the 60/40 portfolio (red line) and the S&P500 (yellow line).

Since inception plus backtest (May, 2019). VBAIX is the 60/40.

Below you can find details of each ETF performance, including dividends, in the quarter:

Below is the Q2 price graph for each component of the portfolio:

How to read the portfolio performance

I have to admit I fell for the single-line item performance fallacy. NTSX is the ETF with embedded leverage that allows the addition of “free diversifiers” to the portfolio. I, wrongly!, judged the merits (or otherwise) of leverage within NTSX, thinking for example about the implications of an inverted yield curve (NTSX borrows at the short-term rate and invests in bonds that pay the long-term rate…not great when the curve is inverted).

Leverage belongs to the portfolio.

Not only that. COM and DBMF use futures; a small fraction of the sum invested in those ETFs is posted as margin while all the balance erns the T-Bills returns. In other words, if the Bills rate is 5% and DBMF returns 3%, it means DBMF alpha, the real yield of the strategy, was -2% for that year.

Diversification is supposed to protect you. One asset zigs, the other zags. Simple enough. But lately, it feels more like: one asset stops bleeding (bonds), and another starts limping (trend).

Eric Crittenden recently did a great video with Matt Zeigler and Jason Buck discussing the rough patch for managed futures. The takeaway? No strategy wins all the time. Even the good ones go through pain.

Eric even threw bonds under the bus, calling them almost useless after the secular bull run they had. According to him, when you factor in inflation, taxes, and fees, the real return is less than 1%. Hard to argue with that. Compared to trend following? Not even close, in his view.

And yet, here we are. I diversified my diversifiers and still ended up suffering. Classic.

I track most of the major trend ETFs (CTA, AHLT, ASMF, MFUT, TFPN, IMF, KMLM), and it’s not just a DBMF problem: the whole trend-following space is dragging. That’s the bad news.

The good news? Nothing seems broken. On a rolling basis, the Model Portfolio is still delivering. A 0.7 Sharpe ratio may feel underwhelming, but that’s nearly double the long-term Sharpe of equities. And across the board, we’re still outperforming the classic 60/40 portfolio by almost every metric that matters.

Drawdowns suck. But context helps:

If I were starting today, I would opt for something like BTAL rather than TAIL:

At first glance, the difference looks small. But that’s only because the allocation is small. Scale it up, and the picture changes: boost the allocation to that sleeve, and the Sharpe of the BTAL portfolio improves. Meanwhile, the one with TAIL gets worse.

I’ve gone into detail about the problems with TAIL here, but the short version is: it’s expensive insurance that doesn’t really seem to pay off.

To be fair, if I were running this in real life, the proper way to handle the switch would be to keep the old equity line with TAIL and only use BTAL going forward. That’s what would happen in a real portfolio.

Unfortunately, I can’t replicate that with tools like Testfol.io. Maybe someone out there has a workaround, but for now, the portfolio stays as is.

When I first built this thing, I assumed leverage might introduce some tail risk. But with a portfolio running at 11% vol and a max drawdown under 20%, it might be structurally protected from the worst-case scenarios. Or maybe we’ve just been lucky, no real crisis in the last decade.

Which brings us back to TAIL. Is dropping a 30bps insurance policy short-sighted? Possibly. But BTAL provides a different kind of diversification, one that might be more useful for the long term.

I want to close with a sneak peek at the Europoor Model Portfolio:

In the same period, the Vanguard LifeStrategy60 did this:

As mentioned earlier, trend following hasn’t exactly been delivering lately, and now there’s the added exposure to the U.S. dollar.

I’ve written about FX risk before, but this post in particular breaks down why being long USD isn’t necessarily a bad move right now. You just have to zoom out. The recent noise from the new U.S. administration about devaluing the dollar is just one piece of the puzzle. The broader context still favors dollar strength…at least as long as the FED stays above the ECB rate-wise.

And yes, I get it: many of you saw the dollar devaluation coming and positioned accordingly. Congratulations. Please don’t forget to invite me aboard your yacht, now that you’re richer than Bezos thanks to your elite market timing skills.

What I am reading now: