The Discipline Fund ETF is the first ever systematic countercyclical rebalancing fund designed to help you behave better and stay the course.
The Discipline Fund is designed to do what its name implies – help investors stay fully invested and disciplined through all the behavioral challenges we encounter over the boom/bust cycle of markets. The fund implements this strategy using a methodology similar to what John Bogle discussed in this 2018 interview in which he said he rebalanced his portfolio in a countercyclical manner when markets were grossly overvalued because it helped him behave better. The Discipline Fund achieves this by implementing a 50/50 stock/bond benchmark that rebalances in a countercyclical manner over time using a highly diversified, long-term oriented, low fee, tax efficient structure that is fully automated to rebalance between 70/30 stocks/bonds and 30/70 stocks/bonds depending on macro conditions.
A Smarter Form of Balanced Investing
Your standard index fund rebalances to a static allocation of something like 60% stocks and 40% bonds when it grows out of line with its benchmark allocation. But have you ever wondered how and why they came up with this arbitrary 60/40 weight? We know the market cap weight of the underlying assets changes over time. We also know that the 60% stock allocation contributes over 85% of the risk to the portfolio. And most importantly, we know that that 85% weight in stocks compounds our behavioral risk during bear markets. They call this a “balanced” index when in fact, it’s not balanced at all.
The Discipline Fund solves this problem by being the first ever systematic countercyclical rebalancing fund that rebalances to create more balance across time. And the best part is that it does so within a single ETF thereby maintaining a very tax efficient rebalancing methodology allowing the investor to defer gains while maintaining a diversified portfolio and more consistent risk profile over time as they rebalance within the ETF.
The primary issue with a static weighting like 60/40 is that the static allocation isn’t really static because the 60% slice generates 85%+ of the portfolio volatility. This means that the 60% slice becomes riskier in big bull markets and when you rebalance back to that static weighting you’re rebalancing back to a riskier allocation of 60%. This isn’t a “balanced” approach and our research shows that a countercyclical rebalancing methodology creates greater balance across time when compared to inherently procyclical rebalancing strategies like 60/40.
The Discipline Fund seeks to create smoother and more balanced returns by countercyclically rebalancing in an inactive, tax and fee efficient manner while also understanding that investors don’t perceive risk in a static manner. Therefore, the Discipline Fund might be underweight stocks late in a market cycle or overweight stocks early in a cycle with the goal of helping the investor remain more comfortable and earning better returns than they otherwise would by helping them be better disciplined with their investments.
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1 – This fee is substantially lower than the average broad world allocation fund which has a fee of 0.81% according to Morningstar.
Further, according to Research Affiliates, the estimated tax liability of a mutual fund when compared to an ETF is 0.8% when adjusted for dividends.
The Fund’s investment adviser has contractually agreed to waive all or a portion of its management fee for the Fund until at least one year from the date of the Fund’s commencement of operations to the extent necessary to offset all Acquired Fund Fees and Expenses.