TSP Funds: A peek inside

By Michael Bond on August 4, 2020

In case you have not heard, there are five monopolies in America driving the markets. They now make up 28% of the SP500 index (TSP C fund) and 48% of the Nasdaq-100. And of course, they do not make up any of the small cap funds like the TSP S fund.

It’s time to look under the hood and see how this affects the TSP funds.

TSP does not have a Nasdaq-100 fund unfortunately, but these stocks are captured in the SP500. Since the SP500 is more diversified its returns have been lower than the concentrated Nasdaq-100. We can use Nasdaq-100 to highlight the market internals of the C fund.

The grey plot in the chart above is the equal-weight SP500 index which gives all 500 companies an equal weighting. This means the mega-caps make up the same 0.2% as the smallest SP500 companies. And what this tells us is the broader SP500 is not doing as well as the SP500 index indicates.

This is important because market breadth is an important market internal and narrowing breadth often indicates market weakness and top forming. I believe we are seeing this but with the added pump higher by extreme monetary policy.

Monetary policy can “fix” asset prices but it can not fix the economy. And they have certainly “fixed” financial asset prices this year.

Over the time frame seen in the chart, the equal-wt SP500 and the small cap TSP S fund have performed about the same. Since the early 2020 peak the small caps have out-performed the equal-wt fund or should we say the broader SP500 has under-performed small caps. This means market breadth narrowed at a more rapid pace within the SP500 after the last market crash.

BTW, the Nasdaq-100 sports a Price-to-Earnings ratio of 47 and a Price-to-Book ratio of 13 which means a lot of future growth has been priced in. It will only take a doubling or tripling of earnings to bring the PE ratio back to earth. Sure, no problem in a pandemic.

Let’s keep looking at our TSP equity funds.

Don’t get suckered into those PE ratios looking mildly acceptable… they do not include companies with negative earnings. Before the pandemic, companies with negative earnings made up 40% of the smallest 2000 US companies. Sigh.

Everyone seems to forget the world had already entered an industrial recession before the word coronavirus was ever mentioned. Of course, the de-industrialization of the US means only about 16% of the SP500 includes the old economy stocks compared to 29% for the TSP I fund countries. But this is not why I have avoided the TSP I fund.

My lack of enthusiasm for the TSP I fund has been due to the measly 8.5% tech weighting. Again, if you want international tech exposure, you will find it in US SP500 index where tech obtains 60-70% of its revenue overseas.

And for the record, 76% of the US stock market capitalization is in the SP500 index (TSP C fund) which means the other 24% is in the TSP S fund. I thought it may have shifted, but it seems the broader SP500 is being cannibalized for the the mega cap value appreciation. So you still need to hold 3 parts C fund and 1 part S fund to obtain the perfect US diversified fund allocation.

TSP F and G funds

Interest rates are being suppressed again driving the G fund’s interest rate. It has dropped to 0.7% annualized the last two months. Thanks Fed!

This means ALL low-risk bond fund yields are dropping and at the end of last month the TSP F fund was down to 1.22% SEC yield or 1.03% yield to maturity thanks to the extra risk it carries.

Risk? What’s risk?

Well, 70% of the TSP F fund’s holdings are in Treasuries or some sort of gov’t backed mortgage pass-through security with a AAA rating. So everyone assumes the gov’t will cover all the missed mortgage payments.

It is the other 30% of its holdings that are interesting in that half of them are rated one notch above junk status (BBB). And this is before the virus downgrades really kick in. Or maybe they will go straight to default in bankruptcy. If those AAA rated Mortgage Backed Securities in the last crisis could go straight to defaults, why wouldn’t BBB corporate bonds.

So default risk is real within the F fund and why I shy away from it.

That and a higher cost-of-living is now US monetary policy. Otherwise called inflation.

Real US interest rates today are negative after accounting for inflation… and they want MORE inflation. The word is financial repression. It’s here and going to get a lot worse. Don’t get me going on this one.

If any of this in news to you, make sure you have read my free guide on TSP funds and Allocations.

Invest safe, invest smart.

Michael Bond

TSP Smart & Vanguard Smart Investor serves serious and reluctant investors