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Speaker 1: Welcome to Trillance. I'm Joel Webber and I'm Eric Beltunas Eric.

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Speaker 1: The past week has been an interesting one, to say

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Speaker 1: the least in the markets. Right there was a Job's

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Speaker 1: report that came out on Friday, a new FED share

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Speaker 1: started on Monday, and then we saw some red, a

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Speaker 1: lot of red, and it kind of rebounded the following day.

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Speaker 1: But there's a lot of turbulence in the market right now,

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Speaker 1: and a lot of investors, especially if you're new to investing,

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Speaker 1: are seeing red in a way that they've never seen

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Speaker 1: before because we've we've been in this epic bowl market

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Speaker 1: for for almost a decade now. Yeah, it started to

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Speaker 1: seem like utopia, like you're just especially with the FED

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Speaker 1: and how they kind of had the markets back for

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Speaker 1: a while. Then Trump won. That was another catalyst. Just

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Speaker 1: been this nice perform Yeah, yeah, there's always some reason

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Speaker 1: to buy right and now we've gotten some shakiness. And

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Speaker 1: for me, it was very unfortunate because I am in

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Speaker 1: Philly on Sunday night the Eagles win. I didn't get

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Speaker 1: to bed until three in the morning on Sunday, and

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Speaker 1: I took Monday off to sort of just relish the

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Speaker 1: Eagles victory and I get start getting emails about some

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Speaker 1: of these volatility tf So around three o'clock I kind

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Speaker 1: of was woken from that Eagles dream and into reality

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Speaker 1: and spent the last basically forty eight hours dealing with

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Speaker 1: a lot of issues around to sell off and volatility

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Speaker 1: products and what have you, which is is what we're

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Speaker 1: going to dedicate this whole episode too this week, because

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Speaker 1: we've talked a lot about e t f s, but

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Speaker 1: they have some cousins that are called e t n s,

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Speaker 1: and these all fit under something called an e t P,

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Speaker 1: which are exchange traded products. E t N stands for

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Speaker 1: exchange traded notes, and ETFs are exchange traded funds. Those

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Speaker 1: three things are very different things. Yeah. Look, I mean

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Speaker 1: they went out and basically wrapped up everything you could

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Speaker 1: possibly think of into an e t F or an

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Speaker 1: e t N. We call that e TPS. Imagine a zoo, right,

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Speaker 1: There's different categories, and there's there's some stuff in there

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Speaker 1: that's highly exotic, you know, the reptile area kingdom. Yeah, yeah,

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Speaker 1: that area you can bite, you know. And I think

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Speaker 1: there's some that happens every couple of years. You see

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Speaker 1: investors who might have gotten a little too um naive.

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Speaker 1: They went from the petting zoo to the reptile section, right, yes, exactly,

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Speaker 1: straight from petting the sheep into playing with the python.

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Speaker 1: We also have joining us your colleague James Seffert, who's

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Speaker 1: an E t F Associate analyst with Bloomberg Intelligence, and

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Speaker 1: we're gonna talk about something I'm really excited to talk

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Speaker 1: about because brand new. You guys just kicked it off.

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Speaker 1: It's like available now on the Bloomberg terminal. It's hot,

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Speaker 1: it's hot. The e t F stop flight system. We

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Speaker 1: can say we dropped it, right, we dropped Okay, we

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Speaker 1: dropped this week on Trilliance, the e t F stop

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Speaker 1: flight systems to save you from yourself. Okay, Eric et

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Speaker 1: F stop light system, what is the genesis of that? Right? So,

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Speaker 1: E t F s are a wild it's just a

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Speaker 1: huge spectrum of products. And over the years I've been

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Speaker 1: finding that if you talk to like a financial advisor

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Speaker 1: network we call them wire houses where they have a

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Speaker 1: large network of advisors, I found they'll put E t

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Speaker 1: F into two categories. Either they're on the approved list

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Speaker 1: where they're not right, and the media there tends to

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Speaker 1: be they're safe or they're dangerous. But to me, there's

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Speaker 1: much more nuanced than that. And the other problem is

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Speaker 1: what's dangerous to one person might be god send to another.

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Speaker 1: You know, there could be a product that's triple leverage

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Speaker 1: junior gold miners. Now I don't know what you just said,

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Speaker 1: but triple leverage gold miners, okay, Just know you could

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Speaker 1: lose or make a lot very quickly. These are products

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Speaker 1: that I call trading tools, and for certain investors they're great.

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Speaker 1: These are like power tools, and for other investors they

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Speaker 1: would be horrible. Right, But they're all kind of put

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Speaker 1: into this big area we call e t F and

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Speaker 1: some aren't even technically e t S. Will get to

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Speaker 1: that in a minute, But arguably I thought movie ratings

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Speaker 1: would be useful for e t F s. You did

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Speaker 1: in your book, right, and I wrote this in my book.

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Speaker 1: You know there's like five ratings GPG, PG thirteen, r A,

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Speaker 1: n C seventeen. Right, Because look, at the end of

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Speaker 1: the day, just because children exist doesn't mean people shouldn't

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Speaker 1: be allowed to see a Quentin Tarantino movie. Right. We

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Speaker 1: want him to make his movies, but we don't want

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Speaker 1: like my I don't want my son to see The

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Speaker 1: Hateful Eight. Not until he's at least ten years old.

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Speaker 1: He's like nine right now. Right, Well, my dad let

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Speaker 1: me watch The Extorcists when I was eleven. I'm still

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Speaker 1: recovering that anyway. Look, movie ratings are great because the

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Speaker 1: other problem with rating systems out there, for e. T.

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Speaker 1: F is they might tell you by cell hold right

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Speaker 1: whether they think the underlyings can go up or down.

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Speaker 1: We don't do that. It be I. There's also rating

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Speaker 1: systems like from that are targeting advisors and they'll throw

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Speaker 1: all the crazy stuff out the window. They won't even

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Speaker 1: rate them. They're like they don't exist. They're awful. But

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Speaker 1: at Bloomberg, you know our terminal users are sophisticated, so

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Speaker 1: we wanted to assist them. That could be used in

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Speaker 1: regardless of who the investor is or what their goal,

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Speaker 1: whether it's a small hedge fund, my grandma or an

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Speaker 1: advisor in Oklahoma. Telling you what the rating is gives

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Speaker 1: you advanced information to know the level of nasty surprise

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Speaker 1: that could be within the product. This is a helpful

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Speaker 1: way to avoid having a bad experience. So again, it's

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Speaker 1: like movie ratings. That way, you know what's appropriate to

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Speaker 1: take your kid to so James. The thing here is

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Speaker 1: that you couldn't use movie ratings, right, Yeah, that's that's copyrighted.

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Speaker 1: So we had to come up with something else. So

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Speaker 1: we came up with a stoplight, green, yellow, red, pretty simple.

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Speaker 1: McDonald's simple and Eric's world. It's not as exciting as saying, hey,

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Speaker 1: this et F rated are that's pretty cool, but it

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Speaker 1: tells you advanced information about what you should be doing

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Speaker 1: or what to be thinking about. Okay, so we've also

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Speaker 1: said something called exchange traded notes, and we need to

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Speaker 1: talk about that because an exchange traded note, or an

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Speaker 1: e t N is not the same thing as an

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Speaker 1: exchange traded fund. So what is an e t N.

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Speaker 1: It's an unsecured debt obligation. And really they probably shouldn't

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Speaker 1: be in the whole e t F universe, but they

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Speaker 1: kind of got grandfathered in about twelve fifteen years ago.

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Speaker 1: They were originally launched to go out and track areas

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Speaker 1: that e t s couldn't like, for example, India fifteen

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Speaker 1: years ago, you couldn't get in there as a foreign investor,

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Speaker 1: so an e t N could say, okay, we'll track

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Speaker 1: an India index. But it's a note. Just know that

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Speaker 1: that's what we're doing. You don't know what we're investing in,

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Speaker 1: so they'll just it's sort of like saying, just trust this.

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Speaker 1: And so that's why they don't report holdings, because you

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Speaker 1: don't exactly know what they're doing. Largely they do invest

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Speaker 1: in the underlying to hedge themselves, but that's ultimately what

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Speaker 1: it was designed for at the beginning. Now, over time,

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Speaker 1: all those things have opened up, and e t f

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Speaker 1: s track them, and most people would rather have the

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Speaker 1: e t F which physically holds what it says it holds.

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Speaker 1: But e t n s have hung around for one

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Speaker 1: big reason. They're essentially a tax loophole. So in the

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Speaker 1: cases of like futures, E t F to tract futures

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Speaker 1: get taxed uh in an unfortunate way. You get a

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Speaker 1: K one because it's like your tax like you hold futures,

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Speaker 1: whereas an e t N they don't hold it, so

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Speaker 1: their tax like shares of Microsoft. So people who don't

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Speaker 1: want to deal with the sort of fussy taxation will

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Speaker 1: use the e t N and stomach the fact that

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Speaker 1: it's a note and comes with credit risks. So if

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Speaker 1: the issue of an e t n like Barclays has some.

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Speaker 1: If they go back up, you could lose all your money,

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Speaker 1: which happened with Lehman. Actually, yeah, Lehman had a couple

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Speaker 1: of bear Stearns had one, and that you know, the

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Speaker 1: bedrock of the e t F is the fact that

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Speaker 1: it's built on the forty Act, yes, right, which is

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Speaker 1: what's made it, you know, be this stable thing for

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Speaker 1: as long as it's been around. E tns do not

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Speaker 1: have that, right, they're not built on that forty Acts.

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Speaker 1: So they're basically unregulated in the same way, right, they're

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Speaker 1: they're regulated to a degree, but yeah, they're under the Acts.

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Speaker 1: So they're still regulated, just not to the scrutiny that

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Speaker 1: ETFs are. And they're in some areas that are really interesting.

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Speaker 1: And one of those areas is volatility. And there's been

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Speaker 1: a dearth of volatility of late in the markets, right,

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Speaker 1: and so a lot of people piled into a certain

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Speaker 1: kind of trade. And I'll let you pick it up here.

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Speaker 1: What was that trade? So this was a trade that

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Speaker 1: you short vix futures and vixes volatility. Yeah, fix is

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Speaker 1: basically and vix vix. The vixen nets took a step

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Speaker 1: back the VIX index is tracking the volatile on options

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Speaker 1: on the SPI. In other words, if there's volatili on options,

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Speaker 1: it means people are looking to buy insurance on their portfolio.

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Speaker 1: That's what you do with puts. So if that starts

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Speaker 1: going up, it means people are nervous. Right now. They

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Speaker 1: have futures tracking the VIX, which you can invest in.

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Speaker 1: The futures market is what the e T s hold.

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Speaker 1: Most of them go long, which is they hold the

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Speaker 1: futures and like just like the oil et F holds

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Speaker 1: oil futures, but a new category came out that shorts them.

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Speaker 1: Now what this does is it sort of puts you

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Speaker 1: in the position as being like a hurricane insurance company.

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Speaker 1: You're selling risks. So as long as there's no problems,

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Speaker 1: you collect this nice premium. I mean, it's really nice.

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Speaker 1: That thing went up the inverse vix E T N

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Speaker 1: when about in the last two years. That's more it's

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Speaker 1: more like stepping up. I mean, that's some serious They

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Speaker 1: could equated to picking up nickels in front of a

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Speaker 1: steam roller, but those are like five dollar bills. And yes,

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Speaker 1: a hurricane from hell came and basically it lost nine

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Speaker 1: in a day so because of this low ball environment,

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Speaker 1: Normally it'd have more hiccups along the way and you

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Speaker 1: wouldn't see that level of event. But there's been such

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Speaker 1: this placidness over the last couple of years that when

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Speaker 1: it hit Man, it made up for lost time. And

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Speaker 1: actually Bloomberg News has done something really interesting reporting around

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Speaker 1: this of volatility as an you know, volatility inc. Is

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Speaker 1: the idea, right, there's so much money wrapped up in

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Speaker 1: volatility now that it's almost become its own asset class. Yeah,

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Speaker 1: this is part of the reason I think this stoplight

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Speaker 1: system is timely, because some of these products are useful

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Speaker 1: for people who know what they're doing. Say you're a

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Speaker 1: small hedge fund, you don't have access to some big

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Speaker 1: prime broker, all right, you know how to trade these things,

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Speaker 1: go for it. The problem is they're not labeled, and

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Speaker 1: so if you're a retail investor, you may not understand

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Speaker 1: the inner workings of Vick's futures. So big debate now

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Speaker 1: is whether it just banned these things or as we're proposing,

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Speaker 1: label them because there are people who actually might still

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Speaker 1: be able to use them. They're just not your grandmother. Yeah,

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Speaker 1: And and the e T F S did what they

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Speaker 1: were supposed to do. Vick's futures rose that day, so

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Speaker 1: you got the inverse of that. It's not like they

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Speaker 1: failed as a product, they just what they held just

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Speaker 1: kind of went to hell. Okay, so we had this

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Speaker 1: big sell off and you guys have this new stop

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Speaker 1: light system. Let's talk about one of the E t

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Speaker 1: N s the inverse vix x I V. I'm looking

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Speaker 1: here at your stop light system. It's got a red

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Speaker 1: light and seven points. James. That sounds bad. Yeah, yeah,

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Speaker 1: that is. That is bad. So the highest we have

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Speaker 1: on our system is is a ten. So seven is

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Speaker 1: pretty high. Up is anything at ten? Yeah, we have one.

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Speaker 1: We have one thing that's attend on our system that

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Speaker 1: it's actually another e t N that's three times leveraged

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Speaker 1: on oil crude oil and it's actually listed OTC. It

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Speaker 1: has a lot of tons of different issues surrounding it.

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Speaker 1: So yeah, this would be like almost beyond NC seventeen. Yeah,

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Speaker 1: I mean this would be almost like banned by the government. Yeah,

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Speaker 1: it's like times square or yeah, when it was fun.

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Speaker 1: Let's walk through the rating system so we get a

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Speaker 1: better sense of why something could be a seven out

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Speaker 1: of ten or a ten out of ten or maybe

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Speaker 1: like a zero out of ten? Does that exist? Zero

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Speaker 1: out of tens exist? There's a lot of the market

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Speaker 1: zero at tends most of vanguards funds or zero out

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Speaker 1: of ten. That's like the G category. That's like it's

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Speaker 1: safe for Grandma to just go to town with not

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Speaker 1: That's not to say the E t F will always

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Speaker 1: go up again. It's just to say there's nothing odd

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Speaker 1: that's gonna make you go, oh, I didn't know that

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Speaker 1: would happen. The system technically could go higher than ten.

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Speaker 1: We just don't have any that we rate that hit

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Speaker 1: that number. It's like mind blowing. I mean, look the

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Speaker 1: smp F, t fs uh, the aggregate bond ETFs, all

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Speaker 1: the stuff that generally is used as building blocks for

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Speaker 1: portfolio is all green. Zero All systems go have fun.

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Speaker 1: The green category likely makes up about t f sts.

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Speaker 1: And at what point do you get a yellow light

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Speaker 1: or a red light? When you get one point in

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Speaker 1: our system or one in fraction, whatever you want to

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Speaker 1: call it, and then to get to a red light

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Speaker 1: you need three points or or infraction from there, YEA.

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Speaker 1: So yellow light is sort of like PGPG thirteen area

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Speaker 1: in terms of violations, and you know, look, we don't

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Speaker 1: just look at like whether it holds leverage or futures.

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Speaker 1: There's some legit things on here that I think are

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Speaker 1: also eye opening about due diligence on et F. So

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Speaker 1: let's talk about them. Alternative tax treatment. So that's the

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Speaker 1: first one in the list, So that basically looks at

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Speaker 1: anything that has an alternative tax. You invest in futures,

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Speaker 1: you have to deal with what's called a K one,

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Speaker 1: which can be complicated more paperwork that a lot of

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Speaker 1: people don't want to deal with. Um. The other thing

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Speaker 1: is something like gold, which is taxed as a collectible,

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Speaker 1: which many people don't realize. To invest in a gold ETF,

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Speaker 1: you're not actually going to be taxed in the same

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Speaker 1: way that you would investing in a normal equity E.

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Speaker 1: T F, G L D is a great example because

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Speaker 1: other other than that tax issue, it's completely fine. It

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Speaker 1: holds the gold, it's does a great job tracking, no problem.

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Speaker 1: But if you do sell it, you your taxes. If

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Speaker 1: you held like one of those gold plates from you

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Speaker 1: know the commercial during Fox News or whatever, you know

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Speaker 1: what I mean, where you're actually holding a collectible that

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Speaker 1: is a different taxation system and I've heard some investors

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Speaker 1: are a little mildly surprised by that green light yellow

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Speaker 1: yellow light alternative waiting scheme. So this one is just

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Speaker 1: saying that the ETF is waiting its underlying assets by

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Speaker 1: something other than market cap. So market cap meaning you're

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Speaker 1: it's just a broad investible index like the SMP five hundred,

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Speaker 1: But you can get equal weight SMP five hundred, which

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Speaker 1: will give you more volatility because it's going to give

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Speaker 1: higher weighting to those smaller cap funds are smaller cap act.

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Speaker 1: One thing that would fit in this category then would

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Speaker 1: be smart beta e t f s, which had become

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Speaker 1: really popular lately, and we haven't really talked about them yet,

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Speaker 1: and we will talk about them more. But what is that.

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Speaker 1: It's just a fantastic buzzword. But really all it is

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Speaker 1: is applying to anything that isn't market cap weighted. So

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Speaker 1: if you have the SMP five hundred apples at the top, right,

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Speaker 1: and then exon and down you go, the biggest companies

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Speaker 1: get the most waiting. Smart Batas says, let's do something different.

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Speaker 1: Let's equal weight those stocks, give the smaller ones more voice.

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Speaker 1: Let's wait them by their fundamentals. Let's look at stocks

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Speaker 1: with lower p s. Let's wait them by the momentum.

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Speaker 1: You know, there's all different ways you can wait them.

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Speaker 1: So it's a twist on the market cap weighted index,

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Speaker 1: but in reality it's actually taking active strategies that have

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Speaker 1: worked for many years and converting them into a rules

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Speaker 1: based index. So smart BATA sort of fills that void

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Speaker 1: between discretionary active where you just do what you want

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Speaker 1: and pure passive market cap weighted. We want people to

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Speaker 1: know there's something in there that you should probably just

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Speaker 1: look at, and that is all smart bait against an

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Speaker 1: immediate yellow. Yeah. The other thing to note is that

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Speaker 1: none of this nuts is necessarily saying this is a

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Speaker 1: bad e t F or this is a bad situation.

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Speaker 1: This is just something that to make people aware of

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Speaker 1: what's going on. Here's a great example XOP, which is

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Speaker 1: the Oil Producers et F. It's equal weighted and it

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Speaker 1: has two thirds mid and small caps. It's triple the

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Speaker 1: volatility right of x l E, which is the Spider

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Speaker 1: Energy et F, which you think those are kind of similar,

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Speaker 1: but XLS market cap weighted mostly large caps. This one

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Speaker 1: is equal weighted and it's a smaller area of the

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Speaker 1: oil energy of the energy area. And that is a

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Speaker 1: lot of extra vol right there. You can go up

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Speaker 1: and down pretty fast an x OP. That's why it

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Speaker 1: gets a yellow. Next factor that you guys looked at

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Speaker 1: potential NAV tracking issues, So how do how do you

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Speaker 1: guys factor this in? So? So NAV is the just

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Speaker 1: basically the underlying value of what the fund is actually holding.

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Speaker 1: So an E t F has a NAV and the price.

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Speaker 1: Um so when you buy your buying at the price,

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Speaker 1: you're not buying at the NAV. So what you expect

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Speaker 1: in a passively managed e t F. For really, any

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Speaker 1: E t F you expect to be buying at a

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Speaker 1: value that where the price is equal to the NAV.

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Speaker 1: So any e t F where there's some discrepancy between

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Speaker 1: the price and the NAV over extended periods of time,

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Speaker 1: that's unexpected losses. So even if you're talking only a

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Speaker 1: couple of basis points or percentages of percentage points, it

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Speaker 1: can really affect your return. And what does NAV stand for?

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Speaker 1: Net asset value? It's basically what you know the Kelly

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Speaker 1: blue Book. Yeah, it's what the value of those stocks

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Speaker 1: are worth. So everybody wants to buy something close to

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Speaker 1: that Kelly blue Book value, right or until you're are

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Speaker 1: for it. Yeah, there you go. That is sort of

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Speaker 1: what the NAV is is a metaphor, but ultimately you

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Speaker 1: want to be close to it. And that's what people

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Speaker 1: love about ETS is it the price that you that

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Speaker 1: it trades at is close to the NAV because if

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Speaker 1: it gets out of whack, people can come in and

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Speaker 1: arbitrage the difference. That's what you don't have in closed

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Speaker 1: end funds, and people don't like those for that reason.

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Speaker 1: The other part of this is think about what an

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Speaker 1: e t F sole mission in life is is the

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Speaker 1: track and index. So we're also gonna dig it. If

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Speaker 1: it doesn't do a good job at that, we want

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Speaker 1: to let you know because arguably the distance between the

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Speaker 1: index return and the ETS return is really the total cost.

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Speaker 1: The expense ratio comes out of that, and then sometimes

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Speaker 1: they do a little better of the expense ratio, sometimes

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Speaker 1: they do worse. We're trying to capture that to make

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Speaker 1: sure you know there's actually some extra tracking costs in

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Speaker 1: here that you're going to have to pay for it.

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Speaker 1: Next fund is actively managed because there are actively managed

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Speaker 1: t yees, So especially on the fixed income side, there's

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Speaker 1: a there's a lot, there's a significant assets on that

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Speaker 1: are actively managed, meaning there's there's a fund manager actually

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Speaker 1: going in there and picking specific securities. It's growing in

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Speaker 1: popularity on the equity side and basically all over ets,

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Speaker 1: but it's still a very small aspect of the e

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Speaker 1: t F market. And these are big name bond guys, right, Yeah,

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Speaker 1: You've got people like Jeffrey Gunlock, and then you have

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Speaker 1: people double Line exactly and Pimco. There's a lot of active,

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Speaker 1: big bond asset managers that have e t s. It's

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Speaker 1: not bad to be active in an e t F. However,

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Speaker 1: sometimes people assume it's all passive. Again, it's just to

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Speaker 1: alert you that this is a this is an e

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Speaker 1: t F where the manager is doing whatever they want

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Speaker 1: and you just should know that. Right. Hidden fees, So

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Speaker 1: this one gets a little complicated. There's a lot of

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Speaker 1: different ways that e t f s can have hidden fees, right. So, Um,

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Speaker 1: one of the big things that people have been talking

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Speaker 1: about are these interest rate hedge gtfs. So what they're

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Speaker 1: doing is they're trying to hedge out the risk from

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Speaker 1: rising interest rates. Um, But there's costs in shorting that

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Speaker 1: You're you're paying the cost in whatever the interest rate

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Speaker 1: is to short the interest rate. So look, there's a

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Speaker 1: lot of ets that I call package trades. They go

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Speaker 1: longness and short that right and there are which is

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Speaker 1: kind of phenomenal when you think about that yellow. But

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Speaker 1: arguably the reason those get yellow is because there have

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Speaker 1: hidden costs the shorting. When you short, you gotta pay,

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Speaker 1: You gotta pay for that. So what's the degree of that.

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Speaker 1: We want to let you know that that's what it is.

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Speaker 1: There's also hidden fees, and like um funds that own

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Speaker 1: other funds, there's acquired fund fees that that aren't reported

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Speaker 1: all the times, like the really superfine print at the body. Yes,

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Speaker 1: and there's mlpts which have these incredibly awful taxation issues.

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Speaker 1: We throw all that in into hidden fees that aren't

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Speaker 1: necessarily reported in the expense ratio. By the way, how

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Speaker 1: many e t f s have you guys put through

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Speaker 1: this gauntlet? So basically when we start, we we look

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Speaker 1: for e t f that have at least one year

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Speaker 1: of history, so we can say that they've been trading

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Speaker 1: or alive for one year and they have at least

390
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Speaker 1: fifty million dollars in assets right now, we're just overtfs

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Speaker 1: are classified. Those are that's going to be the assets

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Speaker 1: and volume. However, we might expand it. If we get

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Speaker 1: some traction on this, we may just rate them when

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Speaker 1: they come out like a movie. Um, and you know

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Speaker 1: that way people know what they're getting into right away.

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Speaker 1: We wouldn't be able to some of these won't be

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00:19:04,119 --> 00:19:07,280
Speaker 1: will be moot because you need uh you know, history.

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Speaker 1: But some of these you could write right away. Credit risk.

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Speaker 1: So this is directly related to what we talked about

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Speaker 1: before with exchange traded notes. Exchange traded notes have a

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Speaker 1: credit risk, their unsecured dead obligations issued by big banks,

402
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Speaker 1: credit suee ubs, uh, you name it. There's another one,

403
00:19:23,600 --> 00:19:26,000
Speaker 1: less liquid holdings. Yeah. So there was debate on what

404
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Speaker 1: we wanted to call this because we didn't really want

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Speaker 1: to call it a liquid holdings because if the holdings

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Speaker 1: were truly a liquid then there really wouldn't be an

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00:19:31,560 --> 00:19:34,600
Speaker 1: e t F. But um, there are plenty of assets

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Speaker 1: that have been wrapped in the e t F rapper

409
00:19:36,640 --> 00:19:39,840
Speaker 1: that are considered less liquid. So you've got high yield

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Speaker 1: dead instruments such as bank loans or high yield corporate

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Speaker 1: bonds which don't really trade that off in E t

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Speaker 1: F trades multiples of times more per day than the

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Speaker 1: underlying assets. You also have things like frontier markets like

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Speaker 1: Vietnam Um where the equity doesn't trade nearly as much

415
00:19:55,080 --> 00:19:57,720
Speaker 1: as something like a U S stock. The high yield

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00:19:57,760 --> 00:19:59,680
Speaker 1: bond area is really what we wanted to capture this

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Speaker 1: because I've always said H y G and J and K,

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Speaker 1: the two junk bond E t F r PG, they

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Speaker 1: hold what they hold. I mean, they're along the bonds.

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Speaker 1: There's nothing, there's no derivatives, nothing weird. But let's just

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Speaker 1: face it, they're holding something that doesn't trade a lot

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Speaker 1: only about I don't know, less than half the bonds

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Speaker 1: trade every day inside H y G. It's traded over

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Speaker 1: the counter. And there's a lot of people concerned about this,

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Speaker 1: so we want to make sure that we're sensitive to

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Speaker 1: that concern. But to me, they're not, like, don't ever

427
00:20:25,520 --> 00:20:28,720
Speaker 1: use them. But this is perfect yellow light PG. Thirteen area.

428
00:20:28,960 --> 00:20:31,320
Speaker 1: Good advice is always to be if if you're looking

429
00:20:31,359 --> 00:20:33,200
Speaker 1: at an E t F and you wouldn't invest in

430
00:20:33,280 --> 00:20:35,760
Speaker 1: the underlying asset or what it's tracking, you probably shouldn't

431
00:20:35,800 --> 00:20:37,280
Speaker 1: be investing in the t F because it's just an

432
00:20:37,280 --> 00:20:40,200
Speaker 1: instrument to get access to those markets that probably should

433
00:20:40,200 --> 00:20:42,560
Speaker 1: be at the top of everybody's you know et F

434
00:20:42,640 --> 00:20:45,680
Speaker 1: due diligence guide. That is so true. You're outsourcing the

435
00:20:45,800 --> 00:20:48,520
Speaker 1: work of going to do it yourself, but doesn't change

436
00:20:48,560 --> 00:20:53,239
Speaker 1: the underlying especially when you add something like leverage. Right,

437
00:20:53,560 --> 00:20:56,560
Speaker 1: what's leverage? So leverage in the e t F space

438
00:20:56,760 --> 00:21:00,920
Speaker 1: is primarily done through swaps and derivatives and really complicated instruments.

439
00:21:01,000 --> 00:21:02,719
Speaker 1: But what they'll do is they'll do the same thing

440
00:21:02,840 --> 00:21:04,879
Speaker 1: as most ETFs, will try to track an index, but

441
00:21:05,400 --> 00:21:07,800
Speaker 1: they're daily leverage, right, So it's gonna look at the

442
00:21:07,840 --> 00:21:09,800
Speaker 1: e t F or the index. So, for example, the

443
00:21:09,920 --> 00:21:12,359
Speaker 1: SMP five hundred, if the SMP five hundred goes up

444
00:21:12,920 --> 00:21:16,240
Speaker 1: five and this is a three three x levered e

445
00:21:16,400 --> 00:21:19,239
Speaker 1: t F that day, that e t F should go up.

446
00:21:20,560 --> 00:21:23,520
Speaker 1: And they're also inverse leverage, so if it's three times inverse,

447
00:21:23,680 --> 00:21:26,760
Speaker 1: it will go down. So not only do you have

448
00:21:26,960 --> 00:21:29,800
Speaker 1: this wildly volatile area, but these are swap agreements, so

449
00:21:29,880 --> 00:21:33,120
Speaker 1: there's some counterparty risk there. This is a company going

450
00:21:33,200 --> 00:21:35,680
Speaker 1: to different banks sort of like the guys in the

451
00:21:35,720 --> 00:21:38,320
Speaker 1: Big short to get the subprime mortgage, and they're saying,

452
00:21:38,520 --> 00:21:40,600
Speaker 1: let's just do a swap agreement on the side. The

453
00:21:40,640 --> 00:21:42,720
Speaker 1: good news is they use several so if one bank

454
00:21:42,720 --> 00:21:44,479
Speaker 1: were to blow up, there's other ones there and they

455
00:21:44,760 --> 00:21:47,480
Speaker 1: reset them all the time, so they're always mixing it up.

456
00:21:48,080 --> 00:21:50,439
Speaker 1: That said, the real issue though, is that you can

457
00:21:50,480 --> 00:21:52,080
Speaker 1: go up and down a lot in today, Like you know,

458
00:21:52,160 --> 00:21:54,639
Speaker 1: we look at something like a triple leveraged gold miners

459
00:21:54,680 --> 00:21:56,320
Speaker 1: back to that one that can go up fifteen percent

460
00:21:56,359 --> 00:21:59,720
Speaker 1: in a day, we're down, And there's been evidence that

461
00:21:59,840 --> 00:22:01,920
Speaker 1: like on tam Mary trade. You know, there's some individual

462
00:22:01,920 --> 00:22:04,760
Speaker 1: investors who use these things. This should be a total

463
00:22:04,840 --> 00:22:07,719
Speaker 1: red light simply because of the fact of the leverage.

464
00:22:07,760 --> 00:22:09,720
Speaker 1: But then on top of that, when you reset the

465
00:22:09,800 --> 00:22:13,080
Speaker 1: leverage every day, if there's volatility, you're resetting all over

466
00:22:13,160 --> 00:22:16,159
Speaker 1: the place, and so over the long term, that volatility

467
00:22:16,200 --> 00:22:18,160
Speaker 1: drag will wipe you out. So even if the index

468
00:22:18,200 --> 00:22:20,920
Speaker 1: had gone up in that year that volatility, you could

469
00:22:20,960 --> 00:22:23,320
Speaker 1: be down if you bought and hold it. So leverage

470
00:22:23,320 --> 00:22:28,080
Speaker 1: GTF should be treated like hot potatoes. They traded power tools, Yeah,

471
00:22:28,119 --> 00:22:31,920
Speaker 1: you could lose a hand um dangerously. Low volume was

472
00:22:32,000 --> 00:22:34,600
Speaker 1: one that we can talk about if it's got low

473
00:22:34,920 --> 00:22:38,240
Speaker 1: low volume things not trading. So I I feel bad

474
00:22:38,280 --> 00:22:41,600
Speaker 1: because there's this volume addiction. If it trades a lot,

475
00:22:41,680 --> 00:22:43,159
Speaker 1: people just trade it more and they think that's what

476
00:22:43,200 --> 00:22:45,440
Speaker 1: they should do. But you have this opposite problem where

477
00:22:45,480 --> 00:22:47,560
Speaker 1: like the lesser liquid ones have such a hard problem

478
00:22:47,640 --> 00:22:50,080
Speaker 1: getting like an audience. It's like a party. Nobody's at

479
00:22:50,840 --> 00:22:56,680
Speaker 1: um those you could I'm just picturing your whole high

480
00:22:56,680 --> 00:23:02,200
Speaker 1: school years right now. Hi guys, Okay, sorry that was

481
00:23:02,560 --> 00:23:04,520
Speaker 1: too hardy of a laugh. I'd like you more than that.

482
00:23:04,680 --> 00:23:08,800
Speaker 1: Um listen. Dangerously low volume. Isn't that you can't trade them?

483
00:23:09,400 --> 00:23:12,120
Speaker 1: Is that you probably should use a limit order. You should.

484
00:23:12,119 --> 00:23:14,120
Speaker 1: You don't just put a market order in because when

485
00:23:14,119 --> 00:23:16,200
Speaker 1: they're low volume, a lot of times the spread on

486
00:23:16,280 --> 00:23:18,720
Speaker 1: the screen will be a little wider, meaning what somebody

487
00:23:18,720 --> 00:23:20,880
Speaker 1: will pay versus what they'll sell. That's the spread that's

488
00:23:20,880 --> 00:23:22,600
Speaker 1: sort of like your toll going in and out of it.

489
00:23:23,080 --> 00:23:24,640
Speaker 1: So you can put a limit order in the middle

490
00:23:24,680 --> 00:23:27,040
Speaker 1: of that though, and actually get a price. They put

491
00:23:27,119 --> 00:23:29,160
Speaker 1: the wide spreads on those lesser liquid ones. So that's

492
00:23:29,240 --> 00:23:31,480
Speaker 1: really the warning there. But I would you know, open

493
00:23:31,600 --> 00:23:33,159
Speaker 1: up the door to people, because if you just go

494
00:23:33,320 --> 00:23:36,240
Speaker 1: to the highly liquid et s, you're essentially trading stuff

495
00:23:36,280 --> 00:23:38,520
Speaker 1: that came out in the nineties, might not be the cheapest,

496
00:23:38,720 --> 00:23:40,920
Speaker 1: might not be the best exposure, So you do want

497
00:23:40,960 --> 00:23:43,320
Speaker 1: to maybe look deeper in the toolbox. But if you

498
00:23:43,359 --> 00:23:45,760
Speaker 1: see yellow dangerously low volume, really that should just tell

499
00:23:45,800 --> 00:23:48,119
Speaker 1: you that, Okay, let me just be careful trading it.

500
00:23:48,280 --> 00:23:50,960
Speaker 1: Let me buy using a limit order. And by the way,

501
00:23:51,119 --> 00:23:53,800
Speaker 1: if something has low volume and you're worried about it closing,

502
00:23:53,880 --> 00:23:56,680
Speaker 1: it can close. But with E t F s you

503
00:23:56,760 --> 00:23:58,840
Speaker 1: don't lose all your money. Not E t N you can.

504
00:23:58,920 --> 00:24:01,120
Speaker 1: That's the credit risk. But any TF holds the security,

505
00:24:01,160 --> 00:24:03,960
Speaker 1: so if it closes, it basically just sends a letter saying, look,

506
00:24:04,440 --> 00:24:07,720
Speaker 1: we this product didn't really work right, Like the waste

507
00:24:07,760 --> 00:24:09,760
Speaker 1: management et F for the fishing, how about the fishing

508
00:24:09,800 --> 00:24:12,800
Speaker 1: ETF holds a bunch of Japanese and Norwegian stocks didn't

509
00:24:12,800 --> 00:24:14,800
Speaker 1: make it, So on the closure date they sell those

510
00:24:14,800 --> 00:24:16,600
Speaker 1: stocks and give you a check for your n a V.

511
00:24:17,080 --> 00:24:18,639
Speaker 1: We should add that most of the ones that got

512
00:24:18,720 --> 00:24:20,680
Speaker 1: dinged with this, we're actually E t N s that

513
00:24:20,920 --> 00:24:23,320
Speaker 1: basically don't trade like less than once a month, So

514
00:24:23,520 --> 00:24:27,240
Speaker 1: we're talking like seriously low volume on the exchanges. Were like, yeah,

515
00:24:27,240 --> 00:24:29,679
Speaker 1: they barely trade at all. How many of those actually

516
00:24:29,720 --> 00:24:32,960
Speaker 1: just end up folding a lot and more should I

517
00:24:33,000 --> 00:24:34,320
Speaker 1: think they should. If if you don't have like a

518
00:24:34,400 --> 00:24:36,760
Speaker 1: trade in your product, like every day at least one trade,

519
00:24:37,040 --> 00:24:39,720
Speaker 1: you should probably just close. I mean that is really

520
00:24:39,800 --> 00:24:42,320
Speaker 1: like ignored. I mean there's even products that are less

521
00:24:42,320 --> 00:24:44,720
Speaker 1: than say ten million dollars trading a day, which many

522
00:24:44,760 --> 00:24:46,680
Speaker 1: of users won't touch. They'll look for at least fifty

523
00:24:46,720 --> 00:24:48,680
Speaker 1: million a day, but that only gets you a hundred

524
00:24:48,680 --> 00:24:50,800
Speaker 1: and sixty ETFs. So then you got to go deeper

525
00:24:50,840 --> 00:24:53,359
Speaker 1: and deeper. But there's probably I don't know four or

526
00:24:54,040 --> 00:24:58,800
Speaker 1: tf that I think we're probably better off just closing. Okay,

527
00:24:58,840 --> 00:25:02,719
Speaker 1: so we've got two more, uh, discount or premium issues

528
00:25:02,800 --> 00:25:04,440
Speaker 1: being one of them. Yes, So we talked about this

529
00:25:04,480 --> 00:25:07,560
Speaker 1: a little bit before with the potential nav tracking errors UM,

530
00:25:07,920 --> 00:25:11,560
Speaker 1: but the discount premium issues take really take into account

531
00:25:11,560 --> 00:25:15,240
Speaker 1: the difference between the NAV and the price. So before

532
00:25:15,280 --> 00:25:17,120
Speaker 1: when we talked about the tracking issues, we were talking

533
00:25:17,119 --> 00:25:20,119
Speaker 1: about performance solely. So over the last year or two

534
00:25:20,200 --> 00:25:23,520
Speaker 1: years or whatever it may be, the index outperformed or

535
00:25:23,640 --> 00:25:28,719
Speaker 1: underperformed the actual e t F. So UM discount premium

536
00:25:28,760 --> 00:25:31,200
Speaker 1: issues just looks at on a given day, say you

537
00:25:31,320 --> 00:25:34,000
Speaker 1: need to sell in a given time period, for example Egypt.

538
00:25:34,160 --> 00:25:37,640
Speaker 1: When Egypt closed down, the market was not trading properly,

539
00:25:37,720 --> 00:25:39,679
Speaker 1: so you didn't know what the actual NAV was. There

540
00:25:39,800 --> 00:25:41,960
Speaker 1: was huge disconnects between the price of the e t

541
00:25:42,160 --> 00:25:44,600
Speaker 1: F and the underlying asset values. These are all things

542
00:25:44,640 --> 00:25:46,119
Speaker 1: that you should be aware of that have happened in

543
00:25:46,160 --> 00:25:49,040
Speaker 1: the past with these ETFs. The discount premium is a

544
00:25:49,480 --> 00:25:52,560
Speaker 1: um It can confuse people. You think discount cheap, premium expensive.

545
00:25:53,480 --> 00:25:55,480
Speaker 1: The word I use as arbitrage band and I know

546
00:25:55,560 --> 00:26:00,399
Speaker 1: that sounds even worse. Basically, basically, how it is it

547
00:26:00,520 --> 00:26:02,840
Speaker 1: before somebody steps in and goes, okay, the price of

548
00:26:02,840 --> 00:26:04,159
Speaker 1: the e t F is drifted away from the NAV

549
00:26:04,280 --> 00:26:06,240
Speaker 1: enough that I'm gonna go by the e t F

550
00:26:06,320 --> 00:26:09,600
Speaker 1: and sell the underlying vice versa. That arbitrageer is only

551
00:26:09,640 --> 00:26:10,920
Speaker 1: going to do it when it's worth it to them.

552
00:26:11,280 --> 00:26:14,239
Speaker 1: So how why does that get before they act? Now,

553
00:26:14,400 --> 00:26:17,240
Speaker 1: it's gonna the more exotic and less liquid the holdings,

554
00:26:17,359 --> 00:26:21,320
Speaker 1: the wider it's gonna get. So the premium discount arguably

555
00:26:21,560 --> 00:26:24,200
Speaker 1: is another cost of access in that market. You're not

556
00:26:24,240 --> 00:26:26,880
Speaker 1: gonna see big premiums discounts on SPY or i VV.

557
00:26:27,240 --> 00:26:29,280
Speaker 1: There's gonna be like a couple of basis points, but

558
00:26:29,400 --> 00:26:32,040
Speaker 1: you will see them on other exotic products. Those will

559
00:26:32,119 --> 00:26:34,960
Speaker 1: definitely go in line with the exotic nous of the holdings.

560
00:26:35,240 --> 00:26:37,520
Speaker 1: So not necessarily bad, it's just something again you need

561
00:26:37,560 --> 00:26:39,679
Speaker 1: to know. And in this case, we we look at

562
00:26:39,720 --> 00:26:41,560
Speaker 1: for two things, right, So we're looking for any time

563
00:26:41,640 --> 00:26:46,440
Speaker 1: there's massive spikes, so we're talking differences between the NAV

564
00:26:46,720 --> 00:26:48,879
Speaker 1: and the price, so that's just to alert you that

565
00:26:48,960 --> 00:26:51,280
Speaker 1: there have been spikes in the past. And then also

566
00:26:51,400 --> 00:26:54,320
Speaker 1: we're looking for an average discount premium over a given

567
00:26:54,400 --> 00:26:57,720
Speaker 1: time period that's relatively high. So over the time period,

568
00:26:57,800 --> 00:27:00,840
Speaker 1: this is never really as close to a NAV as

569
00:27:01,000 --> 00:27:03,320
Speaker 1: say the smp is. And part of that is just

570
00:27:03,440 --> 00:27:06,000
Speaker 1: because of the underlying assets. Like Eric said, if you're

571
00:27:06,040 --> 00:27:09,000
Speaker 1: investing in Japanese equities, uh, they're not trading at the

572
00:27:09,040 --> 00:27:11,520
Speaker 1: same time that US market is trading, so there's a

573
00:27:11,600 --> 00:27:15,639
Speaker 1: little bit less ability to do those arbitrage trading mechanisms. Okay,

574
00:27:15,720 --> 00:27:18,720
Speaker 1: so this last one is like leverage in that it

575
00:27:18,800 --> 00:27:23,520
Speaker 1: can get really thick really quickly. Potential futures, roll costs,

576
00:27:24,359 --> 00:27:27,000
Speaker 1: what's that. Yeah, so this is probably the one that

577
00:27:27,080 --> 00:27:29,440
Speaker 1: I think is the most important because a lot of

578
00:27:29,480 --> 00:27:32,119
Speaker 1: the products that hold futures forget the volatility. I mean

579
00:27:32,160 --> 00:27:34,639
Speaker 1: those sound dangerous. They are dangerous, but like there's an

580
00:27:34,680 --> 00:27:36,800
Speaker 1: et F out there called the United States Oil Fund,

581
00:27:37,520 --> 00:27:39,560
Speaker 1: it sounds pretty innocent. When oil was down a couple

582
00:27:39,560 --> 00:27:41,000
Speaker 1: of years ago, I had friend texting me, how can

583
00:27:41,040 --> 00:27:43,359
Speaker 1: I play the oil rebound? And they were buying USO

584
00:27:44,359 --> 00:27:47,040
Speaker 1: that that that does not really do justice to what

585
00:27:47,119 --> 00:27:49,680
Speaker 1: it does. So when you have to hold oil futures,

586
00:27:50,040 --> 00:27:52,359
Speaker 1: you have to roll them. As the one month gets closer,

587
00:27:52,480 --> 00:27:55,280
Speaker 1: nobody wants oil delivered to their house, So everybody bails

588
00:27:55,280 --> 00:27:57,920
Speaker 1: at that contract and it decays as as as it

589
00:27:57,960 --> 00:28:00,639
Speaker 1: gets closer to when it expires. So then you got

590
00:28:00,760 --> 00:28:02,800
Speaker 1: to sell that one. The e t F has to

591
00:28:02,840 --> 00:28:04,520
Speaker 1: go buy the next one out, which is more expensive.

592
00:28:04,800 --> 00:28:07,240
Speaker 1: When you're selling low and buying high over and over

593
00:28:07,359 --> 00:28:10,000
Speaker 1: and over, something's not gonna work. Yeah, you are corroding

594
00:28:10,040 --> 00:28:13,920
Speaker 1: the returns. So USO will have a we call it

595
00:28:14,040 --> 00:28:18,359
Speaker 1: roll costs of pcent a year. And if it's said

596
00:28:18,760 --> 00:28:22,120
Speaker 1: the United States Oil plus crippling contango roll costs or whatever,

597
00:28:22,240 --> 00:28:24,720
Speaker 1: that would be fine. Maybe wouldn't have to have this system,

598
00:28:24,920 --> 00:28:30,560
Speaker 1: but it doesn't USO, which sounds contain the oil fund. Yeah,

599
00:28:31,320 --> 00:28:33,800
Speaker 1: which you know, bigger meta picture here which we've talked

600
00:28:33,840 --> 00:28:37,040
Speaker 1: about before is that's the ultimate risk with e t

601
00:28:37,200 --> 00:28:41,000
Speaker 1: f s is something can be a wolf in sheep's clothing. Yeah,

602
00:28:41,120 --> 00:28:44,160
Speaker 1: and that is the future's role cost automatic three. We

603
00:28:44,200 --> 00:28:46,000
Speaker 1: don't want anyone to get concerned, you know, to worry

604
00:28:46,000 --> 00:28:48,240
Speaker 1: about this. Plus the taxation. If you hold the ones

605
00:28:48,320 --> 00:28:51,040
Speaker 1: that actually hold futures, you've got different taxation issues. And

606
00:28:51,120 --> 00:28:53,280
Speaker 1: then there's one that leverage on top of that. And

607
00:28:53,320 --> 00:28:55,080
Speaker 1: then some of those are e t n s, So

608
00:28:55,200 --> 00:28:56,840
Speaker 1: those are the ones that actually start adding up and

609
00:28:56,840 --> 00:29:00,680
Speaker 1: get into like eight nine infractions. Not to say that

610
00:29:00,800 --> 00:29:02,440
Speaker 1: some of these e t f s aren't really good

611
00:29:02,440 --> 00:29:05,040
Speaker 1: at what they're doing. For example, if my grandma's investing

612
00:29:05,320 --> 00:29:07,560
Speaker 1: in the markets, she shouldn't be investing in a vix

613
00:29:07,760 --> 00:29:10,120
Speaker 1: e t N. That's as a long term investment. But

614
00:29:10,160 --> 00:29:12,320
Speaker 1: if you're a hedge fund or a trader and you're

615
00:29:12,320 --> 00:29:15,120
Speaker 1: trying to head your volatility, rest of a vix et

616
00:29:15,280 --> 00:29:17,600
Speaker 1: F such as v x X as a really good

617
00:29:17,920 --> 00:29:20,040
Speaker 1: investment for what they're trying to do. And that's what

618
00:29:20,200 --> 00:29:22,200
Speaker 1: the the system is trying to do. It's trying to

619
00:29:22,280 --> 00:29:24,680
Speaker 1: say that this is an alert. You should be aware

620
00:29:24,680 --> 00:29:26,400
Speaker 1: of this um. If you are aware of it and

621
00:29:26,440 --> 00:29:29,720
Speaker 1: you're still okay with it, go ahead. So et F

622
00:29:29,760 --> 00:29:31,760
Speaker 1: stoplight system. Where can I find it? Well, it's on

623
00:29:31,760 --> 00:29:34,479
Speaker 1: the Bloomberg terminal. That's where James and I publish all

624
00:29:34,480 --> 00:29:36,880
Speaker 1: our research. However, not only can you find it there,

625
00:29:36,880 --> 00:29:39,400
Speaker 1: if you email me, I'll send you a copy of it.

626
00:29:39,520 --> 00:29:43,040
Speaker 1: It's ebal tunists at Bloomberg dot net. And we wanted

627
00:29:43,080 --> 00:29:45,000
Speaker 1: to get out there. It's it's on the terminal. We

628
00:29:45,080 --> 00:29:46,800
Speaker 1: write to it. But it's okay that it goes out.

629
00:29:46,880 --> 00:29:49,680
Speaker 1: It's a simple thing, right, Yeah, it's a universal thing.

630
00:29:50,000 --> 00:29:52,520
Speaker 1: We think that there should be an independent body doing this,

631
00:29:52,760 --> 00:29:54,920
Speaker 1: and maybe not the SEC or the issuers. So I

632
00:29:54,960 --> 00:29:56,920
Speaker 1: think that's uh, there's a need for it. And if

633
00:29:56,960 --> 00:29:59,880
Speaker 1: it's not this system, maybe it'll spark somebody else to

634
00:29:59,920 --> 00:30:03,200
Speaker 1: do it, or people will just get int into thinking

635
00:30:03,240 --> 00:30:05,760
Speaker 1: about e t F s in terms of having nuanced

636
00:30:05,840 --> 00:30:08,760
Speaker 1: or five levels of safe and dangerous and not just

637
00:30:09,200 --> 00:30:13,560
Speaker 1: these are good, these are bad, green, yellow, red. James, Eric,

638
00:30:13,960 --> 00:30:18,960
Speaker 1: thanks thanks for listening to New trillions. Until next time,

639
00:30:19,040 --> 00:30:21,600
Speaker 1: you can find us on the Bloomberg Terminal, Bloomberg dot com,

640
00:30:22,120 --> 00:30:24,840
Speaker 1: Apple Podcast, and a bunch of other places. I probably

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Speaker 1: haven't heard that yet. We'd love to hear from you.

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Speaker 1: We're on Twitter, I'm at Joel Weber Show, Eric's at

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Speaker 1: Eric ball Tunes, James is at j S E y

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Speaker 1: f F. Trillions is produced by Magnus Hendrickson with a

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Speaker 1: lift from Tofur four as this week, Francesco Levi is

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Speaker 1: the head of Bloomberg Podcast, but