WEBVTT - This ETF is Rated R 0:00:05.960 --> 0:00:10.559 Welcome to Trillance. I'm Joel Webber and I'm Eric Beltunas Eric. 0:00:10.920 --> 0:00:13.360 The past week has been an interesting one, to say 0:00:13.400 --> 0:00:15.560 the least in the markets. Right there was a Job's 0:00:15.600 --> 0:00:18.680 report that came out on Friday, a new FED share 0:00:19.360 --> 0:00:23.520 started on Monday, and then we saw some red, a 0:00:23.600 --> 0:00:26.759 lot of red, and it kind of rebounded the following day. 0:00:27.240 --> 0:00:30.800 But there's a lot of turbulence in the market right now, 0:00:31.000 --> 0:00:34.080 and a lot of investors, especially if you're new to investing, 0:00:34.080 --> 0:00:36.440 are seeing red in a way that they've never seen 0:00:36.520 --> 0:00:39.000 before because we've we've been in this epic bowl market 0:00:39.159 --> 0:00:41.600 for for almost a decade now. Yeah, it started to 0:00:41.640 --> 0:00:44.720 seem like utopia, like you're just especially with the FED 0:00:44.840 --> 0:00:46.479 and how they kind of had the markets back for 0:00:46.520 --> 0:00:49.040 a while. Then Trump won. That was another catalyst. Just 0:00:49.120 --> 0:00:52.200 been this nice perform Yeah, yeah, there's always some reason 0:00:52.240 --> 0:00:55.240 to buy right and now we've gotten some shakiness. And 0:00:55.360 --> 0:00:58.920 for me, it was very unfortunate because I am in 0:00:58.960 --> 0:01:02.520 Philly on Sunday night the Eagles win. I didn't get 0:01:02.560 --> 0:01:04.520 to bed until three in the morning on Sunday, and 0:01:04.520 --> 0:01:07.320 I took Monday off to sort of just relish the 0:01:07.319 --> 0:01:10.360 Eagles victory and I get start getting emails about some 0:01:10.440 --> 0:01:13.800 of these volatility tf So around three o'clock I kind 0:01:13.800 --> 0:01:17.200 of was woken from that Eagles dream and into reality 0:01:17.240 --> 0:01:20.520 and spent the last basically forty eight hours dealing with 0:01:20.840 --> 0:01:23.560 a lot of issues around to sell off and volatility 0:01:23.560 --> 0:01:26.280 products and what have you, which is is what we're 0:01:26.280 --> 0:01:29.880 going to dedicate this whole episode too this week, because 0:01:30.440 --> 0:01:32.280 we've talked a lot about e t f s, but 0:01:32.400 --> 0:01:36.080 they have some cousins that are called e t n s, 0:01:36.680 --> 0:01:39.080 and these all fit under something called an e t P, 0:01:39.280 --> 0:01:42.760 which are exchange traded products. E t N stands for 0:01:42.880 --> 0:01:47.920 exchange traded notes, and ETFs are exchange traded funds. Those 0:01:48.360 --> 0:01:51.280 three things are very different things. Yeah. Look, I mean 0:01:51.360 --> 0:01:54.600 they went out and basically wrapped up everything you could 0:01:54.600 --> 0:01:56.840 possibly think of into an e t F or an 0:01:56.880 --> 0:02:00.200 e t N. We call that e TPS. Imagine a zoo, right, 0:02:00.240 --> 0:02:03.240 There's different categories, and there's there's some stuff in there 0:02:03.240 --> 0:02:07.120 that's highly exotic, you know, the reptile area kingdom. Yeah, yeah, 0:02:07.400 --> 0:02:09.799 that area you can bite, you know. And I think 0:02:09.840 --> 0:02:12.919 there's some that happens every couple of years. You see 0:02:13.160 --> 0:02:16.120 investors who might have gotten a little too um naive. 0:02:16.200 --> 0:02:19.480 They went from the petting zoo to the reptile section, right, yes, exactly, 0:02:19.600 --> 0:02:22.519 straight from petting the sheep into playing with the python. 0:02:23.960 --> 0:02:27.720 We also have joining us your colleague James Seffert, who's 0:02:27.760 --> 0:02:31.320 an E t F Associate analyst with Bloomberg Intelligence, and 0:02:31.680 --> 0:02:33.520 we're gonna talk about something I'm really excited to talk 0:02:33.520 --> 0:02:36.680 about because brand new. You guys just kicked it off. 0:02:36.800 --> 0:02:39.760 It's like available now on the Bloomberg terminal. It's hot, 0:02:39.960 --> 0:02:43.400 it's hot. The e t F stop flight system. We 0:02:43.440 --> 0:02:45.239 can say we dropped it, right, we dropped Okay, we 0:02:45.360 --> 0:02:50.360 dropped this week on Trilliance, the e t F stop 0:02:50.400 --> 0:02:55.839 flight systems to save you from yourself. Okay, Eric et 0:02:56.000 --> 0:02:59.320 F stop light system, what is the genesis of that? Right? So, 0:03:00.080 --> 0:03:02.040 E t F s are a wild it's just a 0:03:02.200 --> 0:03:05.560 huge spectrum of products. And over the years I've been 0:03:05.760 --> 0:03:08.280 finding that if you talk to like a financial advisor 0:03:08.360 --> 0:03:10.320 network we call them wire houses where they have a 0:03:10.440 --> 0:03:13.000 large network of advisors, I found they'll put E t 0:03:13.160 --> 0:03:15.560 F into two categories. Either they're on the approved list 0:03:15.720 --> 0:03:18.519 where they're not right, and the media there tends to 0:03:18.600 --> 0:03:21.640 be they're safe or they're dangerous. But to me, there's 0:03:21.720 --> 0:03:24.320 much more nuanced than that. And the other problem is 0:03:25.000 --> 0:03:28.200 what's dangerous to one person might be god send to another. 0:03:28.440 --> 0:03:30.640 You know, there could be a product that's triple leverage 0:03:30.720 --> 0:03:32.519 junior gold miners. Now I don't know what you just said, 0:03:32.760 --> 0:03:37.360 but triple leverage gold miners, okay, Just know you could 0:03:37.400 --> 0:03:40.840 lose or make a lot very quickly. These are products 0:03:40.920 --> 0:03:44.400 that I call trading tools, and for certain investors they're great. 0:03:44.440 --> 0:03:47.320 These are like power tools, and for other investors they 0:03:47.360 --> 0:03:49.160 would be horrible. Right, But they're all kind of put 0:03:49.200 --> 0:03:51.680 into this big area we call e t F and 0:03:51.720 --> 0:03:53.400 some aren't even technically e t S. Will get to 0:03:53.400 --> 0:03:57.240 that in a minute, But arguably I thought movie ratings 0:03:57.280 --> 0:03:59.160 would be useful for e t F s. You did 0:03:59.200 --> 0:04:01.280 in your book, right, and I wrote this in my book. 0:04:01.440 --> 0:04:04.320 You know there's like five ratings GPG, PG thirteen, r A, 0:04:04.480 --> 0:04:06.960 n C seventeen. Right, Because look, at the end of 0:04:07.000 --> 0:04:11.560 the day, just because children exist doesn't mean people shouldn't 0:04:11.560 --> 0:04:14.120 be allowed to see a Quentin Tarantino movie. Right. We 0:04:14.200 --> 0:04:16.479 want him to make his movies, but we don't want 0:04:16.560 --> 0:04:17.960 like my I don't want my son to see The 0:04:18.000 --> 0:04:20.280 Hateful Eight. Not until he's at least ten years old. 0:04:21.040 --> 0:04:23.599 He's like nine right now. Right, Well, my dad let 0:04:23.640 --> 0:04:26.080 me watch The Extorcists when I was eleven. I'm still 0:04:26.160 --> 0:04:30.880 recovering that anyway. Look, movie ratings are great because the 0:04:30.960 --> 0:04:33.120 other problem with rating systems out there, for e. T. 0:04:33.279 --> 0:04:36.120 F is they might tell you by cell hold right 0:04:36.200 --> 0:04:37.840 whether they think the underlyings can go up or down. 0:04:37.839 --> 0:04:40.080 We don't do that. It be I. There's also rating 0:04:40.120 --> 0:04:43.640 systems like from that are targeting advisors and they'll throw 0:04:43.760 --> 0:04:46.000 all the crazy stuff out the window. They won't even 0:04:46.080 --> 0:04:48.200 rate them. They're like they don't exist. They're awful. But 0:04:48.240 --> 0:04:51.360 at Bloomberg, you know our terminal users are sophisticated, so 0:04:51.880 --> 0:04:53.840 we wanted to assist them. That could be used in 0:04:53.920 --> 0:04:55.760 regardless of who the investor is or what their goal, 0:04:55.800 --> 0:04:58.320 whether it's a small hedge fund, my grandma or an 0:04:58.320 --> 0:05:02.400 advisor in Oklahoma. Telling you what the rating is gives 0:05:02.400 --> 0:05:05.880 you advanced information to know the level of nasty surprise 0:05:06.000 --> 0:05:09.000 that could be within the product. This is a helpful 0:05:09.040 --> 0:05:12.160 way to avoid having a bad experience. So again, it's 0:05:12.160 --> 0:05:14.240 like movie ratings. That way, you know what's appropriate to 0:05:14.279 --> 0:05:16.440 take your kid to so James. The thing here is 0:05:16.520 --> 0:05:19.320 that you couldn't use movie ratings, right, Yeah, that's that's copyrighted. 0:05:19.360 --> 0:05:20.760 So we had to come up with something else. So 0:05:20.880 --> 0:05:24.119 we came up with a stoplight, green, yellow, red, pretty simple. 0:05:24.240 --> 0:05:28.120 McDonald's simple and Eric's world. It's not as exciting as saying, hey, 0:05:28.200 --> 0:05:30.720 this et F rated are that's pretty cool, but it 0:05:30.839 --> 0:05:33.080 tells you advanced information about what you should be doing 0:05:33.440 --> 0:05:36.520 or what to be thinking about. Okay, so we've also 0:05:36.600 --> 0:05:39.000 said something called exchange traded notes, and we need to 0:05:39.080 --> 0:05:41.520 talk about that because an exchange traded note, or an 0:05:41.560 --> 0:05:43.760 e t N is not the same thing as an 0:05:43.800 --> 0:05:46.120 exchange traded fund. So what is an e t N. 0:05:46.880 --> 0:05:50.279 It's an unsecured debt obligation. And really they probably shouldn't 0:05:50.279 --> 0:05:52.000 be in the whole e t F universe, but they 0:05:52.080 --> 0:05:54.440 kind of got grandfathered in about twelve fifteen years ago. 0:05:54.720 --> 0:05:57.600 They were originally launched to go out and track areas 0:05:57.680 --> 0:06:00.680 that e t s couldn't like, for example, India fifteen 0:06:00.760 --> 0:06:03.080 years ago, you couldn't get in there as a foreign investor, 0:06:03.440 --> 0:06:05.240 so an e t N could say, okay, we'll track 0:06:05.279 --> 0:06:08.560 an India index. But it's a note. Just know that 0:06:08.680 --> 0:06:10.640 that's what we're doing. You don't know what we're investing in, 0:06:10.760 --> 0:06:13.440 so they'll just it's sort of like saying, just trust this. 0:06:13.600 --> 0:06:15.680 And so that's why they don't report holdings, because you 0:06:15.680 --> 0:06:18.119 don't exactly know what they're doing. Largely they do invest 0:06:18.160 --> 0:06:21.040 in the underlying to hedge themselves, but that's ultimately what 0:06:21.160 --> 0:06:23.000 it was designed for at the beginning. Now, over time, 0:06:23.080 --> 0:06:26.040 all those things have opened up, and e t f 0:06:26.120 --> 0:06:27.800 s track them, and most people would rather have the 0:06:27.839 --> 0:06:30.839 e t F which physically holds what it says it holds. 0:06:31.240 --> 0:06:32.880 But e t n s have hung around for one 0:06:32.920 --> 0:06:36.120 big reason. They're essentially a tax loophole. So in the 0:06:36.200 --> 0:06:39.280 cases of like futures, E t F to tract futures 0:06:39.320 --> 0:06:42.200 get taxed uh in an unfortunate way. You get a 0:06:42.279 --> 0:06:44.640 K one because it's like your tax like you hold futures, 0:06:45.000 --> 0:06:47.040 whereas an e t N they don't hold it, so 0:06:47.080 --> 0:06:49.599 their tax like shares of Microsoft. So people who don't 0:06:49.600 --> 0:06:52.040 want to deal with the sort of fussy taxation will 0:06:52.120 --> 0:06:54.600 use the e t N and stomach the fact that 0:06:54.680 --> 0:06:56.880 it's a note and comes with credit risks. So if 0:06:56.880 --> 0:06:58.880 the issue of an e t n like Barclays has some. 0:06:59.279 --> 0:07:01.320 If they go back up, you could lose all your money, 0:07:01.520 --> 0:07:03.640 which happened with Lehman. Actually, yeah, Lehman had a couple 0:07:03.640 --> 0:07:05.800 of bear Stearns had one, and that you know, the 0:07:05.960 --> 0:07:08.720 bedrock of the e t F is the fact that 0:07:08.839 --> 0:07:12.680 it's built on the forty Act, yes, right, which is 0:07:13.360 --> 0:07:16.000 what's made it, you know, be this stable thing for 0:07:16.080 --> 0:07:18.640 as long as it's been around. E tns do not 0:07:18.840 --> 0:07:21.160 have that, right, they're not built on that forty Acts. 0:07:21.200 --> 0:07:24.160 So they're basically unregulated in the same way, right, they're 0:07:24.200 --> 0:07:27.720 they're regulated to a degree, but yeah, they're under the Acts. 0:07:27.800 --> 0:07:30.240 So they're still regulated, just not to the scrutiny that 0:07:30.320 --> 0:07:34.880 ETFs are. And they're in some areas that are really interesting. 0:07:34.960 --> 0:07:38.440 And one of those areas is volatility. And there's been 0:07:38.480 --> 0:07:41.600 a dearth of volatility of late in the markets, right, 0:07:41.880 --> 0:07:44.239 and so a lot of people piled into a certain 0:07:44.360 --> 0:07:47.760 kind of trade. And I'll let you pick it up here. 0:07:47.920 --> 0:07:49.960 What was that trade? So this was a trade that 0:07:50.080 --> 0:07:53.560 you short vix futures and vixes volatility. Yeah, fix is 0:07:53.600 --> 0:07:56.400 basically and vix vix. The vixen nets took a step 0:07:56.400 --> 0:08:01.640 back the VIX index is tracking the volatile on options 0:08:01.680 --> 0:08:04.880 on the SPI. In other words, if there's volatili on options, 0:08:04.920 --> 0:08:07.640 it means people are looking to buy insurance on their portfolio. 0:08:07.680 --> 0:08:09.920 That's what you do with puts. So if that starts 0:08:09.960 --> 0:08:12.440 going up, it means people are nervous. Right now. They 0:08:12.480 --> 0:08:15.200 have futures tracking the VIX, which you can invest in. 0:08:15.560 --> 0:08:18.120 The futures market is what the e T s hold. 0:08:18.600 --> 0:08:20.520 Most of them go long, which is they hold the 0:08:20.600 --> 0:08:22.520 futures and like just like the oil et F holds 0:08:22.560 --> 0:08:26.320 oil futures, but a new category came out that shorts them. 0:08:26.720 --> 0:08:28.440 Now what this does is it sort of puts you 0:08:28.520 --> 0:08:31.320 in the position as being like a hurricane insurance company. 0:08:31.800 --> 0:08:35.160 You're selling risks. So as long as there's no problems, 0:08:35.200 --> 0:08:37.480 you collect this nice premium. I mean, it's really nice. 0:08:37.520 --> 0:08:40.120 That thing went up the inverse vix E T N 0:08:40.160 --> 0:08:44.319 when about in the last two years. That's more it's 0:08:44.360 --> 0:08:46.600 more like stepping up. I mean, that's some serious They 0:08:46.640 --> 0:08:48.480 could equated to picking up nickels in front of a 0:08:48.480 --> 0:08:51.439 steam roller, but those are like five dollar bills. And yes, 0:08:51.920 --> 0:08:54.720 a hurricane from hell came and basically it lost nine 0:08:55.760 --> 0:08:59.400 in a day so because of this low ball environment, 0:08:59.440 --> 0:09:01.079 Normally it'd have more hiccups along the way and you 0:09:01.080 --> 0:09:03.320 wouldn't see that level of event. But there's been such 0:09:03.400 --> 0:09:06.719 this placidness over the last couple of years that when 0:09:06.800 --> 0:09:08.920 it hit Man, it made up for lost time. And 0:09:09.000 --> 0:09:11.760 actually Bloomberg News has done something really interesting reporting around 0:09:11.800 --> 0:09:16.040 this of volatility as an you know, volatility inc. Is 0:09:16.080 --> 0:09:19.079 the idea, right, there's so much money wrapped up in 0:09:19.160 --> 0:09:22.760 volatility now that it's almost become its own asset class. Yeah, 0:09:22.920 --> 0:09:25.080 this is part of the reason I think this stoplight 0:09:25.160 --> 0:09:28.880 system is timely, because some of these products are useful 0:09:28.960 --> 0:09:30.480 for people who know what they're doing. Say you're a 0:09:30.480 --> 0:09:32.800 small hedge fund, you don't have access to some big 0:09:32.880 --> 0:09:35.680 prime broker, all right, you know how to trade these things, 0:09:35.880 --> 0:09:38.559 go for it. The problem is they're not labeled, and 0:09:38.679 --> 0:09:40.720 so if you're a retail investor, you may not understand 0:09:40.720 --> 0:09:43.560 the inner workings of Vick's futures. So big debate now 0:09:43.720 --> 0:09:46.960 is whether it just banned these things or as we're proposing, 0:09:47.240 --> 0:09:49.560 label them because there are people who actually might still 0:09:49.559 --> 0:09:52.480 be able to use them. They're just not your grandmother. Yeah, 0:09:52.480 --> 0:09:53.800 And and the e T F S did what they 0:09:53.880 --> 0:09:57.559 were supposed to do. Vick's futures rose that day, so 0:09:57.840 --> 0:09:59.440 you got the inverse of that. It's not like they 0:09:59.679 --> 0:10:02.160 failed as a product, they just what they held just 0:10:02.440 --> 0:10:14.319 kind of went to hell. Okay, so we had this 0:10:14.360 --> 0:10:18.840 big sell off and you guys have this new stop 0:10:18.920 --> 0:10:22.400 light system. Let's talk about one of the E t 0:10:22.640 --> 0:10:26.560 N s the inverse vix x I V. I'm looking 0:10:26.679 --> 0:10:28.840 here at your stop light system. It's got a red 0:10:29.000 --> 0:10:33.920 light and seven points. James. That sounds bad. Yeah, yeah, 0:10:34.000 --> 0:10:36.280 that is. That is bad. So the highest we have 0:10:36.400 --> 0:10:38.599 on our system is is a ten. So seven is 0:10:38.640 --> 0:10:41.200 pretty high. Up is anything at ten? Yeah, we have one. 0:10:41.240 --> 0:10:42.959 We have one thing that's attend on our system that 0:10:43.240 --> 0:10:46.200 it's actually another e t N that's three times leveraged 0:10:46.320 --> 0:10:50.280 on oil crude oil and it's actually listed OTC. It 0:10:50.360 --> 0:10:52.559 has a lot of tons of different issues surrounding it. 0:10:52.720 --> 0:10:56.040 So yeah, this would be like almost beyond NC seventeen. Yeah, 0:10:56.080 --> 0:10:58.199 I mean this would be almost like banned by the government. Yeah, 0:10:58.200 --> 0:11:01.760 it's like times square or yeah, when it was fun. 0:11:03.480 --> 0:11:05.000 Let's walk through the rating system so we get a 0:11:05.040 --> 0:11:07.280 better sense of why something could be a seven out 0:11:07.320 --> 0:11:09.240 of ten or a ten out of ten or maybe 0:11:09.320 --> 0:11:11.840 like a zero out of ten? Does that exist? Zero 0:11:11.880 --> 0:11:13.920 out of tens exist? There's a lot of the market 0:11:14.040 --> 0:11:16.120 zero at tends most of vanguards funds or zero out 0:11:16.160 --> 0:11:19.280 of ten. That's like the G category. That's like it's 0:11:19.320 --> 0:11:22.280 safe for Grandma to just go to town with not 0:11:22.440 --> 0:11:24.640 That's not to say the E t F will always 0:11:24.720 --> 0:11:28.560 go up again. It's just to say there's nothing odd 0:11:28.679 --> 0:11:30.319 that's gonna make you go, oh, I didn't know that 0:11:30.400 --> 0:11:33.280 would happen. The system technically could go higher than ten. 0:11:33.440 --> 0:11:35.360 We just don't have any that we rate that hit 0:11:35.440 --> 0:11:37.439 that number. It's like mind blowing. I mean, look the 0:11:37.600 --> 0:11:41.520 smp F, t fs uh, the aggregate bond ETFs, all 0:11:41.559 --> 0:11:44.559 the stuff that generally is used as building blocks for 0:11:44.679 --> 0:11:48.000 portfolio is all green. Zero All systems go have fun. 0:11:48.520 --> 0:11:53.439 The green category likely makes up about t f sts. 0:11:53.960 --> 0:11:56.199 And at what point do you get a yellow light 0:11:56.559 --> 0:11:58.520 or a red light? When you get one point in 0:11:58.600 --> 0:12:00.599 our system or one in fraction, whatever you want to 0:12:00.640 --> 0:12:02.160 call it, and then to get to a red light 0:12:02.200 --> 0:12:05.839 you need three points or or infraction from there, YEA. 0:12:05.880 --> 0:12:09.559 So yellow light is sort of like PGPG thirteen area 0:12:10.040 --> 0:12:13.000 in terms of violations, and you know, look, we don't 0:12:13.040 --> 0:12:15.080 just look at like whether it holds leverage or futures. 0:12:15.120 --> 0:12:17.319 There's some legit things on here that I think are 0:12:18.000 --> 0:12:20.880 also eye opening about due diligence on et F. So 0:12:20.960 --> 0:12:24.319 let's talk about them. Alternative tax treatment. So that's the 0:12:24.400 --> 0:12:26.440 first one in the list, So that basically looks at 0:12:26.440 --> 0:12:29.000 anything that has an alternative tax. You invest in futures, 0:12:29.040 --> 0:12:31.079 you have to deal with what's called a K one, 0:12:31.160 --> 0:12:33.599 which can be complicated more paperwork that a lot of 0:12:33.640 --> 0:12:35.840 people don't want to deal with. Um. The other thing 0:12:35.960 --> 0:12:38.600 is something like gold, which is taxed as a collectible, 0:12:38.640 --> 0:12:41.240 which many people don't realize. To invest in a gold ETF, 0:12:41.360 --> 0:12:43.240 you're not actually going to be taxed in the same 0:12:43.280 --> 0:12:45.319 way that you would investing in a normal equity E. 0:12:45.400 --> 0:12:47.400 T F, G L D is a great example because 0:12:47.720 --> 0:12:50.679 other other than that tax issue, it's completely fine. It 0:12:50.760 --> 0:12:53.800 holds the gold, it's does a great job tracking, no problem. 0:12:54.240 --> 0:12:56.600 But if you do sell it, you your taxes. If 0:12:56.640 --> 0:12:58.400 you held like one of those gold plates from you 0:12:58.440 --> 0:13:00.360 know the commercial during Fox News or whatever, you know 0:13:00.400 --> 0:13:03.199 what I mean, where you're actually holding a collectible that 0:13:03.320 --> 0:13:05.480 is a different taxation system and I've heard some investors 0:13:05.520 --> 0:13:08.760 are a little mildly surprised by that green light yellow 0:13:08.960 --> 0:13:13.079 yellow light alternative waiting scheme. So this one is just 0:13:13.160 --> 0:13:16.760 saying that the ETF is waiting its underlying assets by 0:13:16.840 --> 0:13:19.400 something other than market cap. So market cap meaning you're 0:13:19.640 --> 0:13:22.360 it's just a broad investible index like the SMP five hundred, 0:13:22.400 --> 0:13:24.920 But you can get equal weight SMP five hundred, which 0:13:25.000 --> 0:13:27.200 will give you more volatility because it's going to give 0:13:27.240 --> 0:13:29.920 higher weighting to those smaller cap funds are smaller cap act. 0:13:30.240 --> 0:13:32.040 One thing that would fit in this category then would 0:13:32.040 --> 0:13:34.560 be smart beta e t f s, which had become 0:13:34.640 --> 0:13:37.679 really popular lately, and we haven't really talked about them yet, 0:13:37.679 --> 0:13:39.920 and we will talk about them more. But what is that. 0:13:40.200 --> 0:13:43.280 It's just a fantastic buzzword. But really all it is 0:13:43.360 --> 0:13:46.400 is applying to anything that isn't market cap weighted. So 0:13:46.640 --> 0:13:49.240 if you have the SMP five hundred apples at the top, right, 0:13:49.280 --> 0:13:51.920 and then exon and down you go, the biggest companies 0:13:51.920 --> 0:13:54.040 get the most waiting. Smart Batas says, let's do something different. 0:13:54.120 --> 0:13:57.160 Let's equal weight those stocks, give the smaller ones more voice. 0:13:57.400 --> 0:13:59.880 Let's wait them by their fundamentals. Let's look at stocks 0:13:59.880 --> 0:14:02.680 with lower p s. Let's wait them by the momentum. 0:14:03.080 --> 0:14:04.920 You know, there's all different ways you can wait them. 0:14:05.440 --> 0:14:07.440 So it's a twist on the market cap weighted index, 0:14:07.720 --> 0:14:11.079 but in reality it's actually taking active strategies that have 0:14:11.160 --> 0:14:13.880 worked for many years and converting them into a rules 0:14:13.920 --> 0:14:16.079 based index. So smart BATA sort of fills that void 0:14:16.440 --> 0:14:18.959 between discretionary active where you just do what you want 0:14:19.400 --> 0:14:22.000 and pure passive market cap weighted. We want people to 0:14:22.120 --> 0:14:24.640 know there's something in there that you should probably just 0:14:24.760 --> 0:14:27.040 look at, and that is all smart bait against an 0:14:27.040 --> 0:14:29.440 immediate yellow. Yeah. The other thing to note is that 0:14:29.760 --> 0:14:31.760 none of this nuts is necessarily saying this is a 0:14:31.800 --> 0:14:33.640 bad e t F or this is a bad situation. 0:14:33.720 --> 0:14:36.000 This is just something that to make people aware of 0:14:36.080 --> 0:14:39.600 what's going on. Here's a great example XOP, which is 0:14:39.640 --> 0:14:42.920 the Oil Producers et F. It's equal weighted and it 0:14:43.000 --> 0:14:46.360 has two thirds mid and small caps. It's triple the 0:14:46.480 --> 0:14:51.040 volatility right of x l E, which is the Spider 0:14:51.160 --> 0:14:53.040 Energy et F, which you think those are kind of similar, 0:14:53.080 --> 0:14:56.080 but XLS market cap weighted mostly large caps. This one 0:14:56.280 --> 0:14:58.280 is equal weighted and it's a smaller area of the 0:14:58.360 --> 0:15:01.320 oil energy of the energy area. And that is a 0:15:01.400 --> 0:15:03.200 lot of extra vol right there. You can go up 0:15:03.200 --> 0:15:05.040 and down pretty fast an x OP. That's why it 0:15:05.040 --> 0:15:08.080 gets a yellow. Next factor that you guys looked at 0:15:08.240 --> 0:15:11.920 potential NAV tracking issues, So how do how do you 0:15:12.000 --> 0:15:14.840 guys factor this in? So? So NAV is the just 0:15:15.000 --> 0:15:18.120 basically the underlying value of what the fund is actually holding. 0:15:18.200 --> 0:15:20.120 So an E t F has a NAV and the price. 0:15:20.680 --> 0:15:22.640 Um so when you buy your buying at the price, 0:15:22.720 --> 0:15:24.480 you're not buying at the NAV. So what you expect 0:15:24.520 --> 0:15:26.480 in a passively managed e t F. For really, any 0:15:26.520 --> 0:15:28.640 E t F you expect to be buying at a 0:15:28.920 --> 0:15:31.040 value that where the price is equal to the NAV. 0:15:31.480 --> 0:15:34.440 So any e t F where there's some discrepancy between 0:15:34.480 --> 0:15:36.720 the price and the NAV over extended periods of time, 0:15:37.160 --> 0:15:39.960 that's unexpected losses. So even if you're talking only a 0:15:40.040 --> 0:15:43.960 couple of basis points or percentages of percentage points, it 0:15:44.040 --> 0:15:46.280 can really affect your return. And what does NAV stand for? 0:15:46.800 --> 0:15:49.560 Net asset value? It's basically what you know the Kelly 0:15:49.600 --> 0:15:54.160 blue Book. Yeah, it's what the value of those stocks 0:15:54.200 --> 0:15:57.480 are worth. So everybody wants to buy something close to 0:15:57.560 --> 0:16:00.120 that Kelly blue Book value, right or until you're are 0:16:00.160 --> 0:16:02.240 for it. Yeah, there you go. That is sort of 0:16:02.360 --> 0:16:05.000 what the NAV is is a metaphor, but ultimately you 0:16:05.080 --> 0:16:06.400 want to be close to it. And that's what people 0:16:06.400 --> 0:16:08.320 love about ETS is it the price that you that 0:16:08.440 --> 0:16:11.040 it trades at is close to the NAV because if 0:16:11.080 --> 0:16:12.840 it gets out of whack, people can come in and 0:16:12.920 --> 0:16:15.680 arbitrage the difference. That's what you don't have in closed 0:16:15.760 --> 0:16:17.720 end funds, and people don't like those for that reason. 0:16:18.120 --> 0:16:19.800 The other part of this is think about what an 0:16:19.840 --> 0:16:22.360 e t F sole mission in life is is the 0:16:22.440 --> 0:16:25.320 track and index. So we're also gonna dig it. If 0:16:25.320 --> 0:16:27.160 it doesn't do a good job at that, we want 0:16:27.160 --> 0:16:30.520 to let you know because arguably the distance between the 0:16:30.560 --> 0:16:34.080 index return and the ETS return is really the total cost. 0:16:34.560 --> 0:16:37.400 The expense ratio comes out of that, and then sometimes 0:16:37.440 --> 0:16:39.440 they do a little better of the expense ratio, sometimes 0:16:39.480 --> 0:16:41.400 they do worse. We're trying to capture that to make 0:16:41.400 --> 0:16:44.400 sure you know there's actually some extra tracking costs in 0:16:44.520 --> 0:16:46.200 here that you're going to have to pay for it. 0:16:46.440 --> 0:16:51.560 Next fund is actively managed because there are actively managed 0:16:52.040 --> 0:16:55.760 t yees, So especially on the fixed income side, there's 0:16:55.760 --> 0:16:57.960 a there's a lot, there's a significant assets on that 0:16:58.000 --> 0:17:00.960 are actively managed, meaning there's there's a fund manager actually 0:17:01.000 --> 0:17:03.800 going in there and picking specific securities. It's growing in 0:17:03.840 --> 0:17:06.879 popularity on the equity side and basically all over ets, 0:17:06.920 --> 0:17:08.840 but it's still a very small aspect of the e 0:17:08.880 --> 0:17:12.000 t F market. And these are big name bond guys, right, Yeah, 0:17:12.040 --> 0:17:13.840 You've got people like Jeffrey Gunlock, and then you have 0:17:14.119 --> 0:17:18.439 people double Line exactly and Pimco. There's a lot of active, 0:17:18.520 --> 0:17:21.760 big bond asset managers that have e t s. It's 0:17:21.800 --> 0:17:24.160 not bad to be active in an e t F. However, 0:17:24.400 --> 0:17:27.600 sometimes people assume it's all passive. Again, it's just to 0:17:27.680 --> 0:17:29.639 alert you that this is a this is an e 0:17:29.720 --> 0:17:31.760 t F where the manager is doing whatever they want 0:17:32.240 --> 0:17:36.320 and you just should know that. Right. Hidden fees, So 0:17:36.440 --> 0:17:38.240 this one gets a little complicated. There's a lot of 0:17:38.280 --> 0:17:41.679 different ways that e t f s can have hidden fees, right. So, Um, 0:17:41.920 --> 0:17:43.400 one of the big things that people have been talking 0:17:43.400 --> 0:17:46.640 about are these interest rate hedge gtfs. So what they're 0:17:46.640 --> 0:17:48.239 doing is they're trying to hedge out the risk from 0:17:48.359 --> 0:17:51.359 rising interest rates. Um, But there's costs in shorting that 0:17:51.440 --> 0:17:54.159 You're you're paying the cost in whatever the interest rate 0:17:54.280 --> 0:17:57.480 is to short the interest rate. So look, there's a 0:17:57.520 --> 0:17:59.800 lot of ets that I call package trades. They go 0:18:00.040 --> 0:18:02.960 longness and short that right and there are which is 0:18:03.040 --> 0:18:05.680 kind of phenomenal when you think about that yellow. But 0:18:06.000 --> 0:18:08.920 arguably the reason those get yellow is because there have 0:18:09.040 --> 0:18:11.800 hidden costs the shorting. When you short, you gotta pay, 0:18:11.800 --> 0:18:14.000 You gotta pay for that. So what's the degree of that. 0:18:14.119 --> 0:18:15.720 We want to let you know that that's what it is. 0:18:15.880 --> 0:18:18.240 There's also hidden fees, and like um funds that own 0:18:18.320 --> 0:18:21.800 other funds, there's acquired fund fees that that aren't reported 0:18:21.800 --> 0:18:24.760 all the times, like the really superfine print at the body. Yes, 0:18:24.880 --> 0:18:28.800 and there's mlpts which have these incredibly awful taxation issues. 0:18:29.359 --> 0:18:31.840 We throw all that in into hidden fees that aren't 0:18:31.880 --> 0:18:35.439 necessarily reported in the expense ratio. By the way, how 0:18:35.520 --> 0:18:37.440 many e t f s have you guys put through 0:18:37.480 --> 0:18:41.320 this gauntlet? So basically when we start, we we look 0:18:41.359 --> 0:18:42.960 for e t f that have at least one year 0:18:43.000 --> 0:18:45.040 of history, so we can say that they've been trading 0:18:45.160 --> 0:18:46.800 or alive for one year and they have at least 0:18:46.840 --> 0:18:50.760 fifty million dollars in assets right now, we're just overtfs 0:18:50.760 --> 0:18:53.879 are classified. Those are that's going to be the assets 0:18:53.920 --> 0:18:56.199 and volume. However, we might expand it. If we get 0:18:56.280 --> 0:18:58.399 some traction on this, we may just rate them when 0:18:58.440 --> 0:19:00.560 they come out like a movie. Um, and you know 0:19:00.640 --> 0:19:02.280 that way people know what they're getting into right away. 0:19:02.280 --> 0:19:03.920 We wouldn't be able to some of these won't be 0:19:04.119 --> 0:19:07.280 will be moot because you need uh you know, history. 0:19:08.119 --> 0:19:10.840 But some of these you could write right away. Credit risk. 0:19:11.200 --> 0:19:13.240 So this is directly related to what we talked about 0:19:13.240 --> 0:19:15.760 before with exchange traded notes. Exchange traded notes have a 0:19:15.840 --> 0:19:19.560