WEBVTT - Messing With Models: Vanguard, Buffers, Two Sigma 0:00:02.720 --> 0:00:07.200 Bloomberg Audio Studios, podcasts, radio news. 0:00:07.760 --> 0:00:11.840 Should I get closer? Yeah, even though people like my 0:00:12.000 --> 0:00:13.440 audio at least relative to Matt. 0:00:13.600 --> 0:00:18.919 Yeah, I'm the audio of death. Sorry, I'm so low. 0:00:19.520 --> 0:00:21.439 Should I do this? Should do like an Ero vice 0:00:21.480 --> 0:00:22.080 the whole time? 0:00:22.239 --> 0:00:23.680 Maybe they'd like it a little bit more. 0:00:24.040 --> 0:00:27.640 Hello, and Welcome to the Money Stuff Podcast. 0:00:27.960 --> 0:00:31.000 And then maybe they would like your normal voice more. 0:00:31.960 --> 0:00:36.520 Hello and welcome to the Money Stuff Podcast, your weekly 0:00:36.560 --> 0:00:40.040 podcast where we talk about stuff related to money. I'm 0:00:40.040 --> 0:00:41.920 Matt Levin and I write the Money dot Com for 0:00:41.960 --> 0:00:42.800 Bloomberg Opinion. 0:00:42.920 --> 0:00:45.360 And I'm Katie Greifeld, a reporter for Bloomberg News and 0:00:45.400 --> 0:00:46.720 an anchor for Bloomberg Television. 0:00:47.360 --> 0:00:50.360 What are we talking about today, Katie. 0:00:50.120 --> 0:00:53.199 Well, you're we're talking about Vanguard getting put on the 0:00:53.280 --> 0:00:58.360 SEC's naughty List. We're going to talk about Buffer Bicklin ETFs, 0:00:58.920 --> 0:01:01.920 and then we're going to talk about two sigmas. 0:01:05.520 --> 0:01:08.800 I wrote this. It might be the last SEC natty list. 0:01:09.760 --> 0:01:09.840 You. 0:01:10.400 --> 0:01:12.600 I'm really interested what's going to happen in the next 0:01:12.600 --> 0:01:14.680 few years in terms of like like I've made fun 0:01:14.720 --> 0:01:16.840 of the SEC over the past few years about some 0:01:16.880 --> 0:01:19.960 of its enforcement things like the like cell phone stuff 0:01:19.959 --> 0:01:21.640 where like if you text about work, you get in 0:01:21.640 --> 0:01:24.039 trouble with the SEC. I don't know how much the 0:01:24.080 --> 0:01:27.400 SEC is like a sort of like self operating mechanism 0:01:27.400 --> 0:01:30.160 that has inertia. And we'll keep bringing cases and we'll 0:01:30.200 --> 0:01:32.560 keep going after Security is for out, and how much 0:01:32.560 --> 0:01:34.000 of it is going to be Like the tone from 0:01:34.000 --> 0:01:36.520 the top is screwtys. Frode is great, and then we 0:01:36.720 --> 0:01:39.000 just you know, never see an SEC case again, or 0:01:39.040 --> 0:01:40.880 you see SEC cases, but they have a very different 0:01:40.880 --> 0:01:44.080 political posture, you know, Yeah, well anti ESG cases. 0:01:44.160 --> 0:01:46.960 It seems like that sentiment is shared because it was 0:01:47.000 --> 0:01:49.440 a real rush to the finish for the SEC. You 0:01:49.480 --> 0:01:52.639 had a very long column about everything that the SEC 0:01:52.760 --> 0:01:53.640 was like. 0:01:53.640 --> 0:01:56.680 One quarter of the things that the SEC SEC did 0:01:56.720 --> 0:01:58.080 last week. There's so many things. 0:01:58.280 --> 0:02:01.680 Nestled at the bottom was something on Vanguard. Of course, 0:02:01.760 --> 0:02:04.720 Vanguard to pay one hundred and six million dollars to 0:02:04.760 --> 0:02:09.120 resolve violations related to capital gains distributions in their target 0:02:09.200 --> 0:02:13.120 date funds. This is a rare moment where Matt and 0:02:13.200 --> 0:02:16.120 I both wrote about something him and money stuff me 0:02:16.320 --> 0:02:20.880 in the ETFIQ newsletter newsletters. Yeah, Matt, you find this 0:02:21.280 --> 0:02:27.720 aggressively boring, but I think it's kind of interesting. What okay, 0:02:27.919 --> 0:02:31.000 Well this came down and to me it sort of 0:02:31.040 --> 0:02:33.079 read like the inverse of what we were talking about 0:02:33.120 --> 0:02:36.840 with Capital One. And let me tell you. Yeah, okay, 0:02:36.919 --> 0:02:40.440 all right, so you're buying in. So Vanguard basically lowered 0:02:40.520 --> 0:02:45.880 the minimum initial investment on its Vanguard Institutional Target Retirement 0:02:45.960 --> 0:02:49.960 funds in December twenty twenty. But they also had a 0:02:50.000 --> 0:02:53.680 retail version of this, and the institutional version had a 0:02:53.720 --> 0:02:57.640 lower fee than the retail And my crude explanation in 0:02:57.680 --> 0:03:02.240 my newsletter was that, okay, they told the investors in 0:03:02.280 --> 0:03:04.800 the retail product that they were lowering the minimum, and 0:03:04.840 --> 0:03:08.120 you had a bunch of these retirement investors switched to 0:03:08.160 --> 0:03:12.639 the now lower fee institutional TRFs that they could get 0:03:12.680 --> 0:03:15.520 access to. But the bad news came in when the 0:03:15.560 --> 0:03:18.280 retail funds to meet those redemptions, that had to sell 0:03:18.320 --> 0:03:21.280 a bunch of assets and the remaining holders were caught 0:03:21.360 --> 0:03:22.400 with big capital gains. 0:03:22.680 --> 0:03:25.320 Yeah. So there's the two glasses of the investor fund 0:03:25.360 --> 0:03:28.160 and the institutional fund. The investor fund is not exactly retail. 0:03:28.200 --> 0:03:31.200 It was like sub one hundred million dollars and so 0:03:31.240 --> 0:03:33.560 a lot of retirement funds had their money in the 0:03:33.639 --> 0:03:36.120 investor fund, and then they cut the minimum for the 0:03:36.160 --> 0:03:39.120 institutional fund to five million from one hundred million. So 0:03:39.160 --> 0:03:42.640 all these like small and mid sized retirement plans were like, Okay, 0:03:42.680 --> 0:03:44.640 we'll get the lower fees by taking our money out 0:03:44.640 --> 0:03:47.280 of the investor and putting it an institutional. But to 0:03:47.360 --> 0:03:51.960 get the lower fees, that's technically a like taxable transaction. 0:03:52.120 --> 0:03:55.440 Like technically the retail fund sells all those stocks and 0:03:55.520 --> 0:03:58.480 the institutional fund buys it, and that means that the 0:03:58.520 --> 0:04:02.440 retail fund has capital gains, and those capital gains are 0:04:02.440 --> 0:04:05.520 shared by not the redoing holders, but also the continuing holders. 0:04:05.560 --> 0:04:07.440 So if you had money in that fund, you got 0:04:07.440 --> 0:04:10.400 a big capital gains tax bill and you were surprised 0:04:10.400 --> 0:04:12.440 by it because it's not it's not in any sort 0:04:12.480 --> 0:04:15.440 of proportion to your actual gains. It's like all these 0:04:15.440 --> 0:04:18.040 people cashed out, so there was a big bill. Yeah, 0:04:18.480 --> 0:04:21.760 so mutual funds, mutual funds, you were like, I wrote 0:04:21.760 --> 0:04:23.640 about this, and I was like, let me guess they 0:04:23.640 --> 0:04:24.760 should have done an ETF. 0:04:25.279 --> 0:04:28.800 Well, I mean ets with ETFs, this wouldn't have happened. 0:04:28.800 --> 0:04:32.880 Do you think about the creation redemption mechanism of ETF shares. 0:04:33.360 --> 0:04:38.280 People love ETFs because you don't get capital gains bills 0:04:38.279 --> 0:04:39.960 in the same way that you would with a mutual 0:04:40.000 --> 0:04:41.920 fund when other holders redeem. 0:04:41.760 --> 0:04:43.440 Right, it's like you have to sort of think about, 0:04:43.440 --> 0:04:45.599 like what is the right treatment, you know. So I 0:04:45.600 --> 0:04:47.840 wrote a few years ago, like Bloomberg, Zach Miner had 0:04:47.839 --> 0:04:50.280 a series of stories about the ETF heartbeat trade, or 0:04:50.360 --> 0:04:53.640 basically like if you run an ETF, broadly speaking, you 0:04:53.680 --> 0:04:57.479 can avoid realizing any taxable gains because you're doing in 0:04:57.560 --> 0:05:00.240 kind creations and redemptions. But every so often you need 0:05:00.279 --> 0:05:02.440 to like adjust the holdings of your fund, and if 0:05:02.440 --> 0:05:05.880 you traded for cash, you would have taxable gains. If 0:05:05.920 --> 0:05:08.159 you run an ETF, the number one goal is never 0:05:08.200 --> 0:05:10.640 have taxable gains. And so people have developed all of 0:05:10.640 --> 0:05:14.200 these like complicated mechanisms to take advantage of what a 0:05:14.200 --> 0:05:16.479 lot of people call the ETF tax loophole, right, Like 0:05:16.560 --> 0:05:20.120 it's a loophole that you can have this fund that 0:05:20.320 --> 0:05:23.920 never buys or sells stocks and never has taxable gains. 0:05:24.040 --> 0:05:26.480 Yeah, after heart it's kind of a tax dodge. 0:05:26.560 --> 0:05:29.080 Yeah, it's kind of a taxx. It is so intuitively 0:05:29.120 --> 0:05:32.000 appealing to say I've put my money in a fund. 0:05:32.960 --> 0:05:35.159 In a year or ten years or thirty five years, 0:05:35.360 --> 0:05:36.720 I'll take my money out of the fund. If I 0:05:36.760 --> 0:05:39.400 have gains over those thirty five years, I'll pay taxes 0:05:39.440 --> 0:05:42.160 on the gains. But in between, I shouldn't pay any 0:05:42.160 --> 0:05:44.400 taxes because I haven't sold anything. Like what's the taxable 0:05:44.400 --> 0:05:46.719 event where I just hold the mutual fund and every 0:05:46.760 --> 0:05:48.880 year I get a tax bill and the tax bill 0:05:48.920 --> 0:05:51.239 is not really related to my actual gains in the fund. 0:05:51.440 --> 0:05:53.560 It's just weird. Yeah, And like that's how the tax 0:05:53.600 --> 0:05:56.080 lot works for mutual funds. It's not how the tax 0:05:56.160 --> 0:05:59.039 law works for ETFs, in part because there is this 0:05:59.120 --> 0:06:01.520 CTF loophole and part because people have built the industry 0:06:01.520 --> 0:06:05.080 around exploiting the loophole. But like the ETF treatment is 0:06:05.120 --> 0:06:07.080 just more intuitive than the mutual fund treatment. And like 0:06:07.120 --> 0:06:09.840 a lot of people are genuinely surprised that they get 0:06:09.880 --> 0:06:13.080 a tax bill for their mutual fund trading activity, and 0:06:13.120 --> 0:06:15.039 the SEC is like they should have been surprised, Like 0:06:15.080 --> 0:06:16.839 it's not fair. They shouldn't get to the tax bill, 0:06:16.960 --> 0:06:19.000 you know, because that is the tax law. But no one, 0:06:19.120 --> 0:06:21.200 no one finds it intuitive or appealing. 0:06:21.360 --> 0:06:23.760 I mean, so mutual funds when they're in four A 0:06:23.800 --> 0:06:27.000 one k's what we're talking about, like sort of goes away, 0:06:27.080 --> 0:06:28.920 like yes, for a one k's, you don't have that 0:06:29.000 --> 0:06:32.920 capital gains thing in this specific instance with these Vanguard 0:06:33.480 --> 0:06:37.440 target date funds. So it was the investors that held 0:06:37.480 --> 0:06:40.280 these funds in their tax BIWL accounts that we're talking about. 0:06:40.880 --> 0:06:43.200 So Vanguard sort of assumed that most of these people 0:06:43.200 --> 0:06:46.400 were four O NK investors theoretic and in part because 0:06:47.320 --> 0:06:49.960 a lot of people hold these funds through Vanguard's own platform, 0:06:50.040 --> 0:06:53.719 like their website and their brokerage, and so Vanguard could 0:06:53.720 --> 0:06:55.560 look at those people and say, almost all these are 0:06:55.560 --> 0:06:57.480 furrow and K plans, so they won't have to pay 0:06:57.520 --> 0:06:59.599 the taxes, so it's not a big deal. But also, 0:06:59.760 --> 0:07:02.680 like people hold billions of dollars of these funds away 0:07:02.800 --> 0:07:06.040 like in other brokerage accounts, and Vanguard didn't have transparency 0:07:06.040 --> 0:07:08.320 on them and sort of assumed, yeah, it's all four 0:07:08.400 --> 0:07:10.120 on K plans, it's fine. But in fact, a lot 0:07:10.160 --> 0:07:13.600 of retail taxable investors had money in these funds and 0:07:13.640 --> 0:07:15.680 then got a big tax bill, yeah, because they were 0:07:15.680 --> 0:07:16.560 outside of the four one K. 0:07:17.040 --> 0:07:19.920 So we talked a lot about products and rappers so far. 0:07:20.200 --> 0:07:22.880 I want to talk though about why this is like 0:07:22.960 --> 0:07:26.120 the spiritual inverse of the Capital One example, because you 0:07:26.160 --> 0:07:28.400 had a lot of sympathy for Capital One last week, 0:07:28.440 --> 0:07:30.360 and if that's the case, you must have a ton 0:07:30.400 --> 0:07:33.160 of sympathy for Vanguard here kind of trying to do 0:07:33.240 --> 0:07:36.560 this out of the goodness of their hearts for these investors. 0:07:36.520 --> 0:07:39.400 I do I mean talk about that. The thing they 0:07:39.440 --> 0:07:43.000 did here was they wanted to lower fees. Yeah, Vanguard 0:07:43.040 --> 0:07:46.120 is an interesting company because it's sort of not a company, right, 0:07:46.120 --> 0:07:48.600 it's like owned by the funds, So it's a mutual 0:07:48.640 --> 0:07:51.480 in a sort of classics apps like the funds ultimately 0:07:51.480 --> 0:07:53.760 on Vanguard, so it doesn't like charge as much as 0:07:53.760 --> 0:07:56.520 it can to provide returns to the shareholders. It like 0:07:56.560 --> 0:07:58.880 has a mandate to kind of keep fees low, and 0:07:58.960 --> 0:08:03.000 so it offered these funds. It set some expense ratios, 0:08:03.320 --> 0:08:06.400 and the funds gathered a lot of assets, including from 0:08:06.400 --> 0:08:08.120 like mid size furrow on k plans and they're like, 0:08:08.120 --> 0:08:10.560 we're making so much money off these plans that we 0:08:10.560 --> 0:08:14.160 don't need. Yeah, like let's give it back. And they 0:08:14.200 --> 0:08:16.720 thought of different ways to give it back and the 0:08:16.760 --> 0:08:19.720 way they came up with was lower the minimums on 0:08:19.760 --> 0:08:22.920 the institutional fund, which there are a lot of other options, 0:08:23.160 --> 0:08:26.040 and they chose this one for reasons that are not 0:08:26.200 --> 0:08:28.280 entirely clear to me, but basically the SEC sort of 0:08:28.320 --> 0:08:31.920 implies that they didn't fully appreciate the tax problem, in 0:08:31.960 --> 0:08:33.520 part because they thought everyone was in FORO O on 0:08:33.559 --> 0:08:37.000 K plans, and in part because when they were considering this, 0:08:37.080 --> 0:08:39.480 it was like March of twenty twenty, and so stocks 0:08:39.480 --> 0:08:41.120 were all the way down and so they're like, yeah, 0:08:41.120 --> 0:08:43.160 nobody has capital gains. It's fine, it's not a big deal. 0:08:43.200 --> 0:08:44.319 But then by the time they actually did it be 0:08:44.360 --> 0:08:45.280 blood capital gains. 0:08:45.360 --> 0:08:45.600 Yeah. 0:08:45.640 --> 0:08:47.680 So I sympathize with a lot of that. One thing 0:08:47.720 --> 0:08:49.000 I was say, like, you know, I have a soft 0:08:49.000 --> 0:08:50.400 spot for Vaneyard. A lot of my money is in 0:08:50.440 --> 0:08:55.000 Vanguard funds, but like Vanguard feels like historic innovator in 0:08:55.640 --> 0:08:58.199 index funds that is like a. 0:08:58.160 --> 0:09:03.200 Little timy okay, old fashioneds, like you know, out in 0:09:03.200 --> 0:09:04.439 the woods of Pennsylvania. 0:09:04.640 --> 0:09:07.920 Yeah, and like you know, they sort of resisted etfization 0:09:08.000 --> 0:09:09.280 a little bit more than the other place. 0:09:09.400 --> 0:09:11.240 Jack had a lot to say about ETF. 0:09:12.080 --> 0:09:15.080 Some of that about what we'll get to like weird 0:09:15.280 --> 0:09:17.720 weird product ETFs. But like some they just didn't like 0:09:17.720 --> 0:09:20.800 the e structure because they felt trader and they want 0:09:20.840 --> 0:09:23.160 like a sort of long term buy and hold investors. 0:09:23.720 --> 0:09:28.439 And the way they've structured this, you could have done 0:09:28.440 --> 0:09:30.480 this in a lot of others. Started from the beginning 0:09:30.520 --> 0:09:34.160 with we have one fund, and we can have two 0:09:34.200 --> 0:09:36.080 classes of shares of the fund, and we can lower 0:09:36.120 --> 0:09:38.320 the fees on one class without lowering you know. Like 0:09:38.520 --> 0:09:40.840 the problem here is that they had two separate funds, 0:09:41.080 --> 0:09:42.840 and so when they lowered the fees on some of 0:09:42.880 --> 0:09:45.600 the investors, those investors had to sell one fund and 0:09:45.600 --> 0:09:47.800 buy another one, which is like kind of crazy. It 0:09:47.800 --> 0:09:49.959 shouldn't work that way. So, like, I have a lot 0:09:49.960 --> 0:09:52.559 of sympathy here for Vanguard because really all they were 0:09:52.559 --> 0:09:56.320 trying to do is lower fees out. But I also like, yeah, 0:09:56.360 --> 0:09:57.560 this is kind of sloppy, you know. 0:09:57.840 --> 0:10:00.720 Yeah, a couple of things. Vanguard turns fifty years old 0:10:00.760 --> 0:10:04.000 on May first. May first, nineteen seventy five was when 0:10:04.160 --> 0:10:08.160 Vanguard was born. Vanguard does this all the time in 0:10:08.240 --> 0:10:11.840 terms of lowering fees. Like you talked about their ownership 0:10:11.920 --> 0:10:14.360 structure a little bit like any time that they have 0:10:14.600 --> 0:10:18.120 extra cash or assets generated by their products that is 0:10:18.240 --> 0:10:22.120 just funneled into lowering fees, which has put a crunch 0:10:22.160 --> 0:10:26.080 on the entire industry because of the way that their owns. 0:10:26.559 --> 0:10:29.520 Other people like Blackrock doesn't operate like Vanguard does, but 0:10:29.520 --> 0:10:31.760 black Rock still has to compete with Vanguard and just 0:10:32.160 --> 0:10:36.839 lower fees to dirt cheap levels, which is interesting. And 0:10:37.320 --> 0:10:40.560 in the ETFIQ newsletter, you know, after you know you've 0:10:40.559 --> 0:10:44.240 read money stuff, if you read the ETFIQ newsletter the 0:10:44.240 --> 0:10:47.520 one hundred and six million dollars, I saw some reaction 0:10:47.640 --> 0:10:50.320 that was like, oh, that's nothing for Vanguard. They manage 0:10:51.000 --> 0:10:54.560 how many like ten trillion dollars in assets. But because 0:10:54.600 --> 0:10:57.600 their fees are so low, assuming that they charge an 0:10:57.640 --> 0:11:00.320 average of ten basis points, one hundred and six million 0:11:00.400 --> 0:11:04.400 dollars for Vanguard is like napkin math, one percent of 0:11:04.440 --> 0:11:07.800 their total revenue. So this is actually pretty painful for 0:11:08.040 --> 0:11:11.120 van Card. Maybe it was sloppy, you know, but it 0:11:11.200 --> 0:11:11.760 was painful. 0:11:12.200 --> 0:11:13.840 I think that I write about a lot. I write 0:11:13.840 --> 0:11:16.319 about cases where either the SEC or like a shareholder 0:11:16.400 --> 0:11:18.320 class action, sues a company for doing a bad thing 0:11:18.320 --> 0:11:20.400 and the company agrees to pay a big fue or 0:11:20.440 --> 0:11:24.320 pay a big recovery to shareholders. And people always ask like, 0:11:24.679 --> 0:11:26.880 isn't that circular? Like where does the money come from? 0:11:26.920 --> 0:11:28.440 And part of the answer is like, the money sometimes 0:11:28.480 --> 0:11:30.960 comes from dn O insurance, but like sometimes yeah, like 0:11:31.000 --> 0:11:34.640 the company writes a check to compensate shareholders who lost 0:11:34.640 --> 0:11:36.960 money on something, and you're like, well, like, how did 0:11:37.000 --> 0:11:38.880 that help the shareholders? Like the lawyer's got a fee, 0:11:38.920 --> 0:11:41.200 but like the shareholders are writing a check to the shareholders. 0:11:42.480 --> 0:11:46.840 Similarly with Vanguard, it's owned by its funds, right, yeah, 0:11:46.920 --> 0:11:50.040 if you find Vanguard one hundred million dollars, in some sense, 0:11:50.400 --> 0:11:53.440 are you taking that money from the Vanguard investors who 0:11:53.559 --> 0:11:55.960 like lost money because of this tax problem? 0:11:56.080 --> 0:11:56.320 Wow? 0:11:56.480 --> 0:11:59.200 Like they're the shareholders, they're the owners, That's true, They're 0:11:59.200 --> 0:12:00.120 the ones paying the fine. 0:12:00.400 --> 0:12:01.040 There's a good point. 0:12:01.080 --> 0:12:02.160 And might I say that, I mean. 0:12:02.160 --> 0:12:06.600 Me, Yeah, So it's technically not a fine. And I 0:12:06.679 --> 0:12:10.839 learned that the hard way because I had said it 0:12:10.920 --> 0:12:12.920 was fine. I said it was a fine, and I 0:12:12.960 --> 0:12:15.600 had to correct my newsletter. It's technically not a fine 0:12:15.640 --> 0:12:18.080 because the one hundred and six million dollars will be 0:12:18.120 --> 0:12:22.800 distributed to those impacted. So but you should still subscribe 0:12:23.120 --> 0:12:31.200 to ETF I Q of the time is correct. Oh, 0:12:31.280 --> 0:12:45.040 come on, I'm doing my best. Let's talk about something 0:12:45.080 --> 0:12:50.160 that Jack Bogel would absolutely hate. They're called buffer bitcoin ETFs, 0:12:50.720 --> 0:12:53.719 Buffer ETFs. They're really popular. They've just ballooned over the 0:12:53.760 --> 0:12:57.640 past several years. Oh, I don't know, I actually so. 0:12:57.800 --> 0:12:59.000 I mean it's a great pitch. 0:12:59.240 --> 0:13:01.600 Yeah, I've written this like it is so close to 0:13:01.640 --> 0:13:03.559 my heart because it's like a pitch that I learned 0:13:03.559 --> 0:13:06.280 as a young derivative structure at an investment bank. Because 0:13:07.120 --> 0:13:09.800 there's no downside exactly all your mouney back. It's great, 0:13:09.920 --> 0:13:10.800 Like what a great pitch. 0:13:10.880 --> 0:13:13.920 Yeah, and it's sort of evolved to be no downside 0:13:13.920 --> 0:13:17.400 at all. Of course, one hundred percent protection downside. Buffer 0:13:17.400 --> 0:13:19.640 and ETFs have launched in the past year or so, 0:13:19.800 --> 0:13:23.440 but buffer ETFs came into existence. I'm sure they existed 0:13:23.600 --> 0:13:27.560 in other iterations, but they came into existence in twenty twenty. 0:13:27.600 --> 0:13:29.560 I believe I was pretty new to the ETF beat 0:13:29.920 --> 0:13:32.440 and in that time they've ballooned to this like sixty 0:13:32.520 --> 0:13:36.360 billion dollar asset class. And it's because the pitch is 0:13:36.400 --> 0:13:39.720 really good. We're going to shield you against these losses. 0:13:40.040 --> 0:13:41.880 Yeah, We're going to give you the upside in something. 0:13:42.040 --> 0:13:45.640 Yeah whatever, yeah, miker whatever, and if like it goes down, 0:13:45.720 --> 0:13:47.760 it doesn't go down, like you get all your money back. Yeah, 0:13:47.760 --> 0:13:49.319 it's amazing. What a great pitch. 0:13:49.400 --> 0:13:53.080 It makes sense in stocks, the one hundred percent downside. 0:13:53.320 --> 0:13:56.600 To me, I can kind of see it in bitcoin. 0:13:56.720 --> 0:14:02.200 I don't super understand it because volatile is the selling 0:14:02.200 --> 0:14:05.000 point of bitcoin for a lot of people. People have 0:14:05.080 --> 0:14:09.240 fun treating extremely volatile cryptocurrencies. If you are buying one 0:14:09.360 --> 0:14:13.400 hundred percent bitcoin buffer ETF with like an upside cap 0:14:13.520 --> 0:14:18.439 of twelve percent or eleven percent, what is the GD point? 0:14:20.280 --> 0:14:20.920 What is what? 0:14:21.840 --> 0:14:22.040 Yes? 0:14:22.760 --> 0:14:25.960 Right, so Calahs is launching these buffered bitcoin ETFs right, 0:14:26.000 --> 0:14:28.000 where like these things are all like defined periods, right, 0:14:28.040 --> 0:14:30.000 so you get like a one year, like you buy 0:14:30.000 --> 0:14:32.400 it at the beginning and at the end you get 0:14:32.440 --> 0:14:34.800 some amount of the return on bitcoin, but like floor 0:14:34.880 --> 0:14:36.360 it at some level, right, so like they have a 0:14:36.400 --> 0:14:38.480 one hundred by like one to eleven something like that. 0:14:38.760 --> 0:14:41.200 Not exactly sure on what the cap levels are, but 0:14:41.240 --> 0:14:44.200 so basically you buy it and if bitcoin goes down 0:14:44.280 --> 0:14:45.640 you get your money back in the year, and if 0:14:45.640 --> 0:14:49.000 bitcoin goes up, you get the return on bitcoin unless 0:14:49.000 --> 0:14:50.920 it goes up by more than eleven percent, which cause 0:14:50.960 --> 0:14:54.000 you only get eleven percent. Right, So if you're sure 0:14:54.000 --> 0:14:56.360 that bitcoin will go up, this is like a way 0:14:56.400 --> 0:14:58.440 to get an eleven percent return on your money. But 0:14:58.440 --> 0:15:00.960 if you're sure that bitcoin will have big coin and like, 0:15:01.040 --> 0:15:03.840 you know, a thousand percent, So why would you rather? 0:15:04.080 --> 0:15:06.720 I continue to ask you, why do people buy buf fordts? Right? 0:15:06.720 --> 0:15:08.760 I mean, like it's such a good pitch. When I 0:15:08.800 --> 0:15:10.560 was doing this, they didn't exist in ETF form. They 0:15:10.560 --> 0:15:12.760 existed in structured notes at banks, right, Like this is 0:15:12.960 --> 0:15:15.600 this is like a classic structured note product. Right. This 0:15:15.680 --> 0:15:19.360 is like your wealth manager goes to a rich conservative 0:15:19.360 --> 0:15:21.640 person who's like, oh, I like this stock, and you're like, well, 0:15:21.800 --> 0:15:25.160 I can give you that stock, but no downside, right, 0:15:25.640 --> 0:15:27.960 Like to be clear, like you're always trading up upside, right, 0:15:28.000 --> 0:15:32.040 Like the trade is that the advisor goes and buys 0:15:32.480 --> 0:15:37.840 treasuries for you know, ninety six percent of the investment, right, 0:15:38.040 --> 0:15:40.560 and like that provides the downside protection because at ninety 0:15:40.600 --> 0:15:42.600 six dollars, treasury bill mature is at one hundred and 0:15:42.640 --> 0:15:44.640 a year, right, And then he takes the other four 0:15:44.680 --> 0:15:47.000 dollars and buys a call spread that gives you some 0:15:47.080 --> 0:15:48.960 of the upside on the on the asset. Right, So 0:15:50.240 --> 0:15:53.400 this is a medium to high interest rates product. Is like, 0:15:53.600 --> 0:15:56.080 if interest rates are really low, you have to spend 0:15:56.120 --> 0:15:58.280 like ninety nine dollars on the treasuries to mature at 0:15:58.280 --> 0:15:59.680 one hundred and so you have like only a dollar 0:15:59.680 --> 0:16:01.440 to spend on a call spread. But if inter it's 0:16:01.440 --> 0:16:03.000 really high, I can spend like ten dollars on a 0:16:03.000 --> 0:16:05.000 call spread and then you have then you're in business. 0:16:05.080 --> 0:16:08.160 Yeah, so Storty I actually started reporting like in autumn 0:16:08.160 --> 0:16:10.760 of last year rate before the Fed started cutting rates, 0:16:10.880 --> 0:16:14.640 was what happens to these one hundred percent downside ETFs 0:16:14.760 --> 0:16:17.880 once rates start going lower, and it seems like a 0:16:17.880 --> 0:16:19.880 couple of aer caps. Yeah, well that's the thing. Well, no, 0:16:20.360 --> 0:16:24.040 some issuers, there's a choice you have to make to yeah, 0:16:24.080 --> 0:16:27.320 do you keep the one hundred percent downside protection or 0:16:27.480 --> 0:16:30.320 do you lower the cap? And some issuers were thinking about, 0:16:30.680 --> 0:16:33.160 you know, maybe it's not one hundred percent protection, it's 0:16:33.360 --> 0:16:35.840 eighty five percent, So there's a choice that has to 0:16:35.840 --> 0:16:37.760 be made. But then interest rates went up like a 0:16:37.840 --> 0:16:40.680 hundred basis points, so it's less relevant right now. But 0:16:40.720 --> 0:16:42.240 it will become relevant at some point. 0:16:42.440 --> 0:16:46.000 My crude assumption is that you can get a buffer 0:16:46.040 --> 0:16:49.000 ETF that has a one hundred floor so you always 0:16:49.040 --> 0:16:51.400 get your money back, and it has a cap of 0:16:51.480 --> 0:16:54.760 like crudely twice the treasury billt rate, right, because like 0:16:55.400 --> 0:16:57.320 you know, like your option is like put one hundred 0:16:57.320 --> 0:17:00.240 dollars in today and get back the treasury rate, or 0:17:01.000 --> 0:17:03.400 put one hundred dollars in today and get back you know, 0:17:03.400 --> 0:17:06.239 with equal probability between zero and twice the treasure right. 0:17:06.280 --> 0:17:09.040 So it's like that's sort of like the right expected value. Yeah, 0:17:09.560 --> 0:17:11.880 it's not exactly right, but it's like it's like kind 0:17:11.880 --> 0:17:14.000 of close. And so like you see caps that are around 0:17:14.000 --> 0:17:16.760 like one ten with like a four and change treasure bill. Right. 0:17:16.840 --> 0:17:18.639 The other thing I'll say is that the bitcoin buffer 0:17:18.640 --> 0:17:20.960 ATF that we're talking about from Calamus, they actually have 0:17:21.040 --> 0:17:23.840 three options. One is like one hundred by like one 0:17:23.840 --> 0:17:25.680 eleven or whatever, and then the others are like a 0:17:25.760 --> 0:17:28.560 ninety by one thirty and a eighty by one fifty. 0:17:28.640 --> 0:17:30.680 So like those haven't launch it though, right. 0:17:30.600 --> 0:17:32.600 Yeah, but they're like they're talking about them like by 0:17:32.600 --> 0:17:34.760 eighty one fifty. I mean, like if bitcoin goes down 0:17:34.800 --> 0:17:37.320 by more than twenty percent, you only go down by 0:17:37.320 --> 0:17:39.720 twenty percent, right, Yeah, Like if bitcoin this is half 0:17:39.720 --> 0:17:41.960 its value, you only lose twenty percent of your investment. 0:17:42.160 --> 0:17:44.280 But then if Bitcoin goes up, you get up to 0:17:44.359 --> 0:17:47.360 fifty percent returns on your investment. So it's like a 0:17:47.440 --> 0:17:54.360 much wider collar, which is maybe more appealing. Still, it's 0:17:54.359 --> 0:17:55.200 like a weird trade. 0:17:55.040 --> 0:17:57.560 That it is. Before we talk about trump Coin, which 0:17:57.640 --> 0:18:00.240 is coming. One more point that I just remembered on 0:18:00.800 --> 0:18:04.399 buffer ETFs broadly, I remember talking to Alliance about this 0:18:04.440 --> 0:18:07.359 and basically asking the same question that we are, who 0:18:07.400 --> 0:18:10.800 and why would you buy this? And the point that 0:18:10.840 --> 0:18:14.720 they made, which I found somewhat compelling, was this is 0:18:14.880 --> 0:18:18.359 a better version of bonds. Like, if you're putting together 0:18:18.359 --> 0:18:22.200 a portfolio, don't take from your equity bucket to put 0:18:22.240 --> 0:18:25.119 into these buffer products. Takes from your fixed income allocation. 0:18:25.640 --> 0:18:28.960 This is a better version of bonds because bonds have 0:18:29.040 --> 0:18:33.600 been an unreliable hedge since the pandemic anyway, this makes 0:18:33.640 --> 0:18:36.760 more sense as a fix income alternative. That was their pitch, 0:18:36.800 --> 0:18:39.879 which you know, if you're getting one hundred percent downside protection, 0:18:40.040 --> 0:18:44.320 but you know twice what Treasury builds are yielding. That 0:18:44.720 --> 0:18:45.840 makes a little bit more sense. 0:18:46.440 --> 0:18:48.920 Yeah, And like just in generally you have some exciting 0:18:48.960 --> 0:18:52.439 sounding things stant on some bond like product, right, Like 0:18:52.480 --> 0:18:54.639 you have like ooh, it's bitcoin but in bond form, right, 0:18:54.640 --> 0:18:56.840 Like that's appealing, right. Yeah. I've written a lot about 0:18:56.880 --> 0:19:00.400 micro strategies convertibles, right, which are bitcoin and bond form, right, 0:19:00.800 --> 0:19:02.879 And the appeal of that is a lot of that 0:19:02.960 --> 0:19:04.679 is the conrod of arbitreagures, but a lot of it 0:19:04.720 --> 0:19:08.919 is actually to like just boring fundamental institutional investors who 0:19:08.960 --> 0:19:12.320 are like I'll take some bitcoin upside and some you know, 0:19:12.480 --> 0:19:13.959 one hundred percent downside protection. 0:19:14.119 --> 0:19:15.960 So yeah, I feel like there's still work to be 0:19:16.000 --> 0:19:18.000 done though when it comes to the pitch for a 0:19:18.119 --> 0:19:19.280 buffered trump coin. 0:19:19.119 --> 0:19:23.800