WEBVTT - Hedging With ETFs Is Trickier Than It Looks 0:00:06.280 --> 0:00:10.399 Welcome to trillions. I'm Joel Webber and I'm Eric bel Tunis. 0:00:10.920 --> 0:00:13.720 Markets go up, and they've been going up for a 0:00:13.720 --> 0:00:16.120 long time, but they also went down recently and then 0:00:16.120 --> 0:00:18.480 they started going back up. Who knew? I knew. I 0:00:18.520 --> 0:00:21.200 was sure they'd never go down. But looks like, yeah, 0:00:21.280 --> 0:00:23.200 every once in a while I read books that they do. 0:00:23.239 --> 0:00:24.919 But you know, now we know, and now you see 0:00:24.920 --> 0:00:27.760 some red. Sometimes you also still see some green. But 0:00:28.040 --> 0:00:31.400 what the red reminded people is that there isn't something 0:00:31.440 --> 0:00:34.400 that you can do as an investor that can protect 0:00:34.440 --> 0:00:37.280 you a little bit. Yeah, as an analyst in E 0:00:37.360 --> 0:00:39.200 t F an else, I'm asked a lot by people 0:00:39.200 --> 0:00:41.680 who just know me as the E t F guy. Hey, 0:00:41.720 --> 0:00:43.600 how can I hedge the market? Or how can I 0:00:43.640 --> 0:00:45.919 actually like put money in something that would go uphen 0:00:45.960 --> 0:00:48.320 the market goes down. This is a popular question that 0:00:48.360 --> 0:00:50.720 I got even before the drawdout. I get this question 0:00:50.800 --> 0:00:52.720 quite a bit. So I recently wrote a primer on 0:00:52.720 --> 0:00:54.480 how to hedge your portfolio with E t F s 0:00:54.480 --> 0:00:56.440 and got a lot of reads. So what we're actually 0:00:56.480 --> 0:01:00.320 gonna be spending this episode talking about is hedging. And 0:01:01.040 --> 0:01:04.560 because Eric and I don't actually manage money or give 0:01:04.600 --> 0:01:07.319 investment advice or give investment advice. We're bringing in someone 0:01:07.440 --> 0:01:12.120 who can do both. Mike Venudo at Toroso Investments, where 0:01:12.160 --> 0:01:14.920 he's the co founder and c I O, and he 0:01:14.920 --> 0:01:18.120 knows this stuff backwards and forwards. And Mike just I've 0:01:18.160 --> 0:01:20.600 met Mike several times on the circuit. As I like 0:01:20.680 --> 0:01:22.440 to say, that's for Todd, Rose and Bluth and I 0:01:22.480 --> 0:01:24.600 hang out. Mike is I thought that was the hot 0:01:24.640 --> 0:01:30.119 tub that's come on. That was an awfor discussion. Mike 0:01:30.280 --> 0:01:32.320 is what I considered to be an E t F 0:01:32.360 --> 0:01:35.000 sort of Jedi master. He isn't all E t F 0:01:35.120 --> 0:01:38.960 using advisor. There's people like this around that are so good. 0:01:38.959 --> 0:01:41.720 They sniffed through the whole toolbox and so they're great 0:01:41.760 --> 0:01:43.840 that I interview these people from my book and they 0:01:43.880 --> 0:01:45.880 were very good because you could throw any ticker at 0:01:45.880 --> 0:01:47.840 them and they have an opinion on it. But not 0:01:47.880 --> 0:01:49.480 only that, they have an opinion on it because they 0:01:49.480 --> 0:01:50.920 have money on the line. So there are really a 0:01:50.960 --> 0:01:53.279 twofer in terms of commenting on this kind of stuff. 0:01:53.800 --> 0:01:55.480 And to be clear, some of the stuff that we're 0:01:55.480 --> 0:01:57.240 gonna talk about is going to be a little bit 0:01:57.240 --> 0:02:01.640 more technical then most people might be accustomed to. But 0:02:01.680 --> 0:02:03.680 we're gonna try and keep it really simple. And to 0:02:03.800 --> 0:02:06.440 go back to that, you know, the Walmart superstore that 0:02:06.880 --> 0:02:09.280 Eric's the manager of. Maybe maybe this is when you 0:02:09.480 --> 0:02:12.640 when you get to the home depot on Saturday, instead 0:02:12.639 --> 0:02:15.640 of getting the you know, the normal shopping cart, you 0:02:15.680 --> 0:02:18.200 get the other kind that's a little bit more heavy duty, 0:02:18.280 --> 0:02:21.240 the flat one with with still with the broken wheels 0:02:21.240 --> 0:02:25.560 that go. But but this is the best version of 0:02:25.560 --> 0:02:28.080 the broken wheel, so good for you on that. And 0:02:28.160 --> 0:02:29.960 the other thing is, yes, this is and when you 0:02:29.960 --> 0:02:31.800 talk about that aisle where you need that cart, normally 0:02:31.800 --> 0:02:33.079 that's the place where you have to ask the guy 0:02:33.080 --> 0:02:35.240 from Home Depot like what's up because you don't know 0:02:35.280 --> 0:02:37.600 what you're doing. So I think that's a good metaphor 0:02:37.600 --> 0:02:40.440 for this. And also not all of the ETFs we're 0:02:40.440 --> 0:02:42.600 gonna go over today are are that hard to understand. 0:02:42.600 --> 0:02:44.840 But the first ones will be where we decided to 0:02:44.840 --> 0:02:47.919 start with the really hardcore exotic stuff that's been in 0:02:47.960 --> 0:02:50.000 the news lately, and then we're gonna kind of like 0:02:50.440 --> 0:02:53.520 slowly go to the more safe plane vanilla stuff that 0:02:53.720 --> 0:02:55.640 most people using their portfolio. So keep in mind we're 0:02:55.680 --> 0:02:57.560 going from like if this were a music store, We're 0:02:57.560 --> 0:02:59.520 gonna start with n W A and then we'll end 0:02:59.520 --> 0:03:04.280 with the parts family. On this episode of trial, how 0:03:04.320 --> 0:03:09.240 to hedge a portfolio? Okay, Mike, how did you find 0:03:09.280 --> 0:03:11.480 the E t F and what was that first trade? Like? 0:03:12.040 --> 0:03:14.240 I found ets because I saw it as a disruption 0:03:14.360 --> 0:03:17.200 to buying individual stocks, which is what we did at 0:03:17.240 --> 0:03:21.440 Horizon Kinetics, where where I learned about investing. The first 0:03:21.480 --> 0:03:23.600 trade ever we did into an e t F was 0:03:23.639 --> 0:03:27.280 buying t I P, which is a Treasury inflation protected 0:03:27.880 --> 0:03:30.400 U e t F, and we sold calls off of it. 0:03:30.400 --> 0:03:32.000 I think we're gonna get into some of that type 0:03:32.000 --> 0:03:35.320 of thing later. And we did it because it was 0:03:35.360 --> 0:03:39.160 a way to diversify away and protect or hedge the 0:03:39.240 --> 0:03:41.680 rest of our portfolio. And this was not that long 0:03:41.720 --> 0:03:44.120 ago two eight so that was what you did. What 0:03:44.160 --> 0:03:47.040 do you do now? So four or five years later, 0:03:47.040 --> 0:03:49.080 I guess it was two thousand twelve, I started to 0:03:49.160 --> 0:03:52.240 Rosto Investments. The core idea was to have an E 0:03:52.320 --> 0:03:54.840 t F research company and use that E t F 0:03:54.960 --> 0:03:58.720 research for a primary portfolio that's based on protection. We 0:03:58.880 --> 0:04:01.720 use the acid algy Sha model of the permanent portfolio 0:04:02.160 --> 0:04:04.520 and we fill it in with intelligent et F choices. 0:04:04.960 --> 0:04:09.040 So I spend my time researching tickers and talking to 0:04:09.080 --> 0:04:13.280 people like Eric Um all day, all night, and we 0:04:13.320 --> 0:04:15.600 have to do it for a little while. Uh, So 0:04:15.680 --> 0:04:18.960 talk about who your clients are. Sure, So we have 0:04:19.040 --> 0:04:22.680 two types of clients. We have an individuals who come 0:04:22.720 --> 0:04:25.360 to us and want advice on which ETF to own, 0:04:25.440 --> 0:04:28.680 whether it's for our asset allocation models or something they're 0:04:28.720 --> 0:04:31.120 trying to do. Then we deal on the other end 0:04:31.320 --> 0:04:34.640 with the institutions. And the institutions are two parts, people 0:04:34.640 --> 0:04:37.159 who want to use ETFs, people who are issuing e 0:04:37.200 --> 0:04:39.440 t F s, and through our we call our e 0:04:39.520 --> 0:04:43.680 t F think tank, we connect both and enjoy the conversation. Okay, 0:04:43.720 --> 0:04:46.720 let's go ahead and talk about hedging. Then, Eric and 0:04:46.760 --> 0:04:51.400 your primary you talk about vix VIX. Uh this is 0:04:51.440 --> 0:04:54.720 a very controversial, highly dangerous area. The VIX is an 0:04:54.760 --> 0:04:57.320 index that measures volatility on options, as known as the 0:04:57.320 --> 0:04:59.400 fear did right. So if it starts moving a lot, 0:04:59.440 --> 0:05:01.560 it means people are taking out insurance on their portfolios, 0:05:01.560 --> 0:05:03.080 which is what they do with options. So if the 0:05:03.160 --> 0:05:05.080 VIX goes up, it means people are buying insurance, and 0:05:05.160 --> 0:05:07.960 that means volatility as a foot. So the VIX goes 0:05:08.040 --> 0:05:10.720 up when people are nervous. Now, there's no et F 0:05:10.760 --> 0:05:13.359 that tracks the VIX. It's a calculation, it's not a 0:05:13.400 --> 0:05:15.880 real thing. But there are futures on the VIX. So 0:05:15.920 --> 0:05:17.160 the e t F s and e t n s 0:05:17.200 --> 0:05:19.440 track those futures. And these are the bad boys. These 0:05:19.480 --> 0:05:22.799 are totally the bad boys. Because red lights, oh red lights, 0:05:22.920 --> 0:05:25.320 but with a score of about ten or thirteen. So 0:05:25.400 --> 0:05:28.640 there's the n C seventeen on my stop lights system easily. 0:05:29.200 --> 0:05:32.760 So why people love them even though they lose money 0:05:32.920 --> 0:05:35.040 year after year and like all of them are down 0:05:35.080 --> 0:05:38.640 about nine since launching. The reason people love them is 0:05:38.720 --> 0:05:42.760 jackpot potential because when the market goes down, nothing will 0:05:42.760 --> 0:05:45.400 come close to the what you get with the VXX 0:05:45.480 --> 0:05:47.760 or that kind of return. So for example, you look 0:05:47.760 --> 0:05:52.479 at something like in August, market was down four percent 0:05:52.560 --> 0:05:56.240 that day v XX was up. Now that's way beyond 0:05:56.360 --> 0:05:59.200 even a triple leverage in verse SNP. Then you go 0:05:59.240 --> 0:06:01.720 to a bad month market down eight percent, VIX is 0:06:01.800 --> 0:06:04.920 up or VXX rather, and then two thou eight when 0:06:04.920 --> 0:06:07.400 the market was sound thirty eight percent, v XX wasn't around, 0:06:07.440 --> 0:06:10.480 but the index at tracks was up a d so 0:06:10.520 --> 0:06:13.760 that jackpot potential is what draws people like a shiny object. 0:06:14.160 --> 0:06:15.760 The problem is a lot of people if they get 0:06:15.800 --> 0:06:17.840 too close and hang out there, they lose a lot 0:06:17.880 --> 0:06:19.719 of money because you have to roll those futures and 0:06:19.760 --> 0:06:22.159 that can cost you thirty percent a year. So it 0:06:22.240 --> 0:06:24.760 is an expensive hedge and you could lose a lot 0:06:24.839 --> 0:06:27.520 of money. But the reason it sticks around and has 0:06:27.560 --> 0:06:29.760 an audience is because it can pay off big time. 0:06:30.320 --> 0:06:32.240 Sounds a little bit like when you go fishing and 0:06:32.240 --> 0:06:35.400 you use that really fancy lure, you know that catches 0:06:35.440 --> 0:06:37.400 all the light in the water. That's what this sounds 0:06:37.400 --> 0:06:39.719 like a little bit, right, Yeah, you gotta be careful 0:06:39.720 --> 0:06:42.599 because you get like might get caught. Absolutely, Yeah, don't 0:06:42.600 --> 0:06:44.760 take the bait is probably the best advice for almost 0:06:44.839 --> 0:06:47.640 all investors, except for people who really know what they're doing. 0:06:48.160 --> 0:06:50.000 And Mike, so, how have you guys been talking about 0:06:50.000 --> 0:06:53.919 this with clients? So using the VIX is extremely complicated. 0:06:54.360 --> 0:06:57.560 I totally agree that it is nc SEV, maybe even 0:06:57.600 --> 0:06:59.720 triple X. I don't even know if they use those 0:06:59.720 --> 0:07:03.280 any work. But the biggest issue with VXX or T 0:07:03.520 --> 0:07:07.000 VIX or any of these. Isn't just that you have 0:07:07.160 --> 0:07:10.200 to know how much you want to hedge. You have 0:07:10.240 --> 0:07:14.760 to know exactly when, like when to the precise second day, 0:07:15.080 --> 0:07:19.720 because the decay the cost of this insurance is enormous. 0:07:19.800 --> 0:07:21.520 And I don't know that, do you know? Do you 0:07:21.560 --> 0:07:23.880 know that you know when? I don't believe anybody can 0:07:23.880 --> 0:07:26.000 really know when. I'm sure there are some tactical people 0:07:26.000 --> 0:07:27.920 out there who think they do. But yeah, look, I 0:07:27.920 --> 0:07:29.680 mean this is why I use Biff from Back to 0:07:29.720 --> 0:07:31.960 the Future too. Remember how we got the Guide to 0:07:32.000 --> 0:07:34.080 the Sports and he and he got he was like 0:07:34.080 --> 0:07:36.240 the richest guy in the country because he knew the future. 0:07:37.040 --> 0:07:39.680 Unless you have the guide to what the vix is 0:07:39.680 --> 0:07:43.760 going to do in the future and your Biff, nobody knows. 0:07:43.800 --> 0:07:46.280 And I think that's you know, that is Timing is 0:07:46.320 --> 0:07:49.600 everything with the vix UH and VXX. But like I said, 0:07:49.600 --> 0:07:51.880 if you have some special insight into the future, or 0:07:51.960 --> 0:07:54.560 if you really, really really just think tomorrow is going 0:07:54.600 --> 0:07:57.640 to be horrendous, there's really no problem with holding it 0:07:57.680 --> 0:08:00.000 for a day. It wouldn't corrode that much in one day. 0:08:00.200 --> 0:08:02.080 You gotta get out quick. Can you say all what 0:08:02.160 --> 0:08:06.040 you just said in Biff's voice, come on, McFly, you 0:08:06.040 --> 0:08:09.920 should say it. Come on, he's the Michael Winslow of 0:08:09.960 --> 0:08:12.040 the two of us. Okay, so there's another bad boy, 0:08:12.280 --> 0:08:18.440 maybe on par with Biff inverse. Yeah, So inverse is 0:08:18.840 --> 0:08:21.480 that's basically saying we're going to short the SP five hundred, 0:08:21.480 --> 0:08:24.200 either using swaps or futures, and so if the SMP 0:08:24.240 --> 0:08:27.000 five hundred goes down, say two percent, they should go 0:08:27.120 --> 0:08:30.440 up to. Then they've got double leveraged short and triple 0:08:30.520 --> 0:08:33.800 leveraged like a hoverboard. Yeah, but s h is the 0:08:33.800 --> 0:08:36.520 one I think is interesting because Eric didn't take that bait. 0:08:37.160 --> 0:08:38.719 Oh sorry, I put the hoverboard out there and you 0:08:38.760 --> 0:08:42.280 didn't jump on it. That was now I can't even 0:08:42.280 --> 0:08:44.720 touch that. That's just untouchable owning. This one is like 0:08:44.720 --> 0:08:48.880 when Biff runs into the manure truck and yeah, it 0:08:48.960 --> 0:08:53.280 can be run pretty short and stinky. Look, Okay. The 0:08:53.600 --> 0:08:55.679 one I think is interesting, and I'd like to get 0:08:55.679 --> 0:09:00.400 Mike's opinion on sh this is inverse SMP five. You 0:09:00.440 --> 0:09:03.000 have to reset the short position. So there is a 0:09:03.080 --> 0:09:05.679 volatility drag that and we won't go into the details here, 0:09:05.760 --> 0:09:08.240 just know that there is there is a corrosion to 0:09:08.720 --> 0:09:10.920 it's a costly hedge as well, but nowhere near v 0:09:11.120 --> 0:09:14.439 x x, and essentially if the market goes down to percent, 0:09:14.520 --> 0:09:17.120 this will go up to Curious what you think whether 0:09:17.440 --> 0:09:19.920 this is viable? You could you could hold this a 0:09:19.920 --> 0:09:22.720 little longer without that extreme decay of v xx or 0:09:22.760 --> 0:09:24.760 would you also put this in don't touch it ever? 0:09:25.320 --> 0:09:28.600 So with v x x, it's all about timing. You 0:09:28.679 --> 0:09:31.760 have to get the time right with this. With s H, 0:09:31.880 --> 0:09:34.920 it's not just timing. It's a little less important here, 0:09:35.280 --> 0:09:37.640 but it's also about the direction of the market. So 0:09:37.679 --> 0:09:40.960 it's not just down, but is it volatile down? So 0:09:41.040 --> 0:09:44.319 this reset that you're describing that can cause it to 0:09:44.400 --> 0:09:47.439 decay is rapidly as v x X. So now you've 0:09:47.480 --> 0:09:49.920 added yet another element that you've got to get right. 0:09:50.200 --> 0:09:52.280 And the reset is just to break this down. For 0:09:52.320 --> 0:09:56.080 anyone out there is leverage ets or inverse ETFs, they 0:09:56.120 --> 0:09:58.480 have to reset their leverage every day so they account 0:09:58.480 --> 0:10:00.480 for the new people coming in. You can't do two 0:10:00.480 --> 0:10:03.080 times from like two years ago, and you have to 0:10:03.120 --> 0:10:06.600 reset it every day there for people coming in and out. 0:10:06.600 --> 0:10:09.280 It makes sense, but when you reset at prices that 0:10:09.320 --> 0:10:12.160 are going all over the place all that it just 0:10:12.200 --> 0:10:15.800 creates a like a Matthew kind of corrosion because you're 0:10:15.800 --> 0:10:18.720 resetting all. If it goes up a similar direction, you 0:10:18.760 --> 0:10:21.880 start resetting higher and higher, and you actually compound a 0:10:21.880 --> 0:10:25.079 little bit. So you have volatility drag in almost all cases, 0:10:25.120 --> 0:10:27.840 which can corrode this insurance. But every now and then, 0:10:28.160 --> 0:10:30.320 if it does go up straight, you get the compounding effect, 0:10:30.320 --> 0:10:32.800 which can help. So I think you're right. If you 0:10:33.240 --> 0:10:35.640 have a feeling the market could go down steadily over 0:10:35.679 --> 0:10:38.320 the next year, s H would make a lot of sense, right, Yes, 0:10:38.400 --> 0:10:41.160 But as we saw recently, we have one day down 0:10:41.160 --> 0:10:43.360 at thousand points, one day up at thousand points, one 0:10:43.400 --> 0:10:47.320 day down thousand points. That is terrible for something like SH. 0:10:47.400 --> 0:10:51.240 You actually could still lose money even though you're inverse. Tactically, 0:10:51.559 --> 0:10:55.360 why would someone use this and and how much would they? 0:10:55.480 --> 0:10:58.680 You know, dial up the volume with it. So people 0:10:58.720 --> 0:11:03.280 who understand tactical or believe they figured it out, they 0:11:03.360 --> 0:11:06.280 use this all day long. UM. They may be hedge funds, 0:11:06.600 --> 0:11:09.200 they may be et F strategists. I mean good Harbor 0:11:09.360 --> 0:11:13.240 in the old days was known for this. UM. This 0:11:13.320 --> 0:11:16.959 is not for your average investor to make a strategic allocation. 0:11:17.400 --> 0:11:21.320 This is the difference between owning something, buying hold and 0:11:21.640 --> 0:11:24.520 trying to guess when something's going to happen and react. 0:11:25.120 --> 0:11:28.560 You can't simply buy this and then go to work 0:11:28.960 --> 0:11:31.360 unless you want to lose your hands. This trades to 0:11:31.559 --> 0:11:34.000 change saw. It's a change saw. You better be careful. 0:11:34.080 --> 0:11:36.280 And you know there are people who are like say, 0:11:36.320 --> 0:11:40.040 like bitcoin investors, people who just love gambling and speculating. 0:11:40.559 --> 0:11:43.080 Those kind of retail investors are attracted this, but you 0:11:43.240 --> 0:11:45.480 they are. They're messaging each other on Reddit and they're 0:11:45.600 --> 0:11:48.600 informed that you can't hold it. What you don't want 0:11:48.640 --> 0:11:52.200 is somebody who is retail a or even institutional and 0:11:52.280 --> 0:11:55.440 just doesn't understand that and is sticks and it. You 0:11:55.480 --> 0:11:57.880 can tell from the trading volume of these like these 0:11:57.960 --> 0:12:02.160 leverage gtfs and vix ETFs trade about fift their assets 0:12:02.200 --> 0:12:04.839 every day. That is a humongous turnover. That means they 0:12:04.840 --> 0:12:08.640 are being used correctly. As hot potatoes. Five six years ago, 0:12:08.679 --> 0:12:10.920 I think you saw less volume because people were unsure 0:12:10.920 --> 0:12:12.640 how to use them. But there's a lot of teachable 0:12:12.679 --> 0:12:15.120 moments since then, so I do think they're probably mostly 0:12:15.160 --> 0:12:18.080 in the right hands, but they definitely should be labeled 0:12:18.480 --> 0:12:22.839 just like the vixed products. The labels are all over them, right. 0:12:23.080 --> 0:12:25.760 If you notice all of these, even in their their name, 0:12:25.920 --> 0:12:28.440 it says daily like they they have gone out of 0:12:28.440 --> 0:12:31.440 their way to warn the public. We have created the 0:12:31.440 --> 0:12:36.160 sharpest knives. And unless you've completed Wolfgang's Pucks TV show 0:12:36.280 --> 0:12:38.880 or something, don't pick this up. Just like we've been 0:12:38.880 --> 0:12:41.160 hearing recently. If you're gonna own the vixed products, read 0:12:41.320 --> 0:12:45.360 every line of of the prospectus with the leverage and 0:12:45.440 --> 0:12:48.400 inverse it says it in the name, right, I don't 0:12:48.400 --> 0:12:58.320 think it could be more black and white than night. Okay, 0:12:58.320 --> 0:13:01.640 So that was the advanced section, hyper advanced. Maybe let's 0:13:01.640 --> 0:13:06.719 go to that sort of the intermediate territory because put options, 0:13:06.880 --> 0:13:11.000 for instance, this becomes much more common. Yeah, writing options 0:13:11.160 --> 0:13:14.240 on your portfolio or buying them is a popular method. 0:13:14.559 --> 0:13:16.800 If you look at E t F, the E t 0:13:16.920 --> 0:13:18.920 F s out there have options on them that you 0:13:18.920 --> 0:13:21.640 know you could trade or buy or sell, and most 0:13:21.640 --> 0:13:23.600 of those options are in the top ten e t fs, 0:13:23.640 --> 0:13:25.959 like Spy is basically like half the equity market in 0:13:26.040 --> 0:13:29.160 option violence, it's a monster. I W M E M 0:13:29.160 --> 0:13:31.760 and that's a big fertile market. People trade those things 0:13:31.760 --> 0:13:34.440 and do actual tactical moves. But there are people buying 0:13:34.440 --> 0:13:36.520 any options for insurance. So a put option would be 0:13:36.559 --> 0:13:39.440 a way to ensure your portfolio. But again you have 0:13:39.520 --> 0:13:42.160 to pay for it, and you have it expires, so 0:13:42.200 --> 0:13:44.120 you'll have to think about Okay, it's expiring, it got 0:13:44.160 --> 0:13:46.760 to buy another one, and that that affects its price. Yeah, 0:13:46.880 --> 0:13:49.640 so that is also away again just because now we're 0:13:49.640 --> 0:13:51.720 dealing with derivatives. I put in the intermediate, but it's 0:13:51.760 --> 0:13:54.839 not nearly as wild as say the vix or inverse world. 0:13:55.240 --> 0:13:56.760 And this one is well, you have to get the 0:13:56.760 --> 0:13:59.560 timing right, but you don't have to commit so much. 0:14:00.200 --> 0:14:06.120 You daily, daily at a time. Yes, and and the 0:14:06.160 --> 0:14:08.840 decay of the cost or the actual cost you're gonna 0:14:08.880 --> 0:14:11.280 put in, you know from day one. Give an example 0:14:11.320 --> 0:14:13.320 of buying an option like on on s p Y, 0:14:13.480 --> 0:14:15.960 Like what just take us through that trade. So let's 0:14:16.000 --> 0:14:20.640 say you think SPY is going to decline, you simply 0:14:20.640 --> 0:14:24.480 would purchase a put at ten percent below or at 0:14:24.520 --> 0:14:27.120 the money that that all can get very complicated, but 0:14:27.160 --> 0:14:29.440 ten percent below it's trading in a hundred today, you 0:14:29.440 --> 0:14:31.440 would buy it. You would buy a put for ninety 0:14:31.800 --> 0:14:33.840 buy a put for nine because that would be cheaper. 0:14:34.280 --> 0:14:38.240 Meaning if the SMP goes down what to then you 0:14:38.280 --> 0:14:41.720 can then guarantee to sell it to that person for nine. Yes, 0:14:41.760 --> 0:14:44.880 but in the interim, if it moves down at all, 0:14:45.120 --> 0:14:47.560 the put option would start to move. So it's not 0:14:47.600 --> 0:14:49.480 that you can be completely hands off with this, but 0:14:49.520 --> 0:14:51.600 it's a little bit more hands off and you can 0:14:51.600 --> 0:14:53.400 go the other way, which is called a call. Yes 0:14:53.440 --> 0:14:57.120 you could. But even more interesting, what et s beautifully 0:14:57.160 --> 0:14:59.640 do for all of us is they'll take strategies like 0:14:59.640 --> 0:15:02.000 this and stick it in the wrapper so you don't 0:15:02.000 --> 0:15:04.920 have to go and do this. So there's by right strategies, 0:15:04.960 --> 0:15:08.480 there's put right strategies. Um, there's one now that buys 0:15:08.560 --> 0:15:13.720 treasuries I think it's tail, and then uses the income 0:15:13.760 --> 0:15:16.400 from those treasuries to buy puts on the SMP. What's 0:15:16.400 --> 0:15:19.160 a classic one that does what we just the scenario 0:15:19.160 --> 0:15:22.240 where you're protecting the downside with options inside and ETF 0:15:22.360 --> 0:15:25.320 what's a good example. Um, I think that tail one 0:15:25.320 --> 0:15:27.760 that I was just describing is probably the purest example 0:15:27.800 --> 0:15:30.520 of that, but there's plenty of others that have used 0:15:30.520 --> 0:15:34.240 options over the years to mitigate volatility. So um, the 0:15:34.360 --> 0:15:37.040 PDP is a great example. To put right is another 0:15:37.080 --> 0:15:40.480 great example, p U t W. And then there's funds 0:15:40.720 --> 0:15:43.400 of option writing funds. So I like this one. Why 0:15:43.440 --> 0:15:46.600 why why? It's an income fund that's a great ticker 0:15:46.720 --> 0:15:50.000 yield yield yield. It might be Eric's boy band had 0:15:50.040 --> 0:15:52.560 when he was in high school. I like that. But 0:15:53.480 --> 0:15:56.840 all it is is it's a bunch of closes. Inever 0:15:57.600 --> 0:15:59.920 why y y? It sounds like frosted tip, Eric Bolton. 0:16:00.280 --> 0:16:01.920 I did use a lot of gel in high school. 0:16:01.960 --> 0:16:06.320 I'll admit it. I was all over the depth gel. Yeah. 0:16:06.600 --> 0:16:13.680 That was my jam. That was like a firm hold. Yeah. Anyway, okay, 0:16:13.720 --> 0:16:16.040 So put options is one that's sort of the intermediate. 0:16:16.440 --> 0:16:19.120 Let's let's talk about the alternative space because we're talking 0:16:19.160 --> 0:16:22.680 about rappers here. Uh, there's a lot of hedge fund 0:16:22.720 --> 0:16:24.680 strategies that have been wrapped up in in the E 0:16:24.760 --> 0:16:27.440 T F rapper as well. I can talk about that 0:16:27.480 --> 0:16:31.440 because that's also sort of an intermediate place. Sure, so um, 0:16:31.560 --> 0:16:34.480 hedge funds are misunderstood. Most people think they're trying to 0:16:34.520 --> 0:16:37.840 babe ruth the performance and get like return every year. 0:16:37.840 --> 0:16:39.680 Like Christian Bale on the big short. There are some 0:16:39.800 --> 0:16:42.360 to do that those are up section, but most of 0:16:42.400 --> 0:16:44.720 them do what the name says, they hedge. They are 0:16:44.720 --> 0:16:48.680 trying to find some kind of weird obscure risk premium 0:16:48.680 --> 0:16:52.640 in the market somewhere, capture it and eliminate market volatility 0:16:52.680 --> 0:16:55.840 to serve up a low vall risk adjust to return. 0:16:55.920 --> 0:16:58.640 That's actually it's sometimes some of them are voltile is 0:16:58.680 --> 0:17:01.840 a bond fund, right, They're very misunderstood. So a lot 0:17:01.880 --> 0:17:04.080 of the alternatives in that have been wrapped the hedge 0:17:04.119 --> 0:17:06.240 funds strikes have been wrapped up into et fs. Do 0:17:06.400 --> 0:17:09.159 that they do merger are their long short, they do 0:17:09.320 --> 0:17:13.000 managed futures um so it is very complicated area. That's 0:17:13.000 --> 0:17:15.720 the downside of this. Well, they can do some things 0:17:16.200 --> 0:17:18.400 that hedge funds do for a lot less than hedge 0:17:18.440 --> 0:17:21.400 funds charge, so they've democratized hedge fund investing. But they're 0:17:21.480 --> 0:17:23.800 very complicated. But what they do is they produce a 0:17:23.880 --> 0:17:27.000 return stream that is not correlated to stocks and bonds, 0:17:27.400 --> 0:17:29.840 hence alternative. And the reason they're called liquid alternatives is 0:17:29.880 --> 0:17:33.280 because only hedge funds which have lock ups, which means 0:17:33.359 --> 0:17:35.879 for multiple years you might be locked out of getting 0:17:35.880 --> 0:17:39.920 your money back. Correct so ultimately, alternatives is a category 0:17:39.920 --> 0:17:42.600 that's pretty broad. Hedge funds is one of example of 0:17:42.640 --> 0:17:44.840 an alternative. But by the way, none of us are 0:17:44.840 --> 0:17:46.280 going to be able to well, at least the three 0:17:46.320 --> 0:17:47.840 of us are probably gonna be able to put much 0:17:47.840 --> 0:17:50.920 money on a hedge fund, which here with the EF. Yeah, 0:17:50.920 --> 0:17:54.280 I'm I'm still a thousand are Yeah, So I would 0:17:54.320 --> 0:17:57.280 never qualify for any hedge fund, but the HF, nor 0:17:57.320 --> 0:17:59.000 would you probably be able to pay for it, which 0:17:59.040 --> 0:18:00.760 is do you know what I want to go into one? 0:18:00.800 --> 0:18:03.960 To be honest with you, Um, I'm fine. Look the 0:18:04.040 --> 0:18:07.920 minds of JP Morgan, Index I Q Goldman Sacks, they've 0:18:08.000 --> 0:18:12.119 made hedge fund ETFs using actual their brains and doing 0:18:12.200 --> 0:18:14.960 hedge fund strategies. You can get anything that hedge fund 0:18:15.000 --> 0:18:17.720 does except for the special star manager, I mean that 0:18:17.760 --> 0:18:20.480 will always exist, but the general strategies are ETFs. This 0:18:20.560 --> 0:18:22.880 category is pretty small though, only about two three billion 0:18:22.920 --> 0:18:25.919 in assets. Um, Mike, do you use any of these? Absolutely? 0:18:26.040 --> 0:18:28.920 These are the things that I think ets are made 0:18:28.960 --> 0:18:32.159 for democratizing access to things. So I've been saying for 0:18:32.320 --> 0:18:35.560 years that hedge funds will just become a call it 0:18:36.240 --> 0:18:38.680 kindergarten for e T s right. It's where people will 0:18:39.040 --> 0:18:43.000 grow up ideas um And it's funny because it's kind 0:18:43.000 --> 0:18:44.720 of what's happened with a lot of these things like 0:18:44.920 --> 0:18:49.920 leverage and and using volatility in terms of alternatives to 0:18:50.119 --> 0:18:53.119 use to protect the portfolio. I think what JP Morgan 0:18:53.240 --> 0:18:55.800 is doing right now to bring out some traditional hedge 0:18:55.800 --> 0:18:59.800 fund strategies in rappers that are more efficient. The one 0:19:00.040 --> 0:19:02.080 I have loved forever and you've heard me talk about 0:19:02.080 --> 0:19:04.920 it on your other show, B T A. L Boy, 0:19:05.040 --> 0:19:11.320 Thomas Apple, Larry. All this does is it's longfty low 0:19:12.280 --> 0:19:15.960 risk stocks in the SMP all short the two fifty 0:19:16.160 --> 0:19:19.640 high risk or high beta. The net result is when 0:19:19.680 --> 0:19:22.800 the markets go down, this goes up. When the markets 0:19:22.840 --> 0:19:25.160 go up, it goes down half as much as they've 0:19:25.200 --> 0:19:27.080 gone up. So you miss out on a little bit 0:19:27.119 --> 0:19:29.920 of everything. Yes, but with the things we talked about 0:19:29.920 --> 0:19:32.880 in the first section, the vix and the shorts, there 0:19:32.920 --> 0:19:36.000 one the one ratios right, you're gonna on the upside, 0:19:36.040 --> 0:19:38.040 you're gonna lose as much as you're gonna make on 0:19:38.119 --> 0:19:41.439 the downside. With something like this, the reason it's more 0:19:41.520 --> 0:19:44.760 strategic and can be held longer is when the markets 0:19:44.800 --> 0:19:47.119 are growing up, you're really only paying fifty cents for 0:19:47.240 --> 0:19:50.000 that dollars worth of protection. Now betal in our system 0:19:50.040 --> 0:19:51.760 does get a yellow Oh yeah, I'm sure it does. 0:19:52.320 --> 0:19:55.399 It's complicated, it's alternative, and but really it's because when 0:19:55.480 --> 0:19:57.520