Speaker 1: Welcome to trillions. I'm Joel Webber and I'm Eric bel Tunis.
Speaker 1: Markets go up, and they've been going up for a
Speaker 1: long time, but they also went down recently and then
Speaker 1: they started going back up. Who knew? I knew. I
Speaker 1: was sure they'd never go down. But looks like, yeah,
Speaker 1: every once in a while I read books that they do.
Speaker 1: But you know, now we know, and now you see
Speaker 1: some red. Sometimes you also still see some green. But
Speaker 1: what the red reminded people is that there isn't something
Speaker 1: that you can do as an investor that can protect
Speaker 1: you a little bit. Yeah, as an analyst in E
Speaker 1: t F an else, I'm asked a lot by people
Speaker 1: who just know me as the E t F guy. Hey,
Speaker 1: how can I hedge the market? Or how can I
Speaker 1: actually like put money in something that would go uphen
Speaker 1: the market goes down. This is a popular question that
Speaker 1: I got even before the drawdout. I get this question
Speaker 1: quite a bit. So I recently wrote a primer on
Speaker 1: how to hedge your portfolio with E t F s
Speaker 1: and got a lot of reads. So what we're actually
Speaker 1: gonna be spending this episode talking about is hedging. And
Speaker 1: because Eric and I don't actually manage money or give
Speaker 1: investment advice or give investment advice. We're bringing in someone
Speaker 1: who can do both. Mike Venudo at Toroso Investments, where
Speaker 1: he's the co founder and c I O, and he
Speaker 1: knows this stuff backwards and forwards. And Mike just I've
Speaker 1: met Mike several times on the circuit. As I like
Speaker 1: to say, that's for Todd, Rose and Bluth and I
Speaker 1: hang out. Mike is I thought that was the hot
Speaker 1: tub that's come on. That was an awfor discussion. Mike
Speaker 1: is what I considered to be an E t F
Speaker 1: sort of Jedi master. He isn't all E t F
Speaker 1: using advisor. There's people like this around that are so good.
Speaker 1: They sniffed through the whole toolbox and so they're great
Speaker 1: that I interview these people from my book and they
Speaker 1: were very good because you could throw any ticker at
Speaker 1: them and they have an opinion on it. But not
Speaker 1: only that, they have an opinion on it because they
Speaker 1: have money on the line. So there are really a
Speaker 1: twofer in terms of commenting on this kind of stuff.
Speaker 1: And to be clear, some of the stuff that we're
Speaker 1: gonna talk about is going to be a little bit
Speaker 1: more technical then most people might be accustomed to. But
Speaker 1: we're gonna try and keep it really simple. And to
Speaker 1: go back to that, you know, the Walmart superstore that
Speaker 1: Eric's the manager of. Maybe maybe this is when you
Speaker 1: when you get to the home depot on Saturday, instead
Speaker 1: of getting the you know, the normal shopping cart, you
Speaker 1: get the other kind that's a little bit more heavy duty,
Speaker 1: the flat one with with still with the broken wheels
Speaker 1: that go. But but this is the best version of
Speaker 1: the broken wheel, so good for you on that. And
Speaker 1: the other thing is, yes, this is and when you
Speaker 1: talk about that aisle where you need that cart, normally
Speaker 1: that's the place where you have to ask the guy
Speaker 1: from Home Depot like what's up because you don't know
Speaker 1: what you're doing. So I think that's a good metaphor
Speaker 1: for this. And also not all of the ETFs we're
Speaker 1: gonna go over today are are that hard to understand.
Speaker 1: But the first ones will be where we decided to
Speaker 1: start with the really hardcore exotic stuff that's been in
Speaker 1: the news lately, and then we're gonna kind of like
Speaker 1: slowly go to the more safe plane vanilla stuff that
Speaker 1: most people using their portfolio. So keep in mind we're
Speaker 1: going from like if this were a music store, We're
Speaker 1: gonna start with n W A and then we'll end
Speaker 1: with the parts family. On this episode of trial, how
Speaker 1: to hedge a portfolio? Okay, Mike, how did you find
Speaker 1: the E t F and what was that first trade? Like?
Speaker 1: I found ets because I saw it as a disruption
Speaker 1: to buying individual stocks, which is what we did at
Speaker 1: Horizon Kinetics, where where I learned about investing. The first
Speaker 1: trade ever we did into an e t F was
Speaker 1: buying t I P, which is a Treasury inflation protected
Speaker 1: U e t F, and we sold calls off of it.
Speaker 1: I think we're gonna get into some of that type
Speaker 1: of thing later. And we did it because it was
Speaker 1: a way to diversify away and protect or hedge the
Speaker 1: rest of our portfolio. And this was not that long
Speaker 1: ago two eight so that was what you did. What
Speaker 1: do you do now? So four or five years later,
Speaker 1: I guess it was two thousand twelve, I started to
Speaker 1: Rosto Investments. The core idea was to have an E
Speaker 1: t F research company and use that E t F
Speaker 1: research for a primary portfolio that's based on protection. We
Speaker 1: use the acid algy Sha model of the permanent portfolio
Speaker 1: and we fill it in with intelligent et F choices.
Speaker 1: So I spend my time researching tickers and talking to
Speaker 1: people like Eric Um all day, all night, and we
Speaker 1: have to do it for a little while. Uh, So
Speaker 1: talk about who your clients are. Sure, So we have
Speaker 1: two types of clients. We have an individuals who come
Speaker 1: to us and want advice on which ETF to own,
Speaker 1: whether it's for our asset allocation models or something they're
Speaker 1: trying to do. Then we deal on the other end
Speaker 1: with the institutions. And the institutions are two parts, people
Speaker 1: who want to use ETFs, people who are issuing e
Speaker 1: t F s, and through our we call our e
Speaker 1: t F think tank, we connect both and enjoy the conversation. Okay,
Speaker 1: let's go ahead and talk about hedging. Then, Eric and
Speaker 1: your primary you talk about vix VIX. Uh this is
Speaker 1: a very controversial, highly dangerous area. The VIX is an
Speaker 1: index that measures volatility on options, as known as the
Speaker 1: fear did right. So if it starts moving a lot,
Speaker 1: it means people are taking out insurance on their portfolios,
Speaker 1: which is what they do with options. So if the
Speaker 1: VIX goes up, it means people are buying insurance, and
Speaker 1: that means volatility as a foot. So the VIX goes
Speaker 1: up when people are nervous. Now, there's no et F
Speaker 1: that tracks the VIX. It's a calculation, it's not a
Speaker 1: real thing. But there are futures on the VIX. So
Speaker 1: the e t F s and e t n s
Speaker 1: track those futures. And these are the bad boys. These
Speaker 1: are totally the bad boys. Because red lights, oh red lights,
Speaker 1: but with a score of about ten or thirteen. So
Speaker 1: there's the n C seventeen on my stop lights system easily.
Speaker 1: So why people love them even though they lose money
Speaker 1: year after year and like all of them are down
Speaker 1: about nine since launching. The reason people love them is
Speaker 1: jackpot potential because when the market goes down, nothing will
Speaker 1: come close to the what you get with the VXX
Speaker 1: or that kind of return. So for example, you look
Speaker 1: at something like in August, market was down four percent
Speaker 1: that day v XX was up. Now that's way beyond
Speaker 1: even a triple leverage in verse SNP. Then you go
Speaker 1: to a bad month market down eight percent, VIX is
Speaker 1: up or VXX rather, and then two thou eight when
Speaker 1: the market was sound thirty eight percent, v XX wasn't around,
Speaker 1: but the index at tracks was up a d so
Speaker 1: that jackpot potential is what draws people like a shiny object.
Speaker 1: The problem is a lot of people if they get
Speaker 1: too close and hang out there, they lose a lot
Speaker 1: of money because you have to roll those futures and
Speaker 1: that can cost you thirty percent a year. So it
Speaker 1: is an expensive hedge and you could lose a lot
Speaker 1: of money. But the reason it sticks around and has
Speaker 1: an audience is because it can pay off big time.
Speaker 1: Sounds a little bit like when you go fishing and
Speaker 1: you use that really fancy lure, you know that catches
Speaker 1: all the light in the water. That's what this sounds
Speaker 1: like a little bit, right, Yeah, you gotta be careful
Speaker 1: because you get like might get caught. Absolutely, Yeah, don't
Speaker 1: take the bait is probably the best advice for almost
Speaker 1: all investors, except for people who really know what they're doing.
Speaker 1: And Mike, so, how have you guys been talking about
Speaker 1: this with clients? So using the VIX is extremely complicated.
Speaker 1: I totally agree that it is nc SEV, maybe even
Speaker 1: triple X. I don't even know if they use those
Speaker 1: any work. But the biggest issue with VXX or T
Speaker 1: VIX or any of these. Isn't just that you have
Speaker 1: to know how much you want to hedge. You have
Speaker 1: to know exactly when, like when to the precise second day,
Speaker 1: because the decay the cost of this insurance is enormous.
Speaker 1: And I don't know that, do you know? Do you
Speaker 1: know that you know when? I don't believe anybody can
Speaker 1: really know when. I'm sure there are some tactical people
Speaker 1: out there who think they do. But yeah, look, I
Speaker 1: mean this is why I use Biff from Back to
Speaker 1: the Future too. Remember how we got the Guide to
Speaker 1: the Sports and he and he got he was like
Speaker 1: the richest guy in the country because he knew the future.
Speaker 1: Unless you have the guide to what the vix is
Speaker 1: going to do in the future and your Biff, nobody knows.
Speaker 1: And I think that's you know, that is Timing is
Speaker 1: everything with the vix UH and VXX. But like I said,
Speaker 1: if you have some special insight into the future, or
Speaker 1: if you really, really really just think tomorrow is going
Speaker 1: to be horrendous, there's really no problem with holding it
Speaker 1: for a day. It wouldn't corrode that much in one day.
Speaker 1: You gotta get out quick. Can you say all what
Speaker 1: you just said in Biff's voice, come on, McFly, you
Speaker 1: should say it. Come on, he's the Michael Winslow of
Speaker 1: the two of us. Okay, so there's another bad boy,
Speaker 1: maybe on par with Biff inverse. Yeah, So inverse is
Speaker 1: that's basically saying we're going to short the SP five hundred,
Speaker 1: either using swaps or futures, and so if the SMP
Speaker 1: five hundred goes down, say two percent, they should go
Speaker 1: up to. Then they've got double leveraged short and triple
Speaker 1: leveraged like a hoverboard. Yeah, but s h is the
Speaker 1: one I think is interesting because Eric didn't take that bait.
Speaker 1: Oh sorry, I put the hoverboard out there and you
Speaker 1: didn't jump on it. That was now I can't even
Speaker 1: touch that. That's just untouchable owning. This one is like
Speaker 1: when Biff runs into the manure truck and yeah, it
Speaker 1: can be run pretty short and stinky. Look, Okay. The
Speaker 1: one I think is interesting, and I'd like to get
Speaker 1: Mike's opinion on sh this is inverse SMP five. You
Speaker 1: have to reset the short position. So there is a
Speaker 1: volatility drag that and we won't go into the details here,
Speaker 1: just know that there is there is a corrosion to
Speaker 1: it's a costly hedge as well, but nowhere near v
Speaker 1: x x, and essentially if the market goes down to percent,
Speaker 1: this will go up to Curious what you think whether
Speaker 1: this is viable? You could you could hold this a
Speaker 1: little longer without that extreme decay of v xx or
Speaker 1: would you also put this in don't touch it ever?
Speaker 1: So with v x x, it's all about timing. You
Speaker 1: have to get the time right with this. With s H,
Speaker 1: it's not just timing. It's a little less important here,
Speaker 1: but it's also about the direction of the market. So
Speaker 1: it's not just down, but is it volatile down? So
Speaker 1: this reset that you're describing that can cause it to
Speaker 1: decay is rapidly as v x X. So now you've
Speaker 1: added yet another element that you've got to get right.
Speaker 1: And the reset is just to break this down. For
Speaker 1: anyone out there is leverage ets or inverse ETFs, they
Speaker 1: have to reset their leverage every day so they account
Speaker 1: for the new people coming in. You can't do two
Speaker 1: times from like two years ago, and you have to
Speaker 1: reset it every day there for people coming in and out.
Speaker 1: It makes sense, but when you reset at prices that
Speaker 1: are going all over the place all that it just
Speaker 1: creates a like a Matthew kind of corrosion because you're
Speaker 1: resetting all. If it goes up a similar direction, you
Speaker 1: start resetting higher and higher, and you actually compound a
Speaker 1: little bit. So you have volatility drag in almost all cases,
Speaker 1: which can corrode this insurance. But every now and then,
Speaker 1: if it does go up straight, you get the compounding effect,
Speaker 1: which can help. So I think you're right. If you
Speaker 1: have a feeling the market could go down steadily over
Speaker 1: the next year, s H would make a lot of sense, right, Yes,
Speaker 1: But as we saw recently, we have one day down
Speaker 1: at thousand points, one day up at thousand points, one
Speaker 1: day down thousand points. That is terrible for something like SH.
Speaker 1: You actually could still lose money even though you're inverse. Tactically,
Speaker 1: why would someone use this and and how much would they?
Speaker 1: You know, dial up the volume with it. So people
Speaker 1: who understand tactical or believe they figured it out, they
Speaker 1: use this all day long. UM. They may be hedge funds,
Speaker 1: they may be et F strategists. I mean good Harbor
Speaker 1: in the old days was known for this. UM. This
Speaker 1: is not for your average investor to make a strategic allocation.
Speaker 1: This is the difference between owning something, buying hold and
Speaker 1: trying to guess when something's going to happen and react.
Speaker 1: You can't simply buy this and then go to work
Speaker 1: unless you want to lose your hands. This trades to
Speaker 1: change saw. It's a change saw. You better be careful.
Speaker 1: And you know there are people who are like say,
Speaker 1: like bitcoin investors, people who just love gambling and speculating.
Speaker 1: Those kind of retail investors are attracted this, but you
Speaker 1: they are. They're messaging each other on Reddit and they're
Speaker 1: informed that you can't hold it. What you don't want
Speaker 1: is somebody who is retail a or even institutional and
Speaker 1: just doesn't understand that and is sticks and it. You
Speaker 1: can tell from the trading volume of these like these
Speaker 1: leverage gtfs and vix ETFs trade about fift their assets
Speaker 1: every day. That is a humongous turnover. That means they
Speaker 1: are being used correctly. As hot potatoes. Five six years ago,
Speaker 1: I think you saw less volume because people were unsure
Speaker 1: how to use them. But there's a lot of teachable
Speaker 1: moments since then, so I do think they're probably mostly
Speaker 1: in the right hands, but they definitely should be labeled
Speaker 1: just like the vixed products. The labels are all over them, right.
Speaker 1: If you notice all of these, even in their their name,
Speaker 1: it says daily like they they have gone out of
Speaker 1: their way to warn the public. We have created the
Speaker 1: sharpest knives. And unless you've completed Wolfgang's Pucks TV show
Speaker 1: or something, don't pick this up. Just like we've been
Speaker 1: hearing recently. If you're gonna own the vixed products, read
Speaker 1: every line of of the prospectus with the leverage and
Speaker 1: inverse it says it in the name, right, I don't
Speaker 1: think it could be more black and white than night. Okay,
Speaker 1: So that was the advanced section, hyper advanced. Maybe let's
Speaker 1: go to that sort of the intermediate territory because put options,
Speaker 1: for instance, this becomes much more common. Yeah, writing options
Speaker 1: on your portfolio or buying them is a popular method.
Speaker 1: If you look at E t F, the E t
Speaker 1: F s out there have options on them that you
Speaker 1: know you could trade or buy or sell, and most
Speaker 1: of those options are in the top ten e t fs,
Speaker 1: like Spy is basically like half the equity market in
Speaker 1: option violence, it's a monster. I W M E M
Speaker 1: and that's a big fertile market. People trade those things
Speaker 1: and do actual tactical moves. But there are people buying
Speaker 1: any options for insurance. So a put option would be
Speaker 1: a way to ensure your portfolio. But again you have
Speaker 1: to pay for it, and you have it expires, so
Speaker 1: you'll have to think about Okay, it's expiring, it got
Speaker 1: to buy another one, and that that affects its price. Yeah,
Speaker 1: so that is also away again just because now we're
Speaker 1: dealing with derivatives. I put in the intermediate, but it's
Speaker 1: not nearly as wild as say the vix or inverse world.
Speaker 1: And this one is well, you have to get the
Speaker 1: timing right, but you don't have to commit so much.
Speaker 1: You daily, daily at a time. Yes, and and the
Speaker 1: decay of the cost or the actual cost you're gonna
Speaker 1: put in, you know from day one. Give an example
Speaker 1: of buying an option like on on s p Y,
Speaker 1: Like what just take us through that trade. So let's
Speaker 1: say you think SPY is going to decline, you simply
Speaker 1: would purchase a put at ten percent below or at
Speaker 1: the money that that all can get very complicated, but
Speaker 1: ten percent below it's trading in a hundred today, you
Speaker 1: would buy it. You would buy a put for ninety
Speaker 1: buy a put for nine because that would be cheaper.
Speaker 1: Meaning if the SMP goes down what to then you
Speaker 1: can then guarantee to sell it to that person for nine. Yes,
Speaker 1: but in the interim, if it moves down at all,
Speaker 1: the put option would start to move. So it's not
Speaker 1: that you can be completely hands off with this, but
Speaker 1: it's a little bit more hands off and you can
Speaker 1: go the other way, which is called a call. Yes
Speaker 1: you could. But even more interesting, what et s beautifully
Speaker 1: do for all of us is they'll take strategies like
Speaker 1: this and stick it in the wrapper so you don't
Speaker 1: have to go and do this. So there's by right strategies,
Speaker 1: there's put right strategies. Um, there's one now that buys
Speaker 1: treasuries I think it's tail, and then uses the income
Speaker 1: from those treasuries to buy puts on the SMP. What's
Speaker 1: a classic one that does what we just the scenario
Speaker 1: where you're protecting the downside with options inside and ETF
Speaker 1: what's a good example. Um, I think that tail one
Speaker 1: that I was just describing is probably the purest example
Speaker 1: of that, but there's plenty of others that have used
Speaker 1: options over the years to mitigate volatility. So um, the
Speaker 1: PDP is a great example. To put right is another
Speaker 1: great example, p U t W. And then there's funds
Speaker 1: of option writing funds. So I like this one. Why
Speaker 1: why why? It's an income fund that's a great ticker
Speaker 1: yield yield yield. It might be Eric's boy band had
Speaker 1: when he was in high school. I like that. But
Speaker 1: all it is is it's a bunch of closes. Inever
Speaker 1: why y y? It sounds like frosted tip, Eric Bolton.
Speaker 1: I did use a lot of gel in high school.
Speaker 1: I'll admit it. I was all over the depth gel. Yeah.
Speaker 1: That was my jam. That was like a firm hold. Yeah. Anyway, okay,
Speaker 1: So put options is one that's sort of the intermediate.
Speaker 1: Let's let's talk about the alternative space because we're talking
Speaker 1: about rappers here. Uh, there's a lot of hedge fund
Speaker 1: strategies that have been wrapped up in in the E
Speaker 1: T F rapper as well. I can talk about that
Speaker 1: because that's also sort of an intermediate place. Sure, so um,
Speaker 1: hedge funds are misunderstood. Most people think they're trying to
Speaker 1: babe ruth the performance and get like return every year.
Speaker 1: Like Christian Bale on the big short. There are some
Speaker 1: to do that those are up section, but most of
Speaker 1: them do what the name says, they hedge. They are
Speaker 1: trying to find some kind of weird obscure risk premium
Speaker 1: in the market somewhere, capture it and eliminate market volatility
Speaker 1: to serve up a low vall risk adjust to return.
Speaker 1: That's actually it's sometimes some of them are voltile is
Speaker 1: a bond fund, right, They're very misunderstood. So a lot
Speaker 1: of the alternatives in that have been wrapped the hedge
Speaker 1: funds strikes have been wrapped up into et fs. Do
Speaker 1: that they do merger are their long short, they do
Speaker 1: managed futures um so it is very complicated area. That's
Speaker 1: the downside of this. Well, they can do some things
Speaker 1: that hedge funds do for a lot less than hedge
Speaker 1: funds charge, so they've democratized hedge fund investing. But they're
Speaker 1: very complicated. But what they do is they produce a
Speaker 1: return stream that is not correlated to stocks and bonds,
Speaker 1: hence alternative. And the reason they're called liquid alternatives is
Speaker 1: because only hedge funds which have lock ups, which means
Speaker 1: for multiple years you might be locked out of getting
Speaker 1: your money back. Correct so ultimately, alternatives is a category
Speaker 1: that's pretty broad. Hedge funds is one of example of
Speaker 1: an alternative. But by the way, none of us are
Speaker 1: going to be able to well, at least the three
Speaker 1: of us are probably gonna be able to put much
Speaker 1: money on a hedge fund, which here with the EF. Yeah,
Speaker 1: I'm I'm still a thousand are Yeah, So I would
Speaker 1: never qualify for any hedge fund, but the HF, nor
Speaker 1: would you probably be able to pay for it, which
Speaker 1: is do you know what I want to go into one?
Speaker 1: To be honest with you, Um, I'm fine. Look the
Speaker 1: minds of JP Morgan, Index I Q Goldman Sacks, they've
Speaker 1: made hedge fund ETFs using actual their brains and doing
Speaker 1: hedge fund strategies. You can get anything that hedge fund
Speaker 1: does except for the special star manager, I mean that
Speaker 1: will always exist, but the general strategies are ETFs. This
Speaker 1: category is pretty small though, only about two three billion
Speaker 1: in assets. Um, Mike, do you use any of these? Absolutely?
Speaker 1: These are the things that I think ets are made
Speaker 1: for democratizing access to things. So I've been saying for
Speaker 1: years that hedge funds will just become a call it
Speaker 1: kindergarten for e T s right. It's where people will
Speaker 1: grow up ideas um And it's funny because it's kind
Speaker 1: of what's happened with a lot of these things like
Speaker 1: leverage and and using volatility in terms of alternatives to
Speaker 1: use to protect the portfolio. I think what JP Morgan
Speaker 1: is doing right now to bring out some traditional hedge
Speaker 1: fund strategies in rappers that are more efficient. The one
Speaker 1: I have loved forever and you've heard me talk about
Speaker 1: it on your other show, B T A. L Boy,
Speaker 1: Thomas Apple, Larry. All this does is it's longfty low
Speaker 1: risk stocks in the SMP all short the two fifty
Speaker 1: high risk or high beta. The net result is when
Speaker 1: the markets go down, this goes up. When the markets
Speaker 1: go up, it goes down half as much as they've
Speaker 1: gone up. So you miss out on a little bit
Speaker 1: of everything. Yes, but with the things we talked about
Speaker 1: in the first section, the vix and the shorts, there
Speaker 1: one the one ratios right, you're gonna on the upside,
Speaker 1: you're gonna lose as much as you're gonna make on
Speaker 1: the downside. With something like this, the reason it's more
Speaker 1: strategic and can be held longer is when the markets
Speaker 1: are growing up, you're really only paying fifty cents for
Speaker 1: that dollars worth of protection. Now betal in our system
Speaker 1: does get a yellow Oh yeah, I'm sure it does.
Speaker 1: It's complicated, it's alternative, and but really it's because when
Speaker 1: you short anything, there is a cost to that. So
Speaker 1: there's a there is a slate head when in that
Speaker 1: cost and show up the expense ratio. But you find
Speaker 1: that appropriate. Not you would pay it anyway if you
Speaker 1: did it yourself. But what does that cost? Like in
Speaker 1: betel so something like beatle, because half the portfolio is short,
Speaker 1: that has a cost to borrow. To short something, you
Speaker 1: have to borrow the stocks um and that gets passed
Speaker 1: onto the end investor and it offsets whatever dividends you
Speaker 1: would be getting from the other side. So the the
Speaker 1: expense ratios that you'll see in a system will look
Speaker 1: a little expensive. That said, for a hedge that you
Speaker 1: can actually buy and hold, I like the concept. Okay,
Speaker 1: now we're gonna get in a safe the safe zone.
Speaker 1: And this hedge is one that everyone is actually familiar with.
Speaker 1: Gold gold they're familiar with it, but boys are controversial.
Speaker 1: It's like politics. There's gold bugs and there's gold haters
Speaker 1: who are offended by the mere concept of gold. They
Speaker 1: say it's just the rock and they don't like it.
Speaker 1: So I know that it's get heated. So gold though.
Speaker 1: The pro of using gold as a hedge, something like
Speaker 1: g l D, which is the biggest gold, is that
Speaker 1: it isn't correlated to the market at all. It's zero correlation.
Speaker 1: No one knows why it does what it does. Correct,
Speaker 1: that's the problem. It's also zero correlated, meaning if the
Speaker 1: market goes down, gold may or may not go up.
Speaker 1: It's sort of like a punk rock or it does
Speaker 1: whatever the hell it wants to do, but that's its beauty.
Speaker 1: You have to appreciate that it's a good diversifier, but
Speaker 1: not a it's a shaky hedge. You do like the
Speaker 1: remoons too? Huh? Yeah, I thought I was a little
Speaker 1: I was a little more of a social distortion kind
Speaker 1: of guy. Yeah, so, but the remains that you can't
Speaker 1: not like, are you a punk rock fan? Mike? Uh no,
Speaker 1: you guys were talking about high school earlier. I was
Speaker 1: the debate champion, chess champion with long hair following the
Speaker 1: Grateful Dead, So I'm definitely are you a gold bug
Speaker 1: or a gold I am definitely a gold bug totally
Speaker 1: have built my acid allocation model on the permanent portfolio,
Speaker 1: which is gold. Now that said, that doesn't mean you
Speaker 1: just buy g l D or B A R I AU.
Speaker 1: There are smart ways to add to own gold like
Speaker 1: um you know. To loop back to the other section
Speaker 1: where we talked about options, one of the things I
Speaker 1: love using is a little E T N called g
Speaker 1: l D I A right so I own gold. It
Speaker 1: sells calls on that gold, which gives me income off
Speaker 1: my gold while I'm waiting for my gold to do
Speaker 1: what we hope it will do. Moving to the mainstream
Speaker 1: gold ETF So you've got g l D S forty
Speaker 1: basis points I use. Then you've got these ones that
Speaker 1: are for like hardcore paranoid gold people like one stores
Speaker 1: it in Switzerland s g o L, and then one
Speaker 1: will deliver you physical coins O U n Z. Where
Speaker 1: do you stand? Do you think that the US would
Speaker 1: ever confiscate gold? Like? Are you it has right? The
Speaker 1: FDR did it? There are people s g O L
Speaker 1: has a billion dollars just because it stores the golden Switzerland,
Speaker 1: whereas g l D and I used store in the States.
Speaker 1: In Canada, so I understand that extreme of the gold bugs,
Speaker 1: and I wish them the best. I'm quite happy with
Speaker 1: an I A U or g l D A B
Speaker 1: A r B because in the scenario where getting that
Speaker 1: physical gold matters, I don't think it matters that you
Speaker 1: own an ETF that claims to have the physical gold. Yeah.
Speaker 1: I mean, look, gold has been around. It survived many civilizations,
Speaker 1: let alone generations, so I I respect it. I'm more agnostic,
Speaker 1: and I do think it isn't it's extra shaky as
Speaker 1: inflation hedge, but I have seen it work as a
Speaker 1: crisis hedge. But in two thousand and eight, for example,
Speaker 1: the market was doundt g l D was only up
Speaker 1: three So again it it didn't go down, but it
Speaker 1: could have gone down. It could have gone up. Who knows?
Speaker 1: Who are these people? I'm just in my Jerry Seinfeld
Speaker 1: emerged into Seinfeld. Sometimes I slowly get there and then
Speaker 1: I end up with who are these people? Um? Just
Speaker 1: to add on with gold one other thing, it gets
Speaker 1: a green lightner system, but it does get a tag
Speaker 1: with with A one. It has one infraction, which is
Speaker 1: alternative tax treatment. If you buy g l D or
Speaker 1: AU you get tax as if you want a collectible.
Speaker 1: And I think that's just something to point out here,
Speaker 1: and that's just one little tiny thing that does mar
Speaker 1: the buying of gold in terms of it being like
Speaker 1: plain vanilla. So the green light hedge's treasuries. Yes, so
Speaker 1: this is what I call the organic aisle. This is
Speaker 1: known unnatural preservatives, no chemicals. Treasuries are classic and they're big.
Speaker 1: They've got billions of dollars in assets. People use them
Speaker 1: all the time. Now, the question is where on the
Speaker 1: curve right do you buy your treasury E t F. Like,
Speaker 1: for example, t L T is a treasury E t F.
Speaker 1: So the pro is it tends to spike up in
Speaker 1: a crisis because there's a flight to safety. In two
Speaker 1: thousand eight, t LT was up the exact amount more
Speaker 1: or less that the market went down. It would have
Speaker 1: completely offset your market losses. However, if rates are going up,
Speaker 1: t LT is going to be hit the hardest. So
Speaker 1: there's an interest rate component that makes t LT sensitive.
Speaker 1: Then you start going down the curve till you get
Speaker 1: to stuff that's closer to quote cash. That stuff will
Speaker 1: buffer and it won't move, and it's it's consistency. It's
Speaker 1: sort of like going under a mattress. So the pro
Speaker 1: is it won't go down, but the con is it
Speaker 1: go up either. So there's even a risk to the
Speaker 1: organic treasuries depending on where you go on the curve. Mike,
Speaker 1: do stuff stuff under your mattress using treasuries absolutely? Um
Speaker 1: In in the short term space, I do use things
Speaker 1: like an s h V, which is a very ultra
Speaker 1: short term treasury index, right, so you're basically buying cash
Speaker 1: instruments um in an e T F rappers so you
Speaker 1: get a little bit more than cash out of it.
Speaker 1: Is SHV the same thing as a money market fund?
Speaker 1: Because I know some people probably use those. What's the difference?
Speaker 1: And can you replace some money market fund with an
Speaker 1: sh V? No, they are not the same thing. They
Speaker 1: are very very very close, but you don't have that
Speaker 1: guarantee of the dollar staying the exact same price. But
Speaker 1: the amount of risk you're taking to get a little
Speaker 1: bit more reward is probably worth it. What's the more
Speaker 1: reward with sh V A few more basis points are
Speaker 1: a few more per cents of a percent of yield
Speaker 1: um and uh. I do think though, in that space,
Speaker 1: if you want to stuff money under the mattress. If
Speaker 1: that's the way you want to protect, which I add
Speaker 1: resolutely advocate have some money on the side. Some cash
Speaker 1: cash is good, but you can go to some of
Speaker 1: the more interesting ones to get a little bit more yield.
Speaker 1: Like I think First Trust does a great job with
Speaker 1: f t SM. It's a short term fixed income fun
Speaker 1: and it's actively managed, especially with these short term things.
Speaker 1: I do think active management in fixed income makes a
Speaker 1: big difference. But before I I get too far down
Speaker 1: the line on the short term stuff, the long term stuff,
Speaker 1: the t l t s, those can be painful. Um
Speaker 1: So you know this year, for example, it's down, It's
Speaker 1: down a lot. It's down almost six or seven percent
Speaker 1: over the first couple of months of the year. In
Speaker 1: two thousand fourteen fifteen, you had moves in these things
Speaker 1: that are up in long term treasuries. People get confused
Speaker 1: by that this is long term treasuries and it can move.
Speaker 1: It can go the other way as well. I don't
Speaker 1: want anybody to wake up one day going I thought
Speaker 1: I had long term treasuries and I lost four that's
Speaker 1: actually possible. The the the organic part comes from the
Speaker 1: fact that it's just treasury bills there's nothing else going
Speaker 1: on in that fun it's a it's a green light
Speaker 1: zero for us, but I agree, and there's ones to
Speaker 1: even go further out in the curve. But I agree
Speaker 1: that there's a volatility level of deal. How can you
Speaker 1: give that a green light? Well, because our system is
Speaker 1: not passing judgment on the user or their motivation. It's
Speaker 1: just saying, is there anything in this et F the
Speaker 1: packaging of it that might be a surprise to me?
Speaker 1: And in the case of treasuries, we're assuming you know
Speaker 1: that these are twenty plus your treasuries and they have
Speaker 1: great risk. If you don't know that, maybe our system
Speaker 1: will worked out. Well. We're not saying it's gonna go
Speaker 1: up or down. We're just saying that that's what you're buying.
Speaker 1: There's nothing, there's no weird action in it, there's no derivatives,
Speaker 1: there's no hidden costs. It is what it is. Yeah,
Speaker 1: I would totally agree with the green light on this,
Speaker 1: but I would caution all your listeners to know when
Speaker 1: you take bonds and put them into an ETF, you
Speaker 1: lose one of the most important covenants of a bond,
Speaker 1: which is a maturity date, a date when you get
Speaker 1: your money back. That doesn't happen in in T L T.
Speaker 1: It is perpetually extending that maturity. And because of that,
Speaker 1: understand that although you're gonna get returns like a bond,
Speaker 1: you're not guaranteed to get your money back someday. Okay,
Speaker 1: bottom line, Mike, how should the average person approach hedging?
Speaker 1: So bottom line, don't try and time it. Be aware
Speaker 1: that time in matters way more than timing time in time.
Speaker 1: In the longer you're in, the less it matters about hedging. Right,
Speaker 1: So I love this idea of having some sh V
Speaker 1: or some cash of some alternative like assets like a
Speaker 1: g l D or a bar. All of those things
Speaker 1: matter over the long time, but in the short time,
Speaker 1: don't freak out. Right, if you have the right plan,
Speaker 1: everything will be fine. In other words, the ultimate hedge
Speaker 1: is patients. I love that. What's your favorite ticker? Well,
Speaker 1: I have to go with my own, so cheating, Well,
Speaker 1: it's t t F right, So as E t F
Speaker 1: T E t F it is the E t F
Speaker 1: that tracks the growth of the E t F industry.
Speaker 1: That's the ticker should have been meta, Yeah, you know what,
Speaker 1: we might change it, so I uh We've talked about
Speaker 1: the cyril metaphor before. I think and actually this was Eric.
Speaker 1: I think you are we're all done eating the cereal.
Speaker 1: You're the milk, the cereal milk at the bottom of
Speaker 1: the bowl. I don't know that I ever want to
Speaker 1: come up with that analogy. Um, you're welcome, But you
Speaker 1: know it's it's pretty straightforward and simple. We wanted to
Speaker 1: know all about the ETFs. In order to know about them,
Speaker 1: you have to know about the industry for creating them.
Speaker 1: So we created an index and it certainly does a
Speaker 1: lot better than the financials alone. You know what I
Speaker 1: like about t e t F not to like plug Mike,
Speaker 1: but the the stocks at hold. It's like black Rock
Speaker 1: States treat the index makers. So here you have an
Speaker 1: index that's essentially most of the passive companies X the
Speaker 1: ones that are all in no active and so I
Speaker 1: think some of that active as the trend continues, could
Speaker 1: weigh those down. So it's an interesting e t F
Speaker 1: that I think some people are confused by. They think
Speaker 1: it's an ETF that holds other e t s, but
Speaker 1: it actually just it's basically like the passive side of
Speaker 1: the financials. And next Mike, it's been a pleasure talking hedging,
Speaker 1: Biff Manure and Eric's amazing high school jail with you.
Speaker 1: This has been an experience I won't soon forget. Thank
Speaker 1: you for having me. I guess that's good time. Yeah, no,
Speaker 1: Mike had no ideas anymore. Thanks for listening New Trillions
Speaker 1: until next time. You can find us on the Bloomberg Terminal,
Speaker 1: Bloomberg dot com, Apple Podcast, pocket Cast, and a bunch
Speaker 1: of other places I probably haven't heard about yet. We'd
Speaker 1: love to hear from you on Twitter. I'm at Joel
Speaker 1: Webber Show, Eric's at Eric Baltunas, Mike's at Michael Underscore.
Speaker 1: The Noodoh with an E. Trillions is produced by Magnus Hendrickson.
Speaker 1: Francesca Levie is the head of Bloomberg podcast Pipe