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Speaker 1: Welcome a trillions. I'm Joel Webber and I'm Eric. I'll

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Speaker 1: tunis Eric. I think three banks have collapsed in one week.

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Speaker 1: That's pretty historic. Yeah, reminds me of what is it

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Speaker 1: fifteen years ago at this point, although I gotta say

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Speaker 1: it doesn't feel as crazy, and it feels more isolated,

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Speaker 1: and the FED stepped in very quickly and that feels good.

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Speaker 1: But yeah, this is a situation and we have to

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Speaker 1: push aside our scheduled agenda and lineup to cover this

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Speaker 1: for this so people understand what this means as ETF

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Speaker 1: investors when you have some companies kind of blow up.

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Speaker 1: I like that you said situation because maybe not a crisis.

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Speaker 1: Situation seems for real, let's consider it that. What are

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Speaker 1: the ETFs of note that we should be talking about today? Yeah,

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Speaker 1: we're going to explore them. So I know we have

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Speaker 1: Katie from Bloomberg News and some people from my team

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Speaker 1: on the show today. We all have tried to cover

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Speaker 1: this from different angles. And the situation that's not a crisis.

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Speaker 1: This situations from the Jersey Shore anyway. That aside, we've

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Speaker 1: been trying to cover this from all angles, both Bloomberg

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Speaker 1: News and Bloomberg Intelligence. And if I to pick one

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Speaker 1: ETF that's just in the crosshairs of this whole thing,

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Speaker 1: it's KRI, which is the Regional banking ETF. It's interesting

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Speaker 1: like every now and then, when there is a situation

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Speaker 1: or a crisis, you do tend to find there's an

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Speaker 1: ETF or two that just hits the spot. For this

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Speaker 1: crisis isn't in the middle of it. And this ETF

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Speaker 1: broke all kinds of volume records. It went down dramatically,

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Speaker 1: the short interest, the options activity. It became the focal

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Speaker 1: point for all kinds of big and small investors who

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Speaker 1: needed to quickly position to deal with this situation. And

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Speaker 1: KRE was just fascinated to watch. There are many other

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Speaker 1: angles to this, but I think we should sort of

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Speaker 1: explore what the ripple effects are when you have a

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Speaker 1: company like this completely just disappear. I mean, it went

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Speaker 1: to zero. And how does that work, How do ETFs adapt,

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Speaker 1: how do people use them, how does it affect the returns?

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Speaker 1: There's definitely ETF angles all over the place for this. Okay,

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Speaker 1: So to walk us through this mail storm, we've got

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Speaker 1: James Sabert with Bloomberg Intelligence as well as Athanasios Saraphagus

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Speaker 1: and Katie G. Bloomberg News, this time on Trilliance the situation. James,

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Speaker 1: Katie Athanasius, Welcome back to Trilliance. You're glad to be back.

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Speaker 1: Welcome back to the situation. Thanks for having me. We've

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Speaker 1: all been talking about the situation for a while, and

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Speaker 1: we're going to talk about it a little bit more

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Speaker 1: now because what I haven't actually talked about with any

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Speaker 1: of you is the what's happening in ETFs. So let's

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Speaker 1: start with kar which we teased at the top. James,

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Speaker 1: what the hell has happened? Yeah, so Eric, Eric did

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Speaker 1: a good job of teasing what happened, but essentially Kerry

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Speaker 1: became the center of like everything in the financial universe.

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Speaker 1: I mean, Kry itself had seventeen stocks and portfolio that

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Speaker 1: traded down over twenty percent on Monday, March thirteenth in

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Speaker 1: the morning. Tons of them were halted, About eleven names

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Speaker 1: were halted. The options activity on this thing went through

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Speaker 1: the roof. Tons of people were buying calls and puts,

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Speaker 1: selling calls and puts, what have you, and the volume

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Speaker 1: broke all kinds of records. And Kry isn't the only

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Speaker 1: regional banking e TF. We're going to get into some

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Speaker 1: of them. There's a lot of bank ETF, there's a

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Speaker 1: lot of financials ETFs, but there's like about six that

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Speaker 1: I really looked at that we're regional banking or banking

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Speaker 1: specific that even all of them saw massive increases in volume.

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Speaker 1: There was even a leverage version, which we can dive

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Speaker 1: into a little bit too. But KRY was definitely at

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Speaker 1: the center of this whole storm. Katie, When did you

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Speaker 1: learn about KRI? I learned about KRI. I mean it's

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Speaker 1: always it's one of those ETFs that I know of,

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Speaker 1: But how many times in my normal working life do

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Speaker 1: I need to like look at the regional bankst midside

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Speaker 1: banks being like, yeah, out of nowhere, who are these players? Yeah,

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Speaker 1: Like I'm much more familiar with XLF for example. And

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Speaker 1: then I mean the big brother of KRI k b E,

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Speaker 1: which are just broad banking ETF. So I mean KAR

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Speaker 1: sort of like what we've been talking about, Like it

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Speaker 1: feels like when these situations happen, or when you have

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Speaker 1: crisis moments, some sort of big moment of up people

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Speaker 1: in the market, there's like one ETF that becomes the

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Speaker 1: poster child that everyone is just constantly checking in for

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Speaker 1: whatever reason. It's KR even though I mean I know

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Speaker 1: that I Shares, for example, has a regional banking ETF

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Speaker 1: as well, but it feels like KRI is as we're

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Speaker 1: trying to figure this out on the fly, how much

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Speaker 1: anxiety there actually is. This is sort of the risk

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Speaker 1: appetite monitor. Yeah. One thing to add to what Katie

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Speaker 1: was saying was that one of the reasons think KAR

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Speaker 1: became such the focal point is that all the stocks

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Speaker 1: are equal weighted. So SVB had a nice juicy waiting

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Speaker 1: at two percent, and so it could be used as

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Speaker 1: a surrogate not only for all the regional banks, but

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Speaker 1: SVB itself, So a lot of institutions and hedge funds.

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Speaker 1: I think we're using this to hedge themselves from this situation.

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Speaker 1: And secondly, though on the flip side, the fact that

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Speaker 1: it was only a two percent waiting, I think speaks

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Speaker 1: to why people like ETFs is that you're diversified. So

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Speaker 1: SVB was down it looks like sixty three percent in

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Speaker 1: that you know, in March basically, but the ETF was

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Speaker 1: down twenty six percent, so you weren't down near I

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Speaker 1: mean twenty six is really bad for this product, but

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Speaker 1: still you are protected a bit from single stock risk.

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Speaker 1: So I think those are two also points to you know,

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Speaker 1: put put out there in terms of how stocks that

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Speaker 1: go crazy can impact ETFs. The one thing that we

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Speaker 1: haven't really touched on is there were you said there

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Speaker 1: was multiple banks that went down, there was also a

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Speaker 1: Signature bank that went down. So one of the things

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Speaker 1: I looked at is as the one that Katie mentioned,

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Speaker 1: the I Shares Regional Banking ETF ticker IAT and KARE,

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Speaker 1: they both had both of them had exposure to both

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Speaker 1: Silicon Valley Bank and Signature Bank. So I actually had

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Speaker 1: a higher rating at four point six percent for both

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Speaker 1: of them, and KRE had four point one percent. And

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Speaker 1: both of those, I mean, they're their equities are worthless now,

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Speaker 1: so they're both gone to zero. So if you look

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Speaker 1: at the bonds, they're Signature Bank is trading at about

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Speaker 1: nineteen cents on the dollar for the bonds, and then

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Speaker 1: if you look at the Silicon Valley Bank, they're trading

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Speaker 1: near fifty cents in the dollar. But still that means

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Speaker 1: that the equity is wiped out, so it's one hundred

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Speaker 1: percent loss in March essentially, And yeah, you know, this

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Speaker 1: actually reminded us of an episode Joel that we did

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Speaker 1: about a year ago, and Athanasius and Rebecca brought this

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Speaker 1: up in that it felt like Russia in that you

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Speaker 1: have this whole, this exposure in and fun that's just gone,

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Speaker 1: like basically it's worthless. Even though it's a completely different situation,

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Speaker 1: it's kind of the same, Athanasio. One thing that stuck

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Speaker 1: out to me has been the volumes that have kind

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Speaker 1: of hit this, Like obviously there were some noteworthy investors.

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Speaker 1: The lackman comes to mind, saying like, hey, there's a

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Speaker 1: fire sale happening here that had all of the shares

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Speaker 1: had already tanked by that point. Was there a buying

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Speaker 1: opportunity there? Yeah, I think people want it to step in.

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Speaker 1: Maybe not on SVB specifically because it was halted, but

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Speaker 1: I think they were using the ETF as a proxy.

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Speaker 1: But while KRE is the focal point now, I'll be honest,

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Speaker 1: I didn't know a lot about SVB before this, Like

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Speaker 1: did you know it's an SMP five hundred company? So

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Speaker 1: I think you're gonna have a situation where it's going

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Speaker 1: to start popping up in these ETFs that people didn't know.

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Speaker 1: You're like, oh my god, it's in that ETF two.

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Speaker 1: There's probably one hundred two hundred plus ETFs that hold

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Speaker 1: it just because it was so well spread out. So um, yeah,

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Speaker 1: I think we're going to be surprised to see how

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Speaker 1: far the reach is because it's going to be touching

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Speaker 1: a lot of different ETFs. I mean to the point

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Speaker 1: on sort of buying opportunities and what you do actually

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Speaker 1: on et F i Q. On Monday, Eric and I

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Speaker 1: spoke to Eduardo Ripetto, who's the CIO over at Avantis Investors.

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Speaker 1: He manages the advantis US small cap value ETF. It

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Speaker 1: has five and a half billion dollars. A lot of

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Speaker 1: that is in banks. That's their top industry waiting. It's

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Speaker 1: an actively managed fund. So we talked to him on Monday,

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Speaker 1: and my question to him was are you shifting around

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Speaker 1: your allocations at all? Are you doubling down or you

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Speaker 1: de risking or you riding this out? And the answer

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Speaker 1: that I got was just riding it out. You know,

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Speaker 1: if you're managing a portfolio right now, you want to

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Speaker 1: be you know, somewhat committed to your view and that

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Speaker 1: was what he said. And you look at what happened

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Speaker 1: the rest of the week, it seems like that was

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Speaker 1: an okay call. This situation reminded me of a mini

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Speaker 1: version of two thousand and eight. As I said earlier,

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Speaker 1: and I'll never forget when when I was writing my

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Speaker 1: first book on the ETFs and I talked to Rob

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Speaker 1: are not PRF is a rafi ETF that's fundamentally weighted,

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Speaker 1: and it's not. It's a smart BADTF. So it uses rules,

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Speaker 1: and the rules saw that banks were cheap in early

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Speaker 1: two thousand and nine, so this ETF rotated and had

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Speaker 1: fifty percent bank stocks. In two thousand and nine, no

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Speaker 1: active managers would buy bank stocks. They were radioactive at

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Speaker 1: that point. But that one trade produced alpha for that

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Speaker 1: ETF for like ten years, and some like I think

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Speaker 1: Ben Johnson from Morning Star, I think he's the one

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Speaker 1: credited with this, called it the immaculate rebalance. So to

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Speaker 1: Eduardo's point, you know, not only if, especially as a

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Speaker 1: quant as he is, you know, rotating into some of

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Speaker 1: these really rough situations is where you pick up your

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Speaker 1: return over the average. So it's just the question of

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Speaker 1: is it done, And that's obviously the big question. But

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Speaker 1: certainly I think opportunity is here, especially if the Fed

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Speaker 1: and Biden have been pretty much vocal that they're not

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Speaker 1: going to let any anything go wrong. We mentioned two

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Speaker 1: banks here, I think we neglected to mention that third,

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Speaker 1: which is silver Gate, which was actually first and had

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Speaker 1: a lot of crypto exposure, too many as all SI.

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Speaker 1: Funny enough, right, so silver Gate Silicon Valley Bank, and

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Speaker 1: then don't run a bank that starts with S or SI.

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Speaker 1: But uh, that was the silver Gate was the smallest

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Speaker 1: of this was that in the ETS James silver Gate

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Speaker 1: was also an ETS but a little bit less. But

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Speaker 1: that's that's still trading. So you can still trade the

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Speaker 1: equity on silver Gate. Um, it's it's winding down, but

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Speaker 1: you can still you can still trade the equity on

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Speaker 1: silver Gate. Okay, I think if we have one one

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Speaker 1: area that saw a black eye here, it has to

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Speaker 1: be esg Um. When you look at this, I looked

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Speaker 1: at the holders of I'm shocked, as you're coming out

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Speaker 1: of your mouth. I know I'm getting a reputation as

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Speaker 1: ESG hater, but again I'm not anti Eesg. I'm anti nasty, surprised,

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Speaker 1: and this is a great teachable moment. I looked at

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Speaker 1: the holders of SVB, and the number one fund was

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Speaker 1: a sustainable fund. And then I looked and fifty ESG

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Speaker 1: ETFs and mutual funds hold this stock. So clearly this

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Speaker 1: stock checked all the right boxes for ESG. The bigger

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Speaker 1: point isn't that ESG messed up. This stock really satisfied

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Speaker 1: its metrics. The bigger point is ESG metrics and scoring

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Speaker 1: high there doesn't necessarily mean the companies doing well on

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Speaker 1: in their books or is profitable. Those are two entirely

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Speaker 1: different things. So it's I think maybe a little bit

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Speaker 1: of a wake up call if you are an ESG investor.

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Speaker 1: Just know that there's a difference and that ESG might

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Speaker 1: not catch this and it doesn't really look at some

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Speaker 1: of these metrics that that this company had. It was

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Speaker 1: really more concerned with those again ESG metrics, and they man,

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Speaker 1: this company was like highly highly rated on the SG front.

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Speaker 1: I mean, we debated this. I see his point. I

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Speaker 1: don't you know. I think it's a loose connection ESG

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Speaker 1: to you know, the visions management of the But to

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Speaker 1: Eric's point, esg's an active decision, right, So it's really

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Speaker 1: a teachable moment in that you know it's going to

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Speaker 1: pop up in a lot of these ets. It's an

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Speaker 1: active decision to besg or rate it based on these metrics.

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Speaker 1: It's got climate tech exposure. This is great. Yeah, you know, so,

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Speaker 1: like you said, it's a teachable moment. But to the

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Speaker 1: point I was making before it was in the SMP,

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Speaker 1: it's going to get shoved into a lot of them

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Speaker 1: because I think that's a bigger teachable moment than just

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Speaker 1: DSG eric but point ticking. That's why we say it.

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Speaker 1: For like the second half of the conversation I said

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Speaker 1: it was it was less of an important point. But

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Speaker 1: it's a story that Bloomberg News wrote. It's a story

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Speaker 1: that I saw Investment News. Another thing that was brought

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Speaker 1: up here was, you know, last week we had we

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Speaker 1: talked about the inverse. Jim Kramer ETF Kramer said people

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Speaker 1: should buy this at three hundred and forty dollars about

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Speaker 1: a month ago. I was waiting. I couldn't wait for

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Speaker 1: us to talk about this because what when we did

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Speaker 1: our our segment, our last segment, which was one of

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Speaker 1: my favorites, I was like, oh my, this is like

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Speaker 1: perfectly timed. But here's the thing though, was SBB SBB

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Speaker 1: came out of his mouth at a moment that they

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Speaker 1: could invest. No, it was too early. It was a

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Speaker 1: month before the ETF launched, so it was too back

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Speaker 1: in the rear view mirror. So unfortunately it missed that.

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Speaker 1: Had it caught, that SGIM would have started life on

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Speaker 1: third base. I mean that this would have been a

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Speaker 1: great moment. That said, even without that bet, SGIM is

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Speaker 1: still out performing the S ANDP by about five percentage

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Speaker 1: points in the first eight days of trading. It's off

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Speaker 1: to a pretty good start. But yeah, that would have

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Speaker 1: been an epic call. And that's why that ETF exists,

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Speaker 1: is to try to catch a few of those grand

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Speaker 1: slams that he's capable of. So that's another sort of

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Speaker 1: minor ETF angle on this. I wish this was in

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Speaker 1: it because I think it'd be such a great case

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Speaker 1: study because they would have them so little. They would

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Speaker 1: have shorted it right, and then I'm assuming they would

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Speaker 1: have shorted it and then the ETF was halted, so

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Speaker 1: you'd have this situation where like they were right, they

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Speaker 1: couldn't actually realize the position because it got halted to covers.

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Speaker 1: You have like this amazing case study that it may

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Speaker 1: have worked out even better because it's like you get

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Speaker 1: like the you know, the press off of it, but

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Speaker 1: not yet exactly, and they would be sitting on this

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Speaker 1: like massive gain in not being able to realize it.

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Speaker 1: I think it'd just be like such an amazing case study.

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Speaker 1: There's one more, very minor e ETF angle in the

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Speaker 1: leveraged area, so Ethanasios pointed this out. There's two leverage

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Speaker 1: triple leveraged regional bank ETFs. If you're looking for some excitement,

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Speaker 1: these things are jacked up. But one of them, the

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Speaker 1: one that goes negative three x closed, and it's one

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Speaker 1: of those cases. We see this a lot where an

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Speaker 1: ETF is out for say five, six, seven years, and

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Speaker 1: it just liquidates and then its moment arrives like two

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Speaker 1: years later or six months later even And I gotta

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Speaker 1: imagine directions kicking themselves because that would have been a

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Speaker 1: great ETF to play it. That said, the three x

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Speaker 1: long version, which is dpst deposit is still up, and

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Speaker 1: people the volume on that spiked and people were shorting

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Speaker 1: it to recreate a negative three x position. So when

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Speaker 1: you have a stock like this create waves and volatility,

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Speaker 1: you attract the gambling trading crowd. Like crazy. It's like

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Speaker 1: chum in the water. And so I'm not surprised the

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Speaker 1: leveraged world got like some love too. I am surprised

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Speaker 1: that those ever existed though, like they do seem too specific,

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Speaker 1: but I guess this is why they thought a moment

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Speaker 1: like this could happen. Eric, I'm curious. I know how

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Speaker 1: much your dad loves leverage gtfs. Were these ones that

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Speaker 1: he reached at you about. No, No, he's he's really

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Speaker 1: really just into bedding on college basketball and stuff. I

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Speaker 1: don't think he's doing ets. It's a good times. Yeah.

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Speaker 1: The one thing we didn't talk about is the tickers.

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Speaker 1: So I mean, I must I must say I love

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Speaker 1: the pairing of tickers. Oftentimes you get these leverage ETFs

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Speaker 1: and they have really good tickers. And the three X

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Speaker 1: bowl one is DPST a play on the word deposit,

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Speaker 1: and the three X inverse was w d RW, a

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Speaker 1: play on withdrawal. So it was so they were very

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Speaker 1: they were very good tickers. The other thing I'm saying

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Speaker 1: is I don't think Direction wanted to close w DRWM.

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Speaker 1: They it would. W DRW was part of that, Like

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Speaker 1: there was like eighty leverage funds that had to close

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Speaker 1: during March twenty twenty because volatility thresholds were broken. There

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Speaker 1: was issues with like Evil even being able to operate

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Speaker 1: the ETFs, so like this was part of that whole scenario.

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Speaker 1: But I'm sure they wished they had relaunched if they

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Speaker 1: could have. Was part of the March twenty twenty wipe

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Speaker 1: out of leveraged. That said, though, I would think the

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Speaker 1: negative would have done better and not been a risk,

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Speaker 1: whereas I don't know. I don't they probably could have

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Speaker 1: lowered this inverse one to negative two x and it

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Speaker 1: would have satisfied. But I'm guessing there just wasn't enough

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Speaker 1: interest at the time and they were just like this one,

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Speaker 1: we're just going to close. Because a lot of them

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Speaker 1: they either lowered the leverage from three x to two

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Speaker 1: x or even one x in some cases, or or

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Speaker 1: they just closed them. And it looks like they closed

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Speaker 1: the withdrawal ETF because, like you said, it might have

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Speaker 1: been too niche. So they left the bullish one open

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Speaker 1: for whatever reason. It had enough assets and interest, but

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Speaker 1: they had to close this one. And Athanasios, one note

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Speaker 1: you wrote which I thought is interesting, which is sort

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Speaker 1: of a pivot from this, is that it wasn't just

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Speaker 1: volume and carry volume and ETFs in general spiked on

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Speaker 1: March tenth in a way that suggested a lot of

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Speaker 1: fear out there. And you just talk about your note

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Speaker 1: where you say that this what you think is happening

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Speaker 1: is bears or back in control of the market. Yeah,

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Speaker 1: I mean, it's just that's where everyone goes towards the

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Speaker 1: ETF first. But if you look at just ETFs as

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Speaker 1: or percentage of total volume, we shout up to like

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Speaker 1: forty percent, which is really really high. I mean that's

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Speaker 1: what we saw again during March. So yeah, and for

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Speaker 1: the you know, for the first time, you know, we

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Speaker 1: started knowing this slash year. It was always been in

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Speaker 1: favor of the inverse ETFs. They've always sort of outpaced

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Speaker 1: long and the lungs are actually starting to come back slowly,

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Speaker 1: but this completely put it back into the favor of

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Speaker 1: the short So this was probably the biggest freak out

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Speaker 1: moment we saw on a probably since the Russia invasion

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Speaker 1: of last year. So yeah, definitely just led to a

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Speaker 1: lot of trading and all ETFs, not just the bank ones.

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Speaker 1: So a freak out that became a situation, what is

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Speaker 1: it going to be now? I mean just looking at

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Speaker 1: flows and trading, people are still a little nervous. They've

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Speaker 1: been like that for a year. I don't think I've

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Speaker 1: haven't seen really people jump in aggressively. But I think

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Speaker 1: the bigger issue is why does all the bad stuff

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Speaker 1: happen in March? Yes? Right, I was talking about this

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Speaker 1: with someone yesterday. It seems like COVID this we're almost

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Speaker 1: at the anniversary of the fed's liftoff hike. Is Mars

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Speaker 1: and retrograde? It might be. I mean, yes, this is

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Speaker 1: almost to IDEs of March episode. And on that note,

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Speaker 1: we will wrap. Katie Ethanasius James, thanks very much for

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Speaker 1: running us in Trillions, Thanks for having us to be aware,

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Speaker 1: Thanks for listening to Trillions until next time. You can

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Speaker 1: find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcast, Spotify,

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Speaker 1: and wherever else you like to listen. We hear from you.

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Speaker 1: We're on Twitter, I'm at Joel Wepper Shows, He's at

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Speaker 1: Eric Calcuna's. This episode of Trillions was produced by Magnus Hendrickson.

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Speaker 1: Bye