Speaker 1: Welcome on Trillions. I'm Joel Webber and I'm Eric bel Tunis.
Speaker 1: Eric new launch just happened very much, caught your attention
Speaker 1: and you immediately we're like, we gotta get these guys
Speaker 1: on Trillions to talk to him. What's the product. Yeah,
Speaker 1: there's two launches a year, that's over one a day,
Speaker 1: and I don't know, maybe five or six just catch
Speaker 1: my attention big time over the course of the year.
Speaker 1: This is one of them. Because just when you think
Speaker 1: there's no white space left and etf, somebody comes around
Speaker 1: with something that's pretty original and this is really interesting idea.
Speaker 1: It's called night Shares, that's the name of the brand,
Speaker 1: and it really tries to put into reality something that
Speaker 1: we've been reading about over the past several years where
Speaker 1: you see this article or study that that points out that, hey,
Speaker 1: if you only hold the U S Stock market at night,
Speaker 1: in other words, you buy at the clothes and you
Speaker 1: sell it the open, so you hold it overnight and
Speaker 1: you don't hold it during the day. You crush holding
Speaker 1: it during the day. There's something about that. It's like
Speaker 1: a phenomenon, but it's really never been tried in reality
Speaker 1: because there are real world issues that have probably stopped
Speaker 1: some people from trying it, Um. But here we have
Speaker 1: an et f issuer or that's come out and said
Speaker 1: we're going to try to do this, and they have
Speaker 1: two launches that have our live which is the large
Speaker 1: caps and then a small cap version. So they're trying
Speaker 1: to capture what they call the night effect. Um. And
Speaker 1: you know, we'll there, we'll go into, you know, some
Speaker 1: of the hurdles and challenges, but it's gonna be a
Speaker 1: fascinating experiment. Joining us on trillions is gonna be Max Cookman,
Speaker 1: he's this chief investment officer, and Bruce Levine he's the
Speaker 1: CEO this time on trillions, the night Effect Bruce, Max,
Speaker 1: welcome to Trillion, Thanks so much for having us, nice
Speaker 1: to be here. Can you explain the big idea here,
Speaker 1: Bruce absolutely, Um. You know Eric touched on it. The
Speaker 1: big idea is that there are some unusual differences between
Speaker 1: what happens in the markets overnight and during the daytime session,
Speaker 1: and the overnight session historically has shown far better returns
Speaker 1: and it's far better behaved from volatility standpoint. So we
Speaker 1: find the night session to be a really interesting, uh
Speaker 1: place to play, and we brought ETF to market that
Speaker 1: would for the first time separate these very unique and
Speaker 1: differentiated return streams between the day and night and and max.
Speaker 1: How do you actually set this up to work? Right?
Speaker 1: Because it's as Eric mentioned in the in the beginning there,
Speaker 1: it seems like, you know, very obvious idea, but like,
Speaker 1: how do you actually bring this into practice? Yeah, and
Speaker 1: this is actually one of the things that made me
Speaker 1: think a bit of the myth of Prometheus, where we're
Speaker 1: taking something that exists that was uncapturable for for a
Speaker 1: common investor in bringing it down to them. Um, it
Speaker 1: actually is is a little bit more complex, and it
Speaker 1: requires uh some knowledge of derivatives, that requires understanding how
Speaker 1: the futures market works, how total return swaps work. Because
Speaker 1: we really want to create an efficient exposure tonight effect
Speaker 1: where we really make it um something that considers the impact,
Speaker 1: that considers tea costs and um. The way we're implementing
Speaker 1: it right now is we're buying futures at the close
Speaker 1: and selling them at the open, and as we scale,
Speaker 1: we're able to really expand on that construction to continue
Speaker 1: making it highly efficient. Okay, UM, I want to circle
Speaker 1: back on you call tea cost transaction costs. That's been
Speaker 1: a big worry or I guess something people who pointed
Speaker 1: out when a table I just for one second, I
Speaker 1: want to get back to the night effect, Bruce. And also,
Speaker 1: can you explain why why would the stock market do
Speaker 1: better at night than during the day. What factors are
Speaker 1: contributing to that? And that's a really great question, and
Speaker 1: it was so interesting to look at it. And the
Speaker 1: first time you see this data, it's just stunning. Uh.
Speaker 1: You know, there's been research done for a long time.
Speaker 1: There's sort of three buckets of reasons. I call it.
Speaker 1: One is just that there's news flow when the markets
Speaker 1: are closed. So this could be earnings announcements, which although
Speaker 1: not universally positive on balanced stocks trade up and then
Speaker 1: M and A, which is generally extremely positive for the market.
Speaker 1: So those all happen when the markets are closed, so
Speaker 1: you have to be invested to catch them. The second
Speaker 1: thing is just structural de risking that seems to happen
Speaker 1: among institutions. And an example this would be an et
Speaker 1: F market making firm. Their business is to play between
Speaker 1: the bid and the ask all day long, but their
Speaker 1: business is not to hold inventory overnight, so at the
Speaker 1: end of the day, they kind of flatten out their
Speaker 1: positions and then they kind of read buying the next morning.
Speaker 1: And then the last one is also kind of there's
Speaker 1: a bunch of complexities that you can avoid if you
Speaker 1: just get out by the end of the day. So, um,
Speaker 1: we found this pattern, uh of the night effect happens worldwide,
Speaker 1: which is interesting. So there must be something going on,
Speaker 1: you know, And it's I've seen people pitch their whole
Speaker 1: investment strategy to investors, and what they pitch is we
Speaker 1: get out so you can sleep at night. And and
Speaker 1: it also almost leaves something on the table for those
Speaker 1: that are you know, not so m scared by the
Speaker 1: overnight session. Yeah, we we think that your money should
Speaker 1: work while you sleep, not and not make you, you you know,
Speaker 1: work harder during the day. Well, I mean, I guess
Speaker 1: people who invest in bitcoin may differ from that because
Speaker 1: on the weekend you can see them having to suffer
Speaker 1: when all the stock people are like, I'm not I
Speaker 1: have nothing to worry about on the weekend. But anyway,
Speaker 1: but it's true, the market doesn't ever truly sleep. It's
Speaker 1: just you only see the prices in action during those
Speaker 1: whatever eight hours during the day. But it's still like
Speaker 1: like a lot of times, they'll be news out of
Speaker 1: UM over the weekend or before the market, and I'll
Speaker 1: do G I, P O and Bloomberg which is UM
Speaker 1: intra day pricing, and I'll tweet out, you know, pre
Speaker 1: market trading the S and P s up two on
Speaker 1: this news or whatever. Now, I will say sometimes it's
Speaker 1: bad like such and such a down on this news.
Speaker 1: And I guess, Bruce, I'll come back to you on
Speaker 1: that question, which is that you know, take something like earnings. Okay, fine,
Speaker 1: in a good market, earnings will be good and announced
Speaker 1: after the clothes. But wouldn't that wouldn't there be the
Speaker 1: reverse in like this kind of market where it's harder
Speaker 1: to get let's say we hit a recession or whatever. Um,
Speaker 1: you know, wouldn't that just be negative for the night effect? Yeah?
Speaker 1: You know, it's interesting when you look at the numbers
Speaker 1: yere to day in a in a really tough market
Speaker 1: where there's been a lot of news. Um. The you know,
Speaker 1: if you were buying a hold here today, you're down
Speaker 1: far more than if you were just owning the night session.
Speaker 1: So you can see you can sort of feel this
Speaker 1: viscerally if you've been in the markets here to date
Speaker 1: where you've had all these days where uh, the markets
Speaker 1: open kind of either slightly up, kind of flattershed slightly
Speaker 1: down and then just start picking up steam to the
Speaker 1: cell side. And so um, we have not seen nearly
Speaker 1: as much you know, damage coming in the night session
Speaker 1: this year, so um. And and that's consistent with our
Speaker 1: research which was you see far more left tail events
Speaker 1: happening during the day, you know, statistically than you do
Speaker 1: happening a night. Okay, So I'm really curious. You guys
Speaker 1: have had to have done a ton of back testing
Speaker 1: on this. Um, how is it held up like both
Speaker 1: both recently while you know, markets have been incredibly turbulent
Speaker 1: so far this year, but also more historically, it's it's
Speaker 1: held up really well. I mean, I'll give you an
Speaker 1: example of small caps so UM year to date, if
Speaker 1: you just held say, you know, a small cap up index,
Speaker 1: you'd be down about two If you just held the
Speaker 1: night portion, you'd be down less than six percent. So
Speaker 1: it's pretty substantial. And as we look at it historically, UM,
Speaker 1: it's important to note that this effect does not always
Speaker 1: work right And and by the way, I think if
Speaker 1: anyone comes on the podcast and says, hey, we found something.
Speaker 1: It's always gonna work. It's always going to generate you alpha.
Speaker 1: I would hope there's a lot of skepticism in the room. Um,
Speaker 1: but we do find that if we do like a
Speaker 1: rolling one three five year analysis of sharp ratios or
Speaker 1: um or returns, the night effect consistently does outperform the
Speaker 1: day's session. And it's across a lot of different betas.
Speaker 1: Um let me let me just let me just jump
Speaker 1: in there real quick. Um, So you talk about this.
Speaker 1: I remember looking at the Bespoke study, which was the
Speaker 1: one I think that the papers covered, the media covered
Speaker 1: like a year ago. Bloomberg had an article on it. Anyway,
Speaker 1: it shows that the night returns something like six and
Speaker 1: the day was like flat or down. Even so, a
Speaker 1: very cool chart. One line goes up big, one line
Speaker 1: is flat. However, if you just held the S and
Speaker 1: P five and didn't do just held at the whole time,
Speaker 1: you were up. So I guess what would you say
Speaker 1: to somebody who's like, well, what I'm not going to
Speaker 1: just hold during the day, I'm gonna hold day and night.
Speaker 1: Isn't that just easier? I would say, it's it's it's
Speaker 1: a story of risk and return, right, and I think
Speaker 1: especially in this environment where investors are looking for ways
Speaker 1: to well create a more divorce PI portfolio, create a
Speaker 1: more stable portfolio, it's really important to consider the denominator
Speaker 1: of what should be really any acid allocation equation, which
Speaker 1: is your standard deviation. And it's true about with large caps.
Speaker 1: You do see a positive day effect. And yes, you
Speaker 1: will earn more money if you hold twenty four hours
Speaker 1: over most periods, but you will do so at the
Speaker 1: expense of a disproportionately higher risk. Yeah. So I would
Speaker 1: just add to that that potentially, Eric, you can expand
Speaker 1: your equity exposure if you're playing in the lower risk
Speaker 1: portion of them. You know of the equity market, and
Speaker 1: that's what the night session is. So that's one thing.
Speaker 1: And then the other thing I'll add is um that
Speaker 1: chart you referenced was a was a large cap, but
Speaker 1: what we found in small caps was really surprising, which
Speaker 1: was that the day portion of the Russell too over
Speaker 1: time was negative. So they're holding the night only actually
Speaker 1: outperformed not only on the risk side, but on the
Speaker 1: performance side. So I'm curious anything that ever seems this
Speaker 1: good to be true feels like, just like, why hasn't
Speaker 1: somebody else figured this out or figured out a way
Speaker 1: it are this? And specifically I'm just thinking of hedge
Speaker 1: funds who have you know, teams of analysts specifically trying
Speaker 1: to find things like this that are just sitting in
Speaker 1: in plain side, even if that plain side as the
Speaker 1: lights off. But why, you know, why hasn't this been
Speaker 1: exploited yet and what risks does that maybe create? Yeah,
Speaker 1: so we know there's some hedge funds doing this trade
Speaker 1: and you know there are people playing at it. UM
Speaker 1: asked for why it's never been packaged as an E
Speaker 1: t F M. I don't know, other than you know,
Speaker 1: I've spent like twenty years doing E t F product
Speaker 1: launches that I've never seen the research. In the minute
Speaker 1: I saw it, I said, wow, this is really interesting. Um,
Speaker 1: in terms of the risks. Uh, really, I think mind,
Speaker 1: your question is if it works as it get arped away,
Speaker 1: And that's a really fascinating question and I hope we
Speaker 1: find out, UM. But the question is at what level right,
Speaker 1: and even how structural it is and how the research
Speaker 1: has been out there for a while and the phenomenon
Speaker 1: persists are sensitive takes it would take quite a lot
Speaker 1: of capital to r to trage it away if if
Speaker 1: that's even going to occur. I mean, for me, there
Speaker 1: there's no question that hedge funds are doing it. We
Speaker 1: we have a sister company that that is a hedge fund,
Speaker 1: which is actually where of this effect was discovered UM
Speaker 1: and this is one of our strongest um effects that
Speaker 1: we do capture there. And we just see that a
Speaker 1: lot of structural things, whether it's earnings, economics, announcement, et cetera,
Speaker 1: they do occur when cash markets are closed. You see,
Speaker 1: investor makeup is very different between who trades in equities
Speaker 1: when US markets are closed in terms of European institutions
Speaker 1: and Asian institutions, and so those are the things that
Speaker 1: are really key versus if I say, hey, I found
Speaker 1: this really cool skew and options and I'm going to
Speaker 1: trade on it. Well, yeah, once you start doing that
Speaker 1: in size, everyone else starts reverse engineering it and you
Speaker 1: see about alpha fade UM. We think the structural reasons
Speaker 1: is why this effect can be significantly more persistent. So
Speaker 1: right now you've you've got US focused products. But at
Speaker 1: the beginning you mentioned that you've noticed this night effect
Speaker 1: actually has global potential, right, so I'm wondering, you know, what,
Speaker 1: what kind of global ideas are you kind of eyeing here,
Speaker 1: and what what challenges withoud that product potentially create. So
Speaker 1: we have a pretty long product development queue because it
Speaker 1: when you start to really dig into this night effect,
Speaker 1: there's lots of different ways to work with it, and
Speaker 1: so we would expect at some point to have products
Speaker 1: that offer us investors, um perhaps the chance to be
Speaker 1: in different segments of the market at different times over
Speaker 1: the twenty four hour cycle, so that we're sort of
Speaker 1: capturing the right effect differently as time persists. Uh, so
Speaker 1: you know, stay tuned for that. Um, Okay, we gotta
Speaker 1: here's the big challenge. So I've seen people right about
Speaker 1: this the replies on Twitter, and this is part of
Speaker 1: what the factor world sometimes bumps up against, especially momentum,
Speaker 1: is the fact that you have to trade a lot
Speaker 1: to keep up with this. So I'm just gonna do
Speaker 1: quick math correct if I'm wrong. Let's say I know
Speaker 1: you're using futures, but let's say you held spy during
Speaker 1: the night only to one basis point a bit as spread.
Speaker 1: So if you add up two hundred days of doing that,
Speaker 1: what is that three four hundred basis points of trading costs.
Speaker 1: That's four So that's like a hurdle to get over.
Speaker 1: And because it's ongoing, it's like a constant corrosion to
Speaker 1: the returns and that has been I think one of
Speaker 1: the biggest um pushbacks on this strategy is that it
Speaker 1: can't be done in the wild because transaction costs would
Speaker 1: eat you alive. So what's your plan for that? Yeah,
Speaker 1: that's absolutely um probably the and the strategy hasn't been
Speaker 1: tried before. So look, our goal is to give you
Speaker 1: the greatest institutional execution quality we can and to do it,
Speaker 1: you know, across we're looking across a number of different
Speaker 1: vehicles to do it. We're starting out with futures and
Speaker 1: you know what we see internally is that we think
Speaker 1: we can trade you know, somewhere between a half a
Speaker 1: basis point and a basis point per day. Okay, so
Speaker 1: if you analyze that over two days, you know that's
Speaker 1: basis points. And then we have cash collateral that backs
Speaker 1: up the futures contracts that's going to sit in treasuries
Speaker 1: and cash, and now that rates have popped up a
Speaker 1: little bit, you know, we may be able to get
Speaker 1: a large percentage of that offset from the cash collatoral.
Speaker 1: Now let's explain this again, uh like the local third
Speaker 1: grade style UM, because when you use futures, right, you
Speaker 1: you you buy a little bit, but you get a lot.
Speaker 1: So just explain the sort of dynamics of how you
Speaker 1: can hold treasuries because when someone pulls this up, I
Speaker 1: guess eventually they're going to see a bunch of treasuries
Speaker 1: in here, right, They're not going to see the S
Speaker 1: and P five hunter or anything like that. So just
Speaker 1: explain how the future's exposure to treasuries works. And that's
Speaker 1: a good question. So you know, futures are contracts, right,
Speaker 1: so so it may just show up as we have
Speaker 1: notional exposure. But but features don't have value themselves until
Speaker 1: you you know, mark them from where you bought them
Speaker 1: to where you sold them. So the holdings of the
Speaker 1: fund will show up as treasuries, which we're gonna hold seven.
Speaker 1: And it's the fact that we can you know, features
Speaker 1: really provide some leverage in the sense of um, we
Speaker 1: can uh sitting as treasuries, and they back the futures
Speaker 1: contracts and allow us to hold larger amounts of futures.
Speaker 1: So it's because of that that we're able to get
Speaker 1: you know, sort of this cash collateral return source in
Speaker 1: addition to staying invested in the equity market. And and
Speaker 1: right now, the treasuries, I'm assuming you'll hold short term
Speaker 1: debt right like two year or something like that. Yeah,
Speaker 1: well we'll we'll we'll hold um fairly low duration treasuries.
Speaker 1: We you know, will be smart about that. And certainly, UM,
Speaker 1: you know, having run a pretty large derivative book, very
Speaker 1: comfortable with saying that there's a right and a wrong
Speaker 1: way due to collateral management, UM, and specially something like this,
Speaker 1: we want to be safe. The goal is to offset
Speaker 1: the tea costs and UM, I think at the current
Speaker 1: you know, UM rate environment, we can do that with
Speaker 1: very low duration. Did you file these after the FED
Speaker 1: changed its mission from like keeping rates low to like
Speaker 1: fighting inflation, because clearly that was a a good It's
Speaker 1: arguably good timing in that you were looking for something
Speaker 1: to offset this transaction cost. But did that play into
Speaker 1: your filing filed in March? So I'm not exactly sure
Speaker 1: when they changed. And and look, we were focused on
Speaker 1: bringing this to market and and we were looking at
Speaker 1: lots of different ways to run the fund, and I
Speaker 1: think the fact that rates have popped up and has
Speaker 1: maybe made us lean towards this particular way of running
Speaker 1: the fund. Okay, well, I'm curious, Bruce, you have a
Speaker 1: really interesting backstory. You've you've been in the e t
Speaker 1: F world for a really long time. Um at I shares,
Speaker 1: you help launch l qt h y G. These are
Speaker 1: incredibly um successful bond ETFs. I'm just wondering, you know,
Speaker 1: like all of this, like what have you what have
Speaker 1: you learned from your experience in the industry that you're
Speaker 1: going to be applying here. It has been an interesting, right,
Speaker 1: you know, because I've seen different kinds of products, right,
Speaker 1: some of them. In the early days of I shares,
Speaker 1: it was just an educational thing. We were new with
Speaker 1: this new fangled thing called an e t F and
Speaker 1: once you've got people over the hump of understanding it,
Speaker 1: they really put in. With wisdom Tree, we were new
Speaker 1: with a different way to index, you know. Prior to
Speaker 1: wisdom Tree and ETF, theres just beta and now they're
Speaker 1: smart data, right, And wisdom Tree was a pioneer and
Speaker 1: saying hey, there's a better way to create an index
Speaker 1: and and it was an educational challenge, but now well
Speaker 1: accepted that there's more than one way to index, and
Speaker 1: we see what we're doing with night Shares is similar
Speaker 1: to that in the sense of there is this sort
Speaker 1: of thin slice of the market that is aware of
Speaker 1: this research and a very large slice of the market
Speaker 1: that's not so. First it's just educated and make aware
Speaker 1: that it's out there. Uh. And then you know, people
Speaker 1: will watch it and some will toe dip and some
Speaker 1: will you know, wait for proof. And but we think
Speaker 1: over time, you know, we've added a really interesting um
Speaker 1: dynamic to the market. Uh. And I appreciate what Eric
Speaker 1: said right at the beginning. It's just not that many
Speaker 1: things that you know are truly differentiate in the market space.
Speaker 1: I want to pitch Max on a product idea I have.
Speaker 1: I think you guys would be the right ones to
Speaker 1: launch it. We had a Shark Tank type episode about
Speaker 1: two years ago where a bunch of reporters and analysts
Speaker 1: pitched e T F ideas to a judge and mine,
Speaker 1: I believe mine one, or it came in second or something,
Speaker 1: but it was called X bond. It was just forgets
Speaker 1: because it's just in his mind it was the greatest
Speaker 1: pitch of all time, but yeah, you gotta see it
Speaker 1: a little bit more Jamaican x mon Um, I wont,
Speaker 1: at least in my mind. Um. And basically this is
Speaker 1: the S and P five hundred x Mondays because you
Speaker 1: know how like everybody freaks out over the weekend if
Speaker 1: there's bad news Friday, and like you've black Monday seven,
Speaker 1: then there was a black Monday too. Just seems like
Speaker 1: Mondays are brutal days and they've done studies that Monday
Speaker 1: does on average return a little less than the rest
Speaker 1: of the week. What do you think of that idea?
Speaker 1: And have you ever thought about actually explaining this out
Speaker 1: of just the night but into other times, like just
Speaker 1: making time your thing? Well, well, I definitely think that
Speaker 1: in the t F game, having a good ticker is important,
Speaker 1: so so Eric, if nothing else, you've definitely nailed that.
Speaker 1: And that was a polite letdown. I think, Max, no, no no, no, no,
Speaker 1: I mean, I I do think there's you know, if
Speaker 1: you look at time overall, um and seasonality and you
Speaker 1: know all of that, there there's more ground to cover there.
Speaker 1: I think for us, um we're pretty focused on on
Speaker 1: the night. We think there's a whole lot to do
Speaker 1: in the nighttime before we start looking at other things.
Speaker 1: But you know, certainly, um, the x mon is a
Speaker 1: concept that that has some some grounding in reality. If
Speaker 1: you do look at the Monday fact, you know, Monday
Speaker 1: scaries are real. Yeah, no one likes Mondays. It's like
Speaker 1: it also hits the heart. Now I hate Mondays. This
Speaker 1: lines up with my values. Eric. The other key thing
Speaker 1: is every ETF needs to have a good spokesman, So
Speaker 1: you've got to get Garfield to be your spokesman. Or
Speaker 1: that moment from office Space, somebody's been a case of
Speaker 1: the Monday's. Yeah, yeah, I don't know. I think there's
Speaker 1: something there. We'll see. Maybe if you guys have success,
Speaker 1: you can branch out into other parts of the calendar.
Speaker 1: You could also do a sell in may E t
Speaker 1: F and just have one that just just doesn't hold
Speaker 1: the stocks during the summer, although that's that's been proven
Speaker 1: to be pretty much a lie. But anyway, there's definitely
Speaker 1: some some some options here. I think in fact that
Speaker 1: the name of the company that I thought of was
Speaker 1: Calendar Shares. You guys are like you're the closest thing
Speaker 1: to that sort of tongue in cheek idea. UM. So again,
Speaker 1: that's part of the reason I was so interesting to
Speaker 1: talk to you guys, because time hasn't really been sliced
Speaker 1: up the way sectors have and countries and geographic regions, etcetera. Alright,
Speaker 1: enough for America. Uh. Speaking of speaking of tickers, uh
Speaker 1: in spy in i w M. Both of these are great.
Speaker 1: You got the inn at the front. Um. We always
Speaker 1: end with a ticker question. Um, Max, what is your
Speaker 1: favorite E t F ticker that is not your own?
Speaker 1: And Bruce will come to you next man. Um, I
Speaker 1: have to say, SARK is my favorite ticker that's not
Speaker 1: our own. That's good. That's the first one we've had.
Speaker 1: That's the first. Bruce, Well, I'm a little partial because
Speaker 1: I've been working with John Davy over story for a
Speaker 1: long time and we love pp I uh the first
Speaker 1: inflation Global inflation protected ETFUM, you know that that's a
Speaker 1: great ticker. That is a good one. All right, Max Rus,
Speaker 1: thanks so much for joining us on Trillians. Thanks thanks
Speaker 1: for having us, Thanks for listening to trillions. Until next time,
Speaker 1: you can find us on the Bloomberg Terminal, Bloomberg dot com,
Speaker 1: Apple Podcast Spotify, and wherever else you'd like to listen.
Speaker 1: We'd love to hear from you. We're on Twitter, I'm
Speaker 1: at Joel Weber Show. He's at Eric Baltunas. This episode
Speaker 1: of Trilliance was produced by Magnus Hendrickson. Francesca Levie is
Speaker 1: the head of Bloomberg Podcast. Bye.