WEBVTT - Calamos’ Kaufman, O’Donohue Spotlight Buffer ETFs 0:00:12.400 --> 0:00:15.600 Welcome to Inside Active, a podcast about active managers that 0:00:15.640 --> 0:00:18.360 goes beyond sound bites and headlines and looks steeper into 0:00:18.440 --> 0:00:23.599 their processes, challenges, and philosophies and security selection. I'm David Cohne, 0:00:23.600 --> 0:00:27.240 i lead Mutual fund and Active Research at Bloomberg Intelligence. Today. 0:00:27.360 --> 0:00:31.720 My cost is James Seyffert, ETF analyst at Bloomberg Intelligence. James, 0:00:31.720 --> 0:00:33.120 thank you so much for joining me today. 0:00:33.640 --> 0:00:35.480 Yeah, thanks for having me, David, happy to be here. 0:00:36.280 --> 0:00:39.120 So in the ETF midyear Outlook, there was a section 0:00:39.360 --> 0:00:44.160 on ETF issuers flocking to vaneguard free zones to snag 0:00:44.200 --> 0:00:48.080 growth and revenue. One section is on buffer ETFs. Can 0:00:48.120 --> 0:00:50.640 you explain what a buffer ETF is and why they're 0:00:50.680 --> 0:00:52.240 called boomer candy? 0:00:52.520 --> 0:00:56.240 Yeah, I mean it's arguably one of, if not. 0:00:56.280 --> 0:01:02.120 The fastest growing areas of the ETF market in the US. Specifically, Really, 0:01:02.160 --> 0:01:04.679 anything that was providing income and with some sort of 0:01:05.360 --> 0:01:10.120 downside to volatility, decreasing volatility while capturing some sort of 0:01:10.200 --> 0:01:12.319 upside is doing really well. 0:01:12.360 --> 0:01:13.880 And buffers are a subset of that. 0:01:14.000 --> 0:01:16.640 Right, So within buffers, you what they use is they 0:01:16.680 --> 0:01:21.120 use derivatives to either completely diminish the downside over a 0:01:21.160 --> 0:01:23.680 specified time period, so over a year. So if you're 0:01:23.720 --> 0:01:27.360 investing the SMB of five hundred the queues you name it, 0:01:27.440 --> 0:01:29.280 essentially it's going to give you some sort of protection 0:01:29.360 --> 0:01:33.319 on the downside by selling derivatives or buying derivatives, and 0:01:33.360 --> 0:01:37.400 they're gonna sell derivatives on the upside, basically going to 0:01:37.480 --> 0:01:40.039 cap your exposure. So what they're doing is they're going 0:01:40.080 --> 0:01:42.240 to protect you at some to some level and downside 0:01:42.280 --> 0:01:44.399 in some cases to one hundred percent of your downside 0:01:44.440 --> 0:01:47.520 over a given time period. But in order to do that, 0:01:47.680 --> 0:01:51.120 you're going to have capped upside, so say nine percent 0:01:51.200 --> 0:01:53.400 right now in the current interest rate and environment. Well 0:01:53.480 --> 0:01:55.600 we can get into some of the more fine details there, 0:01:55.600 --> 0:01:58.040 but essentially what it's due if you're in an investor, 0:01:58.400 --> 0:02:01.520 you're protecting yourself a little bit and getting the upside. 0:02:01.520 --> 0:02:03.840 Maybe not the full upside, but it still looks pretty 0:02:03.880 --> 0:02:06.919 good and it's very defined. So this is very synonymous 0:02:06.960 --> 0:02:09.800 with like covered call products, where people are selling options 0:02:09.840 --> 0:02:12.280 on the overs on the upside in order to get 0:02:12.360 --> 0:02:15.959 income from selling those derivatives, and basically you're going to 0:02:16.040 --> 0:02:19.040 get decreased fall that income is going to protect you 0:02:19.080 --> 0:02:21.120 a little on the downside, but you don't know exactly 0:02:21.160 --> 0:02:23.360 how that's going to play out. With these buffer products, 0:02:23.360 --> 0:02:26.600 it's a lot more defined. And boomers, we say boomer 0:02:26.639 --> 0:02:29.119 candy because the people who are retired, that people are 0:02:29.200 --> 0:02:31.680 entering retirement, really care about that income piece and that 0:02:31.760 --> 0:02:34.079 downside protection and this is just like. 0:02:36.040 --> 0:02:37.720 It speaks to them very very well. 0:02:37.960 --> 0:02:40.240 And that's why things are selling very well, particularly for 0:02:40.280 --> 0:02:42.440 people who maybe are scared to go in the market 0:02:42.440 --> 0:02:45.440 fully don't want to take risk of full volatile of 0:02:45.680 --> 0:02:47.120 volatility of the stock market. 0:02:47.400 --> 0:02:49.720 This kind of speaks to them well. 0:02:49.840 --> 0:02:53.480 Speaking of buffer ETFs, we have Matt Kaufman, head of 0:02:53.520 --> 0:02:57.400 ETFs for Kalamos, and David o'donahue, co head of Alternative 0:02:57.400 --> 0:03:00.520 Strategies and head portfolio manager for the al the most 0:03:00.520 --> 0:03:04.200 structured protection ETFs with us. Matt Dave, thanks for coming 0:03:04.200 --> 0:03:05.440 on the podcast. 0:03:05.240 --> 0:03:06.000 Thanks for having us. 0:03:06.040 --> 0:03:06.600 Good to be here. 0:03:06.600 --> 0:03:07.519 Thanks, good to be here. 0:03:07.560 --> 0:03:09.600 Well let's start with Matt. Can you tell us how 0:03:09.639 --> 0:03:11.640 you got your start in ETFs and what it was 0:03:11.840 --> 0:03:14.160 like in the beginning years of the ETF. 0:03:14.040 --> 0:03:19.079 Sure, yeah, happy to I started my ETF career at 0:03:19.120 --> 0:03:23.720 power Shares in the early days. The interesting story there is. 0:03:23.760 --> 0:03:28.680 Your power Shares got its exemptive relief from a we'll 0:03:28.680 --> 0:03:32.079 say an unnamed Chicago based asset manager who had one 0:03:32.120 --> 0:03:34.440 of the only exemptive reliefs in the country. 0:03:34.480 --> 0:03:34.840 At the time. 0:03:34.920 --> 0:03:36.680 There were only a few out there that the SEC 0:03:36.720 --> 0:03:39.640 had granted. I think the statement that they had made 0:03:39.760 --> 0:03:42.840 was they thought all the good indexes were taken. You know, 0:03:42.920 --> 0:03:45.960 the S and P five hundred was taken, the NASDAQ 0:03:46.040 --> 0:03:49.880 one hundred was was an ETF, and so the diamonds 0:03:49.920 --> 0:03:51.320 was out there, and so they didn't think there was 0:03:51.400 --> 0:03:55.520 much more room for growth in the ETF space. You know, 0:03:55.720 --> 0:03:58.520 I say that kind of jokingly, but you know, the 0:03:58.560 --> 0:04:01.400 same is true here today. There's still a lot of 0:04:01.440 --> 0:04:04.440 innovation that can be had in the ETF world. But 0:04:04.840 --> 0:04:06.600 you know, when I was at power Shares there we 0:04:06.680 --> 0:04:10.360 launched well over one hundred ETFs building out the smart 0:04:10.360 --> 0:04:13.000 beta et F space. Most of the products were all 0:04:13.120 --> 0:04:16.440 market cap weighted back then, and so we were delivering 0:04:16.600 --> 0:04:21.480 smart beta type ETFs, delivering thematic ETFs, you know, bringing 0:04:21.520 --> 0:04:24.680 some of the first ETFs to market to bring access 0:04:24.680 --> 0:04:27.640 to spaces that investors just couldn't get get a hold of. 0:04:28.320 --> 0:04:31.320 But the ETF rapper really served to deliver that. So 0:04:31.400 --> 0:04:33.719 that's that's really where I cut my teeth, and ETFs 0:04:33.800 --> 0:04:37.120 learned a lot, you know about launching product, marketing products 0:04:37.120 --> 0:04:40.920 and working with financial advisors. It was a phenomenal opportunity. 0:04:41.640 --> 0:04:43.960 And then you know, power Shares sold to Investo, a 0:04:43.960 --> 0:04:46.880 lot of the partners retired, and I went over to 0:04:46.920 --> 0:04:49.840 an actual real consulting firm, which you know was you know, 0:04:49.960 --> 0:04:52.960 not in ETFs whatsoever. But you know, we learned a 0:04:53.000 --> 0:04:54.919 lot about risk management there, which we can touch on, 0:04:55.720 --> 0:04:57.720 but you' I'll stop there and pass it back over 0:04:57.800 --> 0:04:57.960 to you. 0:04:58.880 --> 0:05:01.159 Well that was great, now, David's your turn. 0:05:02.240 --> 0:05:06.880 Yeah. You know, I got started in the business and 0:05:07.080 --> 0:05:10.320 interested investing in college. I was a finance major, and 0:05:10.520 --> 0:05:13.159 like a lot of eighteen to twenty twenty two year olds, 0:05:13.320 --> 0:05:15.200 I had no idea what that actually meant and what 0:05:15.440 --> 0:05:17.720 to do with it. But I was lucky enough to 0:05:17.720 --> 0:05:20.320 get a job offer from a hedge fund that specialized 0:05:20.360 --> 0:05:22.520 in convert arb, which I think I had you know, 0:05:22.600 --> 0:05:25.960 one page and one book and one class about up 0:05:26.040 --> 0:05:28.600 until that point. But you know, it's interesting. It was 0:05:28.640 --> 0:05:31.800 you know, good hedge fund, good comp you know, it 0:05:31.880 --> 0:05:33.960 was actually local to where I grew up, so it 0:05:34.040 --> 0:05:36.719 was a great opportunity, so I jumped at it. And 0:05:37.600 --> 0:05:40.520 interesting side note to that, when I started, I accepted 0:05:40.520 --> 0:05:43.120 the offer and was still in college. They sent me 0:05:43.160 --> 0:05:44.880 two books to read to get up to speed, and 0:05:44.920 --> 0:05:48.040 one was McMillan's book and Options, which I think is still, 0:05:48.200 --> 0:05:50.320 you know, one of the go to option books. And 0:05:50.360 --> 0:05:53.840 the other was John Callamos's book on Convertibles, And so 0:05:53.880 --> 0:05:55.800 it was interesting. You know, it was exciting to join 0:05:55.880 --> 0:05:57.839 up with Calum most years later because you know, he 0:05:58.279 --> 0:06:02.320 legitimately wrote the book on convertible. But you know, convertibles 0:06:02.400 --> 0:06:05.320 is kind of a blend of bonds and options, and 0:06:05.400 --> 0:06:07.680 so everything that goes into valuing a bond, you know, 0:06:07.760 --> 0:06:11.960 interest rates, coupons, credit spreads, and everything that goes into 0:06:12.000 --> 0:06:16.720 valuing an option, you know, strike price, stock price, applied volatility, 0:06:16.800 --> 0:06:19.200 interest rates again, you know, all of that comes together 0:06:19.360 --> 0:06:21.839 and there's just so many moving parts, and when you 0:06:22.160 --> 0:06:26.239 add in hedging and shortening stock and CDs and bond hedges, 0:06:26.480 --> 0:06:29.400 there's just it's a big puzzle, you know, and trying 0:06:29.440 --> 0:06:31.920 to solve for the inefficiencies. And then you know, when 0:06:31.920 --> 0:06:34.760 you add in the cell side interaction and you know, 0:06:34.880 --> 0:06:37.760 I spotted this opportunity. Can I find somebody that actually 0:06:37.839 --> 0:06:39.520 has these bonds and while they sell them to me, 0:06:39.560 --> 0:06:42.080 and can I negotiate a better price. All of that 0:06:43.360 --> 0:06:46.440 was really right down the middle and kind of hooked 0:06:46.440 --> 0:06:49.240 from hooked early on. And you know, I've it's been 0:06:49.279 --> 0:06:51.320 the same ever since I've been I'm in my twenty 0:06:51.400 --> 0:06:55.359 fourth year now running convert and option related strategies and 0:06:55.400 --> 0:06:58.279 so you know, these buffer structured ETFs is kind of 0:06:58.279 --> 0:07:01.800 just another step that process of making something in the 0:07:01.839 --> 0:07:05.120 market I can use to move around to payoff and 0:07:05.160 --> 0:07:07.159 create a structure that makes sense for people. 0:07:08.200 --> 0:07:08.479 Cool. 0:07:09.040 --> 0:07:11.800 Well, you know James had mentioned, you know how buffer 0:07:11.840 --> 0:07:14.560 ETF's work in general, but Matt, you actually built the 0:07:15.200 --> 0:07:18.840 intellectual property for defined outcome ETFs. Can you kind of 0:07:18.880 --> 0:07:20.360 tell us how those work? 0:07:20.840 --> 0:07:23.360 Yeah, I had had an opportunity to have a role 0:07:23.400 --> 0:07:25.720 in that. So, you know, as I went over to 0:07:26.200 --> 0:07:28.480 Millman was the name of the firm, and they were 0:07:28.800 --> 0:07:32.280 a large actuarial consulting firm. As I went over there, 0:07:32.280 --> 0:07:35.280 it was around twenty ten, I believe, you know, interest 0:07:35.360 --> 0:07:39.000 rates were remarkably low, and so what we were doing 0:07:39.080 --> 0:07:42.160 was a lot of risk management strategies. We were building 0:07:42.320 --> 0:07:45.240 funds that were based off of the hedging strategies that 0:07:45.320 --> 0:07:48.800 we were running on the balance sheets of life insurance companies, 0:07:49.200 --> 0:07:53.240 and so we saw those risk management strategies work remarkably well. 0:07:53.680 --> 0:07:56.920 The interest rate environment that we were in, though, you know, 0:07:57.080 --> 0:08:01.840 really forced the insurance companies to move into this risk 0:08:01.960 --> 0:08:04.640 sharing model. You know, the cap rates that they could 0:08:04.640 --> 0:08:08.040 deliver on a fixed indexed annuity which gives you one 0:08:08.080 --> 0:08:11.960 hundred percent protection, were remarkably low. You know, that product 0:08:12.040 --> 0:08:14.080 set kind of went into the grave for a while. 0:08:14.120 --> 0:08:17.720 People weren't really buying fixed index annuities. The same was 0:08:17.760 --> 0:08:21.960 happening on the variable annuity. The guarantees that insurance companies 0:08:22.000 --> 0:08:25.280 could provide were very low because the interest rate environment 0:08:25.360 --> 0:08:28.240 was low, and we saw the same instructure products with 0:08:28.320 --> 0:08:30.680 the banks. You know, the cap rates were low on 0:08:30.720 --> 0:08:34.160 the principle protected strategies, and so what happened and it 0:08:34.240 --> 0:08:38.080 caused this move into what we would call partial principle 0:08:38.160 --> 0:08:41.360 protected world in that low rate environment where instead of 0:08:41.360 --> 0:08:44.320 one hundred percent protection, you know, an insurance company could 0:08:44.320 --> 0:08:46.600 afford to give you something less. We could give you 0:08:46.640 --> 0:08:50.640 a ten percent protection level or twenty percent protection level, 0:08:51.400 --> 0:08:53.280 or you could call it a buffer, you know, ten 0:08:53.320 --> 0:08:56.079 percent buffer on the S and P five hundred. Well, 0:08:56.080 --> 0:08:59.040 then you could give somebody a meaningful upside cap rate. 0:08:59.440 --> 0:09:02.720 And so we saw that moving through the insurance space 0:09:02.760 --> 0:09:05.720 and through the banking space and really looked back. This 0:09:05.760 --> 0:09:09.840 is around twenty fifteen, twenty sixteen, and we just were 0:09:09.840 --> 0:09:11.840 talking one day and said, you know, you can build 0:09:11.880 --> 0:09:16.319 that model very efficiently using options. We do not need 0:09:16.400 --> 0:09:19.280 a balance sheet from a bank or an insurance company 0:09:19.360 --> 0:09:22.400 to deliver a buffer on the S and P five hundred, 0:09:22.679 --> 0:09:25.960 and so we built some intellectual property that held a 0:09:26.040 --> 0:09:29.320 series of options positions that all expired on the same 0:09:29.400 --> 0:09:34.280 day and could deliver the upside to a cap relative 0:09:34.280 --> 0:09:36.600 to the S and P five hundred and a buffer 0:09:36.679 --> 0:09:39.520 level of what we determined. And you put all those 0:09:39.520 --> 0:09:42.960 in options positions, and then we developed that through a 0:09:42.960 --> 0:09:47.280 series of indexes, and then we built those within unit 0:09:47.360 --> 0:09:51.240 investment trusts. We built those types of strategies in annuity 0:09:51.280 --> 0:09:54.480 products through variable sub accounts, and then helped build the 0:09:54.520 --> 0:09:58.360 first defined outcome ETFs in the market as well. Those 0:09:58.360 --> 0:10:02.000 were launched in two thousand eighteen and really set the 0:10:02.040 --> 0:10:06.679 stage for the buffered ETF space. Remember we filed for 0:10:06.720 --> 0:10:10.400 those products in twenty seventeen. You know, normally it's a 0:10:10.440 --> 0:10:14.520 seventy five day SEC approval, you know period, and the 0:10:14.640 --> 0:10:17.200 SEC will take you know, roughly thirty forty five days 0:10:17.200 --> 0:10:19.160 to get back to you. They they called about two 0:10:19.240 --> 0:10:23.440 hours into the filing and said, what is this. We said, oh, 0:10:23.440 --> 0:10:26.280 we're replicating a structured outcome inside of an ETF And 0:10:26.320 --> 0:10:28.440 they said, okay, that's what we thought you were doing. 0:10:28.480 --> 0:10:30.160 We're gonna have to talk about this one, you know, 0:10:30.240 --> 0:10:33.160 And it took several months back and forth to get 0:10:33.200 --> 0:10:36.480 everybody comfortable with, you know, what was actually being delivered. 0:10:37.040 --> 0:10:39.400 But you know, fast forward, you know, seven eight years 0:10:39.440 --> 0:10:42.480 here and it's more than a fifty billion dollars space. 0:10:43.440 --> 0:10:47.040 Interest rates are obviously much higher, and so I came 0:10:47.040 --> 0:10:49.280 over to Calamos last year to build out the active 0:10:49.360 --> 0:10:52.640 ETF business. You know, there were some SEC rule changes 0:10:52.760 --> 0:10:57.280 that active ETF space is growing tremendously and so as 0:10:57.320 --> 0:10:59.800 I came over, you know, we're watching that rate environment. 0:11:00.080 --> 0:11:02.760 Interest rates are off of zero. You know, we're watching 0:11:02.800 --> 0:11:06.560 people buy fixed index annuities again. People are trying to 0:11:06.640 --> 0:11:09.120 you know, go after that five percent yield now that 0:11:09.240 --> 0:11:12.040 rates are higher and their CDs and money market funds, 0:11:12.600 --> 0:11:15.319 and so the space that we wanted to capture at Kalamos. 0:11:15.600 --> 0:11:19.120 We didn't want to be the tenth buffer ETF provider, 0:11:19.480 --> 0:11:23.920 but the capital protected ETF space, the one protection space, 0:11:24.400 --> 0:11:27.040 was ripe for the taking. And so that's what where 0:11:27.080 --> 0:11:30.120 we're operating in today. You know, I sat down with 0:11:30.200 --> 0:11:32.480 Dave o'donna. He was one of the first people I 0:11:32.559 --> 0:11:35.480 met at Calamos. I think I set up a two 0:11:35.520 --> 0:11:37.760 hour meeting with Dave to talk through these you know, 0:11:37.880 --> 0:11:41.760 quote buffer ETFs. He kind of super nice guy. He 0:11:41.800 --> 0:11:43.560 kind of put up his hand five minutes in He's like, 0:11:43.679 --> 0:11:46.000 I get it. He's like, we've been watching these. We 0:11:46.120 --> 0:11:49.160 really like what what you've done. Let's roll. And so, 0:11:49.360 --> 0:11:51.199 you know, it was a great match, you know, to 0:11:51.640 --> 0:11:54.960 come to Calamos, you know, who's been doing risk management 0:11:55.000 --> 0:11:58.920 for nearly fifty years. You think about John Calamos building 0:11:59.240 --> 0:12:01.960 and writing the book on convertibles, building one of the 0:12:02.000 --> 0:12:05.840 first convertible funds in the market, right around the same 0:12:05.880 --> 0:12:09.160 time that options actually opened on the CBO, you know, 0:12:09.240 --> 0:12:12.880 Chicago Board Options Exchange. And so you fast forward forty 0:12:12.880 --> 0:12:16.320 five years to today and we're still delivering risk management. 0:12:16.360 --> 0:12:20.840 We're still using options. The tools have evolved remarkably. The 0:12:20.880 --> 0:12:23.000 flex options which we can get into you didn't exist 0:12:23.080 --> 0:12:25.520 till nineteen ninety three. But all that said is, you know, 0:12:25.600 --> 0:12:29.680 Calamos was really well positioned to continue this trajectory of 0:12:29.840 --> 0:12:31.400 risk management for investors. 0:12:32.600 --> 0:12:36.080 So I guess this one's for Dave. How does the 0:12:36.080 --> 0:12:41.640 structured protection strategy work in an ETF such as CPSM 0:12:41.760 --> 0:12:44.800 or the Calamos S and P five hundred Structured at 0:12:44.880 --> 0:12:45.800 protection ETF? 0:12:46.800 --> 0:12:49.920 Yeah, it's you know, at its core, it's it's simply 0:12:50.360 --> 0:12:54.400 a product that uses a package package of options to 0:12:54.440 --> 0:12:58.760 create a payoff with no downside and some amount of upside. 0:12:59.200 --> 0:13:01.839 You know, people people talk a lot about rising rates 0:13:01.840 --> 0:13:04.040 and higher rates and the impact that has on fixed 0:13:04.040 --> 0:13:07.920 income and treasury yields, but they'd don't always think about 0:13:07.960 --> 0:13:11.920 the impact that has on option pricing. You know, as 0:13:11.920 --> 0:13:14.200 I mentioned earlier, interest rates are one of the factors 0:13:14.200 --> 0:13:18.160 that goes in to valuing options. And you know, twenty 0:13:18.160 --> 0:13:20.959 five basis point move here or there doesn't matter that much, 0:13:21.440 --> 0:13:25.640 but when you go from zero to five like we 0:13:25.679 --> 0:13:28.920 did recently, it does matter a lot. And so you know, 0:13:28.920 --> 0:13:31.200 as Matt said, it's kind of an extension of some 0:13:31.240 --> 0:13:34.800 of the other option related strategies and hedge equity strategies 0:13:34.840 --> 0:13:37.360 that you know we run and other people run. You know, 0:13:37.360 --> 0:13:39.760 if we have one of our flagship funds that I 0:13:39.840 --> 0:13:42.560 work on as our market neutral income fund, which is 0:13:43.120 --> 0:13:45.920 really a fixed income alternative, but it has a hedged 0:13:45.960 --> 0:13:49.839 equity sleeve. And so you think about the impact on 0:13:50.720 --> 0:13:53.880 rates have on option prices. When rates are higher, call 0:13:53.960 --> 0:13:57.200 prices are higher and put prices are lower. And so 0:13:57.520 --> 0:14:00.240 you know, setting up a hedge hedging out exposure. You 0:14:00.240 --> 0:14:02.520 can buy a put and sell a call, and that 0:14:02.559 --> 0:14:07.320 hatches out your exposure. When you have zero interest rates, 0:14:07.679 --> 0:14:10.720 that put costs you more than you get for selling 0:14:10.720 --> 0:14:14.440 a call. Specifically, you mentioned you know CPSM and one 0:14:14.480 --> 0:14:18.920 year SMP options. You know, you had to pay more 0:14:18.960 --> 0:14:20.560 for an at the money put than you'd get for 0:14:20.640 --> 0:14:23.240 that call. So you were paying to hedge. You know, 0:14:23.320 --> 0:14:26.320 fast forward to five percent risk free or five and 0:14:26.320 --> 0:14:28.840 a quarter risk free. Now you're getting paid to hatch. 0:14:29.320 --> 0:14:31.520 That put costs you less than you're taking in for 0:14:31.560 --> 0:14:34.080 the call. You can actually almost buy two puts for 0:14:34.120 --> 0:14:37.960 every call you sell, and so for our market neutral fund, 0:14:37.960 --> 0:14:41.360 which is more of the fixed income alternative. We're buying 0:14:41.400 --> 0:14:45.680 that put, selling that call, taking the extra money as income, 0:14:46.080 --> 0:14:49.880 and that kind of creates that steady, stable return that 0:14:49.920 --> 0:14:52.640 you expect out of bonds. If you move a step 0:14:52.680 --> 0:14:56.440 further to hedge equity, instead of taking that extra money, 0:14:56.640 --> 0:15:00.560 you can use that ratio to create a positive a symmetry. 0:15:00.720 --> 0:15:03.720 You know right now you can actually if you buy, 0:15:03.800 --> 0:15:06.600 you can buy point sixty five puts for every point 0:15:06.640 --> 0:15:09.160 three to five calls you sell. And if you own 0:15:09.200 --> 0:15:12.000 the underlying and do that, you set up a structure 0:15:12.040 --> 0:15:14.880 where you get sixty five percent of the upside and 0:15:14.960 --> 0:15:17.520 only thirty five percent of the downside. And you know 0:15:17.560 --> 0:15:20.760 that's attractive for people who want to have equity exposure, 0:15:21.560 --> 0:15:24.200 not capped upside, and are willing to take some risk. 0:15:25.440 --> 0:15:27.440 But then we took it another step further, and this 0:15:27.520 --> 0:15:29.440 is where you know Matt came in. You know, this 0:15:29.520 --> 0:15:32.160 is something we've been looking at already, is well, what 0:15:32.200 --> 0:15:35.000 if you want no downside? You know what can I 0:15:35.080 --> 0:15:38.800 do then? And so instead of having that thirty five 0:15:38.800 --> 0:15:41.480 percent downside, we took that to zero. You buy full 0:15:41.560 --> 0:15:44.000 put protection. You know what can I get you know 0:15:44.000 --> 0:15:46.360 I can. I don't have to sell you know, one 0:15:46.440 --> 0:15:48.920 call to pay for it. Or what what we do 0:15:48.920 --> 0:15:50.760 when a lot of people do is instead of selling 0:15:51.200 --> 0:15:53.560 a lower amount of at the money calls, we move 0:15:53.640 --> 0:15:56.040 that call strike up and it becomes you know, how 0:15:56.160 --> 0:15:59.320 high a call strike can I sell to pay for 0:15:59.360 --> 0:16:02.200 the cost of that put. And that's really how these work. 0:16:02.680 --> 0:16:07.680 You're taking advantage of that dynamic of option pricing where 0:16:07.720 --> 0:16:09.560 the you know, the put costs less than the call 0:16:09.640 --> 0:16:13.040 and using that to create that package where you have 0:16:13.160 --> 0:16:16.200 full put protection. You know, we own full at the 0:16:16.240 --> 0:16:18.680 money put protection. That's how you can protect people and 0:16:18.680 --> 0:16:22.480 give them one hundred percent downside protection and we don't 0:16:22.480 --> 0:16:24.440 have to sell and at the money call to pay 0:16:24.440 --> 0:16:27.000 for that. And you know we can sell a higher 0:16:27.120 --> 0:16:29.080 you know, farther out of the money call and give 0:16:29.120 --> 0:16:32.400 people some amount of upside. And you know that's really resonated. 0:16:32.440 --> 0:16:35.440 You know, each of those each of those structures is 0:16:35.520 --> 0:16:37.200 leaning in. Each of those funds is leaning on that 0:16:37.280 --> 0:16:40.480 same option dynamic, but it's doing it with a different 0:16:40.600 --> 0:16:44.320 end use for a different investor base. And I think 0:16:44.360 --> 0:16:46.600 you know, this has has been a natural fit, as 0:16:46.680 --> 0:16:49.520 James mentioned, for a lot of people you know. You know, 0:16:50.040 --> 0:16:54.040 my dad included who you know, wanted exposure to the markets, 0:16:54.080 --> 0:16:56.840 loved being in the markets, but just was so scared 0:16:56.840 --> 0:16:59.160 of a down forty percent, you know, and he couldn't 0:16:59.160 --> 0:17:00.920 take that. And so you know, it fits for a 0:17:00.920 --> 0:17:03.200 lot of people, this new structure. 0:17:05.040 --> 0:17:07.520 Sticking along the lines of what you were just talking about, 0:17:07.600 --> 0:17:09.080 can you get into a little bit more about the 0:17:09.240 --> 0:17:11.800 of the specifics of like how that cap is determined. 0:17:11.800 --> 0:17:13.159 You talk about you have to sell the put get 0:17:13.200 --> 0:17:15.960 the one hundred percent, but like what factors go into 0:17:16.000 --> 0:17:17.679 determining what that cap is going to be? 0:17:18.280 --> 0:17:21.080 Yeah, I mean, simplistically, as I mentioned, it's just what call, 0:17:21.640 --> 0:17:25.200 what how far up that strike is that we need 0:17:25.800 --> 0:17:29.320 that we can sell to fully fund the puts. Basically 0:17:29.520 --> 0:17:31.480 there's a little bit of extra things in there. You know, 0:17:31.520 --> 0:17:34.000 that zero strike doesn't trade exactly at intrinsic you know, 0:17:34.040 --> 0:17:35.800 and all of that. But but basically we want to 0:17:35.840 --> 0:17:39.200 make that that package cost zero so at the end 0:17:39.200 --> 0:17:41.480 of that one year outcome period, if the market is 0:17:41.520 --> 0:17:45.000 flattered down, you still have your your same investment. 0:17:46.080 --> 0:17:47.760 I would say. One of the ways that we explain 0:17:47.840 --> 0:17:51.080 this to our advisors who they use this analogy when 0:17:51.080 --> 0:17:52.840 they're talking to their clients. Just to make it really 0:17:52.920 --> 0:17:55.400 simple for them is just to pretend like I give 0:17:55.400 --> 0:17:59.359 you one hundred dollars and then we can recreate that exposure. So, 0:17:59.520 --> 0:18:01.720 you know, if we one hundred dollars, we're going to 0:18:01.760 --> 0:18:04.600 take about ninety eight of those dollars to buy our 0:18:04.680 --> 0:18:08.600 participation layer, which will give you the upside and downside 0:18:08.600 --> 0:18:11.480 exposure of the S and P five hundred and you know, 0:18:11.520 --> 0:18:14.320 the technically it's a deepen the money or a near 0:18:14.400 --> 0:18:17.760 zero strike call. Like Dave said, the next layer, we're 0:18:17.760 --> 0:18:20.440 going to spend four dollars on an at the money 0:18:20.440 --> 0:18:22.880 put and so that's going to be paying off all 0:18:22.920 --> 0:18:25.440 along the way, you know, as the market goes down. 0:18:25.840 --> 0:18:28.000 And so if you've been following along, we've spent ninety 0:18:28.040 --> 0:18:32.000 eight on your participation leg, four dollars on your put leg, 0:18:32.160 --> 0:18:34.800 so we've overspent. We've spent one oh two. And that's 0:18:34.840 --> 0:18:37.200 where the you know, no free lunch comes into play. 0:18:37.680 --> 0:18:40.520 So to bring that back to one hundred dollars, we're 0:18:40.560 --> 0:18:44.240 going to sell off enough upside to collect two dollars 0:18:44.359 --> 0:18:46.960 worth of premium and whatever the out of the money 0:18:46.960 --> 0:18:49.960 strike prices of that call that we have to sell 0:18:50.119 --> 0:18:53.520 is to collect two dollars, determines your upside cap and 0:18:53.560 --> 0:18:56.600 so that's where the cap comes from. So right now, 0:18:56.640 --> 0:18:59.040 that caps you know, around eight to nine percent, depending 0:18:59.040 --> 0:19:01.040 on the underlying re and saaset. 0:19:00.640 --> 0:19:01.160 That you use. 0:19:01.760 --> 0:19:04.639 So if we're at that eight to nine percent right now, like, 0:19:04.760 --> 0:19:08.120 how will I mean everyone's expecting rates to fall? First 0:19:08.119 --> 0:19:11.320 cuts are likely coming in September. How much of an 0:19:11.320 --> 0:19:14.680 impact will falling interest rates have on like how high 0:19:14.680 --> 0:19:16.320 that cap is going to be or how low that 0:19:16.359 --> 0:19:17.080 cap is going to be? 0:19:17.119 --> 0:19:19.840 For Yeah, Dave can check my math here, but you know, 0:19:20.000 --> 0:19:23.320 roughly you can expect that we'll deliver about twice the 0:19:23.400 --> 0:19:26.000 one year risk free rate. And so if rates settle 0:19:26.040 --> 0:19:28.240 let's say long term average one year risk free rate 0:19:28.280 --> 0:19:31.080 around three percent, you'll see a cap rate on the 0:19:31.160 --> 0:19:34.840 SMP of around six percent, maybe a little higher for Nasdaq. 0:19:35.200 --> 0:19:35.520 And then the. 0:19:35.560 --> 0:19:38.000 Russell has a little more volatility, but still a good 0:19:38.040 --> 0:19:40.600 a good dev yield, and so the Russell cap will 0:19:40.600 --> 0:19:44.000 be a little bit higher still, but comparing to like 0:19:44.080 --> 0:19:47.119 your alternative, let's compare to your CD or a bond. 0:19:47.600 --> 0:19:49.719 You know, if you bought a CD at the one 0:19:49.800 --> 0:19:52.159 year risk free rate of three percent. You're going to 0:19:52.200 --> 0:19:55.200 collect that guaranteed three percent, but then you're going to 0:19:55.240 --> 0:19:58.600 pay tax, you know, ordinary income tax on that three percent, 0:19:59.080 --> 0:20:01.280 so you're three will turn and into about two percent, 0:20:01.400 --> 0:20:04.439 depending on your tax bracket. So the opportunity would be 0:20:04.480 --> 0:20:08.840 to turn in that guaranteed two percent and own the upside. 0:20:09.119 --> 0:20:11.640 Tie your cash to the upside of an equity market. 0:20:11.720 --> 0:20:13.639 In this case, you get up to six percent in 0:20:13.760 --> 0:20:17.199 our example, but then that money grows and stays in 0:20:17.240 --> 0:20:20.320 the ETF. It can grow tax deferred, and then you 0:20:20.400 --> 0:20:23.239 pay long term capital gains rates at the end. So 0:20:23.280 --> 0:20:25.960 no matter how low rates go, you're still going to 0:20:26.000 --> 0:20:29.520 have something meaningful over the risk free rate. So if 0:20:29.520 --> 0:20:33.040