Speaker 1: Welcot Chillians. I'm Joel Webber and I'm Eric bell Tunis. Eric.
Speaker 1: Sometimes we've talked about a certain type of E t
Speaker 1: F that are that is rated are, and that is
Speaker 1: a term or a category that that you've actually come
Speaker 1: up with, And we're gonna spend some time on this
Speaker 1: episode talking only about that that category, if you will. Yeah,
Speaker 1: So these are the we we call them rated are
Speaker 1: or the exotic or the power tools of the Yeah,
Speaker 1: because in the right hands they can work wonders and
Speaker 1: really get the job done. But in the wrong hands,
Speaker 1: they can actually cut your hand off right like a
Speaker 1: chainsaw or worse or worse right, So we want to
Speaker 1: demystify these products. Um, you know, to me, they're demonized
Speaker 1: a little bit. But I get why they're demonized. I think,
Speaker 1: you know. The reason rated R to me is a
Speaker 1: good metaphor is because I believe that in our classification system,
Speaker 1: we give them a red light just to say, hey, look,
Speaker 1: there's some some stuff you need to know about these
Speaker 1: So let's pause. But like in the movies, just because
Speaker 1: ten year olds exist doesn't mean Quentin Tarantino should have
Speaker 1: to stop making movies. So we were okay, with leverage, ETFs,
Speaker 1: vix ETPs. These these products that are for professionals, we
Speaker 1: just think they need a rating like a movie. So
Speaker 1: again we've got green yellow red because we can't use
Speaker 1: the movie ratings because it's like a copyright unfortunately, so
Speaker 1: we use green yellow red power. These E T F
Speaker 1: s UM are basically all instant red lights except for
Speaker 1: the why. The reason is because their triple leveraged or
Speaker 1: double leveraged, and that means that they'll move twice as
Speaker 1: much as the index in a day, but they only
Speaker 1: promise it per day. The way their structure, which we'll
Speaker 1: get into, you don't actually get that two or three
Speaker 1: times over the long haul. Like there's a corrosion element
Speaker 1: that's like a ticking time bomb. So the longer you
Speaker 1: hold it, the more you could just lose money because
Speaker 1: of this sort of um the math of rebalancing every
Speaker 1: day and sometimes most of the time all the time.
Speaker 1: These products come with xs, and that's one way that
Speaker 1: you can know that you're playing with Yeah, they had
Speaker 1: they literally say two x or three x UM. They
Speaker 1: even have the word daily in them to like sort
Speaker 1: of accentuate that you need to use these for the
Speaker 1: short term. And who's going to help us understand this world? Um,
Speaker 1: Sylvia Jablonski. She is from Direction, which makes the most
Speaker 1: chainsaw of the chainsaws, the three X. So there's like
Speaker 1: the big chainsaw. Well there was, Look, there was there
Speaker 1: was the regular like the little tiny electric chainsaw, and
Speaker 1: then there's the big big chainsaw. Then pro Shares came
Speaker 1: out with two X, and then Directions says, oh yeah,
Speaker 1: three X. Just you know, if you're really feeling lucky today, okay,
Speaker 1: on this episode of Trillians playing with power tools. Okay, Sylvia,
Speaker 1: welcome to trillions, Thanks for joining, Thanks so much for
Speaker 1: having me. So you're the head of capital markets at Direction. L. E.
Speaker 1: T s. Yes, okay, So why I do these products exist?
Speaker 1: So the quick answer is that we would like to
Speaker 1: democratize leverage. How does that sound? I mean, I don't
Speaker 1: know what that means. So what is that? Yeah? Exactly? So,
Speaker 1: um so there there are three beta products, as you
Speaker 1: guys were discussing. So for every hundred dollars you invest,
Speaker 1: you get three hundreds of exposure to the underlying index
Speaker 1: for a one day period. So why is that interesting? Well,
Speaker 1: clients can use these to express high conviction on short
Speaker 1: term tactical opportunities. So, for example, if you think that
Speaker 1: you know semi conductors are gonna get crushed for the
Speaker 1: next three days or so, you might look at a
Speaker 1: three x bear fund and express the view that you
Speaker 1: think semi conductors will be both low vaulatile downward trending
Speaker 1: and have high performance in that day period, and generates
Speaker 1: some MALFA from that trade. So leverage effectively amplifies my
Speaker 1: it amplifies your view for the day, and not only that,
Speaker 1: it allows you to allocate capital efficiently. So you put
Speaker 1: down a hundred dollars and you get three hundred dollars
Speaker 1: of exposure. Maybe I'll walk you through an example just
Speaker 1: to give you a sense of real world what actually happens.
Speaker 1: So let's say um SMH is down, semiconductor et F
Speaker 1: is down five percent in a day, So we have
Speaker 1: a bear fund. It's called s o x s now.
Speaker 1: If the underlying e t F that we track is
Speaker 1: down five percent in a day, you have a hundred
Speaker 1: dollars three hundred of exposure five percent move three beta fund,
Speaker 1: so you earn fifteen percent as that e t F
Speaker 1: or index goes down five percent in a day. Now
Speaker 1: on day two, if you have another move downward of five,
Speaker 1: you make seventeen point to five. And this is what
Speaker 1: Eric was referring to. This is sort of the positive
Speaker 1: side of it, where the compounding and the rebalance work
Speaker 1: in your favor. So the market has been trending downward,
Speaker 1: you got the direction right. Five percent in two days
Speaker 1: gives you thirty two point to five over a two
Speaker 1: day period because of the three x and because of
Speaker 1: the rebalance. Now the other side of that, or where
Speaker 1: you don't do quite as well is if semiconductor is
Speaker 1: down five percent on day one and up five percent
Speaker 1: on day two, you're not flat. So it's not like
Speaker 1: buying and selling apple apples up five, down five, you
Speaker 1: make zero. In this case, you're actually down two point
Speaker 1: to five because on day one we rebounds the fund.
Speaker 1: So you had a hundred three hundred, you made fifteen,
Speaker 1: you have one fifteen. We need to rebounce the fund
Speaker 1: and buy an additional forty thirty dollars of exposure from
Speaker 1: three or fifteen to five. So this is like you
Speaker 1: go to home depot rents rent a power tool, but
Speaker 1: it comes with like compounding problems that you might not
Speaker 1: know about or compounding benefits and let me jump in
Speaker 1: on the daily rebouncing. That is essentially what is makes
Speaker 1: the screwy math. People assume you buy it and then oh,
Speaker 1: a year later, why am I not up or down
Speaker 1: three x? The reason it has to reset daily is
Speaker 1: because people come in and out of it. Right. It's
Speaker 1: not like you make it for one day and then
Speaker 1: you close it up for a year. That would make
Speaker 1: sense then, right to have it that long term, But
Speaker 1: because it's a daily trading vehicle, you have to reset
Speaker 1: every day because of people coming in for absolutely right,
Speaker 1: and that's a good point. So there are actually monthly
Speaker 1: rebounds mutual funds that are leveraged so you can hold
Speaker 1: them for thirty days and on day thirty the funds
Speaker 1: rebalanced and you get two times one month's performance of
Speaker 1: whatever index you're tracking. With the daily funds, it is
Speaker 1: rebalanced on a daily basis, so you know, for example,
Speaker 1: if if you had the smp FI this year, it
Speaker 1: doesn't mean that the bull fund is up thirty, and
Speaker 1: it doesn't mean that the bare fund is down thirty.
Speaker 1: It can be anything. It depends on the path that
Speaker 1: it took to get there. So trend is your front.
Speaker 1: If you look at the Obama bottom two thousand nine
Speaker 1: Tech until today it's up two. I know you love
Speaker 1: this e t F tech out. We've talked about it before.
Speaker 1: But if you look at gold miners Techo. By the way,
Speaker 1: techle is, I believe the goat performance wise because TECH
Speaker 1: has done nothing but go up. So in this daily rebouncing,
Speaker 1: as long as it keeps going up every day, you
Speaker 1: actually compound that daily resetting that the daily resetting starts
Speaker 1: to work in your favor, you can get four or
Speaker 1: five times. It's the volatility that will USU up. That's
Speaker 1: called volatility drag right exactly. So so trend is your
Speaker 1: friend and range bound volatility is essentially the enemy of
Speaker 1: Levern University tfs because what happens is during those periods
Speaker 1: the e t F s de kay. So you have
Speaker 1: the market going up for a couple of days, the
Speaker 1: bull funds increased exposure, the bear funds reduce it, and
Speaker 1: then all of a sudden you have a down day.
Speaker 1: You have too much exposure in the bull, not enough
Speaker 1: exposure in the bear, and it doesn't ever catch up.
Speaker 1: So a lot of hedge funds, for example, have figured
Speaker 1: out that during those periods, you know they'll shore both
Speaker 1: the Bear and the bull fund because they know that
Speaker 1: neither will do well in that market environment. So I
Speaker 1: have to have low volatility and training markets. I want
Speaker 1: to get to that trade. It's called the double short.
Speaker 1: That's like some like hardcore stuff. But well, let's just
Speaker 1: for one second go over tackle, because tackle, to me
Speaker 1: is the ultimate um siren. I mean, you look at
Speaker 1: the returns and it is seducing. So this is dale
Speaker 1: this is the compounding effect in effect. So the ten
Speaker 1: years tackle is up four thousand percent, but the index
Speaker 1: that it tracks is only up fos so it returned
Speaker 1: ten times. If you and in ten years ago, however,
Speaker 1: if we found some volatile area, you may find the
Speaker 1: index was up, but the three x CTF was down
Speaker 1: because it was a volatile road. Tech just happens to
Speaker 1: be a much more smooth path up. And I think
Speaker 1: that's the big takeaway. Is it safe to say? The
Speaker 1: compounding effect, which is you know, this is like a
Speaker 1: full moon. It's beautiful when it happens, but it's not
Speaker 1: the norm. It's well, it's been it's been the norm
Speaker 1: for the last decade, right, it's no longer than yeah,
Speaker 1: because of the FED and we didn't have Chinese trade wars.
Speaker 1: But if you look, I just looked this up this morning. Actually, okay,
Speaker 1: so a year to date tackle up fifty three, Bloomberg
Speaker 1: told a return, but the month of May tech s
Speaker 1: the bare fund up and Tech l down, so it
Speaker 1: lost its year to date return because markets are volatile
Speaker 1: and the index is moving down. So those two things
Speaker 1: together have essentially created a perfect storm. And that's obviously
Speaker 1: around the macro backdrop and China and Huawei and all that.
Speaker 1: But so I used a word a few minutes ago,
Speaker 1: I said bet, and you use the word view, yes,
Speaker 1: And I'm interested in that because I think one of
Speaker 1: the like a layman perspective on this, it really feels
Speaker 1: like gambling, right, So so how is it not gambling?
Speaker 1: So I would I'd throw the question you, how is
Speaker 1: investing not gambling? You know, if you view buying IBM
Speaker 1: or Apple, you know, a hundred percent risk concentration in
Speaker 1: one name, as an investment or a gamble, then I
Speaker 1: would say your definition is fair either way. You know,
Speaker 1: they work just like stocks, do. I think because they
Speaker 1: have amplified exposure, there's this sense that the risk is
Speaker 1: certainly a lot higher and people might equate that risk
Speaker 1: to say, a gambling risk. But these are you know,
Speaker 1: investment tools. They're they're very you know, strategic portfolio allocation
Speaker 1: tools for short term tactical traders. You know, I think
Speaker 1: a lot of them use a whole lot of math
Speaker 1: and signals to make their decisions on short term trends,
Speaker 1: long term trends, you know, hedging over the long term,
Speaker 1: things like that. So I would consider it as much
Speaker 1: of a trade as buying buying a tech soccer or
Speaker 1: a high beta stock in a volatile market. But the
Speaker 1: key word is that they are trading tools, and to
Speaker 1: that end, who's using them. So the mix of individuals
Speaker 1: using them is across the board. So you have the
Speaker 1: retail community, you have hedge funds, you have are a s,
Speaker 1: you have large asset managers. So it's everyone from you know,
Speaker 1: my mom to x y z hedge fund to x
Speaker 1: y z R market making shop. What is your mom
Speaker 1: say when when when you talk to her about my
Speaker 1: mom loves leverage, loves direction, loves tech trading. Now but
Speaker 1: three X China, Yeah, of course, of course, you know
Speaker 1: we wouldn't be related if she wasn't trading that. No,
Speaker 1: But you know, so, actually it's a fair question. But
Speaker 1: you know, so, my mom is not a short term
Speaker 1: tactical investor, right, She's probably saving for entirement and she's
Speaker 1: you know, a long term buy and whole investor. So
Speaker 1: for her, she would have to have a short term conviction.
Speaker 1: She would have to be an active day trader looking
Speaker 1: at her account all day long to use these funds.
Speaker 1: That's who we say is sort of the safe person,
Speaker 1: you know, the person who stops at the red light
Speaker 1: knows it's going to turn green, but sitting there watching it. Right,
Speaker 1: It's it's not somebody who's gonna, you know, put in
Speaker 1: a trade and then go golf or play tennis for
Speaker 1: a month or two. That's not not the to that.
Speaker 1: And like what what is um if not your mom,
Speaker 1: maybe my mom? Like what what does she need to
Speaker 1: know before she were to ever touch something like this?
Speaker 1: So she needs to know the basis of how the
Speaker 1: products work, which we talked about that trend is your friend.
Speaker 1: Low trending, low volatility trending markets are the best environment
Speaker 1: for these e t f s to be held longer
Speaker 1: than a day. Volatility means trade very actively. But either way,
Speaker 1: she needs to know that she has to actively monitor
Speaker 1: her position rebounds frequency or frequently, and she needs to
Speaker 1: have essentially a very high risk tolerance. She has to
Speaker 1: understand that the losses could be magnified as well as
Speaker 1: the games. For the record, I don't think my mom
Speaker 1: is ready for an um um. Let me just give
Speaker 1: one example here by the way Yin and Yang, which
Speaker 1: I mentioned earlier, there's the three X long and short
Speaker 1: China there. Over the past ten years, they're both down.
Speaker 1: Yan is down, Yang is down, and f x I,
Speaker 1: the big China et F is up. So I think
Speaker 1: that's an example because China has been volatile. Absolutely, So
Speaker 1: that's the sort of major warning. That's the hand getting
Speaker 1: cut off. If you went in there, you were probably
Speaker 1: unhappy after a couple of years, whereas Teckle you looked
Speaker 1: out because it went up nicely. Absolutely. And if you
Speaker 1: look at the if you look at Yin and Yang
Speaker 1: and the China products year to date prior to UH
Speaker 1: that late day in April, ware Trump came out and
Speaker 1: said no deal. Those ETFs were actually we saw a
Speaker 1: volume increase twenty day average daily volume increased by plus
Speaker 1: and those products the performance was or more. In the
Speaker 1: Bull Fund and it completely switched on to your point,
Speaker 1: there was this macro event and there was volatility. So
Speaker 1: now both funds have essentially over the long term experienced losses.
Speaker 1: And Nugget and Dust are another good example. You know,
Speaker 1: those are the most volatile et F s and they're
Speaker 1: very much for a term trading tools. So there are
Speaker 1: three X gold miners, bowl and bear et F products
Speaker 1: and for those, you know, they were definitely one day
Speaker 1: hold periods, you know, intra day trades. If they were
Speaker 1: held for the long term, you would have lost on
Speaker 1: both the bull and the bare product. But if you
Speaker 1: were looking at sectors like SMP five hundred and tech
Speaker 1: L three x tech for the last decade when it's
Speaker 1: been low, volatile and trending, those trades have really paid off.
Speaker 1: Speaking of Nugget and Dust there those are tracking gold
Speaker 1: miners stocks. There's great great tickets. By the way, well
Speaker 1: there's jay nug which tracks junior gold miners, which we
Speaker 1: all call like the ultimate like that is like the
Speaker 1: hardest of the hardcore. At one point in the first
Speaker 1: half of the year it was up six and the
Speaker 1: volatility on this thing sometimes gets to fifteen times the
Speaker 1: SMP five hundred I mean this thing should they you
Speaker 1: should ship as an X with the by order when
Speaker 1: you you know what I mean, you need so you know,
Speaker 1: you've got to really be able to handle a lot.
Speaker 1: I mean, that's that's way more vaulatle than bitcoin even
Speaker 1: at the time. Uh So some of these get into
Speaker 1: some really even like the underlyings volatile, right right, so
Speaker 1: more the more volatile the underlying is the more volatile.
Speaker 1: Obviously the three x CTF will be um. And what
Speaker 1: I would say about that though, is what's really sort
Speaker 1: of good is that it's evolved over time and that
Speaker 1: the holding periods for J nugg and J dust and
Speaker 1: nugget and dust are a day or less, whereas the
Speaker 1: holding periods for three x SMP could be a couple
Speaker 1: of days to a week. So the average holing periods
Speaker 1: in general for leberty tfs have come in a lot,
Speaker 1: which is great. People are trading them and not you know,
Speaker 1: kind of blindly buying them and hoping for the best.
Speaker 1: And that's what we look for. We want to make
Speaker 1: sure there's a lot of turnover, and if so, we're like, okay,
Speaker 1: the people are probably using those correctly. There's examples of
Speaker 1: ones that should be traded that aren't um like USO
Speaker 1: is a good example, but leverage mostly I think the
Speaker 1: shares trade every day, so that means the average holding
Speaker 1: periods a day or two to that point. Just to
Speaker 1: give some wide numbers here, there's two D and thirty
Speaker 1: leverage inverse ETFs, but the only account for fifty billion dollars,
Speaker 1: which is one point five percent of all e t
Speaker 1: F sets. However, they make up probably eight nine of
Speaker 1: all e t F trading, right, so again they're people
Speaker 1: trade the crap out of them, which is what you
Speaker 1: that's being used correctly for the most part. Yeah, absolutely,
Speaker 1: that's what we want to see. And if you look
Speaker 1: at the last couple of weeks when we've seen all
Speaker 1: come back into the market, we've traded about a third
Speaker 1: of our assets under management almost on a daily basis.
Speaker 1: So people are definitely investors are definitely trading and turning
Speaker 1: these over in the last few days when volatility is there,
Speaker 1: which is great because again I've been doing this for
Speaker 1: I've been with Direction for about a decade now. When
Speaker 1: I first started, I think that the concern around education
Speaker 1: and how to use them was, you know, less than
Speaker 1: it is now. People are definitely trading now and the
Speaker 1: holding periods have come in, which is and most ets
Speaker 1: hold stocks, bonds or futures. Um, these don't these hold swaps.
Speaker 1: Can you explain what a swap is and who it's
Speaker 1: with and whatnot, Like what's in the fund? Sure, So
Speaker 1: we have bull funds and bear funds. So in the
Speaker 1: bull funds it's about two hundred and fifty percent swap.
Speaker 1: And then the remainder of the position is a basket
Speaker 1: of stocks or a very liquid one day to e
Speaker 1: t F So for example, SMP five hundred basket might
Speaker 1: be or spy might and the rest is a swap
Speaker 1: on spy. In the bare fund, it's essentially one or
Speaker 1: three percent exposure via swap. So the way that swaps
Speaker 1: work is on the long side we essentially received performance
Speaker 1: on the index. On the short side, we owe performance
Speaker 1: on the index. Two banks. So we have seven counterparties
Speaker 1: right now, um, and you know our competitor has the
Speaker 1: similar group of counterparties as well. So this is like yes,
Speaker 1: Golman Credit Suites, UM BMP Party, Boss City Group, UM,
Speaker 1: Morgan's you know, Morgan Stanley, BAM, l U b S.
Speaker 1: Those are some of our some of our counterparties UM,
Speaker 1: and what we do on a daily basis is we
Speaker 1: look at what's going on with the underlying index. So
Speaker 1: let's say SMPS rallying today, UM, and you have two factors,
Speaker 1: the primary market in the secondary market, so secondary is
Speaker 1: the index itself and primary is creation and redemption activity.
Speaker 1: So that's authorized participants essentially creating or redeeming shares. And
Speaker 1: we have a number at the to the day. So
Speaker 1: if let's say the SMPS up and there are a
Speaker 1: lot of creates, we go to whichever bank City Ubs
Speaker 1: Meryl credits with and we say we need to buy
Speaker 1: fifty million of exposure and swap to SMP. If there
Speaker 1: are redemptions, that number could be you know, five million,
Speaker 1: whatever it is. UM. We're buying and selling swap on
Speaker 1: a daily basis and managing the fund that way, so
Speaker 1: the bank does the trading. That's the important thing. We
Speaker 1: touched on gold China Tech. What isn't leverage used for
Speaker 1: So the issue or something that would hold us back
Speaker 1: from launching a new fund would be liquidity in the
Speaker 1: underlying and options for us to create the fund. So,
Speaker 1: for example, one of the most top popular topics out
Speaker 1: there has been bitcoin related products or marijuana related ETFs.
Speaker 1: You know, the liquidity and the availability of underlyings is
Speaker 1: just not there to support a three beta fund, So
Speaker 1: you know, things like that we tend to stay away from.
Speaker 1: You know, direction is kind of risk averse in terms of,
Speaker 1: you know, we don't want to launch a product that
Speaker 1: if there was an underlying move of we couldn't rebounce
Speaker 1: on Daihi basis. So, for example, we stay away from
Speaker 1: vix because we just worry about what would happen with
Speaker 1: the futures market and we kind of saw that blow
Speaker 1: up UM a couple of times in history here, So
Speaker 1: we tend to stick to very liquid. They can be volatile,
Speaker 1: but they have to be liquid and there has to
Speaker 1: be a lot of options to build e TF. That's
Speaker 1: how crazy the VIX area is. But the three X
Speaker 1: people will they're like, we're not, we don't go there. Yeah,
Speaker 1: that we gotta have Velocity shares in here. I mean
Speaker 1: that's like that's NC seventeen territory. Yeah. And how lucrative
Speaker 1: is the leverage space. Well, the management fee on the
Speaker 1: majority of three beta et F products, and we have
Speaker 1: about thirteen billion a u M. Most of that is
Speaker 1: in three x CTF. So that gives you a sense
Speaker 1: of you know, the profit on on the e t
Speaker 1: f s. Of course they're financing expenses and things like that.
Speaker 1: But um, you know, when we we look at the
Speaker 1: revenue of the E t F industry, it's something we
Speaker 1: do every year we called welcome to the jungle because
Speaker 1: there's just not a lot of revenue, so be warned.
Speaker 1: But the leverage providers do the best. Uh, they punch
Speaker 1: way above their weight. They might rank eleventh and twelfth
Speaker 1: asset wise, but they probably rank fifth and sixth revenue wise,
Speaker 1: because that when you trade, traders don't really care what
Speaker 1: the fees are. That's why black Rock still makes the
Speaker 1: most money from e M even though most people are
Speaker 1: going to i MG, because the traders that they don't
Speaker 1: really care that it costs whatever seventy basis points. So
Speaker 1: I think you guys are a good takeover target. Frankly
Speaker 1: for a company looking to get a foothold into e
Speaker 1: t f s steady ready revenue stream. Janice bought Velocity Shares,
Speaker 1: which was a wild head scratching acquisition, but it honestly,
Speaker 1: those Velocity shares are contribute like the revenue of janiss
Speaker 1: et F line. So what's the player? Are you guys
Speaker 1: gonna are you looking for for bigger fish or or
Speaker 1: are you happy where you are? We are the big
Speaker 1: fish right now, there you go. I definitely tell you right,
Speaker 1: yeah you should. Here's some inside information and I am
Speaker 1: now fired. Um just quickly before we go onto some
Speaker 1: other topics. The double short, yes, Now, this is a
Speaker 1: trade that hedge funds love to do, where they short
Speaker 1: both the three X long and the short. Basically, it's
Speaker 1: a bet on volatility. What percentage of your three x
Speaker 1: et F family volume is the double short versus regular use?
Speaker 1: I would say it's about and in a way it's
Speaker 1: probably shrinking, which sort of seems counterintuitive because that trade
Speaker 1: is now working. So a lot of hedge funds have
Speaker 1: been doing that trade for many years, but as we said,
Speaker 1: the market has been low, volatile and trending. So the
Speaker 1: problem that they face now is that you know, the
Speaker 1: trade definitely works if you have volatile markets and you
Speaker 1: have say a three x gold miners bull fund and
Speaker 1: goal miners bear fund. They're both decaying, so if you're
Speaker 1: sure both of them, in theory will generate alpha. The trick, though,
Speaker 1: is the borrow, and as we have more volatility, the
Speaker 1: cost of the borrow for the hedge funds to employ
Speaker 1: that trade goes up. So you need some serious returns
Speaker 1: to make up for what they're charging you to short
Speaker 1: the products. But you know that being said, the biggest
Speaker 1: double short trades are still in you know, tax semiconductors,
Speaker 1: emerging markets, China, and it's probably about ten of the
Speaker 1: e T F A U. I'm out there. So the
Speaker 1: way that we you know, people always say, why do
Speaker 1: you talk about the double shore you work for the company.
Speaker 1: Isn't that an opinion that it's it's bad. It's absolutely not.
Speaker 1: The products are tactical trading tools. If you shore both
Speaker 1: of them, it's a way to generate alpha. And for us,
Speaker 1: you know, when when you go to or a client
Speaker 1: goes short nugget or dust or whatever it might be,
Speaker 1: someone behind the scenes has to create those shares so
Speaker 1: it doesn't hurt our A U M. Actually like I'm
Speaker 1: I'm really intrigued by the idea. It's I love that
Speaker 1: has a name totally and that you can do it,
Speaker 1: you know, in multiple different uh, with multiple different funds. Uh.
Speaker 1: It takes Cojones. I think that well, I think it
Speaker 1: was a credit space or somebody just study on the
Speaker 1: double short and they found that it does work most
Speaker 1: of the time. But when it does work, when that
Speaker 1: compounding effect kicks in and you start to that starts
Speaker 1: to kick in and your short, you know, that downside
Speaker 1: is unlimited, right, and that's when it's not one hand
Speaker 1: is two hands. Yeah, it's exactly right. The tail risk
Speaker 1: on the double short is is scary. Yeah. So the
Speaker 1: two big risks for the trade are basically a trend
Speaker 1: that you catch a trend on one side or the other.
Speaker 1: And the second thing is is borrow risk. So recall
Speaker 1: risk and rewrate risk. And you know, we we saw
Speaker 1: that this trade. You know, the borrow was very um efficient.
Speaker 1: It was cheap, i would say, for you know, prior
Speaker 1: to this year, in the last decade or so. But
Speaker 1: that's changing. It's becoming more expensive to finance these trades,
Speaker 1: so that increases your risk too. Um. So, you know,
Speaker 1: unless you're in a position where you're a huge hedge
Speaker 1: fund and you have awesome borrow, it's it's it's not
Speaker 1: an everyday trade, right, It's it's definitely more of a
Speaker 1: sophisticated um you know, hedge fun type of trade. UM.
Speaker 1: So one question on some concerns about leverage besides the
Speaker 1: usage which we just went over. UM. The Boston Fed
Speaker 1: did a study but I've seen this before, which is
Speaker 1: basically they looked at different ways et f s could
Speaker 1: actually increase structural risk to the market. And one of
Speaker 1: the ways they did they said that there could be
Speaker 1: some extra risk is the amplifying of volatility by leverage
Speaker 1: ets because here's the quote. Basically, at the end of
Speaker 1: the day, you rebalance and both must trade in the
Speaker 1: same direction as the market moves earlier that day. So
Speaker 1: that provides a little amplification of what just happened. And
Speaker 1: I think it's that daily rebalancing at the end of
Speaker 1: the day that some people have concerned about. I know
Speaker 1: there's a lot of maybe histrionics around it. Can you
Speaker 1: just set a straight about what's going on and whether
Speaker 1: there is some extra risk there? Sure? So there there
Speaker 1: are three factors. One is that you have both funds
Speaker 1: and bare funds, so the trade at the end of
Speaker 1: the day on either side is not as big as
Speaker 1: you think because you have to rebalance both funds, right,
Speaker 1: so there's a net position there. The second thing is
Speaker 1: that there are often contrarian trades. If everything is sort
Speaker 1: of down today, let's say tech semiconductors SMPR downstay we
Speaker 1: often see creates come in, so people are taking a
Speaker 1: contrarian view, or else they're unwinding a hedge, so that
Speaker 1: reduces the buy into the end of the day trading. Um,
Speaker 1: it's a lot less than you would think. So I
Speaker 1: looked back at this and on our most volatile day,
Speaker 1: we were one half of one percent of the close activity.
Speaker 1: On an average day where one tenth of one percent
Speaker 1: of the end of day activity. So we basically are
Speaker 1: an absolute blip on the radar. This is for e
Speaker 1: t fs in general when you look at them. I
Speaker 1: mean even all ETFs combined only own maybe eight percent
Speaker 1: of the stock market, and if leveraged is one point
Speaker 1: five percent of that eight percent, and you're down to
Speaker 1: some pretty small numbers. Usually context calms people down with
Speaker 1: e t F worries. When you start to show the
Speaker 1: whole big picture, they're like, okay, um, but that's something
Speaker 1: that comes up repeatedly. I'm sure you get questions on
Speaker 1: this a lot. Yeah. I think I think that you
Speaker 1: know when you see big moves in the market and
Speaker 1: you think of three beta funds or any kind of
Speaker 1: product that has a tendency to have high volatility and
Speaker 1: needs to buy or sell in the market, and especially
Speaker 1: at the end of the day. There's this general thesis that, oh, well,
Speaker 1: it must impact the clothes. But the truth is, again,
Speaker 1: on the most volatile day, we were one half of
Speaker 1: one percent, So that's a two thousand and eight end
Speaker 1: of day trade. So what when you talk to your
Speaker 1: power users, what do they want that they can't get yet?
Speaker 1: So well, a lot of people want, you know, three
Speaker 1: x anything tacky like three x five G, three x POD,
Speaker 1: three x bitcoin. Um. But there have been you know,
Speaker 1: we're always getting good ideas. We have a lot of
Speaker 1: traders that trade internationally and they would like to see,
Speaker 1: you know, more bowl and bear funds on single country
Speaker 1: They would like to see, um, you know, more bone
Speaker 1: bear funds on specific regions that might be impacted by say,
Speaker 1: you know, European politics, Brexit, things like that. So there
Speaker 1: are symptomatic ideas. UM. We were actually pushed to use
Speaker 1: leverage in different ways for buy and hold clients. So
Speaker 1: we have light leverage to so one point to five
Speaker 1: for traders who don't trade, but want a little bit.
Speaker 1: So is that single x it's one five x exactly. Yeah,
Speaker 1: so you're getting a little bit of enhancement over the
Speaker 1: long run. And that's that's just you know, a lot
Speaker 1: of clients said, Hey, I just think that I'd like
Speaker 1: to be invested in the SMP five hundred for the
Speaker 1: next hundred years because it's twelve annulyzed return no matter
Speaker 1: what happens in between. But I don't know if I
Speaker 1: want to amplify it. I don't want to three x,
Speaker 1: but two point t five extra makes sense to me.
Speaker 1: The amount of momb taking on diet Coke, Yeah, diet Coke, Yeah,
Speaker 1: you know, both both leverage companies. UM. I frequently compared
Speaker 1: to the Godfather and Godfather too when he's like, we're
Speaker 1: trying to take the family legit, you know, that's his
Speaker 1: big thing. They both came out with the line of
Speaker 1: plain vanilla E T F direction has some some somewhat
Speaker 1: successful ones that are just normal, right, Like you have
Speaker 1: q q QI, which is the equal weighted cues, which
Speaker 1: we just analyzed a couple of weeks ago in the show. Um,
Speaker 1: what's behind that? Why not just be like that leverage provider?
Speaker 1: Why do those other ones. It's like a little off
Speaker 1: brand because I think that I think we've done really
Speaker 1: well with the tactical clients. So there's three types of
Speaker 1: clients I think out there. One is tactical, their short
Speaker 1: term traders. They love us, they know us, they're comfortable
Speaker 1: with three X. Then you have thematic and strategic. So
Speaker 1: thematic are the six to twelve month guys, and they're
Speaker 1: not necessarily using leverage. They're more less looking to express
Speaker 1: thematic views or macro views, and they might do something like,
Speaker 1: you know, we launch relative way e t F there
Speaker 1: one fifty fifty, so they're looking to you know, express
Speaker 1: a view that they like value over growth for the
Speaker 1: next six months and they'd like to you know, get
Speaker 1: the benefit of value performing and then the spread between
Speaker 1: value and growth performing and one product. So that's a
Speaker 1: thematic you know, not high leverage products. Standard deviation is
Speaker 1: similar to the underlying one beta product. It can be
Speaker 1: bought and hold for long periods of time. And then
Speaker 1: there's the strategic client, which is Eric, you know, the
Speaker 1: guy or girl who uses q k q E, which
Speaker 1: is crushing it right now because fang is getting crushed
Speaker 1: right now. So that's you know, a Nazaki product and
Speaker 1: and that's really you know, the long and I would
Speaker 1: consider portfolio plus in that group too. It's the long
Speaker 1: term strategic asset allocator, you know, holding periods of years.
Speaker 1: They might just want a little bit of additional exposure
Speaker 1: to an index like one point to five, or they
Speaker 1: might want you know, strategic beta like an insider et
Speaker 1: f A Nazakia something like that. So we touched. We
Speaker 1: we basically realized, you know, hey, we're really good at
Speaker 1: doing this one thing for this one group of clients.
Speaker 1: But that's there's other player types. There's other player types too,
Speaker 1: and they're the you know, massive areas and asset managers
Speaker 1: out there. So so because this is by and large
Speaker 1: sort of a daily ritual with folks, and you describe
Speaker 1: these different player types when you guys look at the
Speaker 1: sort of the I guess the inflows and the trading patterns.
Speaker 1: How big of of of views are people expressing? How
Speaker 1: much are they putting in? There are some pretty big views.
Speaker 1: There are some pretty big views. You know, we can
Speaker 1: we have days of twenty million or forty million shares
Speaker 1: traded in some of our top ets. Said lately, we've
Speaker 1: seen you know, massive increases across the board and everything
Speaker 1: that has to do with anything you know, growthy, high beta,
Speaker 1: China trade terraff related. So um, the trades could be
Speaker 1: you know, anywhere from a million to sixty million. They're
Speaker 1: big tickets. They're definitely big tickets as compared to you know,
Speaker 1: a newer product that we might launch where somebody puts
Speaker 1: in fifty. These tend to be bigger trades. And what
Speaker 1: do you attribute that increase in the size of the
Speaker 1: trades to. I think opportunity. I think short term opportunity.
Speaker 1: So we really see big bumps in an AUM and
Speaker 1: trading around UM times like earnings for example, where people
Speaker 1: have very strong conviction about certain names coming out, we'll
Speaker 1: see a lot of flow and we'll also see a
Speaker 1: lot of performance and then just big macro events that
Speaker 1: move the market. You know, the tactical technical traders are,
Speaker 1: you know, the people who understand the products and have
Speaker 1: a strong opinion. It's a great way. You know, where
Speaker 1: are you gonna make thirty three percent in a month
Speaker 1: right now? Well? Semi conductor bare fund that trades not
Speaker 1: for everyone, but for the sophisticated trader who has a
Speaker 1: view on semi conductors. It plays out. It's it's a
Speaker 1: great short term outh opportunity. Yeah, there's a hedge fund
Speaker 1: I interviewed from my book UM Metropolitan Capital I believe
Speaker 1: is the name, and Sharon Snow who was a great interview.
Speaker 1: This hedge fund does nothing but leveraged ETFs, but they
Speaker 1: only invest once in a while, like like eighteen different
Speaker 1: metrics have to line up, and then they know they
Speaker 1: want that. They they're so convicted they go all in
Speaker 1: with the three x UM. So it's sort of like
Speaker 1: they just wait and wait and wait, and they see
Speaker 1: an opportunity and then they just use the leverage GTF
Speaker 1: to make it. And it's a really interesting way of investing.
Speaker 1: It takes a lot of discipline and patience, but when
Speaker 1: you pounce, you pounce hard. Yeah. So I know Sharon
Speaker 1: very well. They are very very disciplined in their views.
Speaker 1: And as you said, they don't trade often, but when
Speaker 1: they trade, they trade with high conviction, and they trade
Speaker 1: in size, and they have mythical mathematical models which give
Speaker 1: them a signal and you know, until they get to
Speaker 1: a sweet spot, perfect environment to go longer short a
Speaker 1: bull er bear ETF. You know, they're sort of hands
Speaker 1: off and it's really worked out for them because they
Speaker 1: have called a lot of the crack trends, so they've
Speaker 1: they've been doing a great job. So now that we're
Speaker 1: kind of closing here, let's have a little fun here.
Speaker 1: One of the things with leverage ETFs that rules is
Speaker 1: the tickers. I mean, every time they have a new one,
Speaker 1: the tickers are amazing. I mean there are home runs
Speaker 1: every time. So recently you had talk and mute t
Speaker 1: A w K and mute. That's going to be three
Speaker 1: x communications and three x bear communications. Want and need
Speaker 1: are good, Ying and yang, dig and doug, drip and gush.
Speaker 1: What's that one for? What are those four oil, chiff
Speaker 1: and gush? Yeah, they're they're three x SMP oil and
Speaker 1: energy ETF. There you go. Cure and sick is six
Speaker 1: little round that close sick, sick up the flu. Only
Speaker 1: cure survives. So good ticker. Great band reminds me of
Speaker 1: the band the Cure. Yeah, actually a great trade now too?
Speaker 1: How many how many of those tickers can you take
Speaker 1: credit for? You know? I the tickers that I come
Speaker 1: up with are terrible, So I can't really, guys can't. Really.
Speaker 1: It's the staff. We we send emails around, we argue
Speaker 1: about it. Really, Yeah, we we have different opinions on it,
Speaker 1: but I have to say it's it's more or less
Speaker 1: our trading desk that comes up with the great you know,
Speaker 1: if there's ever a round table meeting that we can
Speaker 1: be flies on the wall for. Yeah, well, are there
Speaker 1: any tickers that were on the cutting room floor that
Speaker 1: that are just interesting or should have made it? I
Speaker 1: mean for the healthcare one of the one of the
Speaker 1: names we have lab you and lab D that's three
Speaker 1: X biotech and you know, rat and rats was on
Speaker 1: the table for a while, but then we thought, you know,
Speaker 1: that gets into some animal treatment issues and yeah, we
Speaker 1: try to be careful. Sounds like because they're fun, but
Speaker 1: they're not over the PC linel be careful. Yeah, Rat
Speaker 1: would would definitely speak to that. I think. So how
Speaker 1: often will you sit on a ticker that you like
Speaker 1: even though you don't have that product yet? So we
Speaker 1: filed for a whole bunch of products, and you know,
Speaker 1: we do reserve tickers along the way. So it's you know,
Speaker 1: when we have an idea that we think is absolutely brilliant,
Speaker 1: will do it. And a lot of et F providers
Speaker 1: do that actually, so, yeah, there's a lot reserved. It's
Speaker 1: the whole thing. I've heard that they trade tickers. Now
Speaker 1: that you have on loan or that you've reserved, you
Speaker 1: can actually like go find the person and make an
Speaker 1: offer or something. Yeah, right right, And if you have
Speaker 1: a product that another et F provider would like to
Speaker 1: launch and use your product for an underlying you know,
Speaker 1: they might kind of bait you with, hey, we have
Speaker 1: this great idea. So and you know when you talk
Speaker 1: about new launches, I do find sometimes, you know, when
Speaker 1: e t F has arrived, when there's a three X version,
Speaker 1: like I think cybersecurity. Do you have a three x
Speaker 1: cybersecurity now? Yeah? But I'll give you an even better
Speaker 1: example than that. We have, um you bought which exactly
Speaker 1: and that e t F. It was sort of we
Speaker 1: launched it. It was admittedly a bit sleepy, but I
Speaker 1: just I absolutely love this idea. I think it's the
Speaker 1: way of the future, right, Robotics and and AI and
Speaker 1: you know, bots really started to crush it. And and
Speaker 1: we had, you know, prior to all this China stuff
Speaker 1: that e t F was up close to a and
Speaker 1: still up about thirty year a date. But you Bought
Speaker 1: has really picked up and steam with a UM and
Speaker 1: trading and you know it's on the map because it's
Speaker 1: it's popular and topical. But yeah, it hit its shride.
Speaker 1: You know, we talked about ques being like the sun
Speaker 1: in this sort of like mini solar system. That's the
Speaker 1: three X leverage is like something that else would there
Speaker 1: would orbit a hit E t F usually and then
Speaker 1: you bought sends some volume assets and interest to the
Speaker 1: underlying as well, so uh that it all feeds into
Speaker 1: that main body. But first you've got to get the assets,
Speaker 1: like I think robo and bots together hit five billion,
Speaker 1: and then you start to see options on them, the
Speaker 1: three x E t F s launching UM, et cetera,
Speaker 1: and then copycats and then all of a sudden you
Speaker 1: got a whole new category that just was born. Yeah,
Speaker 1: and on the flip side, there's so many good ideas
Speaker 1: out there right now, Like I'm a big enthusiast in
Speaker 1: the office and we have to launch this. Look at
Speaker 1: this idea. It's so cool and whatever. But you know,
Speaker 1: there are some regulatory hurdles too. So within the case
Speaker 1: of bots, we had to wait for it to get
Speaker 1: big enough in order for us to be able to
Speaker 1: launch the three x CTF prot but there are some
Speaker 1: awesome ideas out there right now they're too small, not
Speaker 1: liquid enough, but will someday be three extremes? And um,
Speaker 1: you know, some people would ask me like, is there
Speaker 1: ever going to be a four x E t F?
Speaker 1: And there was a filing by a company called four Shares,
Speaker 1: what a great name for four x and they filed
Speaker 1: for four x S and P I believe, but the
Speaker 1: SEC initially said okay, but then they rescinded. I think
Speaker 1: there was a mini freak out in social media on it,
Speaker 1: and uh, I don't think the s SEC one of
Speaker 1: the pr issue around that. But do you know anything
Speaker 1: about the four shares or four x or would you
Speaker 1: ever do that if you could? Well, I look, there's
Speaker 1: there's a lot of leverage in the environment, right features
Speaker 1: or ten x mortgages on your house or are you know,
Speaker 1: essentially leverage and it's more in its purest form, So
Speaker 1: I think that leverage in the ecosystem is generally good. Um,
Speaker 1: you know, the reason we stopped at three is because
Speaker 1: we thought that it's probably not going to happen. But
Speaker 1: if there was a thirty percent move in an underlying
Speaker 1: index and you know it's stuck. It could wipe out
Speaker 1: a fund. So when you talk about moving a day,
Speaker 1: we started to worry that, okay, that could actually you know,
Speaker 1: that could actually happen. So that would really be my
Speaker 1: you know, my sort of reserve on launching four X
Speaker 1: and and more. But I think, you know, for the regulators,
Speaker 1: it's it's smart about product structure, you know, where they
Speaker 1: want to kind of draw the lines, and you know,
Speaker 1: I'm not sure what their final final thoughts on it are,
Speaker 1: but it didn't launch though. Four X, S and P
Speaker 1: wouldn't even rank in the top fifty of volatility though,
Speaker 1: because the SMP probably would never go down of a day,
Speaker 1: and if it did, society would have more problems than
Speaker 1: the four shares. Yeah. Absolutely, but I think I think
Speaker 1: it's let's start with SMP. Well, why don't we make
Speaker 1: right you know, yeah, it's open. Yeah, absolutely, And also
Speaker 1: again I think that there's just the PR worry. You know,
Speaker 1: what's the sec level. You know, Sylvia, thanks for joining tricks,
Speaker 1: Thank you for having me, Thanks for listening to trillions.
Speaker 1: Until next time, you can find us on the Bloomberg terminal,
Speaker 1: Umberg dot com, Apple podcasts, Spotify, and wherever else you
Speaker 1: like to Elisa, we'd love to hear from you. We're
Speaker 1: on Twitter, I'm at Joel Webber Show, He's at Eric Calltunist,
Speaker 1: and you can find Sylvia and Direction at Direction L
Speaker 1: E T S. That's Direction with an X trillions is
Speaker 1: produced by Magnus Hendrickson. Francesca Levie is the head of
Speaker 1: Bloomberg podcast. Bye.