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Speaker 1: Welcome to Trallians.

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Speaker 2: I'm Joel Webber and I'm Eric Valchunis Eric.

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Speaker 1: Every once in a while we come across the thing

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Speaker 1: that feels like a big deal, maybe a good thing,

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Speaker 1: really good thing for investors, and this one really piqued

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Speaker 1: my interest.

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Speaker 2: Yeah, there's a new category that's getting big quickly and

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Speaker 2: it's really we call them the buffer ETFs. Target out

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Speaker 2: target outcome is another name for them, and there's been

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Speaker 2: there's dozens of them. But there was a story written

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Speaker 2: by Bloomberg News that had a headline that really just

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Speaker 2: caught people's attention. This story got a lot of reads

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Speaker 2: and it was basically along the lines of, hey, here's

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Speaker 2: a new fund that offers one downside protection.

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Speaker 1: Downside protection.

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Speaker 2: That's what I like, Yeah, everybody does. I think there's

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Speaker 2: also a too good to be true element to it

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Speaker 2: as well, and so clearly you're going to click on

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Speaker 2: that and say what's going on here? And I think

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Speaker 2: it's just excuse to get into the buffer funds and

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Speaker 2: what they do and the audience they serve. I just

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Speaker 2: looked recently they've taken in over five billion this year.

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Speaker 2: That's a twenty three percent organic growth rate. That's about

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Speaker 2: triple the ETF industry as a whole. They're now up

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Speaker 2: to about thirty billion dollars. And this search I did

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Speaker 2: isn't even catching them all. It's only the ones with

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Speaker 2: buffer in the name. But anyway, it's a whole big category.

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Speaker 2: Black Rocks jumped in and so I think it's a

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Speaker 2: good time to revisit this, in particular this one that

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Speaker 2: has one hundred percent downside protection.

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Speaker 1: Joining us on this episode. We're gonna have Bruce Bond,

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Speaker 1: the CEO and founder of Innovator Capitol Management, as well

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Speaker 1: as Graham Day, the chief investment officer, and we're going

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Speaker 1: to talk about the Innovator equity defined protection ETF with

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Speaker 1: the ticker t Jewel, this time on trillions no downside Bruce, Graham,

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Speaker 1: Welcome to the Trillions.

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Speaker 3: Great to be here, guys, really happy to be here.

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Speaker 4: Thanks for having us guys.

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Speaker 1: Okay, Bruce, I'm gonna start with you. Do you prefer

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Speaker 1: the term buffer ETF or defined outcome?

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Speaker 4: We prefer the term defined outcome to cover the whole

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Speaker 4: category of these defined outcome type ETFs, which includes buffers, accelerated,

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Speaker 4: income based and now you know the defined protection ETFs

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Speaker 4: as well, so we look at defined outcome kind of

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Speaker 4: as an umbrella, and buffers is a category within that.

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Speaker 1: Okay, so is this too good to be true? I

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Speaker 1: mean I put money in and then a little bit later,

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Speaker 1: like chaos unfolds. There's no downside. I only get upside.

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Speaker 1: That seems like there's a catch.

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Speaker 4: Yeah, well there really is no catch. It is a

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Speaker 4: great product. It took us a while to get it out,

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Speaker 4: and I think to be able to tell people that

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Speaker 4: you can now participate in the equity markets with no

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Speaker 4: downside risk and with upside now you are giving a

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Speaker 4: couple things up.

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Speaker 1: One of the Oh there's the catch, okay, yeah, what

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Speaker 1: do I give up?

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Speaker 3: Yeah?

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Speaker 4: So I guess, yeah, I mean catch you're giving up

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Speaker 4: the dividend, so you don't receive the dividend, and you're

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Speaker 4: also giving up the upside over two years above sixteen

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Speaker 4: point six percent, you know, so any performance over sixteen

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Speaker 4: and a half percent, let's say you're giving that up.

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Speaker 4: So you're giving up the dividend and that and so

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Speaker 4: those are the gives up. So there's nothing free within

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Speaker 4: the investing world, as we all know. But to be

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Speaker 4: able to understand you don't have downside, but you get

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Speaker 4: that amount of upside is a huge benefit to many

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Speaker 4: many people in the investing world.

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Speaker 1: Do you keep whatever's above sixteen percent.

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Speaker 4: No, we don't keep it. What happens is we take

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Speaker 4: the dividend and we buy part of the options with

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Speaker 4: the dividend. But then we don't quite have enough money

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Speaker 4: just using the dividend to buy the options, and so

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Speaker 4: we have to sell a call and we determine where

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Speaker 4: the cap is by how much money we have to

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Speaker 4: raise in order to finance this package. We want the

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Speaker 4: options package to be a zero cost package for investors,

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Speaker 4: and so we set the cap there. So where's really

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Speaker 4: We're selling off the upside to get a little more

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Speaker 4: money to finance the package. And that's really what happens,

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Speaker 4: and the way we're able to give you the downside

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Speaker 4: protection and give you a certain amount of the upside.

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Speaker 1: Gram Let's come in here. That was a deep endo

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Speaker 1: the swimming pool. Can you break that down a little

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Speaker 1: bit before.

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Speaker 3: Me, guys, It's really simple. All we're doing is, as

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Speaker 3: Bruce was saying, in giving up unlimited upside potential, you're

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Speaker 3: exchanging that for the certainty of having a one hundred

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Speaker 3: percent buffer and if you think about long term the

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Speaker 3: ability to get some equity upside in today's market where

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Speaker 3: it's at all time highs, where people are really scared

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Speaker 3: of what do I do. Do I just keep giving

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Speaker 3: my money to the banks and letting them sit in

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Speaker 3: the deposits, or do I invest in the markets but

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Speaker 3: also have that one hundred percent protection and so to

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Speaker 3: have a sixteen percent upside over two years, history suggests

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Speaker 3: that's a better spot to be than if you were

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Speaker 3: just sitting on the sidelines in cash.

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Speaker 2: Okay, there's a lot of questions on where this fits

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Speaker 2: into portfolio, who it's for, But before we get there,

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Speaker 2: just while we're on the product itself, just explain as

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Speaker 2: best you can what you're doing in the portfolio. You

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Speaker 2: talked about selling the upside. What kind of options are

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Speaker 2: you using, how often are you changing the options, what

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Speaker 2: kind of options are they?

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Speaker 3: It's really simple at the end of the day, these

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Speaker 3: are three options positions that we're holding. And the beauty

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Speaker 3: of the defined outcome ets is that once that basket

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Speaker 3: of options is set, it is fixed for the entirety

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Speaker 3: of the outcome period. There's no active management, there's no

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Speaker 3: one pulling levers behind the curtain. That's what gives all

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Speaker 3: investors a defined outcome. And so we start with a

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Speaker 3: deepend the money call on the S and P five

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Speaker 3: hundred that gives you the long exposure to the S

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Speaker 3: and P five hundred, and then, as Bruce mentioned, we

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Speaker 3: use the implied dividend inside that deep in the money

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Speaker 3: call to help fund the at the money put so

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Speaker 3: and at the money put is what gives you that

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Speaker 3: one hundred percent downside protection. Now the dividend is not

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Speaker 3: enough to cover that cost of that protection, and so

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Speaker 3: that's where we go out and we put the market

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Speaker 3: makers on the option side into competition and tell them, look,

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Speaker 3: we need to finance this downside protection. At what level

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Speaker 3: can we sell a call the highest level possible to

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Speaker 3: finance the remainder of the cost of the protection. In

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Speaker 3: this case, it was sixteen point six percent. We sell

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Speaker 3: that call. That's what gives the cap to investors, but

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Speaker 3: it's also what helps finance that at the money put.

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Speaker 2: When these products come out they sometimes have dates around them.

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Speaker 2: Is this is this one T jewel, which by the way,

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Speaker 2: sounds like a like a rapper. It's a cool name,

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Speaker 2: it's like a It just kind of rolls off the tongue.

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Speaker 2: Whoever got that took your good job?

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Speaker 1: Do you?

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Speaker 2: These are designed to start on the day that they

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Speaker 2: come out, kind of right. It's not a lot of

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Speaker 2: other ETFs, including leveraged the leverage resets every day. This

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Speaker 2: is a little different. Can you just explain how the

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Speaker 2: timing works.

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Speaker 4: Yeah, and Eric, maybe even before we do that, we

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Speaker 4: didn't really talk about, Okay, what is this product and

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Speaker 4: how does it work a little bit, you know, just

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Speaker 4: kind of the overview for everyone. Yeah, basically, t jewel

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Speaker 4: It was listed on the first of July, and you

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Speaker 4: have to hold this product for two years in order

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Speaker 4: to get the sixteen point six percent. So you buy

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Speaker 4: that and then over a two year period, if the

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Speaker 4: market is up twenty percent, you get sixteen point six

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Speaker 4: If the market is up ten percent, you just get

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Speaker 4: ten percent, So you get all the way up to

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Speaker 4: sixteen point six percent. Now, the beauty of this product

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Speaker 4: is that you can't lose money on the downside if

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Speaker 4: you buy day one. So if the market's down five percent,

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Speaker 4: you don't lose. If it's down ten percent, you don't lose.

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Speaker 4: If it's down twenty percent from July first, you don't

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Speaker 4: lose any money, and I think that's what people are

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Speaker 4: so excited about. So I just want to make sure

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Speaker 4: everybody understands this. Although what Graham's talking about with the

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Speaker 4: call bonds, and I mean with the calls and the

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Speaker 4: options and all this stuff, it's not kind of confusing

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Speaker 4: for some people. What they really need to do is

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Speaker 4: look at this at face value. You buy it on

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Speaker 4: the first of July, or you can really buy it anytime.

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Speaker 4: If you look at the website, you get the upside

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Speaker 4: of the market up to sixteen and a half percent

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Speaker 4: and you have no risk on the downside. But you

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Speaker 4: have to stay in it for two years in order

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Speaker 4: to receive that. And that's really what people are so

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Speaker 4: excited about. So storry to interrupt. I just want to

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Speaker 4: make sure everybody understood where we were.

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Speaker 2: Do people religiously buy on the first day and then

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Speaker 2: nobody buys it? Or do you find some people come

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Speaker 2: into these products after a couple months or a year.

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Speaker 2: Is there a benefit to buying it a year in

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Speaker 2: let's say the market is down or up, like, is

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Speaker 2: there a trading crowd that gets into this even if

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Speaker 2: they're not sort of maybe the older investor looking to

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Speaker 2: protect their wealth and they go in day one, Is

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Speaker 2: there any thing you can do with this after day one?

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Speaker 3: Eric? Yes. For the most part, though, we do find

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Speaker 3: advisors like to buy at the very beginning of the

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Speaker 3: outcome period. They like to understand that they have the

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Speaker 3: full downside buffer, they have the full upside cap. And

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Speaker 3: I think one of the things that we realized early

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Speaker 3: on when we brought these products back in twenty eighteen

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Speaker 3: was that what I alluded to before, when you look

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Speaker 3: at the defined outcome, that package of options is fixed

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Speaker 3: for the entirety of the outcome period. That means it's

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Speaker 3: someone who buys, say six months into an outcome period,

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Speaker 3: they can still achieve a defined outcome. Now, their outcome

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Speaker 3: may look a little different. The price of the underline

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Speaker 3: and the options have moved, so the price of the

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Speaker 3: ETF has moved. But now if they had a one

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Speaker 3: year out from pater to start and they're six months in,

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Speaker 3: now they have a unique six month defined outcome that

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Speaker 3: they can achieve. And so we've seen a growing number

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Speaker 3: of advisors who have grown comfortable with using these ets.

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Speaker 3: Maybe they started buying at the very beginning of the

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Speaker 3: outcome period, but now they look and realize, well, this

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Speaker 3: payoff is really intriguing to me and my clients for

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Speaker 3: this next six months. In terms of the trading community,

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Speaker 3: I think there's definitely some and we've been talking with

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Speaker 3: some institutions that have used options in sophisticated ways, but

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Speaker 3: the ability to access a package of options via single

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Speaker 3: ETF is far more efficient for them than it is

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Speaker 3: to recreate the options package, trade those individual option legs

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Speaker 3: tax full event every single time you're managing this portfolio options.

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Speaker 3: And so we're seeing the application of these ets extending

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Speaker 3: from simply using day one the people using throughout the

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Speaker 3: outcome period, to now getting some of these institutions involved

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Speaker 3: as well.

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Speaker 4: One other thing I would add to you guys too,

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Speaker 4: just to think about. So let's say you bought in

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Speaker 4: day one and then at a at the year point,

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Speaker 4: let's say the market's up ten or fifteen percent and

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Speaker 4: the ETF's up eight percent. You know it's not going

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Speaker 4: to be up as much as the EGF. Listeners need

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Speaker 4: to understand that it's going to trail a little because

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Speaker 4: there's a lot of time value in there. Only at

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Speaker 4: the very end of the outcome period you're going to

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Speaker 4: get one to one on the upside with the SMP.

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Speaker 4: And but just think about anytime you could use this

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Speaker 4: if the market's up, and if the ETF is up,

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Speaker 4: you can roll it into a new one at the

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Speaker 4: reset time and you lock in whatever that gain is.

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Speaker 4: You can't lose it after that, you know, so you

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Speaker 4: just step up, you continue to lock your gains in.

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Speaker 4: I can see a lot of people using it like

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Speaker 4: that into the future if the market's up.

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Speaker 2: And so this to me, especially after last year, because

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Speaker 2: sometimes I see a product like this and I'm like,

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Speaker 2: why not just like diversify old school, have some treasuries,

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Speaker 2: have some stocks. But after last year, treasuries and stocks

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Speaker 2: both went down a lot, And so how big of

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Speaker 2: an opening did that create? Because I get the appeal here, right,

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Speaker 2: You've got older investors especially who have a lot of gains.

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Speaker 1: I was going to say, like a retiree.

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Speaker 2: This just seems like, yeah, what is the average age

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Speaker 2: in these funds? Got to be like seventy? I mean

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Speaker 2: I can't I mean, you wouldn't use this if you're

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Speaker 2: thirty years old, right.

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Speaker 4: Yeah, it's hard to track. But you know one other thing,

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Speaker 4: you know, because they're ETOs, we don't know everybody that

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Speaker 4: owns them. But the thing to remember is that like

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Speaker 4: seventy five percent of investable assets are in pre retirement

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Speaker 4: and retirement accounts. That's where most of the money is located.

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Speaker 4: And so those people that are getting ready are looking

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Speaker 4: at retirement, are almost in retirement or saying I don't

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Speaker 4: want to put my money at risk, and Eric, you're right.

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Speaker 4: Typically you would say, you know, let's say you get

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Speaker 4: a windfall, you get a million blocks, and you're like, okay,

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Speaker 4: well I need to buy a little bond. I got

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Speaker 4: to buy a little You don't have to think about

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Speaker 4: that anymore.

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Speaker 3: If you don't want to.

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Speaker 4: You can just buy this and say, Okay, I get

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Speaker 4: all the upside up to sixteen percent over the next

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Speaker 4: couple of years. I got no risk on the downside. Why,

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Speaker 4: I think about what I want to do, and I

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Speaker 4: think those are the options that this gives people that

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Speaker 4: they didn't have access to before. One other thing, Eric,

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Speaker 4: you can appreciate this. The SEC has never approved the

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Speaker 4: name protection and the name of any other ETF until now.

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Speaker 4: It's called defined protection ETFs that innovators bringing. That's a

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Speaker 4: big deal. It tells you a lot about how the

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Speaker 4: SEC has seen them as well.

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Speaker 2: How were those conversations. Did it take a lot to

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Speaker 2: convince them, because they are pretty conservative when it comes

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Speaker 2: to putting certain words in the name.

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Speaker 3: Eric, you know, really know. In fact, what you'll find

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Speaker 3: when you bring a lot of products to market is

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Speaker 3: that the SEC has a significant amount of input when

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Speaker 3: it comes to the final name, and so you are

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Speaker 3: it's almost a collaboration with them. And so we were

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Speaker 3: actually very surprised that this was one of the iterations

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Speaker 3: that they had come back to us with. And so

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Speaker 3: I think to Bruce's point, that kind of reaffirms that

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Speaker 3: they understand the value add proposition of this ETF and

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Speaker 3: it being the first ETF that for this outcome period

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Speaker 3: is going to provide investors what they have one hundred

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Speaker 3: percent buffer on the downside.

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Speaker 1: Okay, so here's the question that I really want to know.

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Speaker 1: What took so long?

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Speaker 3: Yeah?

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Speaker 4: Exactly. Well, you know, if good things take time, y'all,

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Speaker 4: you know that, so it uh, yeah, it took a while.

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Speaker 4: And you know, I think in our approach to the business,

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Speaker 4: what we do is we look at the market and

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Speaker 4: we say what do people need, what do they really want?

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Speaker 4: What are they using today that we might be able

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Speaker 4: to do better. And so if you look at the

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Speaker 4: annuity business, this is why do people buy annuities for

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Speaker 4: the insurance. They want to know they're not going to

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Speaker 4: lose that money, right, and so this provides that to them.

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Speaker 4: Or even market link CDs that banks issue, why do

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Speaker 4: people buy those because they want to know they can't

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Speaker 4: lose money. Well, guess what's insurance companies? I mean, heaven forbid,

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Speaker 4: we have a huge environmental calamity in these insurance companies.

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Speaker 4: So of them go down or something, I mean, it's

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Speaker 4: a real concern on people's minds these days. These do

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Speaker 4: not have credit risk. You don't have to wonder what

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Speaker 4: they're invested in. You can see what's in there and

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Speaker 4: it's not tax will when it resets, and so you

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Speaker 4: don't have the credit risk, you don't have the tax risk.

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Speaker 4: You just let it go into the future and you

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Speaker 4: know when you sell it you have to pay the

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Speaker 4: tax that's there, but you don't have to pay the

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Speaker 4: tax until you sell it.

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Speaker 2: I remember looking through some teachers retirement plans with some

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Speaker 2: of variable annuities, and the fees were ridiculous. I mean,

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Speaker 2: these teachers were getting gouged in my opinion, Can you

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Speaker 2: talk a little bit about that industry versus the fees

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Speaker 2: on this and what the savings is.

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Speaker 3: Like, Eric, I think that's you kind of hit the

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Speaker 3: nail on the head when you look at the way

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Speaker 3: the ETF industry has evolved. It's been taking these exposures

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Speaker 3: that have been less liquid, more expensive, less tax efficient,

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Speaker 3: and making them accessible to all investors at the same price.

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Speaker 3: And that price is often significantly lower than what you

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Speaker 3: see in the insurance market. And so that's really no

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Speaker 3: different of what we've done here with Tjewel. We've taken

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Speaker 3: a look at an area of the market where we

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Speaker 3: were looking at the numbers twenty twenty two eighty billion

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Speaker 3: dollars of fixed index annuity sales. So that's products in

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Speaker 3: the insurance market that give you some of the equity upside,

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Speaker 3: but give you that principle protection on the downside. The

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Speaker 3: problem is the fees are high. They tend to be

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Speaker 3: five six years in duration. Your money is locked up,

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Speaker 3: you want to get out after a year, you're going

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Speaker 3: to have a hefty surrender charge. And that doesn't even

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Speaker 3: take in consideration the tax implications of those structures. And

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Speaker 3: again the ETF has shown the power of deferring taxes

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Speaker 3: and what that can do for the end investor. You

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Speaker 3: add that, uh, you know, you add that dynamic to

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Speaker 3: this ETF, the tj U L there's a massive value

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Speaker 3: added potential that investors can unlock because when you look

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Speaker 3: at market link CDs, when you look at insurance products,

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Speaker 3: market link CDs have what's called phantom income. Now that's

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Speaker 3: a fancy term for you. Essentially are going to be

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Speaker 3: paying taxes along the way on gains that you have

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Speaker 3: not yet received at an ordinary income rate. You look

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Speaker 3: at fixed indextinuities. Once those policies come due in five

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Speaker 3: or six years, you're going to be paying ordinary income

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Speaker 3: taxes on gains the ETF you defer those gains. You

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Speaker 3: choose if you want to sell after a year in

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Speaker 3: a day, it's going to be long term cap gains.

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Speaker 3: And so you think about the tax alpha potential that

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Speaker 3: the ETF wrapper delivers on top of the liquidity, on

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Speaker 3: top of the fact that there's no credit risk, on

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Speaker 3: top of the fact that there's no surrender charges. There's

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Speaker 3: a huge benefit that we think we are giving to

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Speaker 3: the end investor. And there's a huge market for this

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Speaker 3: type of participation in the market. But having that known goffer.

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Speaker 1: In place, Okay, strong pitch, I think I understand the

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Speaker 1: product a little bit better. Now, what could go wrong?

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Speaker 1: What could make me not get the protection?

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Speaker 2: Yeah, of March twenty twenty, or like a black Swan event,

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Speaker 2: or I don't know, what would make me.

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Speaker 3: There's there's none of Yeah, there's yeah, Joel, It's I mean,

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Speaker 3: it's a great question. And again a lot of people

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Speaker 3: will say this just sounds too good to be true.

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Speaker 3: That the ETF owns options. Those options are exchange traded options.

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Speaker 3: They are guaranteed for settlement by the OCC. The OCC

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Speaker 3: has been identified by the US government as a too

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Speaker 3: important to fail institution, and so that's your counterparty when

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Speaker 3: it comes to the underlying options. The OCC has been

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Speaker 3: around since the seventies. They have never defaulted on any

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Speaker 3: of their obligations. So that's your counterparty. Now obviously contrasts

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Speaker 3: that to a bank or insurance company. We have found

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Speaker 3: investors saying we would much rather prefer having our counter

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Speaker 3: party be the OCC, as opposed to an insurance company

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Speaker 3: or a bank.

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Speaker 4: So what can go wrong? Let me let me run

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Speaker 4: at that real quick guys, I don't mean to jump in,

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Speaker 4: but so really on the downside, you own to put

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Speaker 4: one hundred percent put at the money, can't lose money

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Speaker 4: if the market goes down. To remember, these are spy options,

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Speaker 4: most liquid options in the world right, so unbelievably adopted

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Speaker 4: a deep pool of options, so you really have no

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Speaker 4: risk there. So the only risk someone really has if

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Speaker 4: the market goes up significantly above the cap.

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Speaker 3: That's it.

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Speaker 4: That's your risk. And we find most people that are saying, Okay,

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Speaker 4: I'm going to get one hundred percent downside protection. I'm

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Speaker 4: good with sixteen. I can live with that. I'm happy

387
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Speaker 4: with that, and I don't need more than that, and

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Speaker 4: I'm willing to give up what is above that to

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Speaker 4: know I can't lose going down. That's that's really your risk.

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Speaker 2: And that's sixty percent over two years, sixteen over two years.

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Speaker 2: What's interesting is the S and P annually I think

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Speaker 2: going back fifty one hundred years returns about eight point

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Speaker 2: five nine percent, So it's almost the average return of

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00:21:05,359 --> 00:21:07,720
Speaker 2: the S and P. So I get it.

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Speaker 1: I mean it's actually to that end. You guys must

396
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Speaker 1: have done a lot of back testing on this, like

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Speaker 1: what did you learn from that process.

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Speaker 3: Yeah, I think you know what we found is and

399
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Speaker 3: you look at today's market and you've got a JP

400
00:21:23,480 --> 00:21:26,480
Speaker 3: Morgan in their second half outlook, they said that twenty

401
00:21:26,480 --> 00:21:28,960
Speaker 3: five to thirty percent of their client's in bestible assets

402
00:21:29,080 --> 00:21:31,040
Speaker 3: in cash. And I think that people have had this

403
00:21:31,200 --> 00:21:34,280
Speaker 3: idea of gosh, cash is paying me four percent. Now,

404
00:21:34,320 --> 00:21:37,879
Speaker 3: what a great place to be. But history shows that

405
00:21:38,000 --> 00:21:41,080
Speaker 3: you do not want to overweight cash in your portfolio.

406
00:21:41,160 --> 00:21:44,439
Speaker 3: Look what happened in twenty twenty three. People experience all

407
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Speaker 3: that downside. They moved to cash markets. The shots on

408
00:21:47,480 --> 00:21:50,920
Speaker 3: nineteen percent, it's on a tear. And even you look

409
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Speaker 3: at bonds, people were talking about bonds generational opportunities. Core

410
00:21:55,040 --> 00:21:56,960
Speaker 3: bonds are up two percent, two and a half percent.

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Speaker 3: That doesn't sound like a generational opportunity to be And

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Speaker 3: so that's that's the beauty of these products is equity

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Speaker 3: exposure is where where the where it happens in terms

414
00:22:09,320 --> 00:22:11,240
Speaker 3: of the portfolio. That's where you get the bulk of

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Speaker 3: your returns, especially now that interest rates have normalized.

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Speaker 1: Well, that was what I was going to say, Like

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Speaker 1: when I asked that question of like what took so long?

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Speaker 1: It really was interest rates, right, we needed that to

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Speaker 1: go up for strategy, right, yeah.

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Speaker 3: Yeah, yeah, you know, and Joel, that's a that's a

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00:22:26,960 --> 00:22:29,880
Speaker 3: fair point. And one of the reasons why it took

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Speaker 3: a while. And again you look at the insurance market,

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Speaker 3: the reason why they brought partially protected products is because

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Speaker 3: it was too expensive to bring products that had one

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Speaker 3: hundred percent downside protection. That was a function of interest rates.

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Speaker 3: And so as interest rates have risen, that has really

427
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Speaker 3: led to this new proliferation of insurance products that give

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00:22:54,480 --> 00:22:57,520
Speaker 3: you equity upside with the full downside protection. And now

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Speaker 3: we can offer that in the ef rapper. But in

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00:23:01,560 --> 00:23:05,359
Speaker 3: terms of back testing looking we have seen that this

431
00:23:05,520 --> 00:23:11,920
Speaker 3: type of strategy significantly outperforms cash, which you would expect. Again,

432
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Speaker 3: people think, well, gosh, I'm guaranteed to get four percent

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Speaker 3: of my money market fund. Why would I give that

434
00:23:17,720 --> 00:23:22,200
Speaker 3: up for potentially getting sixteen point six percent over two years?

435
00:23:22,920 --> 00:23:25,800
Speaker 3: And that's the hurdle that people can't get over. But

436
00:23:25,880 --> 00:23:29,199
Speaker 3: that's why that these strategies actually do better than if

437
00:23:29,240 --> 00:23:32,320
Speaker 3: you're just sitting in cash. And you, guys, Eric, you

438
00:23:32,359 --> 00:23:34,840
Speaker 3: pointed out eight percent a year, eight nine percent a

439
00:23:34,880 --> 00:23:37,520
Speaker 3: year over fifty years. That's the average an you'll return.

440
00:23:37,840 --> 00:23:40,760
Speaker 3: You look over two year time frames, the SMP is

441
00:23:40,840 --> 00:23:44,960
Speaker 3: positive ninety percent of those times, and the average return

442
00:23:45,280 --> 00:23:49,560
Speaker 3: in positive markets is thirty two percent over two years.

443
00:23:50,040 --> 00:23:54,280
Speaker 3: So the math and the probability history tells you that

444
00:23:54,520 --> 00:23:57,840
Speaker 3: this is a better spot to be in than simply

445
00:23:57,920 --> 00:24:01,639
Speaker 3: sitting in bonds or on the side sidelines in cash.

446
00:24:01,800 --> 00:24:05,400
Speaker 3: And by my dad, the money market funds are four percent.

447
00:24:06,040 --> 00:24:09,240
Speaker 3: I'm not getting paid that at my JP Morgan Chase account.

448
00:24:09,359 --> 00:24:11,359
Speaker 3: And that's where a lot of people have moved to.

449
00:24:11,920 --> 00:24:14,919
Speaker 3: They've moved from these regional banks. They've moved they put

450
00:24:15,000 --> 00:24:17,800
Speaker 3: their money in these big banks that are flush with cash,

451
00:24:17,920 --> 00:24:21,240
Speaker 3: that are still paying ten twenty bases points on deposits.

452
00:24:21,680 --> 00:24:23,639
Speaker 3: And so again this is a tool to get that

453
00:24:23,760 --> 00:24:26,479
Speaker 3: money off the sidelines and into the market.

454
00:24:26,640 --> 00:24:29,280
Speaker 4: Now, remember that's pre tax. I mean, I got to

455
00:24:29,320 --> 00:24:31,640
Speaker 4: remind people that all the time they try to compare

456
00:24:31,680 --> 00:24:34,280
Speaker 4: this to that, you know, I mean, if you did

457
00:24:34,280 --> 00:24:38,080
Speaker 4: an after tax comparison, like buying a one year or

458
00:24:37,800 --> 00:24:41,760
Speaker 4: to your T bill, you need really about eleven percent

459
00:24:42,040 --> 00:24:45,639
Speaker 4: after you know, pre tax, So after tax you hit

460
00:24:45,680 --> 00:24:47,840
Speaker 4: about eight percent. Where we're saying we're going.

461
00:24:47,760 --> 00:24:48,040
Speaker 3: To be.

462
00:24:54,880 --> 00:24:56,760
Speaker 2: All right, Let's talk a little bit about the size

463
00:24:56,760 --> 00:24:59,760
Speaker 2: of this market. Because you guys were first I got

464
00:24:59,800 --> 00:25:01,439
Speaker 2: to get you credit, and I've ember seeing these roll

465
00:25:01,480 --> 00:25:03,960
Speaker 2: out and go. These are just probably too complex for advisors.

466
00:25:03,960 --> 00:25:06,200
Speaker 2: I was wrong. I'm not wrong much, and I.

467
00:25:06,160 --> 00:25:07,200
Speaker 3: Really admit it when I am.

468
00:25:07,400 --> 00:25:10,120
Speaker 2: I was wrong on this. This was this category is ballooning.

469
00:25:10,640 --> 00:25:12,920
Speaker 2: Then you had a bunch of copycats come after you.

470
00:25:13,320 --> 00:25:17,760
Speaker 2: First Trust now Blackrock, now you know Blackrock. First Trust

471
00:25:17,800 --> 00:25:21,520
Speaker 2: is really good at selling ETFs. Blackrock is Blackrock. What

472
00:25:21,560 --> 00:25:24,200
Speaker 2: if this category goes to one hundred billion, two hundred billion,

473
00:25:24,600 --> 00:25:28,719
Speaker 2: does that change the expensiveness of buying that insurance and

474
00:25:29,200 --> 00:25:31,120
Speaker 2: or could the trade get too crowded? Is there any

475
00:25:31,200 --> 00:25:32,439
Speaker 2: risk to the size of this.

476
00:25:33,920 --> 00:25:35,880
Speaker 4: I think one of the things we've done is we've

477
00:25:35,880 --> 00:25:38,480
Speaker 4: tried to stay in or we are in, and I

478
00:25:38,480 --> 00:25:40,439
Speaker 4: think most of the others as well, are in the

479
00:25:40,440 --> 00:25:43,560
Speaker 4: most liquid pools. You know, we're really not looking to

480
00:25:43,600 --> 00:25:46,639
Speaker 4: go into thinly traded areas. Like I said, you know

481
00:25:46,720 --> 00:25:51,440
Speaker 4: the spy options ESPX options, that pool is the most

482
00:25:51,440 --> 00:25:53,760
Speaker 4: liquid pool in the world. You know, we're talking in

483
00:25:53,800 --> 00:25:59,439
Speaker 4: the multiples of billions of dollars daily. So I don't think, really,

484
00:26:00,040 --> 00:26:02,800
Speaker 4: we also have something you know, in the queues, in

485
00:26:03,200 --> 00:26:06,679
Speaker 4: the small cap and EFA and emerging markets, you know,

486
00:26:06,760 --> 00:26:10,280
Speaker 4: for the buffers, So we don't think so we you know,

487
00:26:10,400 --> 00:26:13,760
Speaker 4: these options they trade an enormous size, so we don't

488
00:26:13,760 --> 00:26:16,280
Speaker 4: think it's going to be an issue. And I think

489
00:26:16,280 --> 00:26:18,600
Speaker 4: we have the flexibility to adjust, you know, where the

490
00:26:18,680 --> 00:26:21,400
Speaker 4: trades occur. So we think we'll be fine for quite

491
00:26:21,440 --> 00:26:22,520
Speaker 4: a while. Eric.

492
00:26:22,600 --> 00:26:24,720
Speaker 3: What I would say too, is you look at how

493
00:26:24,800 --> 00:26:28,720
Speaker 3: much is traded in SPY and SPX options you're talking about.

494
00:26:28,880 --> 00:26:33,400
Speaker 3: There's seven eight nine trillion dollars of open interest. There's

495
00:26:33,480 --> 00:26:37,080
Speaker 3: almost eight hundred, nine hundred billion dollars traded every single

496
00:26:37,160 --> 00:26:40,359
Speaker 3: day in these options. And so again to Bruce's point,

497
00:26:40,760 --> 00:26:44,879
Speaker 3: we're bringing these exposures on the most liquid markets. Now.

498
00:26:45,440 --> 00:26:48,680
Speaker 3: The beauty of what we've done, too, is we've diversified

499
00:26:48,680 --> 00:26:52,520
Speaker 3: that liquidity across all of our series of products. We're

500
00:26:52,560 --> 00:26:55,840
Speaker 3: not rolling all the options at one time. That's we

501
00:26:55,880 --> 00:26:59,520
Speaker 3: have monthly series with buffers of nine fifteen thirty percent.

502
00:27:00,160 --> 00:27:03,480
Speaker 3: We have buffer here of one hundred percent on teedool,

503
00:27:04,000 --> 00:27:06,240
Speaker 3: but we're not rolling all these at the same time,

504
00:27:06,280 --> 00:27:10,280
Speaker 3: and that spreads out the liquidity risk. Now we will say,

505
00:27:11,119 --> 00:27:12,920
Speaker 3: you know, we heard through the Grape find there was

506
00:27:12,960 --> 00:27:18,919
Speaker 3: a there's a large mutual fund that's issued by JP Morgan.

507
00:27:19,480 --> 00:27:23,320
Speaker 3: It's a great fund. They were rolling twenty billion dollars

508
00:27:23,480 --> 00:27:27,719
Speaker 3: of SMP options every single quarter, and we've noted that

509
00:27:27,760 --> 00:27:30,880
Speaker 3: they closed that fund to new investors and opened up

510
00:27:31,359 --> 00:27:34,879
Speaker 3: similar to what Innovator's done a few other series. And

511
00:27:34,920 --> 00:27:38,240
Speaker 3: I think that was to diversify, you know, some liquidity

512
00:27:38,600 --> 00:27:40,320
Speaker 3: if you want to call it risk, or that they

513
00:27:40,520 --> 00:27:43,000
Speaker 3: saw that their calfs that they were getting were maybe

514
00:27:43,119 --> 00:27:47,040
Speaker 3: lower because the amount of size and risk that they

515
00:27:47,119 --> 00:27:49,280
Speaker 3: were putting on the market at a one time. But

516
00:27:49,359 --> 00:27:52,879
Speaker 3: that was at twenty billion dollars. We have almost one

517
00:27:53,000 --> 00:27:56,760
Speaker 3: hundred to find out comyts and so that gives us

518
00:27:56,800 --> 00:28:00,040
Speaker 3: a huge opportunity to continue to scale the business. I

519
00:28:00,040 --> 00:28:02,640
Speaker 3: think our largest ETF is just knocking on the door

520
00:28:02,720 --> 00:28:05,439
Speaker 3: of a billion dollars. So we feel like we have

521
00:28:05,560 --> 00:28:06,640
Speaker 3: a long ways to go.

522
00:28:07,400 --> 00:28:09,800
Speaker 2: And just getting back to Blackrock, I know they came

523
00:28:09,840 --> 00:28:13,240
Speaker 2: out there's are a little cheaper than the rest of

524
00:28:13,240 --> 00:28:16,160
Speaker 2: the group their Blackrock. Do they worry you at all?

525
00:28:16,200 --> 00:28:17,679
Speaker 2: What'd you think when you saw that filing?

526
00:28:20,000 --> 00:28:23,040
Speaker 4: I don't think we were surprised, you know, we we

527
00:28:23,160 --> 00:28:26,320
Speaker 4: knew that they were very interested in the space. We

528
00:28:26,359 --> 00:28:30,800
Speaker 4: are really pleased to see them talking about talking a

529
00:28:30,880 --> 00:28:33,480
Speaker 4: lot like how we talk about investors and how much

530
00:28:33,560 --> 00:28:36,159
Speaker 4: risk investors should be willing to take or want to

531
00:28:36,240 --> 00:28:40,120
Speaker 4: take in the markets. And so really it's a real

532
00:28:40,200 --> 00:28:43,480
Speaker 4: credibility booster for us, for you know, the largest asset

533
00:28:43,520 --> 00:28:45,560
Speaker 4: manager in the world to come in and say, you

534
00:28:45,600 --> 00:28:47,760
Speaker 4: know what, this makes a lot of sense for investors,

535
00:28:48,440 --> 00:28:52,080
Speaker 4: and we think they will continue to do this. But

536
00:28:52,360 --> 00:28:56,320
Speaker 4: as you said, JP, Morgan and the like you know,

537
00:28:56,400 --> 00:28:59,560
Speaker 4: have all come into the space saying yeah, Ali once

538
00:29:00,080 --> 00:29:03,240
Speaker 4: know to do products along these lines because they really

539
00:29:03,240 --> 00:29:04,000
Speaker 4: see the value.

540
00:29:04,360 --> 00:29:08,920
Speaker 1: All right, last question, Graham, what is your favorite ETF

541
00:29:09,240 --> 00:29:11,920
Speaker 1: ticker other than any of your own?

542
00:29:15,800 --> 00:29:20,760
Speaker 3: That's a that's a good one. Oh, I can't think

543
00:29:20,800 --> 00:29:22,120
Speaker 3: of one off the top of my head.

544
00:29:22,240 --> 00:29:24,800
Speaker 1: It's your next. But we'll let Graham kind of be

545
00:29:24,920 --> 00:29:26,880
Speaker 1: quiet here for a second. Will he racks his brain?

546
00:29:30,800 --> 00:29:34,840
Speaker 4: Well, I'm a big tech investor. Uh so, uh, you know,

547
00:29:34,920 --> 00:29:38,880
Speaker 4: I'm way overweighted into tech, and so probably something along

548
00:29:39,040 --> 00:29:40,320
Speaker 4: the lines of a r KK.

549
00:29:40,920 --> 00:29:43,040
Speaker 2: I'll take arc from Bruce. I think that's an out

550
00:29:43,040 --> 00:29:45,200
Speaker 2: of the box. I wasn't expecting it, Graham.

551
00:29:45,360 --> 00:29:46,080
Speaker 1: Would you come up.

552
00:29:46,040 --> 00:29:49,280
Speaker 3: With yeah, you know what, guys, I would probably have

553
00:29:49,360 --> 00:29:52,360
Speaker 3: to say cows the fun from Pacer.

554
00:29:53,480 --> 00:29:55,240
Speaker 1: How did that go down with move head to head

555
00:29:55,360 --> 00:29:56,400
Speaker 1: cows versus.

556
00:29:56,120 --> 00:29:59,680
Speaker 3: Move Cole's mood, Yeah, exactly, moves.

557
00:29:59,240 --> 00:30:02,160
Speaker 2: In all top par That's the first time someone pick cows.

558
00:30:02,200 --> 00:30:04,680
Speaker 1: But that is a good one, all right, Graham Bruce,

559
00:30:04,800 --> 00:30:06,280
Speaker 1: thanks so much for joining us on Trillions.

560
00:30:06,480 --> 00:30:15,080
Speaker 4: Thanks for having us guys.

561
00:30:13,200 --> 00:30:16,160
Speaker 5: Thanks for listening to Trillions. Until next time. You can

562
00:30:16,160 --> 00:30:21,040
Speaker 5: find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify,

563
00:30:21,680 --> 00:30:22,520
Speaker 5: or wherever else.

564
00:30:22,400 --> 00:30:24,600
Speaker 1: You'd like to listen. We'd love to hear from you.

565
00:30:25,000 --> 00:30:28,640
Speaker 1: We're on Twitter, I'm at Joel Webber Show. He's at

566
00:30:28,840 --> 00:30:33,560
Speaker 1: Eric Bauchuns. This episode of Trillions was produced by Magnus Hendrickson.

567
00:30:34,440 --> 00:30:36,920
Speaker 5: Bye