WEBVTT - Hedging an Epidemic 0:00:13.760 --> 0:00:16.840 Hello, and welcome to What Goes Up, a Bloomberg Weekly 0:00:16.880 --> 0:00:20.360 Markets podcast. I'm Sara Panzek, a reporter on the Cross 0:00:20.400 --> 0:00:23.079 Asset team, and I'm Mike Reagan, a senior editor on 0:00:23.079 --> 0:00:25.840 the Markets team. This week on the show, data show 0:00:26.079 --> 0:00:29.160 that retail investors are getting in on the rally, with 0:00:29.240 --> 0:00:32.600 new accounts surging at some popular brokerages. We talked to 0:00:32.640 --> 0:00:34.880 the head of investment strategy at one of the leading 0:00:34.920 --> 0:00:37.760 et F providers about how their products are being used 0:00:37.800 --> 0:00:40.600 to play the market. Plus, there have been some major 0:00:40.640 --> 0:00:44.320 moves in the FX markets, particularly as dollary and breaks 0:00:44.320 --> 0:00:47.479 out of a multi year trend. And sorry, I've been 0:00:47.479 --> 0:00:49.280 meaning to ask you, do you think we should once 0:00:49.280 --> 0:00:52.000 again do the craziest thing I saw in markets At 0:00:52.000 --> 0:00:54.160 the end of the show, I do think we should 0:00:54.160 --> 0:00:55.440 do it. At the end of the show. Why why 0:00:55.520 --> 0:00:57.280 all of a sudden change I feel good about. I 0:00:57.320 --> 0:00:58.680 just want to make sure you're on board with it. 0:00:58.800 --> 0:01:02.120 You know, I scared you have kind of a losing 0:01:02.160 --> 0:01:04.400 streek going. And okay, first of all, I don't have 0:01:04.440 --> 0:01:07.520 a losing street going. I would even say that I 0:01:07.600 --> 0:01:10.640 came prepared. We had a couple of listeners who really 0:01:10.680 --> 0:01:12.920 came out of the woods in this last week to 0:01:13.040 --> 0:01:16.160 really hit on Mike. For one, we had a comment 0:01:16.200 --> 0:01:18.920 from Corman one three four who said, like the Yankees, 0:01:19.240 --> 0:01:22.360 I'm always rooting against Mike. So Mike, not everyone's on 0:01:22.400 --> 0:01:25.959 your side, particularly not me and not Corman one three four, 0:01:26.080 --> 0:01:29.399 Corman one one three four, whoever you are. I am 0:01:29.440 --> 0:01:31.840 like the Yankees of the craziest thing. But as you know, 0:01:31.959 --> 0:01:34.720 the crazy things in markets are one of my passions. 0:01:35.080 --> 0:01:38.039 And as you also know, another very big interest in 0:01:38.120 --> 0:01:43.280 mine is leveraged e t s. We've talked about this before. UM, 0:01:43.319 --> 0:01:46.199 I'm fascinated by them. So we have a great guest 0:01:46.600 --> 0:01:49.240 this week to discuss them with us. His name is 0:01:49.560 --> 0:01:54.280 Simeon Hyman. He's the head of investment strategy at pro Shares. Simeon, 0:01:54.320 --> 0:01:57.080 welcome to the show. Thanks for having me and also 0:01:57.160 --> 0:01:59.360 joining this uh this week first time on the show 0:01:59.560 --> 0:02:03.560 is Bloomberg's own uh Rachel Evans. She's a managing editor 0:02:03.960 --> 0:02:06.880 covered ets for a long time now shifting focus a 0:02:06.880 --> 0:02:09.760 little bit to bonds and FX, but still one of 0:02:09.880 --> 0:02:12.720 our in house et F gurus who we're happy to 0:02:12.760 --> 0:02:14.600 have on the show. Good to be here, all right, 0:02:15.400 --> 0:02:17.360 uh Sammy, let's start with you. I do want to 0:02:17.400 --> 0:02:20.360 get into sort of what's going on in the leveraged 0:02:20.680 --> 0:02:23.760 et F space. But one of my favorite pro shares 0:02:23.800 --> 0:02:25.880 E t F s has got to be Pause P 0:02:26.040 --> 0:02:29.000 A w Z. And this is from the owner of 0:02:29.000 --> 0:02:31.440 a Golden Doodle. You know, a neighbor of ours. Gotta 0:02:31.480 --> 0:02:34.359 go golden doodle in my touch and New Jersey. Then 0:02:34.400 --> 0:02:36.360 we got one and then next thing you know, they're 0:02:36.360 --> 0:02:39.520 all over, all over with touch and fifteen years ago 0:02:39.639 --> 0:02:41.880 he's well, he's fifteen years old. Now he's still hanging 0:02:41.880 --> 0:02:45.440 in there. We were before you wait wait ahead of me, 0:02:45.480 --> 0:02:47.720 of course, But Sammy, and talk to us about the 0:02:47.720 --> 0:02:51.160 pause ETF, just the rationale behind it. I know, uh, 0:02:51.240 --> 0:02:55.600 you know it buys pet store companies, pet medicine companies. 0:02:56.520 --> 0:02:59.000 I'm fascinated by this ETF. Talk to us a little 0:02:59.000 --> 0:03:01.280 bit about how it came about and sort of what 0:03:01.320 --> 0:03:05.519 the reaction has been. Sure the tickers P A w Z. 0:03:05.760 --> 0:03:09.280 And yes, we do pride ourselves on clever, clever tickers, 0:03:09.680 --> 0:03:12.320 so this one counts as a clever ticker. But look, 0:03:12.400 --> 0:03:14.600 we we look at themes all the time, and I 0:03:14.600 --> 0:03:17.320 think the challenge when you look for themes is you 0:03:17.720 --> 0:03:21.040 got to find where money is really being made. Um, 0:03:21.240 --> 0:03:24.240 So here there's real money being made. And anybody who 0:03:24.480 --> 0:03:26.960 has had to take care of their dog or even 0:03:27.080 --> 0:03:29.800 you know, God forbid, have to actually have serious health 0:03:29.800 --> 0:03:32.000 issues with their dogs, know how expensive it can be. 0:03:32.400 --> 0:03:35.880 And also the trends towards premiumization and humanization. I mean, 0:03:35.960 --> 0:03:39.000 right now, there are more households in the US with 0:03:39.320 --> 0:03:42.440 pets than there are uh than there are children. And 0:03:42.760 --> 0:03:46.080 the spending has been incredibly robust. And of course, as 0:03:46.120 --> 0:03:48.280 you it wouldn't surprise you to hear that the spending 0:03:48.320 --> 0:03:52.000 actually increased during the Great Recession. But there's also money 0:03:52.000 --> 0:03:55.120 to be made. You know, around half the t F 0:03:55.240 --> 0:03:58.080 is animal healthcare. And one of the ways I sort 0:03:58.080 --> 0:04:01.600 of think about the spaces, uh, fresh off of the 0:04:01.600 --> 0:04:04.720 the debates and all the political stuff that's going on, 0:04:05.360 --> 0:04:11.120 I note the following there's no medicaid for dogs. You 0:04:11.200 --> 0:04:14.480 gotta pay for that. There's some emerging insurance companies. But 0:04:15.160 --> 0:04:17.640 it's a place where there there are margin, there's money 0:04:17.720 --> 0:04:21.520 to be made. So, um, we thought the opportunity was there. Uh. 0:04:21.800 --> 0:04:24.479 We think this is you know, a long term you 0:04:24.520 --> 0:04:27.599 know opportunity. We think we did this right. In other words, 0:04:27.640 --> 0:04:31.279 we we appropriately I found companies that were, if you will, 0:04:31.320 --> 0:04:34.719 the pure plays, real pet care companies. You know, sometimes 0:04:34.800 --> 0:04:37.960 you see these themes, like you know, a blockchain idea 0:04:38.000 --> 0:04:40.400 and it ends up being a bunch of financial services company, 0:04:40.440 --> 0:04:42.320 or like do I really get blockchain and I get 0:04:42.360 --> 0:04:44.719 something else. We think we really did it right. We 0:04:44.800 --> 0:04:47.640 think the the opportunities for the firms are there, the 0:04:47.720 --> 0:04:49.920 right companies are in the e t F. And you 0:04:49.920 --> 0:04:53.279 know what, it's conversational alpha. You know, if you're talking 0:04:53.279 --> 0:04:55.880 if you're a financial advisor and you're talking to your clients, 0:04:56.240 --> 0:04:58.760 it resonates because their pets are near and dear to 0:04:58.760 --> 0:05:00.520 their heart, and they're spending so much running out of them. 0:05:00.520 --> 0:05:02.080 Would be nice for them to make a little money. 0:05:02.279 --> 0:05:04.840 Well for the pet care industry as well. I love 0:05:04.880 --> 0:05:07.080 this idea of conversational alpha. This is something that the 0:05:07.080 --> 0:05:09.520 Global X has talked about a little bit on the 0:05:09.520 --> 0:05:12.080 Trillions podcast that that covers a t F and it's 0:05:12.080 --> 0:05:13.960 this kind of idea that you've got something to go 0:05:14.040 --> 0:05:17.200 to your clients and talk about. It goes beyond the returns, 0:05:17.480 --> 0:05:19.920 so you're not just thinking about the return side of things. 0:05:19.920 --> 0:05:21.880 You're not just thinking about the strategy, but you're able 0:05:21.920 --> 0:05:24.120 to say, well, look, you know you own a dog, 0:05:24.160 --> 0:05:27.159 you own a labradoodle or retrieve and it's something that 0:05:27.160 --> 0:05:30.080 people can really identify with and they can think about 0:05:30.080 --> 0:05:32.320 that in terms of how it might boost their portfolio. 0:05:32.720 --> 0:05:34.279 For me, and you said, there's money to be me. 0:05:34.440 --> 0:05:37.799 This is a long term opportunity. But if I look 0:05:37.839 --> 0:05:39.800 at the market cap of the fund right now, it's 0:05:39.880 --> 0:05:43.039 roughly fifty six million dollars. I mean, how do you 0:05:43.080 --> 0:05:46.120 get over this hurdle? What is the conversation with investors 0:05:46.120 --> 0:05:48.520 to actually get people to want to come and invest 0:05:48.560 --> 0:05:50.440 in a product of this sort rather than just going 0:05:50.480 --> 0:05:53.440 to a broad market fund um and have them zeroing 0:05:53.440 --> 0:05:56.960 in on one thematics but also thematics surrounding the pet 0:05:56.960 --> 0:05:59.720 care space. Yeah, a couple of thoughts on that. So, first, 0:05:59.720 --> 0:06:04.560 fifty six is uh A a nice viable size for 0:06:04.600 --> 0:06:06.760 any TF So you know, we launched this a little 0:06:06.800 --> 0:06:08.280 bit over a year ago, so it's going in the 0:06:08.360 --> 0:06:12.080 right direction. But absolutely these are you know that satellites 0:06:12.120 --> 0:06:15.760 to a to a core UH to a core investment portfolio. 0:06:15.920 --> 0:06:18.160 So you know, if one were to have an appropriately 0:06:18.200 --> 0:06:21.920 structured long term investment portfolio. You would indeed have this 0:06:22.040 --> 0:06:24.839 as an addition to to a core holding. So nobody 0:06:24.880 --> 0:06:28.039 would be suggesting that you're you're the core of your 0:06:28.320 --> 0:06:31.400 retirement from should be in a pet care ETF. But UH, 0:06:31.520 --> 0:06:34.840 it's going to It really has the opportunity to add alpha, 0:06:34.920 --> 0:06:37.680 to add diversification, UH and to add a little bit 0:06:37.680 --> 0:06:40.039 of extra juice to UH to a core portfolio. And 0:06:40.040 --> 0:06:42.440 those are the of the conversations that we're having, and 0:06:42.560 --> 0:06:44.920 we think they're going pretty well. We're certainly looking to 0:06:44.960 --> 0:06:46.640 grow it, but it's been moving in the right direction 0:06:46.680 --> 0:06:50.000 since it's launched. You know, Simon Simeon as Uh Sarah 0:06:50.040 --> 0:06:52.120 will tell you if the way I think about it, 0:06:52.160 --> 0:06:54.120 if if I'm pulish on pets, I want to go 0:06:54.160 --> 0:07:00.520 triple levered Paul, triple triple ever, triple levered everything. But 0:07:00.560 --> 0:07:02.520 I do want to sort of segue into that discussion 0:07:02.520 --> 0:07:05.880 because I know there's been UH some backlash obviously two 0:07:06.360 --> 0:07:10.280 leveraged e t F s UH. The f sec UM 0:07:10.480 --> 0:07:14.040 wants to sort of implement a system where brokerages have 0:07:14.240 --> 0:07:18.640 to sort of quiz clients on whether they're sophisticated enough 0:07:18.800 --> 0:07:22.080 to to understand what's going on in leveraged and and 0:07:22.120 --> 0:07:24.840 I suppose inverse ETFs as well. Could you sort of 0:07:24.880 --> 0:07:27.800 get us up to date on where that UM debate 0:07:27.920 --> 0:07:31.160 stands right now? I know the SEC is still accepting 0:07:31.240 --> 0:07:34.120 comments about this, Is that right? Yeah? I'm not actually 0:07:34.120 --> 0:07:36.400 not really the right person at the firm to to 0:07:36.520 --> 0:07:39.600 talk about the current proposals. You know. What I can tell, 0:07:39.680 --> 0:07:42.040 of course, is that leverage and reverse ETFs have been 0:07:42.080 --> 0:07:45.160 around for quite a while and have been valuable tools 0:07:45.160 --> 0:07:49.000 for investors for UM both hedging positions in their portfolio 0:07:49.280 --> 0:07:51.960 looking for opportunities where they have particular points of views 0:07:51.960 --> 0:07:54.600 have been valuable tools. But unfortunately I'm not the right 0:07:54.640 --> 0:07:57.080 person at the firm to be talking about the updates 0:07:57.160 --> 0:07:59.600 on on what's going on with the proposal. I can 0:07:59.600 --> 0:08:02.960 type it that. So this is something that we've been 0:08:02.960 --> 0:08:05.360 following quite closely for actually for a couple of years. 0:08:05.360 --> 0:08:08.280 This is kind of part of this long thought out 0:08:08.360 --> 0:08:10.840 derivatives proposal that the SEC has been mulling over for 0:08:10.880 --> 0:08:13.000 a while, and they finally came out towards the end 0:08:13.040 --> 0:08:15.360 of last year with some proposals and a sort of 0:08:15.400 --> 0:08:18.119 carve out provision from the Derivative's rule that would apply 0:08:18.200 --> 0:08:20.960 to to leverage funds. And what they've kind of suggested 0:08:21.080 --> 0:08:23.360 is this kind of give with one hand, take with 0:08:23.400 --> 0:08:26.080 the other kind of approach in that they are proposing 0:08:26.440 --> 0:08:30.040 lifting what has essentially been a moratorium on new issuers 0:08:30.040 --> 0:08:33.679 of leverage products. So prohas, for example and its competitive direction, 0:08:33.679 --> 0:08:35.960 have been able to sell a leverage products, but we 0:08:36.000 --> 0:08:38.320 haven't seen any new issues being able to come into 0:08:38.320 --> 0:08:41.439 the space for since I think around. So they're proposing 0:08:41.559 --> 0:08:44.320 lifting that moratorium. But the downside is that they do 0:08:44.360 --> 0:08:46.520 want these From an issue perspective, the downside is that 0:08:46.559 --> 0:08:50.120 they do want these greater controls at the point of sale. 0:08:50.480 --> 0:08:54.840 So for the brokerages that maybe selling these leverage products, 0:08:54.840 --> 0:08:57.400 they would have to ensure that they're the client has 0:08:57.440 --> 0:09:00.400 a certain degree of sophistication, that they have a certain 0:09:00.480 --> 0:09:02.559 number of assets that they have a certain level of 0:09:02.640 --> 0:09:05.559 understanding before they are able to it's green lighter a 0:09:05.640 --> 0:09:08.040 sale of that of those products. So the SEC has 0:09:08.080 --> 0:09:10.640 been collecting comments on this process has been quite interesting 0:09:10.640 --> 0:09:12.319 in this space, and that they did come out and 0:09:12.640 --> 0:09:16.160 encourage their shareholders to actually respond to the SEC and 0:09:16.360 --> 0:09:18.920 to give their thoughts on this process. But it's still 0:09:18.960 --> 0:09:21.360 something that's kind of um your ongoing and the SEC 0:09:21.559 --> 0:09:23.720 has yet come out with a final proposal. You know 0:09:23.720 --> 0:09:27.400 what I find interesting, Rachel's if I want to so 0:09:27.440 --> 0:09:29.240 the way I envisioned this is if I lag onto 0:09:29.280 --> 0:09:33.120 my E trade or my uh, you know, a marriage 0:09:33.120 --> 0:09:36.199 trade account, and I try to buy a levered e 0:09:36.320 --> 0:09:38.320 t F, I'll get some sort of pop up saying 0:09:38.320 --> 0:09:41.199 you have to answer these questions. I don't correct me 0:09:41.240 --> 0:09:42.559 if I'm wrong, but I don't think the same is 0:09:42.600 --> 0:09:44.640 true if say I want to open a margin account 0:09:44.760 --> 0:09:49.240 or want to start short selling stocks over the same platform. Um, 0:09:49.720 --> 0:09:52.240 So I wonder if would that be a next step. 0:09:52.240 --> 0:09:54.280 Do you think that that they would sort of start 0:09:54.280 --> 0:09:56.440 cracking down on that as well. So there's an interesting 0:09:56.480 --> 0:09:59.480 thing we've kind of purchasing leverage products already and that 0:09:59.559 --> 0:10:02.000 you do times have a few boxes to go through 0:10:02.080 --> 0:10:04.680 already without having these extra kind of provisions that the 0:10:04.760 --> 0:10:07.480 SEC is contemplating in place. Um. You know, some people 0:10:07.520 --> 0:10:09.400 will have a box that you kind of have to tick, 0:10:09.720 --> 0:10:13.800 but there isn't for an options based contract. You would 0:10:13.840 --> 0:10:17.160 have to actually get documents through the mail, sign them, 0:10:17.160 --> 0:10:19.480 film all in, send them back. There's no kind of 0:10:19.800 --> 0:10:22.760 um level UM like that that applies for leverage products, 0:10:22.800 --> 0:10:24.680 and the argument goes that, you know, if you have 0:10:24.760 --> 0:10:28.280 products that have options embedded or other derivatives embedded, maybe 0:10:28.280 --> 0:10:30.640 there should be kind of a similar sort of process 0:10:30.640 --> 0:10:32.640 to ensure that you understand in the same way that 0:10:32.679 --> 0:10:35.320 there is for the more complex, um, you know, purchases 0:10:35.320 --> 0:10:37.400 of derivatives. UM. So I think it's going to be 0:10:37.440 --> 0:10:40.000 interesting to see, um, you know, kind of like how 0:10:40.120 --> 0:10:42.200 the SEC sort of goes from here, whether this is 0:10:42.240 --> 0:10:45.920 sort of the further edge of their kind of policy making. 0:10:46.000 --> 0:10:48.560 Because let's remember this is a proposal, this is not 0:10:48.640 --> 0:10:51.120 kind of written in stone and these things. Looking at 0:10:51.120 --> 0:10:53.920 what the different commissioners from the SEC have come out 0:10:53.960 --> 0:10:56.520 and said on this, there is clearly some division between 0:10:56.559 --> 0:10:58.880 the sort of republican and democratly and in commissioners, and 0:10:58.880 --> 0:11:00.800 this is a bit of a dialogue. Here's a little 0:11:00.800 --> 0:11:03.080 bit of a given take here. So I think it's 0:11:03.080 --> 0:11:05.960 hard to say at this stage whether things veer towards 0:11:06.280 --> 0:11:09.040 the you know, increasing kind of client checks and that 0:11:09.280 --> 0:11:12.840 becoming more and more something we see expanded to other markets, 0:11:13.000 --> 0:11:14.800 whether actually it kind of reigns back and they find 0:11:14.800 --> 0:11:16.760 a middle ground where maybe we see it a little 0:11:16.760 --> 0:11:19.560 bit more required, but not quite what's being contemplated at 0:11:19.559 --> 0:11:22.280 the moment, so simeon regardless of what's going on in 0:11:22.400 --> 0:11:26.720 the regulatory arena. Some of the leverage for leveraged funds 0:11:26.720 --> 0:11:28.600 that you guys are well known for our the pro 0:11:28.640 --> 0:11:31.840 shairs aultopro triple q c q q Q. Then there's 0:11:31.840 --> 0:11:34.440 the short version s q q Q. Can you walk 0:11:34.520 --> 0:11:38.400 us through maybe how you typically see investors actually utilizing 0:11:38.840 --> 0:11:42.439 your products? And then from your perspective as the head 0:11:42.480 --> 0:11:45.360 of investment strategy, how do you actually go about having 0:11:45.360 --> 0:11:48.480 conversations with investors as well about the right way to 0:11:48.559 --> 0:11:51.280 actually put them to use. Yeah, I'll answer them in 0:11:51.280 --> 0:11:55.079 two parts, because one with regards to the lever gtfs 0:11:55.120 --> 0:11:57.480 and the leverage diniversity TFS. We have a ton of 0:11:57.640 --> 0:12:01.760 education on our website to help people think about how 0:12:01.800 --> 0:12:05.600 they can express different views and create portfolio constructions that 0:12:05.640 --> 0:12:07.319 make sense and use them in a way that will 0:12:07.360 --> 0:12:11.320 help them meet their objectives. UM but actually UM myself 0:12:11.400 --> 0:12:14.600 and my team we spend most of our time talking 0:12:14.640 --> 0:12:18.360 about um our our sort of for us traditional buying 0:12:18.400 --> 0:12:21.560 whole strategies. In fact, our biggest et f UH today 0:12:21.600 --> 0:12:23.760 over seven billion dollars has took your n O b 0:12:24.080 --> 0:12:27.199 L which is the S and P five Dividend Aristocrats 0:12:27.240 --> 0:12:29.560 e t f UM. So we talk about our suite 0:12:29.559 --> 0:12:32.840 of a dividend growth ETFs UM more than just about 0:12:32.840 --> 0:12:35.240 anything else on the platform these days. And in fact 0:12:35.240 --> 0:12:38.719 it's very applicable to the current environment because companies that 0:12:39.040 --> 0:12:43.200 consistently grow their dividends have you know, been a really 0:12:43.320 --> 0:12:47.520 nice way to be able to UH participate reasonably well 0:12:47.520 --> 0:12:49.080 when markets go up. But when you have a bad 0:12:49.200 --> 0:12:51.800 quarter like we had in twenty eighteen, the down capture 0:12:51.840 --> 0:12:54.400 the defensiveness has has worked very well as well. So 0:12:54.880 --> 0:12:57.960 that's been a really UH core part of our conversations 0:12:58.040 --> 0:13:01.560 with UH. With Financial Advisor is another clients for a 0:13:01.559 --> 0:13:04.160 little while. Now I love the name of that, the Aristocrats. 0:13:04.760 --> 0:13:07.640 What is it you have to have UH grown your 0:13:07.679 --> 0:13:10.240 dividend for Is it twenty years going or something twenty 0:13:10.280 --> 0:13:13.360 five for the large cap And we think we also 0:13:13.440 --> 0:13:15.520 have ticker R e g L which is the SMP 0:13:15.600 --> 0:13:19.920 four Aristocrats and SMDV the small cap And there's almost 0:13:19.960 --> 0:13:21.960 a little bit of an interesting I don't want to 0:13:22.200 --> 0:13:25.360 say more per se, but certainly an interesting opportunity with 0:13:25.440 --> 0:13:29.040 mid and small caps because as we know, large caps 0:13:29.080 --> 0:13:31.480 have run this market for a while, but it's perhaps 0:13:31.559 --> 0:13:34.720 even a bigger has been a bigger impacted people. Note 0:13:35.040 --> 0:13:37.760 over the last decade, on a price to book basis, 0:13:38.280 --> 0:13:40.679 mid and small cap stocks have gone from parity to 0:13:40.760 --> 0:13:44.480 the SMP five hundred to trading at a discount sixty 0:13:44.520 --> 0:13:46.640 cents on the dollar. Now, the problem is there's a 0:13:46.679 --> 0:13:48.440 lot of junk when you get down there, but you 0:13:48.480 --> 0:13:52.559 resolve the junk problem if you invest in the dividend growers. 0:13:52.559 --> 0:13:55.520 The consistent dividend growers and been small So uh, you know, 0:13:55.559 --> 0:13:57.640 we've been talking not just about the flagship and O 0:13:57.760 --> 0:13:59.480 b L, but also R E, g L and mid 0:13:59.520 --> 0:14:03.960 cap and and SMGV and small, which resonates with folks. 0:14:03.960 --> 0:14:06.200 You know, you're looking at the tape and wondering, things 0:14:06.280 --> 0:14:10.040 keep going up, but I'm a little nervous night and 0:14:10.400 --> 0:14:12.600 a nice alternative for that, things keep going up, but 0:14:12.640 --> 0:14:15.920 I'm a little nervous state of mind. But but at 0:14:15.920 --> 0:14:17.520 the same time, I want to ask because I feel 0:14:17.520 --> 0:14:20.360 like we've almost been in the state of mind for 0:14:20.720 --> 0:14:23.680 quite a while now, this idea that things keep going up, 0:14:23.680 --> 0:14:27.840 but I'm pretty nervous. And with that We've heard multiple strategists, 0:14:27.880 --> 0:14:30.880 portfolio managers, many people I've spoken to saying, all right, 0:14:30.880 --> 0:14:33.800 so that means look at small caps, look at emerging markets, 0:14:33.840 --> 0:14:36.400 look elsewhere, don't look at US large caps. But that's 0:14:36.400 --> 0:14:39.240 just continues to be what keeps going up, and you 0:14:39.240 --> 0:14:43.440 would imagine maybe making people more nervous. I mean, is 0:14:43.480 --> 0:14:48.400 a solution really to keep going elsewhere even though it's 0:14:48.440 --> 0:14:51.120 been roughly I guess a year now over that since 0:14:51.160 --> 0:14:55.440 we had that correction in in which we did see 0:14:55.480 --> 0:14:58.520 this performance continue. Yeah, So first, I'm kind of a 0:14:58.560 --> 0:15:03.760 classic acid allocation. So yeah, somewhere between forty and of 0:15:03.800 --> 0:15:06.160 your portfolio probably should be. US large caps are for 0:15:06.280 --> 0:15:08.000 US investor, And if you love it, you have a 0:15:08.040 --> 0:15:09.760 little more. If you hate, if you had at less. 0:15:10.040 --> 0:15:12.680 And to put that in perspective, if you think about 0:15:12.720 --> 0:15:15.760 the valuations of large caps, I don't get two worked 0:15:15.840 --> 0:15:18.600 up because and you've you've all heard this many times before, 0:15:18.640 --> 0:15:20.760 because how low interest rates are? You know, if you 0:15:20.880 --> 0:15:25.360 plot the p the SMP five D guess interest rates 0:15:25.400 --> 0:15:27.360 at a two percent ten yere you get a twenty 0:15:27.440 --> 0:15:30.080 multiple and we're now one and a half times and 0:15:30.120 --> 0:15:33.080 we're at somewhere around the twenty multiple. And by the way, 0:15:33.360 --> 0:15:35.960 we're starting to have a little bit of earnings growth. 0:15:36.400 --> 0:15:39.440 In Q four we had about one percent earnings growth 0:15:39.440 --> 0:15:41.840 for the SMP five hundred, but if you take out energy, 0:15:42.960 --> 0:15:46.000 you had actually over a four percent increase in earnings. 0:15:46.000 --> 0:15:48.800 That's the first time in four quarters, and I would 0:15:48.880 --> 0:15:51.160 argue it's it's a little bit of kind of this. 0:15:52.000 --> 0:15:53.960 You have to follow the bouncing ball, but it's an 0:15:54.040 --> 0:15:57.480 artifact of the corporate tax cut. The corporate tax cut 0:15:57.840 --> 0:16:01.720 temporarily boosted margins in AN eighteen, but then for the 0:16:01.800 --> 0:16:04.440 large part of twenty nineteen that started to be eroded 0:16:04.480 --> 0:16:08.120 in price. Just like we learned in Freshman economics, the 0:16:08.160 --> 0:16:10.280 tax cut went through price for a lot of companies 0:16:10.280 --> 0:16:13.080 that are are price competitive where you don't have the 0:16:13.160 --> 0:16:16.040 anniversary it anymore, using old retail speak. And in Q 0:16:16.280 --> 0:16:18.440 four he started to see some earnings growth. So if 0:16:18.480 --> 0:16:21.280 you put that together, it's not a terribly bearish story 0:16:21.840 --> 0:16:26.080 for large caps, particularly when we're in this almost goldilocks 0:16:26.120 --> 0:16:30.520 of two GDP growth. We have two percent GDP growth 0:16:30.560 --> 0:16:32.400 because we have a very strong consumer in a middling 0:16:32.440 --> 0:16:35.680 manufacturing sector, and that means the FED can't do anything 0:16:35.680 --> 0:16:37.480 but we're growing just enough, so I don't want to 0:16:37.480 --> 0:16:40.000 be I'm not I'm not a particular pessimist, such a 0:16:40.000 --> 0:16:42.400 pessimist on large cap that you should dump all your 0:16:42.480 --> 0:16:44.760 large cap and going to mid small emerging markets. But 0:16:44.800 --> 0:16:47.520 it would absolutely agree with the notion that, as I mentioned, 0:16:47.520 --> 0:16:51.120 there's a relative valuation opportunity in mid and small And 0:16:51.320 --> 0:16:53.360 I'll pile onto the e M a little bit too. 0:16:53.400 --> 0:16:56.240 One of the things that people I think, uh don't 0:16:56.320 --> 0:17:00.240 are aren't as familiar with with regards to emerging markets box. 0:17:00.360 --> 0:17:02.080 And by the way, we have ticker e M d V, 0:17:02.240 --> 0:17:04.200 which is our dividend grower and e M as I 0:17:04.280 --> 0:17:06.200 do a ticker check because that's part of my job. 0:17:10.000 --> 0:17:12.080 That's where I'm an e t F. I gotta I 0:17:12.080 --> 0:17:14.600 gotta put tickers out there. That's what we do. So 0:17:14.920 --> 0:17:19.840 in emerging markets the quality is actually higher than in 0:17:19.920 --> 0:17:22.879 developed markets. So in other words, margins and returns on 0:17:22.920 --> 0:17:26.199 assets and equities are actually higher in e M. We 0:17:26.359 --> 0:17:29.920 know that the virus isn't overhanging e M. We also 0:17:29.960 --> 0:17:33.159 suspect there's stimulus coming along the way, not just from China, 0:17:33.240 --> 0:17:35.720 but look, we even might get cut in the US 0:17:35.800 --> 0:17:38.560 and that's always good for EM. And I think if 0:17:38.600 --> 0:17:41.800 we see some stability and commodity prices, I know that's 0:17:41.800 --> 0:17:44.679 a big if people looking at oil, copper and all that. Um, 0:17:44.720 --> 0:17:48.119 there's an opportunity there. So I am. I am on 0:17:48.200 --> 0:17:51.040 board with the notion that there's some relative value opportunities 0:17:51.040 --> 0:17:54.800 in things like mid small and EM. But I don't 0:17:54.840 --> 0:17:58.040 think valuations are that scary in in in core US 0:17:58.119 --> 0:18:03.520 large cap pequitis either. Now, Ray sure Simeon sounds fairly optimistic, um, 0:18:03.560 --> 0:18:04.960 but I know you were looking at some of the 0:18:04.960 --> 0:18:09.200 flows into the pro shaares funds year to date. I'm 0:18:09.200 --> 0:18:11.760 got to say that the money coming into the pro 0:18:11.800 --> 0:18:14.520 shairs is does not look very optimistic. Tell us a 0:18:14.560 --> 0:18:17.240 little bit about what the flows look like to you, Yeah, 0:18:17.280 --> 0:18:18.359 I mean, it's all you always have to be a 0:18:18.400 --> 0:18:20.320 little bit careful when you look at leverage funds and 0:18:20.320 --> 0:18:22.040 flows because you do see a lot of people kind 0:18:22.040 --> 0:18:24.240 of using these very much as getting get out kind 0:18:24.240 --> 0:18:26.360 of trading vehicles. But there is a sign here. When 0:18:26.359 --> 0:18:28.919 you see a flow, it means that people need more shares. Therefore, 0:18:28.960 --> 0:18:31.440 more shares have been created because people want to use 0:18:31.440 --> 0:18:33.359 that fund. And we've been seeing a lot of that 0:18:33.440 --> 0:18:35.960 in s q q Q and in s H which 0:18:35.960 --> 0:18:39.040 are two short funds, one against kind of the nasdack 0:18:39.160 --> 0:18:42.159 and one against um that the SMP five hundred, And 0:18:42.160 --> 0:18:44.919 that suggests to me that the people are hedging themselves 0:18:45.160 --> 0:18:48.840 or betting against the current highs that we're seeing in 0:18:48.840 --> 0:18:51.639 the SMP five and the NAZAC. We are starting to 0:18:51.680 --> 0:18:54.800 see a little bit of signs that maybe we could 0:18:54.800 --> 0:18:57.359 see a slight pullback in stocks. Been a couple of 0:18:57.400 --> 0:18:59.359 wobbles this week, so I think it'll be kind of 0:18:59.359 --> 0:19:01.760 interesting to see sort of whether those flows continue, whether 0:19:01.840 --> 0:19:03.560 we see a little bit of reversal, if some of 0:19:03.560 --> 0:19:06.120 the kind of froth is taken out of the market. Look, 0:19:06.160 --> 0:19:10.840 I mean, people when the virus is creating volatility, and 0:19:11.000 --> 0:19:14.040 you know, people always look for hedges and times of volatility. 0:19:14.960 --> 0:19:18.879 It's not it's quite well known that after just about 0:19:18.880 --> 0:19:24.040 every one of these UH pandemics epidemics viruses, you look 0:19:24.119 --> 0:19:25.960 six to twelve months out the markets up. But in 0:19:26.000 --> 0:19:29.200 the short run things can happen, uh you know, outside 0:19:29.240 --> 0:19:31.760 of the of the opportunities that you discussed with with 0:19:31.840 --> 0:19:35.560 our vehicles. I also point out a classic old school hedge, 0:19:35.600 --> 0:19:38.159 you know, zero coupon bonds are up thirteen percent year 0:19:38.240 --> 0:19:43.160 to date. The problem is with duration. All we need 0:19:43.200 --> 0:19:44.920 is just to calm down and the ten year goes 0:19:44.960 --> 0:19:48.360 back to two percent and you lost twelve So um 0:19:48.520 --> 0:19:51.040 that but that's but that's something that that that's old 0:19:51.080 --> 0:19:53.760 school heage right there, because you have the if the 0:19:53.840 --> 0:19:56.600 virus um you know, really kicks in for all we know, 0:19:56.680 --> 0:19:59.479