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Speaker 1: Welcome to Trillions. I'm Joel Webber and I'm Eric bel Tunis. Eric.

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Speaker 1: I'm recording from my closet for this special Corona virus

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Speaker 1: episode of Trillions. How about you? Uh, ditto. My wife

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Speaker 1: and two kids are downstairs. My son is doing like

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Speaker 1: through the internet classes for the next two weeks. So

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Speaker 1: it's noisy down there and a little quieter and here,

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Speaker 1: and I see that I have to do some cleaning here.

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Speaker 1: I'm real up close to all the mess in this closet,

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Speaker 1: so uh, there's that too, But yeah, it's quieter. How

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Speaker 1: are you managing otherwise? Day three of the quarantine. And

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Speaker 1: when you have two little kids around, I think it

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Speaker 1: makes it a little more cabin feverish sometimes, But at

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Speaker 1: the same time, it's kind of nice having them home.

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Speaker 1: And I work from home two days a week anyway,

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Speaker 1: so it's not that big of a stretch. So what

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Speaker 1: is your best work from home tip? Um? Basically, for

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Speaker 1: I write a lot, and I just roll out of

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Speaker 1: bed pretty much, start drinking coffee and get writing. I

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Speaker 1: find that early in the morning you are most inspired,

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Speaker 1: you have the greatest natural energy, so I just don't

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Speaker 1: waste time in the morning. I roll rate until ten

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Speaker 1: and I'm highly productive. The afternoon is tougher. That's a

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Speaker 1: pro tip there. Okay, So this episode of Trillions, we

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Speaker 1: felt like we needed to take stock of the reality

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Speaker 1: right now, which is not kind. There's a lot of

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Speaker 1: red in the world. Where do you think we should start?

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Speaker 1: I mean, look, I think the SMP five is something

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Speaker 1: almost everybody at this point owns, whether it's through an

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Speaker 1: active mutual fund or individual stocks or more increasingly passive

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Speaker 1: in e t F like s p Y or I

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Speaker 1: V v or OO. And last time I checked, I mean,

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Speaker 1: it's going up eight percent, down nine percent. It's I

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Speaker 1: equate it to being in a little rowboat and there's

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Speaker 1: just in the middle of the ocean and there's a

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Speaker 1: storm and the waves are just massive, and you're hoping

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Speaker 1: that when you slide down the one wave there's another

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Speaker 1: one to catch you. And it's just it's really um

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Speaker 1: chaotic and discombobulating, a little scary. I'm getting kind of

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Speaker 1: tired of it, and I think other people are. I've

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Speaker 1: talked to market makers all week and they're telling me

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Speaker 1: they're exhausted. So for this episode, we wanted to talk

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Speaker 1: about sort of the some five observations are the biggest

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Speaker 1: themes that are relating to e t s right now.

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Speaker 1: We're also going to have Katie Greyfield come on, who's

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Speaker 1: covering ets for Bloomberg News amidst all this chaos, this

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Speaker 1: time on Trilliance Carnage. Katie, Welcome back to Trillians. Thanks

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Speaker 1: for having me. What do you guys think is the

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Speaker 1: number one thing people should just know about how e

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Speaker 1: t s are performing right now? Um? You know, for me,

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Speaker 1: I look at two things, volume and the e t

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Speaker 1: F price versus its net asset value, and those two

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Speaker 1: things are like thermometers to me. E t F s

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Speaker 1: are all seeing heightened volume three or four times their average.

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Speaker 1: This is part of what they're they were designed for

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Speaker 1: is to be a liquidity buffer release valve so that

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Speaker 1: all the pressure wasn't on the stocks and bonds. And

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Speaker 1: I think they do a great job of that, and

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Speaker 1: sell off after sell off they seem to gain new

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Speaker 1: fans along the way. I don't think this would be

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Speaker 1: that much different. And I think you look at something

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Speaker 1: like Spy that one traded a hundred and thirteen billion

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Speaker 1: on February. No exchange traded listed equity or fund has

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Speaker 1: ever traded over a hundred billion, and all told, in

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Speaker 1: the past three weeks, it's traded about one point two

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Speaker 1: trillion worth of shares. It normally does that in three months.

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Speaker 1: So across the board, whether it's h Y, G or SPY,

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Speaker 1: the volumes are very high. A lot of people are

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Speaker 1: turning to E t F too quickly. Tweak portfolios make

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Speaker 1: short positions, and I you know, the volume tells you

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Speaker 1: people trust them, use them. There's been a couple of

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Speaker 1: little hiccups, but nothing worse than that, and so I

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Speaker 1: would give them a strong B plus or even an

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Speaker 1: A UH for their performance in this sell off and

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Speaker 1: handling what I think is the craziest market I've seen

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Speaker 1: since two thousand eight, if not worse. The other thing

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Speaker 1: that's happening right now is this dislocation with the nav

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Speaker 1: right what is what is that about? Right? So um

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Speaker 1: N A V s are UH the fair value of

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Speaker 1: what the E t F holds of the basket, and

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Speaker 1: the E t F trades in real time, and so

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Speaker 1: it can sometimes move a little ahead or behind, or

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Speaker 1: you know, above or below that fair value. And that's

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Speaker 1: what people watch and what makes them nervous. And if

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Speaker 1: you see a ton of stress, you will see the

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Speaker 1: e t F price move a little bit, but largely

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Speaker 1: the dislocations from NAV have been a little higher, uh

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Speaker 1: than in than in normal times. Uh. There's a lot

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Speaker 1: of arguments that the e t F is sort of

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Speaker 1: the true market in real time. Generally speaking, the e

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Speaker 1: t F price is kind of what you can, you know,

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Speaker 1: sell the car for, and then the NAV is, you know, again,

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Speaker 1: the best they can do. It's saying here's the fair

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Speaker 1: value of it. And in normal times those things are

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Speaker 1: right on top of each other, but in stressful situations

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Speaker 1: the price can deviate a little bit from that NAV.

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Speaker 1: And Katie, what are you hearing from you know, investors

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Speaker 1: in in in the newsroom, in our reporting in terms

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Speaker 1: of how e t F s are faring well, I've

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Speaker 1: been all over that NAV discount that Eric was just

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Speaker 1: talking about, specifically in the bond space, because that's where

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Speaker 1: you're seeing the biggest dislocations, the weirdest sort of moves,

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Speaker 1: whereas you know, equity e t F s aren't having

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Speaker 1: those same problems, those same discounts. And what I've been

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Speaker 1: talking a lot about with investors and advisors is you know,

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Speaker 1: whether this is the start of the death spiral which

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Speaker 1: we hear about with E t F sometimes, that you know,

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Speaker 1: in times of sell off, when you are seeing the

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Speaker 1: price of the E t F dip way below that

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Speaker 1: n A V value, whether that will exacerbate a sell

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Speaker 1: off in the underlying markets. But doesn't seem like we're

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Speaker 1: seeing any signs of that so far, because the underlying

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Speaker 1: bond markets just aren't trading. There's no liquidity there, whereas

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Speaker 1: the E t F is actually the much more liquid

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Speaker 1: tradeable vehicle. And I think um, when you think of

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Speaker 1: the bond ETFs like l q D investment grade bonds,

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Speaker 1: I think that's been stuck at about a two. So

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Speaker 1: the price of l q D has been living at

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Speaker 1: about two percent below the net asset value. T lts

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Speaker 1: wavered between like three percent and you know, one percent.

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Speaker 1: But even even plain vanilla stuff like b n D,

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Speaker 1: the Vanguard Total bond has been um one night, I

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Speaker 1: think it closed at five percent, but it's been hovering

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Speaker 1: more about one five. But I think that tells you

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Speaker 1: that at any time somebody market maker a P could

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Speaker 1: sell the bonds and buy the E t F and

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Speaker 1: pocket the difference as a risk free profit. But what

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Speaker 1: it tells you is there is a lot of faith

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Speaker 1: that you can sell those bonds, and so the e

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Speaker 1: t F would be the place to go to a

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Speaker 1: point and then someone would arbitrage it. So the lack

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Speaker 1: we call that's why we call that discount or that

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Speaker 1: dislocation the arbitrage band, and those stretching times of turmoil.

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Speaker 1: But I you know, I think after last time in

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Speaker 1: two eight, there was a lot of like go you know,

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Speaker 1: h YG was trading a like seven percent discounts and

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Speaker 1: people were like wondering if it was broken and that

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Speaker 1: kind of thing. I think the tone shifted a lot

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Speaker 1: this time. Especially. We've talked to Eric Kazotski, our MUNI analyst,

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Speaker 1: and Damian are emerging markets analysts in b I and

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Speaker 1: they look to E M B and H y D

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Speaker 1: so to speak as where the bonds are probably going.

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Speaker 1: So the E t F sort of like leading where

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Speaker 1: the bonds will probably catch up to because they're less liquid.

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Speaker 1: And so I think there's been a definitely a tone

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Speaker 1: change in people maybe looking at the E t F

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Speaker 1: is an indicator, a metric, and but I will say

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Speaker 1: to Katie's point, the idea of getting out of an

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Speaker 1: E T F. The middlemen in this world have to

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Speaker 1: make a little money, So the price of the e

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Speaker 1: t F does incorporate what those people need to make

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Speaker 1: in that arbor. And so a fair way to put

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Speaker 1: it is, maybe you pay up a little bit to

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Speaker 1: get out in these crazy times. It's not like it's

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Speaker 1: the e t F is perfect. I just think it's

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Speaker 1: a measure of the bond liquidity us the cost of

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Speaker 1: arbitrage um. But I think for people who are retail investors,

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Speaker 1: two takeaways here. If you don't need to trade in

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Speaker 1: these times, don't I think you know, somebody referred to

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Speaker 1: it as adult swim. You know, just stay home because

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Speaker 1: none of these dislocations matter long term. Your total return

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Speaker 1: of the e t F will match the index give

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Speaker 1: or take the tracking, or they won't show up in

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Speaker 1: the long term return. So that's one thing. The second

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Speaker 1: thing is if you do need a trade, I would

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Speaker 1: use limit orders in times like this, and I would

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Speaker 1: stay away from the market opener clothes because things get

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Speaker 1: really crazy as market makers are figuring out what's going

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Speaker 1: on that day, So the middle of the day limit orders.

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Speaker 1: I think those are two good tools to navigate this.

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Speaker 1: Speaking of retail um I'm wondering what's been happening with

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Speaker 1: flows and what you guys have been watching on that front.

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Speaker 1: Something good's been catching my eyes. Flows into spy Um Eric.

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Speaker 1: I know that's more of the trader type e t F,

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Speaker 1: but prior to Wednesday it had been just on a tear.

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Speaker 1: It received nine billion and inflows last week, an additional

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Speaker 1: seven point five billion on Monday, and uh, you know

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Speaker 1: that kind of caused people to scratch their heads because

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Speaker 1: anyone who's been paying attention knows that the stock market

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Speaker 1: has just been doing terribly. But you know, JP Morgan

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Speaker 1: has a theory that this is just create to lend activity,

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Speaker 1: where these aren't actual inflows, it's not a good measure

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Speaker 1: of investor sentiment. But basically, these new shares are being

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Speaker 1: created in order for investors to basically short the e

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Speaker 1: t F. So that was a little bit interesting. Another

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Speaker 1: thing is that ultra short bond funds have received a

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Speaker 1: lot of interest in this sell off. It it feels

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Speaker 1: like they're the only section of the e t F

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Speaker 1: market that hasn't seen outflows of some magnitude, which I

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Speaker 1: think just speaks to how desperate people are for cash

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Speaker 1: right now, especially as liquidity drives up in most markets. Yeah,

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Speaker 1: and to riff off that, people sometimes equate e t

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Speaker 1: f s with equities or risk on. They forget that

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Speaker 1: they are e t s for things that you run

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Speaker 1: to when this guy is falling. And I think those

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Speaker 1: short duration e t f s, it's amazing how much

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Speaker 1: they've taken in because it was a year where only

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Speaker 1: cash worked. It seemed like everything was negative except for cash.

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Speaker 1: And they've in the month of March. Those ultra short

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Speaker 1: bondy tfs have superseded any month and the month isn't

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Speaker 1: even over, So that tells you how cash is king

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Speaker 1: right now in this market. I also think in the

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Speaker 1: flow category spy I w M, the cues those flows

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Speaker 1: to me move a lot like the waves I was

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Speaker 1: talking about in the rowboat. You know, five billion in

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Speaker 1: one day, two billion out the next. It's very hard

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Speaker 1: to read what what's going on because those things are

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Speaker 1: used as derivatives by some investors, so they could be shorting,

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Speaker 1: they could be hedging. You just it's hard to tell.

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Speaker 1: The retail type flows though, um are pretty strong, which

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Speaker 1: is good. It shows you there's a base bid out there.

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Speaker 1: Vanguard in particular, the Vanguard f who has taken in

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Speaker 1: cash every single day during this sell off, and and

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Speaker 1: a lot like a half a billion, a billion even

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Speaker 1: took in money when the market was down twelve It's

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Speaker 1: pretty uh, pretty miraculous. And other Vanguard ETFs have also

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Speaker 1: do the same, although not surprising. We look at Vanguard

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Speaker 1: and past sell offs and in two thousand and eight

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Speaker 1: they took in money every month. They're just kind of

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Speaker 1: a machine. Their investors are just pretty unshakable. And I

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Speaker 1: do see some sentiment on Twitter with advisors who are

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Speaker 1: just not selling. They're just they're just going to coach

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Speaker 1: their clients into hanging in there, because I think over

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Speaker 1: time a lot of people have just been enlightened with

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Speaker 1: the fact that it's very hard to to time these

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Speaker 1: things and when do you go in, when do you

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Speaker 1: take out? Well, you know, and I think a lot

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Speaker 1: of people are just like, look, I'm just gonna continue

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Speaker 1: my sort of drip drip drip inflows into the market.

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Speaker 1: And we've done polls and the flows show that for

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Speaker 1: the most part, the retail investor base in ETFs is

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Speaker 1: hanging in there. And you know, we watch those flows

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Speaker 1: because if those starts to turn negative, we're in a

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Speaker 1: whole different ball game, but so far they've held strong

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Speaker 1: and that's arguably a good sign. So one takeaway and

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Speaker 1: all this is that perhaps retail investors have more of

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Speaker 1: a stomach and especially bogol heads, uh than professionals. Yeah,

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Speaker 1: that's probably a takeaway. Yeah, or institutional maybe. Yeah. There's

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Speaker 1: also um the Internet has allowed the spread of information.

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Speaker 1: I think people are more enlightened to the difficulty of trading.

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Speaker 1: I also think though, that there's been a shift in

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Speaker 1: the advisor business from the broker commission model where a

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Speaker 1: mutual fund pays the broker to put the client in it.

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Speaker 1: Those tend to be more churning type brokers where they

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Speaker 1: churn your account. The new model is fiduciary, where the

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Speaker 1: advisor gets a percentage of the client's assets. And in

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Speaker 1: that model, the advisors shoulders shoulder with the clients, so

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Speaker 1: their knowledge kicks in and they're like, look, I've seen

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Speaker 1: this happen, just hang in there. In addition, advisors get,

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Speaker 1: you know, good fees compared to the fun world. They

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Speaker 1: get like points to one percent to advise you on

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Speaker 1: your wealth. And one of the biggest value propositions now

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Speaker 1: is behavioral coaching and so they're going to really hit

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Speaker 1: that hard and so I think that's another buffer. So

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Speaker 1: I think you've got vanguard people, You've got this these

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Speaker 1: new school advisors who are more about the big long

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Speaker 1: than the big short. And I think you've just got

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Speaker 1: the spread of information and past sell offs. If anybody's

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Speaker 1: gen X or above, they know that two eight was rough,

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Speaker 1: but the next ten years were amazing. So Katie, I

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Speaker 1: know that you haven't interest in what's happening in the

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Speaker 1: bond world, and that's one that I know. UH investors

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Speaker 1: have have have long expressed concerns about what are you

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Speaker 1: seeing on the stuff that you're reporting? Something that I

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Speaker 1: found really interesting over the past week, and I don't

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Speaker 1: have a good explanation for why it's happening, so please

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Speaker 1: enlighten me. But it's it's really the high quality tickers

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Speaker 1: that you're seeing have these big discounts. You know t

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Speaker 1: LT that's a Treasury E, T S, b N D

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Speaker 1: l q D. Those are all in gressive investment grade

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Speaker 1: products mostly whereas it's the risky names like J and

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Speaker 1: K and H y G that are actually trading at

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Speaker 1: small premiums, and those were the names that people are

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Speaker 1: really focused on it was you know, all of those

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Speaker 1: concerns were really centered on junk debt, but those ones

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Speaker 1: are actually pretty well behaved, whereas it's the higher quality

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Speaker 1: stuff that is that has these big discounts. And I

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Speaker 1: don't really know why that's happening, and I haven't heard

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Speaker 1: a good answer yet. I agree with you. I think

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Speaker 1: h y G has superseded anybody's expectations in this sell off.

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Speaker 1: But I think l q D and t l T

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Speaker 1: might have underwhelmed in terms of their ability to track

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Speaker 1: in these times. And we do have a theory and

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Speaker 1: b I my colleague in London, Tom, who's been looking

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Speaker 1: at discounts. One thing he noticed is he looked at

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Speaker 1: the discount in the bonds by maturity, and you can

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Speaker 1: see a direct correlation to the higher the maturity, the

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Speaker 1: longer the maturity, a deeper the discount. And so h

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Speaker 1: y G, a lot of people don't realize, has a

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Speaker 1: duration of only three years. It's not it doesn't have

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Speaker 1: a lot of long dated stuff in there, whereas l

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Speaker 1: q D the duration is nine years and t l

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Speaker 1: T is twenty. And I talked to some market makers

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Speaker 1: that they'll say things like yeah, long dated off the

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Speaker 1: run treasuries, no bid, you know, stuff like that, and

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Speaker 1: the word long seems to be in their dialogue a lot. So, Uh,

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Speaker 1: the long end of the curve, I think is where

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Speaker 1: the bids have dried up the most, and I think

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Speaker 1: h y G avoids that to a degree. But junk

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Speaker 1: has been sold off violently a couple of days, and

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Speaker 1: that's good. I mean, h y G has has really

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Speaker 1: I think hung in there. I think it might have

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Speaker 1: closed it a discount of one percent one day, but

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Speaker 1: it's been within one percent most of the time. And

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Speaker 1: also it's seen a lot of outflows and they've been

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Speaker 1: pretty orderly. Seems like people are getting in and out

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Speaker 1: in an orderly fashion, which is I think more than

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Speaker 1: people thought was gonna happen. Okay, so I want to

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Speaker 1: talk about exotics and and the ETFs in that world, Katie,

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Speaker 1: what are you seeing in that space? Well, it's feast

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Speaker 1: and famine in the leveraged e t F world. Um, Eric,

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Speaker 1: you and I were talking about t VIX yesterday, which

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Speaker 1: is just I mean, over its lifetime it's down well

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Speaker 1: over nine, but it is just on a tear, with

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Speaker 1: the VIX obviously ripping higher this week as of rate.

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Speaker 1: Now as of Wednesday, it's up over percent for the year,

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Speaker 1: which is you know, it's by far the best performing

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Speaker 1: exchange traded product. And uh that's two times levered. And

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Speaker 1: again this this this e t N has had a

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Speaker 1: really tough time of things, but it's clearly it's moment

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Speaker 1: to shine. But you know, on the flip side of

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Speaker 1: the coin, you've seen some of these levered oil e

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Speaker 1: t f s have to be liquidated. Um pro shares

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Speaker 1: had too, in particular this week oil you and oil

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Speaker 1: D So you're seeing some shakeout, you know, obviously in

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Speaker 1: the oil spaces, oil plunges. But t VIX again, it's

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Speaker 1: just having a great time. And you know t VIX

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Speaker 1: there it gets a red light in our traffic lights

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Speaker 1: system obviously, and it gets the highest score of third

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Speaker 1: getting it for thirteen reasons. I mean most stuff is

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Speaker 1: like four or five tops. So t VIX is like

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Speaker 1: highly dangerous, full of nasty surprises. But all the things

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Speaker 1: that are nasty surprises in it are now helping it,

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Speaker 1: whether that's daily resetting of leverage or the roll costs

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Speaker 1: in the futures market which is now turning into roll yield.

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Speaker 1: So all kinds of weird math that hurts t vix

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Speaker 1: normally is actually kicking in. And you know the exotics

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Speaker 1: are obviously highly dangerous, But there, I gotta be honest,

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Speaker 1: fascinating because if you look at your to date returns

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Speaker 1: of all e tps, you might see one you know

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Speaker 1: that that's to be having a good year, and occasionally

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Speaker 1: you've seen one almost get to within a calendar year.

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Speaker 1: T vix is over a thousand percent in your date returns.

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Speaker 1: That's never happened, a quadruple digit returns within a year,

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Speaker 1: and it did it in a month. But you gotta

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Speaker 1: be careful because this thing is still down what since

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Speaker 1: it came out. And the other thing is I do

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Speaker 1: see some retail usage of it. If you look at

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Speaker 1: the Fidelity site, t vix is I think in their

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Speaker 1: top twenty five most traded on the platform. So um,

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Speaker 1: you know, I really hope retail investors aren't messing with it,

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Speaker 1: or if they do, they're the day trader types that

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Speaker 1: know exactly how this thing works. If you want to

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Speaker 1: learn more about leverage products, we have a great episode

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Speaker 1: that specifically about that. Eric, you just kept talking about

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Speaker 1: t VX there and the only thing I wanted to

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Speaker 1: know was whether or not your dad Ken bell Junis

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Speaker 1: which from another episode of Our Two Dads, we know

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Speaker 1: Um has used t VX before. How's uh, how's old

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Speaker 1: Ken doing with t VX right now? Yeah, he loves

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Speaker 1: the reverse splits that it has, which a lot of

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Speaker 1: leveraged e t P s are going through right now

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Speaker 1: reverse splits, so to keep it from going to zero.

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Speaker 1: But um, you know the problem with his t VX

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Speaker 1: holding that he never sold, which I told him to,

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Speaker 1: but he didn't, is that even if you autit like

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Speaker 1: three or four years ago when he did, even with

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Speaker 1: this thousand percent spike, you're still down. So it's you know,

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Speaker 1: very that does very little to his holding. You have

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Speaker 1: to time it perfectly to really benefit it from. So

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Speaker 1: I told him to stick to betting on college football games,

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Speaker 1: which aren't gonna be happening in the near term. I

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Speaker 1: know he well, he had, well, he had his friend

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Speaker 1: come in to watch the tournament, his friend Dennis, and

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Speaker 1: they were just gonna, like, you know, drink beer and

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Speaker 1: watch the tournament. I was almost gonna go join him,

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Speaker 1: but I just couldn't. But and now the tournament's not

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Speaker 1: going on, I'm like what are you guys gonna do

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Speaker 1: with yourselves? So I guess they're gonna have to play

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Speaker 1: board games. Okay, Katie, what's your clothing thought for this episode?

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Speaker 1: I mean, I'm all about the fixed income right now,

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Speaker 1: and I'm curious to see who wins this tug of war.

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Speaker 1: You know, will the price of these bond ETFs rush

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Speaker 1: up to meet the nava or you know, will those bonds,

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Speaker 1: those underlying bonds fall to meet the price. I'm curious

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Speaker 1: to see who wins. Yeah, totally. I think fixed income

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Speaker 1: is where the most tension is right now. Um, even

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Speaker 1: though equities are down big and they're the bigger part

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Speaker 1: of your portfolio for most people. I know that's a hold,

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Speaker 1: you know, that's a major scene. But the fixed income

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Speaker 1: to me, within the e t F s is a

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Speaker 1: much more dynamic place right now because of the way

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Speaker 1: an e t F trades on exchange, but the bonds don't.

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Speaker 1: And that tension is something we're gonna watch. And one

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Speaker 1: thing to watch is this active bond mutual funds, which

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Speaker 1: have avoided the sort of active to passive move because

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Speaker 1: they've tended to outperform their benchmark. The aggregate bond indecks

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Speaker 1: because they tilted to high yield a lot of them.

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Speaker 1: That's biting back high yields down a lot, and they're

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Speaker 1: now underperforming the agg down on the year. If they

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Speaker 1: start to see outflows in any like significant way, that

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Speaker 1: could put a little more pressure selling pressure on bonds

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Speaker 1: and the bond ETFs. And so the bond market to

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Speaker 1: me has um that extra little bit of anxiety because

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Speaker 1: of that and the illiquidity the bonds. Then the stock

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Speaker 1: market is more just about okay, how is it reacting

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Speaker 1: to what Trump said today? How are the fundamentals looking?

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Speaker 1: And the e t F seemed to be pretty kosher

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Speaker 1: over there, not saying it's, you know, a good place

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Speaker 1: to be in terms of returns, but the way the

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Speaker 1: e t F s work over there to me is

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Speaker 1: h takes less of my attention. And I'm with Katie.

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Speaker 1: I think the bond e t F areas um really

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Speaker 1: where a lot of the nerdy eyeballs are right now. Katie,

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Speaker 1: thanks for joining us on Trilliance, Thanks for having everybody else.

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Speaker 1: Thanks for joining us, and please stay safe out there.

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Speaker 1: Thanks for listening to truths. Until next time, you can

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Speaker 1: find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify,

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Speaker 1: and wherever else you'd like to listen. We'd love to

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Speaker 1: hear from you. We're on Twitter, I'm at Joel Webber Show,

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Speaker 1: He's at Eric Falltunus, and you can find Katie at

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Speaker 1: kate grape Folks. This episode of Trillions was produced by

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Speaker 1: Magnus Hendrickson. Francesca Leady is the head of bloom podcast

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Speaker 1: by oo oo oo