WEBVTT - JPMorgan’s Reiner, McNerny on Active ETF Income 0:00:14.640 --> 0:00:17.720 Welcome to Inside Active, a podcast about active managers that 0:00:17.760 --> 0:00:20.439 goes beyond sound bites and headlines and looks deeper into 0:00:20.440 --> 0:00:25.160 their processes, challenges and philosophies and security selection. I'm David Cohne, 0:00:25.160 --> 0:00:27.920 I lead mutual fund and active Research at Bloomberg Intelligence. 0:00:28.240 --> 0:00:31.840 Today my coast is Eric Baltoonis, Senior ETF analyst at 0:00:31.880 --> 0:00:35.080 Bloomberg Intelligence. Eric, thank you for being my coast today. 0:00:35.520 --> 0:00:36.360 Great to be here, Dave. 0:00:36.720 --> 0:00:39.760 So this is our first episode recorded on location. We're 0:00:39.800 --> 0:00:43.360 here down in sunny Orlando with our gracious hosts JP Morgan. 0:00:43.680 --> 0:00:45.960 And since you do cover JP Morgan, I thought i'd 0:00:46.000 --> 0:00:46.920 let you kick this off. 0:00:47.880 --> 0:00:48.160 Yeah. 0:00:48.159 --> 0:00:51.080 Look, this is one of the fastest growing companies in 0:00:51.120 --> 0:00:53.440 a way. You know, they're very big. Everybody knows them. 0:00:53.560 --> 0:00:56.560 But they were somewhat late to the ETF party, so 0:00:56.600 --> 0:00:59.959 they were really came into the market maybe around ten 0:01:00.120 --> 0:01:02.640 years ago. So they had to make up for lost time, 0:01:02.640 --> 0:01:04.520 and they did. What they did is they found a 0:01:04.600 --> 0:01:09.000 niche in Active. At the time, Active wasn't really that hot, 0:01:09.040 --> 0:01:11.480 it wasn't really that popular, and I think I give 0:01:11.600 --> 0:01:14.440 ARC some credit for getting the hot sauce form of 0:01:14.480 --> 0:01:16.880 Active going. And then JP Morgan really got the sort 0:01:16.920 --> 0:01:21.800 of more traditional active going and they're bond ETF JPST 0:01:21.880 --> 0:01:25.080 and their stock ETFJEP, which are both active, are the 0:01:25.120 --> 0:01:28.000 two biggest active bond in stock ETFs in the world, 0:01:28.520 --> 0:01:31.840 and so they're also the fastest growing except JEFP has 0:01:31.840 --> 0:01:34.600 a little brother named jef Q, which beat all the records. 0:01:34.600 --> 0:01:37.160 But anyway, yeah, if you look up jp Morgan is 0:01:37.200 --> 0:01:38.720 going to be among the top of the list, whether 0:01:38.720 --> 0:01:42.520 you looking at assets or flows. And ETFs are where. 0:01:42.319 --> 0:01:43.160 All the fisher biting. 0:01:43.200 --> 0:01:45.440 So if you have an active management strategy in the 0:01:45.480 --> 0:01:49.320 ETF vehicle and you're at that level, you're really in 0:01:49.400 --> 0:01:51.840 the prime spot for the future in my opinion. And 0:01:51.920 --> 0:01:54.040 so it's good to talk to the pms of the 0:01:54.320 --> 0:01:58.440 really the two biggest, I think most relevant active funds 0:01:58.480 --> 0:01:59.240 in the world right now. 0:02:00.200 --> 0:02:04.000 Great, So in that regard, i'd like to welcome Hamilton Ryner, 0:02:04.280 --> 0:02:07.520 Managing Director, head of US Equity Derivatives and a portfolio 0:02:07.560 --> 0:02:10.560 manager for a number of funds, including the JP Morgan 0:02:10.600 --> 0:02:14.200 Equity Premium Income ETF or what we like to call JEPPI, 0:02:14.720 --> 0:02:18.080 and James McNerney, managing director and a portfolio manager for 0:02:18.080 --> 0:02:21.360 income funds including the j P Morgan Ultra Short Income 0:02:21.400 --> 0:02:24.880 ETF or JPST. Thank you both for joining us. 0:02:24.760 --> 0:02:27.200 Today, Thanks for having us, thanks for coming down. 0:02:27.680 --> 0:02:29.840 So I thought we'd start off with a big picture 0:02:30.080 --> 0:02:32.560 question I'd like each to you to answer before we 0:02:32.639 --> 0:02:35.320 kind of dig into the funds themselves. So you both 0:02:35.360 --> 0:02:39.959 manage income oriented strategies in a way, very different asset classes. Obviously, 0:02:40.440 --> 0:02:43.600 how would you define income with discipline today? We can 0:02:43.639 --> 0:02:44.560 start with you Hamilton. 0:02:45.240 --> 0:02:45.560 Sure. 0:02:45.639 --> 0:02:47.639 So when you think about income, incomes one of those 0:02:47.680 --> 0:02:51.560 things that is evergreen. I mean investors like income. You know, 0:02:51.680 --> 0:02:55.040 in a flatish market, income helps your returns, even in 0:02:55.080 --> 0:02:57.880 a down market, just getting that monthly payment helps shop 0:02:58.000 --> 0:03:01.000 in some of the losses of it overall portfolio. So 0:03:01.400 --> 0:03:05.240 income today right now I think is everrigating portfolios. It 0:03:05.360 --> 0:03:07.720 was a challenge to find income for a while when 0:03:07.840 --> 0:03:12.000 rates were near zero, and so finding a way to 0:03:12.040 --> 0:03:15.639 deliver income in a consistent manner in an evergreen basis, 0:03:15.960 --> 0:03:18.600 I think is something that really helps investors in building 0:03:18.639 --> 0:03:19.880 better portfolios. 0:03:20.280 --> 0:03:21.880 Great, how about you, James. 0:03:21.680 --> 0:03:24.760 Yeah, I think when we think of discipline, I mean 0:03:24.800 --> 0:03:28.680 the reason why JPSD resides in the global liquidity business 0:03:28.680 --> 0:03:31.600 at dablemore where we manage at truty dollars a money 0:03:31.600 --> 0:03:33.919 market Forlouba JBSC is a bond fund, a very low 0:03:34.000 --> 0:03:36.800 duration bond fund, but it resides in that business because 0:03:36.840 --> 0:03:40.080 we want to deliver a high quality, low lall solution 0:03:40.160 --> 0:03:42.640 that's the next set out of cash. And so everything 0:03:42.680 --> 0:03:45.280 we do is through a lens of RISKMA the ball, 0:03:45.400 --> 0:03:49.120 high deplety and capital preservation. And so we think about 0:03:49.120 --> 0:03:51.800 delivering current income part into the earth, we want to 0:03:51.840 --> 0:03:55.000 do it through that lens of a very rigorous wristman 0:03:55.120 --> 0:03:58.480 and menu rebust process that's going to deliver you know, 0:03:58.680 --> 0:04:01.640 I pick up relatives taking that step out, but not 0:04:01.680 --> 0:04:03.160 taking on too much risk to do so. 0:04:03.680 --> 0:04:06.040 In fact, just add one thing. When use the word discipline, 0:04:06.120 --> 0:04:09.280 I actually think predictable is probably you know, a better 0:04:09.320 --> 0:04:11.800 word than discipline, because when you're predictable, you have an 0:04:11.880 --> 0:04:14.520 understanding as to what to expect, when to expect it 0:04:14.680 --> 0:04:16.920 and build and put it into your into your portfolio. 0:04:17.320 --> 0:04:20.200 So happy something that's not like consistent, but predictable means 0:04:20.200 --> 0:04:23.600 that when people want to build models or build client portfolios, 0:04:23.640 --> 0:04:27.320 having that ability to know what to expect is truly 0:04:27.360 --> 0:04:29.080 an important part to portfolio construction. 0:04:29.480 --> 0:04:31.160 And you know, this is a great point. I used 0:04:31.200 --> 0:04:33.120 to say this with Arc all the time. People were like, 0:04:33.160 --> 0:04:34.800 why won't you go to cash? We know when the 0:04:34.800 --> 0:04:36.880 stock market was going on in twenty twenty two, why 0:04:36.920 --> 0:04:39.719 won't she do? She just keeps doubling down on these 0:04:39.800 --> 0:04:42.680 like crazy gross stocks, and I'm like, that's why she 0:04:42.800 --> 0:04:47.320 maintains volume and assets. It's because in ETFs, the person 0:04:47.400 --> 0:04:50.480 putting the portfolio together is the active manager, really, and 0:04:50.560 --> 0:04:53.680 you want each piece to do what it's supposed to do. 0:04:53.839 --> 0:04:56.120 So you're not giving your whole money over to somebody 0:04:56.160 --> 0:04:58.839 to just like pick everything. You want them to stay 0:04:58.839 --> 0:05:01.080 in their lane and be active. Which brings me to 0:05:01.120 --> 0:05:03.480 a question for you, Hamilton, which is I've always thought 0:05:03.560 --> 0:05:06.800 JEFPI is a really interesting fun I always say it's 0:05:06.880 --> 0:05:10.880 legwork active, so you're not just picking stocks. You're doing 0:05:10.880 --> 0:05:13.840 this option's overlay, which is again a pain in the butt, right, 0:05:13.920 --> 0:05:16.960 So you get a convenience factor, But why does it 0:05:17.000 --> 0:05:19.840 need to be active? Why couldn't you put this into 0:05:19.880 --> 0:05:21.360 an index and just not. 0:05:21.320 --> 0:05:24.880 Worry about the stock picking part. Sure, so the space 0:05:25.000 --> 0:05:28.640 has grown in popularity. There's a lot of participants and 0:05:28.839 --> 0:05:32.080 many people call themselves active, and it's when they talk 0:05:32.120 --> 0:05:35.200 about the options they're active. I think what differentiates us 0:05:35.279 --> 0:05:37.760 is it's not just about us being active from an 0:05:37.800 --> 0:05:40.120 options perspective, and as you said, it has a fair 0:05:40.160 --> 0:05:42.080 amount of brain damage associated. That will come back to 0:05:42.080 --> 0:05:44.760 that in a second, but also the stock portfolio. We're 0:05:44.800 --> 0:05:46.960 pretty blessed being here at JP Morgan. I mean, our 0:05:47.040 --> 0:05:49.880 fundamental analyst and the core equity platform. You know, it's 0:05:49.880 --> 0:05:52.720 about twenty folks with one hundred and ninety million dollars 0:05:53.120 --> 0:05:56.680 research budget, five thousand meanings per year. It's a competitivedvantage 0:05:56.680 --> 0:05:57.560 for us. It's a weapon. 0:05:57.839 --> 0:06:00.080 So why not utilize that in building a portfolio? 0:06:00.720 --> 0:06:03.920 And so when we first thought about whiteboarding what would 0:06:03.920 --> 0:06:06.440 we like Jeffy to look like, it wasn't just about 0:06:06.440 --> 0:06:08.760 the income. It was giving you the income some of 0:06:08.800 --> 0:06:11.679 the upside of the market and finding a more defensive, 0:06:11.720 --> 0:06:15.640 higher quality portfolio that would weather market selloffs. So if 0:06:15.640 --> 0:06:17.599 you just bought the index, the only thing protecting you 0:06:17.640 --> 0:06:20.520 to the downside is whatever modest option premium brought in. 0:06:21.000 --> 0:06:24.640 So having that more active defense of higher quality portfolio 0:06:24.920 --> 0:06:27.599 acts as a modest buffer to the downside, which is 0:06:27.640 --> 0:06:31.040 significantly better than just having that option's premium. And as 0:06:31.080 --> 0:06:33.360 you said, there's a lot of brain damage associate with options. 0:06:33.600 --> 0:06:38.400 Stocks don't die. Stocks either get taken over, they go bankrupt, or. 0:06:38.360 --> 0:06:40.560 They last forever. Options die. 0:06:40.920 --> 0:06:43.799 And in order to have a strategy that uses options, 0:06:44.040 --> 0:06:46.880 you need to have a best in class middle office, 0:06:46.920 --> 0:06:50.320 back office, clearance, custody, colliudal management, cash management. 0:06:50.680 --> 0:06:51.279 It's hard. 0:06:51.440 --> 0:06:53.920 It's why so many people outsource the investing part of 0:06:53.960 --> 0:06:56.279 an option or into strategy in the ETF space. 0:06:56.400 --> 0:07:01.360 Eric, So, I'm glad you brought that up. We're talking 0:07:01.400 --> 0:07:03.960 about options, and then you know stock picking. How do 0:07:04.040 --> 0:07:07.360 you balance the goal of delivering regular income with long 0:07:07.440 --> 0:07:09.480 term total return potential? 0:07:10.600 --> 0:07:14.360 Sure, so you know, our north star has always been 0:07:14.600 --> 0:07:18.520 about delivering predictable income, but doing it in a way 0:07:18.600 --> 0:07:21.920 that balance is upside and income. There are some strategies 0:07:21.920 --> 0:07:24.880 that will forego one hundred percent of the upside to 0:07:24.960 --> 0:07:27.200 have a higher level of income. Our goal is to 0:07:27.200 --> 0:07:31.360 have returns be a combination of some dividends, some options premium, 0:07:31.400 --> 0:07:34.760 and then some of the upside. And so it's about 0:07:35.440 --> 0:07:39.000 creating total return with three buckets of return. Now, there 0:07:39.080 --> 0:07:41.160 is never a free lunch and you're going to get 0:07:41.240 --> 0:07:43.120 some of the upside of the market through a cycle 0:07:43.320 --> 0:07:46.920 for that options premium that burdenhand today, but that balance 0:07:47.000 --> 0:07:51.560 is not actually something that is by accident, is very intentional. 0:07:51.960 --> 0:07:55.760 It's very intentional to have that type of balance. In addition, 0:07:55.920 --> 0:07:58.640 we're not looking for dividen paying stocks, David, We're actually 0:07:58.680 --> 0:08:01.320 looking for stocks that are just high quality names. Because 0:08:01.400 --> 0:08:04.360 when the market sells off, high quality named with great 0:08:04.400 --> 0:08:07.560 cash flows and great franchises and great businesses tend to 0:08:07.600 --> 0:08:09.800 go down less and you tend to see that like 0:08:09.840 --> 0:08:14.120 we saw in twenty twenty two, fourth quarter of twenty 0:08:14.160 --> 0:08:16.800 twenty five, first colarre of twenty twenty five, for that matter. 0:08:17.080 --> 0:08:20.760 Finding a way to help buffer the downside besides options 0:08:20.760 --> 0:08:25.560 premium has always been on north Star, so JETPY yields 0:08:25.560 --> 0:08:29.360 eight percent, right and jep Q with ten percent all right, 0:08:29.440 --> 0:08:32.360 So I have been one of my ETFs to we 0:08:32.400 --> 0:08:34.720 do twenty six ETFs to watch in twenty twenty six. 0:08:35.200 --> 0:08:36.839 I think you have a jpmmorder one on there. 0:08:36.840 --> 0:08:40.319 I think it's Jphy, but one of mine is c Aie. 0:08:41.200 --> 0:08:42.920 You may have heard of it. You probably heard of it, 0:08:42.960 --> 0:08:45.600 but for people listening who probably haven't it's the calum 0:08:45.600 --> 0:08:48.760 most auto callable ETF. You practically need a PhD to 0:08:48.840 --> 0:08:51.599 understand how these things work. But at the end of 0:08:51.640 --> 0:08:53.880 the day, it's a fourteen percent yield and that is 0:08:53.960 --> 0:08:56.880 pretty appealing. You just said people love income, so we 0:08:56.960 --> 0:09:00.679 call this derivative income, and derivative income is a real 0:09:00.720 --> 0:09:03.480 hot area of ETFs. It seems like auto callables might 0:09:03.520 --> 0:09:08.560 be a threat to the option income market that you 0:09:08.760 --> 0:09:10.880 are like the king of. Do you see it as 0:09:10.880 --> 0:09:12.480 a threat or is it. 0:09:12.440 --> 0:09:15.960 Going to be more more niche So I'm not sure 0:09:15.960 --> 0:09:19.319 I'm the king of anything, but what I would say 0:09:19.559 --> 0:09:22.720 is when I think about the autoclable market, auto calbs, 0:09:22.920 --> 0:09:25.760 auto callables have been in the wealth management channel for 0:09:25.880 --> 0:09:29.400 years and years, and they've traditionally been done on an index, 0:09:29.720 --> 0:09:34.240 a group of indices, a single name. And I agree 0:09:34.280 --> 0:09:36.840 with you as far as how you said. It not 0:09:36.960 --> 0:09:40.800 me that you need a PhD to understand it. Understanding 0:09:40.840 --> 0:09:44.560 what to expect, why to expect it. 0:09:43.800 --> 0:09:45.480 Is really really important. 0:09:45.600 --> 0:09:47.600 You just can't look at the headline yield, Eric, I 0:09:47.600 --> 0:09:49.760 think you have to look at you know, are they 0:09:49.840 --> 0:09:50.760 using leverage? 0:09:51.000 --> 0:09:53.760 What is the index? You know? Where do is? 0:09:53.840 --> 0:09:59.000 Where is the exploding downside kick in you know, the transparency, 0:09:59.080 --> 0:10:02.920 the liquidity, the issue or the counterpart, the operational complexity. 0:10:03.960 --> 0:10:07.480 I think there's just a lot there to unpack. And 0:10:07.559 --> 0:10:09.480 for those people that do have the PhD and are 0:10:09.480 --> 0:10:13.000 willing to dig deep, I think that it is an intellectual, 0:10:13.320 --> 0:10:17.800 intellectually honest way of investing. But I'm not sure if 0:10:17.840 --> 0:10:20.400 everyone has done the work. And so it's about education. 0:10:20.520 --> 0:10:21.680 I think one of the things that we've done at 0:10:21.720 --> 0:10:25.480 JP Morgan, I think better than most is we help 0:10:25.520 --> 0:10:28.520 people understand what to expect and in what market, what 0:10:28.559 --> 0:10:31.000 would be a good market, what would be a challenging market, 0:10:31.160 --> 0:10:33.920 will be a baseline market. And I think that that's 0:10:33.960 --> 0:10:37.840 going to be important to the auto callable space moving forward. 0:10:38.080 --> 0:10:40.559 And I know you watch filings as the rest of 0:10:40.600 --> 0:10:42.920 your team. It seems like everybody in their mother is 0:10:43.000 --> 0:10:45.920 launching an auto callable strategy. So I think there's going 0:10:45.960 --> 0:10:48.320 to be a lot of education necessary. I think we 0:10:48.360 --> 0:10:49.760 did a lot of the heavy lifting and the driven 0:10:49.800 --> 0:10:52.240 income space. A lot of people are in our coattails 0:10:52.240 --> 0:10:55.120 on It's me interesting to see how much education is 0:10:55.200 --> 0:10:58.280 needed and actually happens in the auto callable space. 0:10:58.600 --> 0:11:00.600 Yeah, just to comment for it as a to you, Dave, 0:11:00.679 --> 0:11:03.920 is that there are forty autocollable ETIFT filings and there's 0:11:03.960 --> 0:11:07.720 like twenty on the market, so it's no secret. Because 0:11:07.720 --> 0:11:10.920 of the Calamost success, the industry is seen like a 0:11:10.960 --> 0:11:14.080 possible hit category, so we're going to see a lot. 0:11:14.080 --> 0:11:17.520 I think CIA is a responsible one. It's very diversified 0:11:17.520 --> 0:11:21.520 with like fifty different swaps in there. However, I do 0:11:21.600 --> 0:11:23.679 agree it is complicated. You have to do your due 0:11:23.679 --> 0:11:25.200 diligence and now they're going to come with like single 0:11:25.200 --> 0:11:28.040 stock autofolbles and as usual etif industry is going to 0:11:28.080 --> 0:11:30.120 go a little wild. See, you got to be careful here. 0:11:30.960 --> 0:11:33.960 So if we get back into the actual income, I 0:11:33.960 --> 0:11:37.079 did want to ask, when you're managing the portfolio, when 0:11:37.080 --> 0:11:40.760 we're in environments with volatility spikes, how do you adjust 0:11:40.840 --> 0:11:44.440 strike selection or timing for covered calls, just to help 0:11:44.520 --> 0:11:46.080 kind of manage that downside risk. 0:11:47.320 --> 0:11:50.400 Sure, So you know, my background is over thirty five 0:11:50.480 --> 0:11:53.960 years investing in equities and equy options, and one of 0:11:54.000 --> 0:11:58.520 the things that I've learned is that for portfolios stocks. 0:11:58.240 --> 0:12:00.560 Volatility is the enemy bond. 0:12:00.640 --> 0:12:02.960 To make cases, volatility as the enemy because credits bread 0:12:03.040 --> 0:12:05.920 is widen But the fact is is every strategy that 0:12:05.960 --> 0:12:08.560 I manage has volatility as a tailwhend it's a benefit. 0:12:08.920 --> 0:12:11.920 So when volatility goes up, we're going to do two 0:12:12.000 --> 0:12:14.640 things for our investors. One, we're going to generate more income. 0:12:15.000 --> 0:12:17.320 Most people like that. The second thing is we're gonna 0:12:17.320 --> 0:12:19.480 sell an option that's farther away from where we are, 0:12:19.800 --> 0:12:22.680 giving them more potential upside. So having that balance of 0:12:22.840 --> 0:12:27.000 upside and income, as we highlighted before, is very important 0:12:27.040 --> 0:12:30.160 to us. So when you put a strategy like JETPI 0:12:30.480 --> 0:12:34.120 or JEPQ in your portfolio, it acts as a implicit 0:12:34.200 --> 0:12:37.760 diversifier because volatility is its friend, or other parts of 0:12:37.800 --> 0:12:41.040 your portfolio used voltility as its natural born enemy. 0:12:42.120 --> 0:12:44.560 I have a question on the naming of it. You know, 0:12:45.360 --> 0:12:49.200 I'm really fascinated by names. Over the years, We've seen 0:12:49.240 --> 0:12:53.040 some ETFs try fail, they resurrect it, we call it 0:12:53.080 --> 0:12:55.480 the Lazarus list. They try it again, it fails, and 0:12:55.520 --> 0:12:57.599 then someone just like renames it, and all of a 0:12:57.600 --> 0:13:00.960 sudden it's a hit. I think think slice spread work 0:13:01.040 --> 0:13:03.000 like this one. Like they couldn't sell bread until like 0:13:03.600 --> 0:13:05.800 wonderbread came along. You if they google that. But there's 0:13:05.800 --> 0:13:08.640 a whole story about how just labeling things sometimes is crucial. 0:13:09.200 --> 0:13:11.720 This used to be covered calls. There's a lot of 0:13:11.720 --> 0:13:14.520 cover quality tfs. They existed for a long time, and 0:13:14.559 --> 0:13:17.160 then you guys come in. You call it equity premium income, 0:13:17.200 --> 0:13:19.520 which I always thought was like the winning the Pooh 0:13:19.520 --> 0:13:21.800 and the Tuxedo. You know, it's like an it's a 0:13:22.559 --> 0:13:26.360 more of a fine name for covered call. How crucial 0:13:26.440 --> 0:13:29.520 is that to the strategy? I mean he thought about 0:13:29.520 --> 0:13:31.839 that at all, because it seemed to the Other thing 0:13:31.880 --> 0:13:34.000 is your timing was good, because twenty twenty two is 0:13:34.000 --> 0:13:37.280 when things got volatile and rate went up and the 0:13:37.320 --> 0:13:41.240 growth stocks really got hit. But what do you credit 0:13:41.320 --> 0:13:43.400 to the reason you were able to do it and 0:13:43.440 --> 0:13:44.880 not the cover call people before you? 0:13:46.080 --> 0:13:46.400 Sure? 0:13:46.559 --> 0:13:49.280 So, you know, as far as I'd love to tell 0:13:49.320 --> 0:13:53.200 you that Jeffy was a you know, instantaneous success, we 0:13:53.280 --> 0:13:55.600 actually launched it first in twenty eighteen. Is a mutual 0:13:55.640 --> 0:13:59.400 fun and we had modest success. And then the ETF 0:13:59.440 --> 0:14:01.480 team and I collaborating this said would you ever be 0:14:01.480 --> 0:14:03.800 interested in running an active ETF on the back of 0:14:03.920 --> 0:14:07.120 James's success with JPST. I said, absolutely, if I can run, 0:14:07.320 --> 0:14:09.960 if I could ride James, this cotails done, and so 0:14:10.000 --> 0:14:14.559 we in twenty twenty we launched JETPY the ETF And 0:14:15.200 --> 0:14:18.200 what I think made us different was not that we 0:14:18.240 --> 0:14:20.800 didn't call it a cover call strategy, but rather we 0:14:21.080 --> 0:14:23.960 help people and what we highlighted earlier how to use 0:14:24.000 --> 0:14:27.200 it and what to expect. You know, in a traditional 0:14:27.760 --> 0:14:30.560 cover call strategy, people start talking about how the sausage 0:14:30.600 --> 0:14:33.280 is made. I buy this and I sell this, and 0:14:33.760 --> 0:14:36.760 they get into the weeds. Nobody really always wants to 0:14:36.800 --> 0:14:39.320 know how the sausage is made initially. What they really 0:14:39.400 --> 0:14:41.000 want to understand is how do I use it and 0:14:41.040 --> 0:14:43.200 how can it help me? So we always led with 0:14:44.040 --> 0:14:45.120 a high quality. 0:14:44.840 --> 0:14:46.080 Group of stocks. 0:14:46.240 --> 0:14:48.520 It's gonna throw off seven to nine percent distributle income 0:14:48.760 --> 0:14:51.720 that incomes be paid out monthly and over timing you 0:14:51.800 --> 0:14:55.040 get some of the upside of the market. And we 0:14:55.080 --> 0:14:57.520 are very thoughtful in the activeness of our long portfolio 0:14:57.600 --> 0:14:59.680 because if the market would ever sell off because we 0:14:59.720 --> 0:15:02.520 wanted in twenty twenty, don't forget, we would expect these 0:15:02.600 --> 0:15:04.320 high quality names to hang in. 0:15:04.320 --> 0:15:05.600 Better and once you know it. 0:15:05.600 --> 0:15:07.840 In twenty twenty two, the market's hold off and the 0:15:07.840 --> 0:15:10.320 strategy was only down a fraction of the overall market. 0:15:10.560 --> 0:15:13.040 But that was you know, it was not something that 0:15:13.120 --> 0:15:16.120 we hoped would happen or expected to happen. It was 0:15:16.240 --> 0:15:18.880 just building it in case that were to happen. So 0:15:19.320 --> 0:15:21.680 I'm not sure if you call it call overriding or 0:15:21.760 --> 0:15:25.360 driven income or covered calls. It's what really brings this 0:15:26.800 --> 0:15:29.880 to I think the success was helping people understand how 0:15:29.920 --> 0:15:32.440 to use it. And the other thing I'd say, Eric, 0:15:32.560 --> 0:15:35.040 is you know when you think about covered calls, many 0:15:35.080 --> 0:15:37.320 people say I'm going to buy a portfolio of twenty names, 0:15:37.600 --> 0:15:40.280 I'm gonna sell options on all twenty names, and then 0:15:40.280 --> 0:15:42.840 two weeks later, some chunk of those stocks are up 0:15:42.840 --> 0:15:44.760 a lot, and you're like, man, I hope that stock 0:15:44.800 --> 0:15:47.200 doesn't go up anymore. You start rooting against your favorite 0:15:47.200 --> 0:15:49.760 stocks going up. So we never had that approach. So 0:15:49.800 --> 0:15:51.880 we always had options at the index level, so we 0:15:51.920 --> 0:15:54.440 would actually get the income by removing beta, but never 0:15:54.520 --> 0:15:56.520 having our favorite stocks taken away from us and being 0:15:56.600 --> 0:15:58.640 left with the losers and having our winners taken away. 0:15:59.040 --> 0:16:01.640 So I think the approach that we first took was 0:16:01.760 --> 0:16:03.600 what is the client experience we want them to have? 0:16:04.080 --> 0:16:07.400 How do we want to build this strategy and actually 0:16:07.480 --> 0:16:09.400 try to figure out how many different environments can the 0:16:09.440 --> 0:16:10.440 strategy work pretty well on. 0:16:12.440 --> 0:16:14.560 So in covering active, one of the things I've been 0:16:14.600 --> 0:16:17.800 tracking is sector concentration, especially with tech. And so if 0:16:17.800 --> 0:16:20.360 we move over to jet Q, how do you manage 0:16:20.400 --> 0:16:24.560 sector concentration risk? You know within that covered call framework, 0:16:24.960 --> 0:16:27.600 you know, especially with a tech heavy market like the Nasdaq. 0:16:28.880 --> 0:16:32.320 So whereas the S and P five hundred is concentrated, 0:16:32.840 --> 0:16:36.680 the NASAK one hundred is really concentrated. So to try 0:16:36.720 --> 0:16:40.600 to be that different from the NASAQ one hundred is 0:16:40.760 --> 0:16:43.360 really really tough to do. So with jet Q, our 0:16:43.400 --> 0:16:47.000 long portfolio is going to be similar to the NASAQ 0:16:47.000 --> 0:16:48.600 one hundred. It's going to have let's call it two 0:16:48.640 --> 0:16:51.520 to three hundred base points of analyzed tracking R modest 0:16:51.640 --> 0:16:55.240 under and overweights, a little bit out of benchmark. But 0:16:55.240 --> 0:16:58.120 it's going to be stocks that could be in the Nasdaq. 0:16:58.200 --> 0:17:01.000 For example, as you know, Walmarts added to the NASTAQ 0:17:01.040 --> 0:17:04.280 one hundred, names that could be the NASA one hundred. 0:17:04.280 --> 0:17:06.960 We're never gonna go down in cap or things that 0:17:07.040 --> 0:17:09.480 are just micro cap. We're gonna own up that is 0:17:09.520 --> 0:17:11.600 either in the nasadack or could be in the Nasdaq. 0:17:12.200 --> 0:17:15.960 But once again, the activeness of that long portfolio helps 0:17:16.000 --> 0:17:19.240 modest it helps create most alpha. We expect somewhere between 0:17:19.320 --> 0:17:21.640 you know, seventy five to hundred bits of alpha par animals. Again, 0:17:21.720 --> 0:17:24.240 it's unique, it's differentiated. We're not sure anyone else is 0:17:24.280 --> 0:17:28.480 doing a Nastak one hundred portfolio that's active. The options 0:17:28.480 --> 0:17:30.320 that we do are always going to be out of 0:17:30.359 --> 0:17:34.359 the money, and the concentration we we you know, we 0:17:34.480 --> 0:17:37.600 try to you know, it's there's no getting away from 0:17:37.640 --> 0:17:41.160 the concentration, but we try to manage the concentration by 0:17:41.200 --> 0:17:44.080 having most over and underweights based on the stocks that 0:17:44.119 --> 0:17:44.440 we like. 0:17:44.359 --> 0:17:45.359 A little bit more than others. 0:17:45.600 --> 0:17:48.159 So we'll be modestly overweight, you know, let's call it 0:17:48.200 --> 0:17:50.960 stocks that we think have a better cash flow and 0:17:51.080 --> 0:17:52.480 better return. 0:17:52.200 --> 0:17:55.240 Profile, lower evaluation relative to others. 0:17:56.359 --> 0:17:59.359 You know, many people say I have to outrun the 0:17:59.400 --> 0:18:02.320 bear or as opposed to outrunning you, we just think 0:18:02.320 --> 0:18:04.919 we have to actually generate modest out above the benchmark, 0:18:05.280 --> 0:18:07.760 and the options that we're doing are on the Nastok 0:18:07.800 --> 0:18:09.840 one hundred, and as such, we want to. 0:18:09.760 --> 0:18:11.200 Make sure we're not that different. 0:18:11.320 --> 0:18:14.040 Because you are going to sell options that are going 0:18:14.080 --> 0:18:16.360 to have exposure to a highly concentrated portfolio as well. 0:18:16.440 --> 0:18:20.359 David, And since I also cover mutual funds and you know, 0:18:20.359 --> 0:18:22.639 I'm always looking for what are the benefits of mutual 0:18:22.640 --> 0:18:25.719 funds over ETF's capacity is kind of the one thing 0:18:25.760 --> 0:18:28.800 where ETFs can't close. And so I just want to ask, 0:18:28.920 --> 0:18:30.920 you know, can the strategy get too big? You know, 0:18:30.960 --> 0:18:32.520 are you ever concerned about capacity? 0:18:32.840 --> 0:18:35.160 I worry about everything. I'm paranoid about everything. 0:18:35.600 --> 0:18:37.920 But I would say the bar for us at JP 0:18:38.000 --> 0:18:40.920 Morgan to launch a strategy is we have to take 0:18:40.920 --> 0:18:43.560 the approach that what if we're lucky enough to have success. 0:18:44.160 --> 0:18:46.560 And when we go to these conferences, and there's conferences 0:18:46.640 --> 0:18:49.560 all over the country, you know, with lots of ETF providers, 0:18:49.600 --> 0:18:51.480 many of them have the approach of you know, that 0:18:51.520 --> 0:18:54.600 would be a Champagne problem, and our approach has always been, 0:18:54.600 --> 0:18:56.439 O would be a champagne headache. As soon as you 0:18:56.440 --> 0:19:00.439 have to change your investment process to actually solved for 0:19:00.480 --> 0:19:03.439 our capacity problem, you now have changed that experience of 0:19:03.440 --> 0:19:05.840 your client, that predictability of your client. You can't have 0:19:05.840 --> 0:19:08.080 a small cap strategy, Sea, I'm gonna start adding MidCap. 0:19:08.480 --> 0:19:12.040 You can't change what clients have bought and expect from you. 0:19:12.480 --> 0:19:14.800 So when you think about the S and P five hundred, 0:19:15.320 --> 0:19:19.440 it's pretty crazy. Three point two trillion trades per day 0:19:19.560 --> 0:19:21.919 of notional and let's just say you take half of 0:19:21.920 --> 0:19:24.440 that out in seried options, it's still one point six 0:19:24.840 --> 0:19:28.960 trillion the options that you know, we started one of 0:19:28.960 --> 0:19:32.600 the very first hedge equity strategies in twenty thirteen. Back 0:19:32.640 --> 0:19:35.360 then the s F YOU one hundred only traded five 0:19:35.440 --> 0:19:37.800 hundred billion, which is pretty big at that point too. 0:19:38.200 --> 0:19:41.200 So those the options in the index have drawn even 0:19:41.280 --> 0:19:44.159 faster than the drind of income, the hedge equity the 0:19:44.200 --> 0:19:47.560 buffer strategies by significant amount. And when you think about 0:19:47.560 --> 0:19:51.000