Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to the Money Stuff Podcast, your weekly
Speaker 2: podcast where we talk about stuff related to money. I'm
Speaker 2: Matt Levine and I write the Money Stuff column for
Speaker 2: Bloomberg Opinion.
Speaker 1: And I'm Katie Greifeld, a reporter for Bloomberg News and
Speaker 1: an anchor for Bloomberg Television.
Speaker 2: And he were talking about just one topic today.
Speaker 1: Yeah.
Speaker 2: That topic is you showed a horse this week.
Speaker 1: I was gonna say ets, but yeah, okay, so yeah
Speaker 1: I did. I rode my horse this weekend. His name
Speaker 1: is Gus. He's about fifteen hands. For the equestrians in
Speaker 1: the audience, which is all of the audience after listening
Speaker 1: to the Money Stuff podcast, it's a good sized size,
Speaker 1: mine size. So he is technically a horse. The only
Speaker 1: to listen to me. Listen to me. A dividing line
Speaker 1: between a horse.
Speaker 2: See think he's a person.
Speaker 1: No, no, no, he does have a personality. But the
Speaker 1: dividing line between a horse and a pony is just tight.
Speaker 1: Some people think it's age. No, it's just tight. So
Speaker 1: he for a while because I got him before he
Speaker 1: turned three, like a couple months before he turned three,
Speaker 1: so he was still a baby and still growing. For
Speaker 1: a while, I had a large pony, but he has
Speaker 1: grown to the point where he is now technically a horse,
Speaker 1: which we're very thrilled for him for.
Speaker 2: So you are, on occasion a competitive I.
Speaker 1: Am so I ride dressage. There's a thing called the
Speaker 1: United States Dressage Federation. On my older pony, whose name
Speaker 1: is Batman. I've had him since I was twelve. Batman
Speaker 1: is a pony. Batman is a large pony, small horse,
Speaker 1: but the line is fuzzier there because he's he's like
Speaker 1: fourteen two hands for the equestrians in the audience. I
Speaker 1: got up pretty high in the levels with Batman. We
Speaker 1: got up to third life. It goes training. Let me
Speaker 1: tell you about it. Okay, we can cut all of
Speaker 1: this if it's boring. Oh no, So when you when
Speaker 1: you showed your sage in the United States, there's intro level,
Speaker 1: there's training level first, second, third, fourth, then you get
Speaker 1: into like Grand Prix and stuff like that.
Speaker 2: I wish that the audience see demonstrating what Prix looks like.
Speaker 1: I tried to like embody the horse doing Grand Prix.
Speaker 1: So with Batman, we got up to third level and
Speaker 1: we did pretty good. Gus is just starting out. This
Speaker 1: was his second show ever. We showed training level. He
Speaker 1: did a great job. I will say I was so
Speaker 1: proud of him.
Speaker 2: From Instagram, I got the impression that you and Gus
Speaker 2: one we.
Speaker 1: Want a blue ribbon. But for context, we're showing training level.
Speaker 1: Like I'm a pretty good rider at this point, so
Speaker 1: it's like pretty easy and the classes were super small.
Speaker 1: I actually posted that on my close friend's story.
Speaker 2: Oh no, I'm.
Speaker 1: It's totally fine because it felt a little bit embarrassing
Speaker 1: because it was such a small class and it's training level.
Speaker 1: But Gus did a great job. Yeah, he got a
Speaker 1: little bit scared. The wind was blowing in a way
Speaker 1: he didn't like, but you know, he was really brave
Speaker 1: about it. So hats off to Gus. It really is
Speaker 1: you have to understand horses are flight animals. They don't fight,
Speaker 1: and the horse ancestors who survived were the really scared
Speaker 1: ones who started running at the first sign of danger.
Speaker 1: So I mean it's written in their ancestral coat to
Speaker 1: be scared of things.
Speaker 2: Like there's a nice metaphor there or something.
Speaker 1: So that transitions nicely to what we're talking about today.
Speaker 2: Sadly, we're actually talking about it. Yeah, yeah, your favorite topic.
Speaker 1: You know, you would think I would be more excited
Speaker 1: about what we're doing today. I wouldn't think that we're
Speaker 1: talking about some pretty nitty gritty stuff when it comes
Speaker 1: to ETFs at the top.
Speaker 2: No, we're talking about I don't know. I guess we're talking.
Speaker 1: About well, we're talking about taxes and how to dodge them.
Speaker 2: Yeah.
Speaker 1: Yeah, we're also talking about derivatives enhanced exchange traded funds,
Speaker 1: which re chilled traders love because they're being hawked them
Speaker 1: on YouTube. And then we're gonna talk about Jamee Street.
Speaker 2: You we're gonna start by dying on Jane Street.
Speaker 1: Let's start with James Straw. I forget how you described it.
Speaker 2: They're like vampire.
Speaker 1: No, no, They're like these this secretive market maker that
Speaker 1: we read about all the time.
Speaker 2: I do feel like Jane Street sort of went from
Speaker 2: nothing to extreme prominence, and like the course of my
Speaker 2: being aware of financial markets, and like there was a
Speaker 2: point where they were truly under the radar, nobody had
Speaker 2: heard of them thing and now there are several chapters
Speaker 2: of a Michael Lewis book. You know this, you know
Speaker 2: they represent fifteen percent of stock trading or whatever the numbers.
Speaker 2: So they're pretty big, and they get a lot of
Speaker 2: articles about them because they're pretty interesting, and each of
Speaker 2: the articles has to say they're very press shy and
Speaker 2: at yeah, you know, they're not that pressure the information. Yeah,
Speaker 2: but I feel like the press they get is good
Speaker 2: in the sense that it's like, look at these guys.
Speaker 2: They make so much money. And my first thought was like,
Speaker 2: that's gotta be good for recruiting, but of course, like
Speaker 2: it's bad for recruiting. There are a lot of people
Speaker 2: who want to go into finance to make money, and
Speaker 2: you want to hire the other people, the ones who
Speaker 2: are going to go into finance, like solve weird puzzles
Speaker 2: and like Jane Street, to be clear, I sometimes do
Speaker 2: puzzle hunts in New York City.
Speaker 1: So what does that mean, Matt. It's a puzzle hunt.
Speaker 2: It's like it's a little bit like dressage, but no,
Speaker 2: you like, it's like a scavenger hunt, but like the
Speaker 2: clues are weird.
Speaker 1: Puzzles like geo cash.
Speaker 2: I don't know, Okay, it's like a scavenger hunt, but
Speaker 2: a complicated puzzle cliss and it's a very financial industry thing.
Speaker 2: And like you basically you go and there's like eight
Speaker 2: teams from Goldman and like three teams from Jane Street,
Speaker 2: and then like a bunch of other hig freakoncy trading firms,
Speaker 2: and like it's always like Jane Street like a big
Speaker 2: puzzle hunt firm, you know, like you go to Jane Street.
Speaker 1: Do they dominate the puzzle hunts.
Speaker 2: No, it's like pretty competitive the puzzle hunts.
Speaker 1: Cool.
Speaker 2: Look, I think they're good at puzzle hunts. So it's
Speaker 2: like real puzzle solving people. If you do out too
Speaker 2: much of a reputation for being a giant lucrative pot
Speaker 2: of money, then you'll attract people who want the giant
Speaker 2: lucrative pot of money, and those people you might hypothesize
Speaker 2: will be worse at solving puzzles. I wrote something like
Speaker 2: that and someone emailed me to say, you're right. I've
Speaker 2: known people who worked to Jane Street, and like, early
Speaker 2: on it was people who liked puzzles and didn't like
Speaker 2: staying that late at work, and then they made more money,
Speaker 2: so they got people who liked money and want to
Speaker 2: stay later at work. So the culture has deteriortor oh
Speaker 2: my god, in the sense that people like work harder
Speaker 2: and make more money.
Speaker 1: Well, I was going to say, like, how do you
Speaker 1: control for that in the interview setting, Well.
Speaker 2: You ask them puzzles.
Speaker 1: Yeah, and you see if they're having fun.
Speaker 2: Yeah, it's a little that's funny, right, you can't really,
Speaker 2: there's only so many puzzles can do. If you're not
Speaker 2: having fun doing puzzles, right, Yeah, you're really good at
Speaker 2: all the puzzles and you like don't have that sparking
Speaker 2: your eye, you're still probably.
Speaker 1: Fine, right, there's not a certain light in your eyes.
Speaker 2: Yeah, if you're just like grudgingly good at puzzles, you'll
Speaker 2: be okay, Yeah, fine, yeah, because the puzzles do result
Speaker 2: in money.
Speaker 1: Yeah, if you work at Jane Street, do you have
Speaker 1: to like trading ETFs?
Speaker 3: Uh?
Speaker 1: No, Okay, well it seems like a lot of people
Speaker 1: at Jane Street do.
Speaker 2: Yeah. But like Jane Street is in the news because
Speaker 2: the Ft had another like profile of them that had
Speaker 2: a lot of interesting facts and sort of quotes, and
Speaker 2: they do quote they're like head of fixed income saying
Speaker 2: basically like their business models, like they automate something and
Speaker 2: then they go up one level of abstraction and they
Speaker 2: automate that so they can sort of do higher and
Speaker 2: hire more complicated, more value adding things by like automating
Speaker 2: all the stuff below it. And like that's kind of
Speaker 2: the common pattern and equities trading for the last twenty years.
Speaker 2: It is not really the pattern and fixed income trading,
Speaker 2: and like Jane Street has been kind of pushing bond
Speaker 2: trading to be more automated. But the point of that
Speaker 2: is that if you like solving puzzles and automating things,
Speaker 2: you don't have to care that much about trading ETFs because.
Speaker 3: Like, you know, you're.
Speaker 2: Puzzle. It's another puzzle. It's like you know, the computer
Speaker 2: is doing something amount of the ETF trading for you,
Speaker 2: or like some of the pricing for you. But it's
Speaker 2: clearly a place where people like the psychological aspect of trading.
Speaker 2: One of the better pictures of Jane Street it comes
Speaker 2: from Michael Lewis's book about Sam Beckman Free who worked
Speaker 2: there for a while, and it's a lot of like
Speaker 2: puzzles and people betting against each other and people learning
Speaker 2: the perils of adverse selection firsthand by like having their
Speaker 2: interviewers like trick them. So you know, it's a it's
Speaker 2: a trading firm but it's not like people whose first
Speaker 2: love is ETFs like you, right.
Speaker 1: Right, So talk to me about portfolio trading, where of
Speaker 1: course ETFs factor in mightily. Portfolio trading is something that
Speaker 1: I write about every couple of years and sort of
Speaker 1: relearn the mechanics of it every of years. When I
Speaker 1: have to write about it, I would say that I
Speaker 1: get it, but I don't understand it.
Speaker 2: So portfolio is trading a portfolio of bonds. Basically, it's
Speaker 2: like there are investors who will need to sell a
Speaker 2: lot of bonds at once, right, who like their thing
Speaker 2: is not like I'm going to like slightly adjust the
Speaker 2: exposure of my bond portfolio, but like I'm an endowment
Speaker 2: and I'm moving from forty percent bonds to thirty percent bonds.
Speaker 2: I'm selling, you know, a giant pile of bonds, And
Speaker 2: traditionally you would do that. You could call a bank
Speaker 2: and sell each bond and it would take a while
Speaker 2: because they'd price each bond and you'd sort of like
Speaker 2: pay a bit ask reread on each bond, and it
Speaker 2: was like inefficient. And people realize that trading a whole
Speaker 2: portfolio of bonds, you can price the portfolio itself. Rather
Speaker 2: than sort of think individually about each individual bond. And
Speaker 2: in particular, what people like Jane Street realized is like
Speaker 2: they are all these bondtfs, bond ETFs. You can like
Speaker 2: hand in some bonds and get back shares with the ETF.
Speaker 2: The bonds that you hand in are going to be
Speaker 2: bonds that are supposed to go on the ETF. There's
Speaker 2: a lot of flexibility to create shares of the ETF
Speaker 2: because like a bond index, ETF just can never like
Speaker 2: exactly contain the index. It's like impossible to recreate a
Speaker 2: bond innecks precisely like a big bond because like a
Speaker 2: lot of bonds, and like you know, you can't like
Speaker 2: buy fractions of bonds, and like bonds are not always
Speaker 2: out liquid, and so every bond ETF is going to
Speaker 2: you know, have some sampling where they're like sort of
Speaker 2: tracking their index, but they're not exactly the index. What
Speaker 2: that means is like if someone wants to tell you
Speaker 2: a thousand bonds, you can go to an ETF and
Speaker 2: be like, overy this thousand bonds, would you like them
Speaker 2: in exchange for shares of the ETF, And the ETF
Speaker 2: will like do some math and be like, yeah, we'll
Speaker 2: take eight hundred and seventy six of those bonds and
Speaker 2: then you just got rid of all those bonds. And
Speaker 2: so Jane Street and like other you know, bond market
Speaker 2: makers who are also ETF market makers can do this
Speaker 2: transaction where they will buy some pension funds a thousand
Speaker 2: bonds from them and hold some of them on their
Speaker 2: balance sheet, but also squash a lot of them into
Speaker 2: an ATF get back these like very easily tradeable, fungible
Speaker 2: ETF shares, And so they've like kind of turned this
Speaker 2: complicated problem of buying all these bonds, they've reduced it
Speaker 2: mostly to a similar problem of like selling ETF shares.
Speaker 2: So it's a much more efficient way to do it.
Speaker 2: And it's become a big part of bond trading in
Speaker 2: the last like ten years. And it's like very electronified
Speaker 2: if people are doing it with computer models rather than
Speaker 2: like putting their finger in the air and trying to
Speaker 2: figure out how much each bond is worth. Yeah, it's
Speaker 2: like a move to like kind of equities like trading
Speaker 2: for bonds.
Speaker 1: Yeah, and it hinges on the creation and redemption mechanism
Speaker 1: that is inherent to ETFs.
Speaker 2: I'm not sure it always always does, because like you
Speaker 2: could sort of have the same concepts and just hold
Speaker 2: the bonds in your balance sheet. But yeah, and practice.
Speaker 1: Like a huge balance.
Speaker 2: Sheet and is like using an ETFs as kind of
Speaker 2: the balance sheet to.
Speaker 1: Buy My understanding and maybe this is because you know,
Speaker 1: I'm coming from the ETF perspective, is that portfolio trading
Speaker 1: picked up in a big way as bond ETFs.
Speaker 2: No, that's right, that's right. Yeah, that's right.
Speaker 1: Yeah, that's right.
Speaker 2: It is. It is very closely linked to ETFs.
Speaker 1: I'm kind of surprised that portfolio trading isn't bigger though
Speaker 1: I know it's becoming a bigger part part of overall
Speaker 1: bond trading, but I think it's still in like single
Speaker 1: digit percentage of overall bond trading.
Speaker 2: I mean, why did you trade bond?
Speaker 1: Why did you trade?
Speaker 2: You know, I've written about this acause I have been
Speaker 2: thinking about private credit. Like there's historically you buy bonds,
Speaker 2: you know, like a ten year bond. You you know,
Speaker 2: You're like, I have a ten year liability, so I'm
Speaker 2: going to buy a ten year bond to match it,
Speaker 2: and I'm just hold it for ten years, right, So
Speaker 2: why do you trade bonds. I mean, one reason you
Speaker 2: trade bonds is because you are a pension pond that's
Speaker 2: like decided to move some of your allocation out of
Speaker 2: bonds or whatever. But a lot of the reasons you
Speaker 2: trade bonds is like you like a particular bond, right,
Speaker 2: Like you're some sort of like credit fund manager where
Speaker 2: you are making some sort of relative value trade that
Speaker 2: one bond is good and one bond is bad, and
Speaker 2: so then you're not like, oh, buy my hundred bonds
Speaker 2: at once, right. But yeah, I mean there are a
Speaker 2: lot of people who have needs to move whole portfolios
Speaker 2: and that's becoming a big business.
Speaker 1: Oh let's talk about the fact that Jane Street doesn't
Speaker 1: have a CEO. We've talked about this before. I do
Speaker 1: love it. It's so cool because again you think about
Speaker 1: this secretive trading firm. Paik As the Ft says. I
Speaker 1: feel like the fact that they don't have a CEO
Speaker 1: and they're run by like this like faceless entity does
Speaker 1: kind of add to that image.
Speaker 2: You know they have, like they'd like four founders. Yeah,
Speaker 2: couldn't name them. There's one guy who's still there's like
Speaker 2: one of the founders. And for a while I just
Speaker 2: looked yesterday and he doesn't shop up on LinkedIn or
Speaker 2: I couldn't find him, but like for a while, his
Speaker 2: LinkedIn just said like I had his name, and it's
Speaker 2: a like Trader had like quantitative trading for him. It's
Speaker 2: like a top resident, like a top linkin. I was
Speaker 2: thinking about that when I was writing about the guy
Speaker 2: who has been suing David Einhorn or green Light for
Speaker 2: months because he wants to call himself the former head
Speaker 2: of macro at green Light and green Light is suing
Speaker 2: him and he's suing them and it's a mess, and
Speaker 2: it's like really really good trolling, and it's like one
Speaker 2: way to live is to like sue, to be able
Speaker 2: to call yourself the job title you think you deserve.
Speaker 2: Another way to live is just trader on your LinkedIn.
Speaker 2: Like it's a different it's a different level. But yeah,
Speaker 2: they know have a CEO. They run everything by committee.
Speaker 2: I don't know, like I wrote this, like it just
Speaker 2: they give off the impression of just being like a
Speaker 2: group of buddies who'd like to solve puzzles together and
Speaker 2: like the puzzles create a lot of money for them, right,
Speaker 2: it doesn't seem like a traditional like hierarchical you know,
Speaker 2: business organization.
Speaker 1: Yeah, specifically, the company calls itself a functionally organized structure
Speaker 1: consisting of various management and risk committees. Just amazing. I
Speaker 1: mean if this was a smaller company, I'd be like,
Speaker 1: I don't know, I don't know how long that can last.
Speaker 1: But obviously they're doing well for it.
Speaker 2: That feels like the sort of thing that can last
Speaker 2: more easily if you're a smaller company, right, I mean,
Speaker 2: like one thing in this a FT article is like
Speaker 2: they've become really big. It is harder to be non
Speaker 2: hierarchical when you have that many people. You know, a
Speaker 2: lot of how that business works is like they all
Speaker 2: trust each other and so there's not a real, you know,
Speaker 2: deep hierarchical supervision. And that's harder to do if there's
Speaker 2: three thousand people instead of three hundred. And also, they
Speaker 2: make so much money, and so all those people have
Speaker 2: grown accustomed to making a certain amount of money. And
Speaker 2: the article's like you they're one like even flat year,
Speaker 2: and people are going to be really dissatisfied because you know,
Speaker 2: you're sort of relying on the money growing every year
Speaker 2: to make everyone.
Speaker 1: Yeah, I guess why I would be skeptical with a
Speaker 1: small company is just because I would assume human ego
Speaker 1: comes in at some point where like one guy or
Speaker 1: gal wants to say I'm in charge, it's me, I'm
Speaker 1: I'm responsible for our success and I call the shots.
Speaker 2: That's just this trait a large company, except that there's
Speaker 2: more people might want to do that.
Speaker 1: But I guess I'm saying I'm obviously it worked for
Speaker 1: them another large company and it's still working. Is there
Speaker 1: any conditions under which where this couldn't work for Jane Street?
Speaker 2: Oh?
Speaker 1: Yeah, when it happens, we'll talk about it. Yeah, let's
Speaker 1: talk about taxes. There's a really interesting ETF filing this week,
Speaker 1: the Cambria tack. So we're ETF and Matt what you
Speaker 1: were describing with portfolio trading, where you know, this big
Speaker 1: institution comes with this like big basket of bonds, maybe
Speaker 1: random bonds, they give them to a Jane Street and
Speaker 1: then they get ETF shares in exchange. That's kind of
Speaker 1: like the process of this ETF. And I have to say,
Speaker 1: I'm not familiar with not that familiar with swap funds
Speaker 1: or exchange funds, but this is basically those. But in
Speaker 1: the ETF wrapper. Maybe you can make heads or tails
Speaker 1: of this.
Speaker 2: Yeah, So a swap fund is like conceptually you have
Speaker 2: like a big undiversified stock position. For instance, you work
Speaker 2: at a company and you want a lot of your
Speaker 2: own company stock, and you want to get out of
Speaker 2: that position and like get into an SMP five hundred fund, right,
Speaker 2: you want to diversify, and so to have a more
Speaker 2: normal diversified portfolio and not just on your own company stock.
Speaker 2: Then natural thing to do is you sell the stock
Speaker 2: you buy n SMP fund. But when you do that,
Speaker 2: you pay taxes on your stock. And if it's you
Speaker 2: know you've owned it for all time, it's appreciated a lot.
Speaker 2: You pay a lot of taxes. People figured out as
Speaker 2: like if you contribute property into a partnership, when you
Speaker 2: form a partnership and you get back shares of the partnership,
Speaker 2: this is not taxified, but that is come on and
Speaker 2: make it so that's not a taxable transaction. So like
Speaker 2: you don't have any gain, you don't have to pay
Speaker 2: any taxes. You just get shares of the partnership, and
Speaker 2: when you eventually sell your shares of the partnership, you
Speaker 2: pay taxes. And so what people do is like they
Speaker 2: get ten tech company employees of different companies and they
Speaker 2: all put their shares into a pot and they get
Speaker 2: back ownership, the partial ownership of the pot. And so
Speaker 2: now instead of owning their undiversified share in their own company,
Speaker 2: they own like a slice of shares of ten companies,
Speaker 2: and so they have a more diversified portfolio. And these
Speaker 2: ETF guys realize you could do that in ETF where
Speaker 2: basically you go out to like a bunch of retail
Speaker 2: investors who have portfolios at like Fidelity or whatever where
Speaker 2: they own not like a bunch of ETFs, but they
Speaker 2: own like you know, Tesla and Berkshire, Hathaway and whatever. Right, Yeah,
Speaker 2: and they can all PLoP that into a pot and
Speaker 2: get back and the pot is an ETF, and they
Speaker 2: get back shares of the ETF and now they go
Speaker 2: from having a fairly short list of holdings to having
Speaker 2: a more divers like a share of a more diversial
Speaker 2: plot set of holdings. And yeah, pay taxes.
Speaker 1: So the part that sort of breaks my brain is
Speaker 1: the CTF. The ticker is tax which is a great ticker.
Speaker 1: I can't believe that that hasn't already been used expected
Speaker 1: to launch in December. So it's going to run a
Speaker 1: strategy that favors value and quality shares with low or
Speaker 1: no dividend yields to avoid being taxed on those payouts.
Speaker 1: So what people come to them with the stocks that
Speaker 1: they own aren't necessarily the stocks that are going to
Speaker 1: be in the CTF.
Speaker 2: I guess that's right.
Speaker 1: I mean, unless they're soliciting people with specifically value in
Speaker 1: quality shares, well, I think they are.
Speaker 2: There are some limitations on you know, you need to
Speaker 2: have like a certain amount of diversivation in your portfolio already,
Speaker 2: so there are limits. I'm like what you can bring in,
Speaker 2: Like if you come in with like I only have Tesla,
Speaker 2: they'll say no, yeah, but yeah they can they can
Speaker 2: rotate out of stuff. We talked on the podcast a
Speaker 2: couple of weeks ago. I was like, I used to
Speaker 2: own I call index mutual funds. Yeah, and I've moved
Speaker 2: to ats because they're tax advantages. If you get emails
Speaker 2: about like what are the tax advantage, the tax advantage
Speaker 2: is like when someone puts money into an ETF, the
Speaker 2: ETF doesn't go buy like the underlying stock, and when
Speaker 2: someone takes money out of the ETF. The ETF doesn't
Speaker 2: sell the stock. There's this weird creation in kind creation
Speaker 2: redemption mechanism where like Jane Street goes and buys the
Speaker 2: stocky and like contributes it to the ETF. And the
Speaker 2: reason for that is like there's like these weird old
Speaker 2: tax rulings saying that if you do it in this way,
Speaker 2: the ETF doesn't incur capital gains taxes on the stock
Speaker 2: that it gets rid of because I'm not selling it,
Speaker 2: it's getting rid of it. And and so people in
Speaker 2: the ETF world are very focused on like never selling stock.
Speaker 2: So you know, if you contribute sty to this ETF,
Speaker 2: the ETF might want to rotate out of that stock
Speaker 2: into something different, but like they can't sell it. That's
Speaker 2: not necessarily a problem because as like Bloomberg's Zach Miter
Speaker 2: has written about, there is a mechanism for an ETF
Speaker 2: to say I don't want to own this stock. I
Speaker 2: want to own that stock. And basically what will happen is, like,
Speaker 2: you know, a Jane Street, an authorized participant will come
Speaker 2: to it with the stock it wants and hand that
Speaker 2: in in a special creation basket to get new shares. Yeah,
Speaker 2: and it'll take out a redemption basket of the old
Speaker 2: shairs so that you can it's called a heartbeat transaction.
Speaker 2: Oh god, it's a way for them to avoid every
Speaker 2: selling stock. So it's a long answer to your question. Yes,
Speaker 2: they can move from what people put in to what
Speaker 2: they want, but they have to do it through these
Speaker 2: like in kind creation and redemption transactions because the goal
Speaker 2: is to never pay taxes. Not never, but you know, yeah,
Speaker 2: defer taxes.
Speaker 1: I mean that's my understanding. Is that again, like you
Speaker 1: can bring them whatever I mean, not quite whatever, but yeah,
Speaker 1: and then they magic it into value shares.
Speaker 2: Yeah. I'll also say I wrote this much like with
Speaker 2: the bond ETFs, they don't have to like have an
Speaker 2: index and then like mats that index exactly right, Like
Speaker 2: they can you know, if you bring them stuff and
Speaker 2: you're like, yeah, it's pretty value eat, then they can just.
Speaker 1: Hold that, right, doesn't emulate the spirit.
Speaker 2: They don't need like zero tracking ert or whatever index
Speaker 2: they have, because like they're giving you something else, right,
Speaker 2: They're giving you this like tax advantage, So like yeah,
Speaker 2: if you have like a little tracking.
Speaker 1: Ert, it's fine, I do wonder. So the idea is
Speaker 1: like they're going to have these investors with these stocks
Speaker 1: coming to them. I want to know, like, how are
Speaker 1: they're soliciting yes, people to come to them. Is this
Speaker 1: like a builded and they will come situation? Do they
Speaker 1: have people lined up already? I wonder how much sort
Speaker 1: of chumming of the waters that they've done.
Speaker 2: Yeah, I don't know. My sense is that this is
Speaker 2: like an advisor's product, right, Like this is like a
Speaker 2: thing that you can go out and pitch to financial
Speaker 2: advisors and like, oh, that's a great idea, right, and
Speaker 2: then like the financial advisor is like a cool thing
Speaker 2: to tell her client, you know, like if you want
Speaker 2: to diversify your like portfolio of six stocks, here's a
Speaker 2: way to do it without paying taxes. Like that's a
Speaker 2: cool piece of value added advice for the advisor to
Speaker 2: give the client. It's not necessarily something that you watch
Speaker 2: a YouTube tutorial about and then and then do it.
Speaker 1: Right, Are you trying to transition?
Speaker 2: I think I'm trying to transition.
Speaker 1: Well I have a few more things, Okay, So in
Speaker 1: the same way, like I wonder how many people like
Speaker 1: they've already lined up or maybe they launch and then
Speaker 1: they go out to the financial advisors et cetera. Or
Speaker 1: maybe they're already in touch with that network. It's interesting
Speaker 1: and fun to think that, you know, you and I
Speaker 1: could go just buy shares of this ETF for what reason,
Speaker 1: I don't know why we would, but because it's an ETF,
Speaker 1: anyone can buy it. There have no control over who
Speaker 1: actually owns this thing.
Speaker 2: Yeah, nor did they care. I mean, they love it
Speaker 2: if it's just more people bought it.
Speaker 1: But wouldn't that be weird if they did a little weird?
Speaker 2: I mean my assumption is it's like any other equity.
Speaker 2: I don't like the tilt towards value, right, just want
Speaker 2: to own a value You after me like this one's
Speaker 2: performance is good. Maybe you have a thesis that is,
Speaker 2: like the people whose accounts at Fidelity have a lot
Speaker 2: of concentrated appreciated positions are really good investors, and this
Speaker 2: ETF will somehow attract their really good portfolios and it
Speaker 2: will have a it will have a better portfolio through
Speaker 2: like the wisdom of the crowd of.
Speaker 1: People with Yeah, maybe it does. It's a little shaky,
Speaker 1: I would say. I just I wonder about the retail investor,
Speaker 1: who's you know going through one.
Speaker 2: That if you're just like browsing. You know, robin Hood,
Speaker 2: and you see a thing with a ticker tax Like,
Speaker 2: that's pretty good.
Speaker 1: Yeah you might.
Speaker 2: You might just buy it exactly. I like, I like
Speaker 2: not paying taxes all Yeah.
Speaker 1: I am fascinated. So again, according to this article written
Speaker 1: by Justina Lee and Wildna Hirich, this is expected to
Speaker 1: launch in December. I am so interested to see how
Speaker 1: big it gets, if at all, I don't know. It's interesting.
Speaker 1: First of it's kind an etf land.
Speaker 2: You do need people to buy it, yeah, like, I
Speaker 2: guess the point of it is actually to let people
Speaker 2: transform their parts, yeah, like actualist and then hold it
Speaker 2: for a long time and not pay taxes. But eventually
Speaker 2: you want to be able to sell.
Speaker 1: The thing, right, But I imagine that's where the bulk
Speaker 1: of its asset growth will come from.
Speaker 2: Yeah, and those people will be sort of buy and
Speaker 2: hold investors because their whole purposes do not pay taxes. Yeah,
Speaker 2: you don't need.
Speaker 3: Anything to buy it.
Speaker 1: So how about YouTube? I mean, I don't know if
Speaker 1: anyone's going to be uh pitching tax on YouTube? Maybe though,
Speaker 1: But anyway, this isn't a good segue. Help me out?
Speaker 2: Was good? So the taxi thing is interesting because, like
Speaker 2: as I said, it does kind of feel like a
Speaker 2: financial advisor product, right. It feels like the sort of
Speaker 2: thing that like you're like, I want to diversify, and
Speaker 2: your advisor's like, wait, let me show you something.
Speaker 1: Mm hmmm.
Speaker 2: A lot of ETFs are almost the opposite of financi
Speaker 2: advisor products. They're like a way to let anyone with
Speaker 2: like a Robinhood account buy a thing that you could
Speaker 2: historically have gotten from a financial advisor. And so if
Speaker 2: you're like in a sort of like somewhat upper tier
Speaker 2: financial advisor relationship, they will sell you all sorts of
Speaker 2: weird derivatives if you're willing to listen. And these are
Speaker 2: called structured notes. And there's actually like a recent court
Speaker 2: case where like the founder of a big tech company
Speaker 2: is like wealth advisor, like First Republic put all of
Speaker 2: his money into like these terrible structured notes that like
Speaker 2: paid like five percent fees, and like they kept you know,
Speaker 2: they're like four year notes, and they kept rolling him
Speaker 2: every nine months because they want to get new fees.
Speaker 2: That business people there's some skepticism about that business. But anyway,
Speaker 2: you can get like all sorts of weird derivatives from
Speaker 2: your financial advisor in the form of structured notes. But
Speaker 2: historically you could only get that from like your financial advisor.
Speaker 2: You could just go out in the market and buy
Speaker 2: all these weird derotas and ETF. People realized that they
Speaker 2: could sell a lot of these weird derotors to people
Speaker 2: in the form of ETFs, and that people had a
Speaker 2: deep hunger for that and would go on YouTube and
Speaker 2: watch videos about like buy right strategies where you like,
Speaker 2: you know, buy some stocks and then you sell call
Speaker 2: options every month and you get you you know, as
Speaker 2: they say, earn yield on the stocks, yeah, which, like
Speaker 2: anyone in the options the world will get really angry
Speaker 2: if you say you're earning yield by selling options, because
Speaker 2: that's not like yield. Yeah, good people do it. Or like,
Speaker 2: you know, there's like we've talked, i think on the
Speaker 2: podcast about buffer ets we have, which are like you
Speaker 2: buy a stock and you kind of collar it, or
Speaker 2: you buy the SMP and you put a collar on it,
Speaker 2: so you can't lose that much money, but you also
Speaker 2: can't make that much money. Yeah, And there's other stuff,
Speaker 2: you know, like the liberty ets, which you also talked about,
Speaker 2: are just you know, they're essentially Derodo's products, and you
Speaker 2: can sell all that stuff to retail, you can package
Speaker 2: it into an ETF and then anyone who wants to
Speaker 2: can buy it. There's a guy in a Bloomberg article
Speaker 2: saying it's like potato chips, it's like sneakers. Anyone can
Speaker 2: buy it, which is not historically true. A lot of like,
Speaker 2: you know, products that financial advisors sold, and so they
Speaker 2: talk you about like democratizing access to this stuff that
Speaker 2: before you have to have an advisor, you know, you
Speaker 2: have to have a relationship with a bank. Now you
Speaker 2: can click a button on your Robinhood account. And the
Speaker 2: downside of that is like you might wonder do people
Speaker 2: know what they're getting? But one, they can read read it,
Speaker 2: and watch YouTube where people will tell them probably a
Speaker 2: great length, what they're getting. And two again this business,
Speaker 2: as a financial advisory business does not have an unblemished reputation.
Speaker 2: Like some number of financial advisors also wouldn't tell their
Speaker 2: clients what they're getting, but they would be proving their
Speaker 2: hands together about the five percent fees, and then like
Speaker 2: clients would get blown up on these things. So it's like, yeah,
Speaker 2: buy like the lower fee, you know, relatively more transparent
Speaker 2: ETF version of it. That's so bad.
Speaker 1: Yeah, there's some great reporting in this article because Denisa
Speaker 1: Taykova and Fildna Hirich again wrote this piece. So they
Speaker 1: watched all the YouTube videos they you know, scraped Reddit,
Speaker 1: et cetera. They found thirty eight year old Todd Aken.
Speaker 1: He has a growing YouTube channel that promises to teach
Speaker 1: followers how to feed off these lucrative ETF payouts in
Speaker 1: a diversified portfolio. I let the dividends replace my nine
Speaker 1: to five. That's the motto. I live and die with
Speaker 1: the results. So I was.
Speaker 2: Surprised dividends are technically it's like hm hm, it's like
Speaker 2: technically a horse. They're technically dividends in that they are
Speaker 2: difidends from the ETF, but they're not like did they're option.
Speaker 1: Let's talk about that a little bit. I mean, they
Speaker 1: did quote some people who were criticizing that, and one
Speaker 1: of the big criticisms of these is that it's return
Speaker 1: of principle, right is the fancy word for it.
Speaker 2: It's not return of principle either, it's.
Speaker 1: What is it? Then? Is it to prenou Is it
Speaker 1: return of capital?
Speaker 2: But what I'm yeah sorry. As a tax matter, it
Speaker 2: might be return for I don't know. Yeah, but like
Speaker 2: you know, a lot of these ETFs, what happens is
Speaker 2: that like every month you get a ten percent cash
Speaker 2: distribution and also the value of the thing goes down
Speaker 2: by eleven percent. Yeah, but what it is is that
Speaker 2: it's option premium. Like you're selling options every month, and
Speaker 2: like if the options move against you, then you lose
Speaker 2: more money than you may but like you get paid
Speaker 2: for the option. Yeah.
Speaker 1: Well to that point, they have a great example in here.
Speaker 1: You take a look at the Yield Max Coin Option
Speaker 1: Income Strategy ETF. It's based on Coinbase. I believe it's
Speaker 1: sent more than one hundred percent of its current share
Speaker 1: value back to holders as cash in the past year.
Speaker 1: That's despite the fact on its holtal Road turn bas
Speaker 1: is so far in twenty twenty four it is trailing
Speaker 1: coin Base itself.
Speaker 2: It's down and absolutely dums too. Yeah, the coinbase is up,
Speaker 2: this thing is down.
Speaker 1: But does the end investor care if they're getting cash
Speaker 1: back in some form, like they're getting a payout in
Speaker 1: some form, Do they really care if it's not.
Speaker 2: They're getting back less than they put it? Yeah, it's
Speaker 2: they yielded more than one hundred percent of the current
Speaker 2: stock price, but it is less than one hundred percent
Speaker 2: of the block price a year ago. They've gotten back
Speaker 2: less than they put in.
Speaker 1: Yeah, well that's what I struggle with, and I don't
Speaker 1: know if I want to keep this in but.
Speaker 2: Like not yield. Yeah, it's option premium. Like you buy
Speaker 2: a stock, right, you sell options on the stock, so
Speaker 2: you get paid five ten percent of the value of
Speaker 2: the stock in option pain. Right. Then if the stock
Speaker 2: goes up, you don't get most of the gains of
Speaker 2: the stock going up because your gains are capped at
Speaker 2: the option because you're selling out of many co options.
Speaker 2: If stock goes down, you take that entire loss. You
Speaker 2: do this every month, right, So every time the stock
Speaker 2: goes down, you take the entire loss, and then you
Speaker 2: sell options struck at like whatever ten percent above the
Speaker 2: current price. And so the stock goes down, you sell
Speaker 2: options struck below where you start it okay, and then
Speaker 2: the stock goes back up. You don't get back to
Speaker 2: where you started. You do get some option pain. It
Speaker 2: is over and over again. You have a very ball
Speaker 2: stock like coinbase, where it goes down a lot you
Speaker 2: lose money goes up, you don't make all the money back.
Speaker 2: Keep doing this, you keep getting the option premium every month,
Speaker 2: which is valuable, but you lose much of the appreciation
Speaker 2: of the stock, and you bear all of the losses
Speaker 2: of the stock. And over the course of a year
Speaker 2: coinbase goes up, you don't get most of the games,
Speaker 2: but you do get the losses every time it goes down,
Speaker 2: and you end up making back less than you put in,
Speaker 2: even though you're getting paid option premier every month.
Speaker 1: But I guess like that option premium every month is
Speaker 1: enough that these people keep buying because these things have
Speaker 1: exploded they are so popular.
Speaker 2: Well, this is like a classic strategy, right, I mean,
Speaker 2: like this is by writing. Right, It's like you buy
Speaker 2: a stock and you sell call options. And I was
Speaker 2: thinking about, like one reason this thing exists is like
Speaker 2: you can just do that yourself. But if you do
Speaker 2: it yourself, you have to sell like one hundred share.
Speaker 2: You know, options contract is one hundred shares, and so
Speaker 2: you have to buy a hundred shares of coinbase, which
Speaker 2: is like, you know, seventeen eighteen thousand dollars and so
Speaker 2: this so you know, you can buy one shot of
Speaker 2: the ETF if you want, and so do you get
Speaker 2: the same exposure for a lower dollar amount. So it
Speaker 2: is a popular strategy, but it you know, people talking
Speaker 2: about it as a volatility defending strategy, which kind of
Speaker 2: is because you get the premium every month. It's like
Speaker 2: when the stock goes down, you don't You're don't really
Speaker 2: shield that, except.
Speaker 1: Yeah, I do like that. They quoted Hamilton Rainer in here.
Speaker 1: So he manages Jeffie, which is like the JP Morgan
Speaker 1: equity premium making ETF, which is.
Speaker 2: A totally normal by right, started.
Speaker 1: This whole craze. One of the things that really contributed
Speaker 1: to the boom, and these types of ETFs. And he's
Speaker 1: so funny because he's he's kind of old school, like
Speaker 1: he managed these types of strategies and mutual funds and
Speaker 1: then brought them over to the ETF rapper. They have
Speaker 1: been enormously popular and it's become this like Frankenstein's Monster
Speaker 1: sort of situation because obviously he doesn't like things such
Speaker 1: as the yield max coin option income strategy ETF, and
Speaker 1: he's quoted in the story saying that, like, not everything
Speaker 1: needs to be in the ETF rapper et cetera, et cetera,
Speaker 1: and these types of funds are a good example of
Speaker 1: that in his view of what doesn't need to be
Speaker 1: in the ETF wrapper.
Speaker 2: But why not you know, like strategy feels a little gambling, right,
Speaker 2: This is a little bit of like a you know,
Speaker 2: like a retail day trader gambling product. But if people
Speaker 2: want that exposure, Like why should they have to trade
Speaker 2: one hundreds share lots of options? Why not do it
Speaker 2: in the ETF forum. Yeah, I don't know.
Speaker 1: Yeah, this is like let the people trade.
Speaker 2: You know, like the people selling these things talk about
Speaker 2: democratizing these financial products, and I don't love these Like
Speaker 2: I wouldn't buy any of these things, but like that's
Speaker 2: just me. Like it's so clear that there is a
Speaker 2: demand for this stuff, and you don't want to be
Speaker 2: too dismissive of it because it is people like watching
Speaker 2: YouTube videos and like learning about this stuff. As someone
Speaker 2: who like grew up in the world of equity derivatives,
Speaker 2: it's impressive how like widespread colledge of equity derivatives has
Speaker 2: become the world of redhead. Right, there's like some truth
Speaker 2: to the idea that this says, like democratizing sophisticated investing strategies. Now,
Speaker 2: they're not always good investing strategies, right, And that was
Speaker 2: the Money Stuff Podcast.
Speaker 1: I'm Matt Levian and I'm Katie Greifeld.
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