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How Leveraged ETFs Became Wall Street's New Obsession · Trillions

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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
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Speaker 2: Pokeron Trains.
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Speaker 3: I'm Joel Webern and I'm Eric.
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Speaker 2: You know, I was thinking about this episode, Eric, and
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Speaker 2: it's a little overdue, but we've touched on it in
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Speaker 2: a couple different ways, but we haven't given it the
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Speaker 2: full episode treatment. Leverage also known as X xxx, So
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Speaker 2: this is that episode when we're going to talk about leverage.
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Speaker 4: Yeah, this is probably the core of the hot sauce
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Speaker 4: that we talk about.
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Speaker 3: Leverage.
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Speaker 4: GT has been around for a long time, but they've
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Speaker 4: gotten really popular lately and they're growing, although we'll go
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Speaker 4: into they're growing kind of with in tandem with the market,
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Speaker 4: but still their assets are now up to two hundred
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Speaker 4: billion dollars. The trading volume has also gotten bigger. And
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Speaker 4: what's given them a recent kick is the two x
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Speaker 4: dockytfs that's kind of new. The single stock, Yeah, and
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Speaker 4: some of them are popular. So now you have the
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Speaker 4: traditional sort of like two x and three X index
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Speaker 4: funds like the two x three x NAZDAC or SMP,
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Speaker 4: plus all these individual stocks and what these issuers are
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Speaker 4: finding that if you get one hit, you're like set
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Speaker 4: for life. Like the two x Navidia has five billion,
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Speaker 4: that's fifty million in revenue because they charge a lot,
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Speaker 4: so you see a lot of launches in this area,
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Speaker 4: you see a lot of volume. But as I will
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Speaker 4: defend them a little bit, to the two people we
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Speaker 4: have on, we're gonna have a debate this episode. They
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Speaker 4: don't have a ton of assets, like they're still pretty tiny,
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Speaker 4: but they they seem bigger and they're definitely popular with
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Speaker 4: the trading crowd, no doubt. So they're getting a lot
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Speaker 4: of crap lately, different columnists and whatnot. They're starting to
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Speaker 4: get scapegoated a little like, oh watch these things they're
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Speaker 4: going to like totally crash the market.
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Speaker 3: There's a lot of some worry articles.
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Speaker 4: So we should just discuss it, you know, facts versus fiction,
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Speaker 4: How much of this sort of negative press is earned
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Speaker 4: versus you know, histrionics. And I thought we should just
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Speaker 4: get it all out because even James Seyfert on my team,
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Speaker 4: who's going to be on this podcast, he has been
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Speaker 4: writing about how lever gtfs are the tail wagging the dog. Again,
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Speaker 4: that's that's like pretty loaded language. I wrote a note
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Speaker 4: pushing back on that, and it's a good debate to have.
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Speaker 4: I think it's one the industry is having and we
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Speaker 4: should have it right here, right now.
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Speaker 2: Joining us James Safer, ETF analyst at Bloomberg Intelligence, as
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Speaker 2: well as Todd Son, the chief ETF strategist at Baird Strategiz,
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Speaker 2: this time on trillions. A great debate about levere gtfs.
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Speaker 2: Are they the boogeyman, which a number of nasias feel,
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Speaker 2: or are they paper tigers, which maybe a few analysts
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Speaker 2: in this room feel. Todd James, welcome back to Trillian's.
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Speaker 5: Great to be with you guys.
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Speaker 2: Thanks for having me. Okay, James, are you three X
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Speaker 2: on these things or like negative three x?
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Speaker 6: So I actually agree with like ninety nine percent of
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Speaker 6: what Eric was saying. The problem is that there is
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Speaker 6: some instances of some of these single stock ETFs where
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Speaker 6: they've just gotten they've kind of gotten too big for
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Speaker 6: the pond that they're swimming in. There, they're holding there,
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Speaker 6: they're offering two x leverage on you know, small and
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Speaker 6: MidCap stocks that don't necessarily trade a ton, and these
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Speaker 6: ETFs are trading a lot, and there's a lot of
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Speaker 6: even options on them.
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Speaker 2: H And there is a little bit of the tail
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Speaker 2: wagging the dog.
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Speaker 6: But again we're talking about like a handful of these
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Speaker 6: these stocks that are being affected. It's not a criticism
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Speaker 6: of the broader leverage ETF universe, but there is definitely
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Speaker 6: some tail wagging the dog here in names like if
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Speaker 6: I would throw a few out there at b M
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Speaker 6: and r bitmind Immersion Technologies, which is an ethereum company,
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Speaker 6: micro strategy, Oklow, which is a nuclear It tends to
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Speaker 6: be a lot of these retail heavy things you would
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Speaker 6: see on Reddit. Those are the things that end up
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Speaker 6: being this tail wagging the dog sort of thing where
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Speaker 6: I was talking.
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Speaker 2: About what about sk Heinex there, Todd.
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Speaker 5: I do find it very humorous that Heinex just had
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Speaker 5: its worse daily loss on record and now we're launching
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Speaker 5: two x. It's just you can't write a better story.
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Speaker 5: I don't think this is a systemic risk, right. I
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Speaker 5: tend to agree with Eric and James. But the majority
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Speaker 5: of the two hundred billion in assets here are tied
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Speaker 5: to semiconductors in large cap tech, which is also tied
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Speaker 5: to the bulk of investor portfolio. So that's where my
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Speaker 5: work comes in, right. A lot of the same stuff
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Speaker 5: is tied together portfolios. Whether you realize it or not.
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Speaker 5: And if there's an unwind, especially driven by maybe Heinex
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Speaker 5: declining like this, that's gonna be painful for the common investor.
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Speaker 2: Why have these become so popular this year?
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Speaker 4: Look, America likes the gamble, I mean in some Asian countries,
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Speaker 4: Europe not so much. Like these things are hit different
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Speaker 4: areas in the world. You're America, I think in a
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Speaker 4: bull market. Look, I've I'm old enough to have seen
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Speaker 4: this cycle a couple times where lever gtfs kind of
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Speaker 4: get more popular in a bull market and then there's like,
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Speaker 4: as we call it, a hard rain and a bunch
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Speaker 4: of them clothes and then you know, things calm down,
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Speaker 4: the market starts getting up again, and you see more
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Speaker 4: long But for the most part, if you if you
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Speaker 4: lent me money, you let me one hundred dollars, I'm
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Speaker 4: not going to do that, I know. But if you
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Speaker 4: let me money and I'm Tesla's stock with it, yep,
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Speaker 4: that's that's leverage. I mean, it's it's just a two
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Speaker 4: x version and it promises it every day. So I
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Speaker 4: think with leverage, it depends on where you come down
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Speaker 4: with trading, like if you are if you want to
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Speaker 4: judge intent, like you as a retail person. You should
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Speaker 4: be a good boy and you should only go long
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Speaker 4: term and buy Voo and that's it. Anything else, we're
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Speaker 4: going to slap your hand because you're not smart enough,
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Speaker 4: or do you allow for people to make their own mistakes,
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Speaker 4: allow for people to trade. Some people who use these
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Speaker 4: might have a Vanguard account, but then have this as
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Speaker 4: like the little cowboy account, just that you know, entertainment
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Speaker 4: really and in some cases they do well. If we
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Speaker 4: look at all these lever gtfs, overall, they have generated
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Speaker 4: about sixty five billion in profits for the investors they use.
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Speaker 4: A lot of people don't think that. Some have had
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Speaker 4: big losses, and the volatility drag of holding them over
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Speaker 4: long term can be a nasty surprise. So there's a
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Speaker 4: lot of boogaboos in there. But for the most part,
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Speaker 4: they the trading volume thirteen percent of all ETF trading
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Speaker 4: is leverage, but they're only one percent of assets. That
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Speaker 4: ratio tells you that they are being used as directed
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Speaker 4: which is as a trading tool to gamble, to speculate.
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Speaker 4: But I mean, hell, there's a huge derivatives market that
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Speaker 4: is made for the same thing. But just because it's
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Speaker 4: called like options, it's like safer or better. I don't know,
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Speaker 4: Like it just seems like a little judgmental to me
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Speaker 4: to fingerwag at the retail investors who are using this.
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Speaker 4: And again, if you add up all the leverage ETFs
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Speaker 4: and add in their notional exposure like the two X,
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Speaker 4: it's still less than one percent.
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Speaker 3: Of the size of the equity market.
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Speaker 4: So there's a lot more going on here, and I
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Speaker 4: just I don't know for now. I'm just like it's
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Speaker 4: always been this niche thing for people who are like
6:52
Speaker 4: want to, you know, get a quick hit. I equate
6:54
Speaker 4: it to whiskey and fast food. It's not healthy, but
6:58
Speaker 4: it does you know, it'll make you feel good for
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Speaker 4: a minute.
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Speaker 3: More legal.
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Speaker 5: I'm more of a tequila guy, to be honest with you.
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Speaker 5: So you mentioned the thirteen percent of asset trading volume. Yeah,
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Speaker 5: they trade on average fifty billion dollars per day. That's
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Speaker 5: up tenfold since pre COVID, So something changed over the
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Speaker 5: last five to six years. Actually think is amazing. Why
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Speaker 5: are they so popular. It's just I think it's just
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Speaker 5: access and efficiency, right, you don't need margin. You can
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Speaker 5: go on your phone brokerage account and.
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Speaker 2: Buy It's just a ticker.
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Speaker 5: Yeah, it's any other ticker. The tricky part though, is,
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Speaker 5: let's just say the chip stocks are down. The largest
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Speaker 5: levitytfs are triple NAZDAC and triple semiiconductors, and so now
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Speaker 5: you're seeing those because the size of those funds have
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Speaker 5: gotten so big in terms of notional we talking about
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Speaker 5: a hundred billion dollars. At the end of the day
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Speaker 5: when they have to rebalance exposure, you're seeing flows of
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Speaker 5: ten to twenty billion dollars like that affects some of
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Speaker 5: the trading for these For a vanguard investor, it's noise.
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Speaker 5: But for some of the more institutional act investors, that
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Speaker 5: starts to whip around a lot of the stocks, like
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Speaker 5: James mentioned bitmin, that's a smaller scenario. Now you're talking
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Speaker 5: these heavyweight names. I guess the analogy would be a
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Speaker 5: rush to the fire exit that starts to sell pressure
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Speaker 5: do other people start to sell? I don't know, but
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Speaker 5: that's my word.
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Speaker 3: We've had that. You've had these in sell offs.
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Speaker 4: True they exacerbated, Yeah, there's no I would agree with that.
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Speaker 4: But you could also have like outflows or mutual funds
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Speaker 4: that own equities that exacerbate to sell off, Like there's
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Speaker 4: all these vehicles and ways to get the stocks, and
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Speaker 4: if people don't like the stocks.
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Speaker 3: All of them will exacerbate a sell off. So I
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Speaker 3: just sort of look at.
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Speaker 4: It as the bigger thing going on here that I
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Speaker 4: think ticks off people is just people who want the
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Speaker 4: market to go down. I don't know why, but they're
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Speaker 4: like doomers, perma bears, or they just have their own
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Speaker 4: internal biases for why they want to see the market crash.
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Speaker 4: And now I think they leverage ETFs are part of
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Speaker 4: like in their crosshairs. But the bigger issue is people
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Speaker 4: just want to trade. They want to gamble in the market.
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Speaker 4: These are one avenue to do that.
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Speaker 2: There becomes a moment in every book market where it
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Speaker 2: becomes hated bull market. We've probably passed that a while ago.
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Speaker 2: But James, I wanted to ask you how these things work, right,
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Speaker 2: Like they do use some funky stuff at Bloomberg Intelligence.
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Speaker 2: You guys have a traffic light system. Is there any
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Speaker 2: such thing as a non yellow or red light leverage?
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Speaker 2: I mean, these are all basically red light products, right.
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Speaker 6: Anything two X or hire is going to be an
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Speaker 6: automatic red light. But what they do is they basically
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Speaker 6: get swap exposure. So a bank is a bank is
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Speaker 6: the counterparty on these and what a lot of these
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Speaker 6: ETFs to do, particularly a single stock ones, is they
9:34
Speaker 6: use multiple different banks to get this exposure. So basically
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Speaker 6: what it's doing is it saying it's going to give
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Speaker 6: you the daily return of two x and underlying single
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Speaker 6: stock or underlying index, and the bank is taking the
9:43
Speaker 6: other side of that and they're hedging that risk. We
9:45
Speaker 6: did see examples of micro strategy in late twenty twenty
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Speaker 6: four where like the banks were like that's enough, Like
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Speaker 6: we can't even offer you anymore here. We have seen
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Speaker 6: some of this and what these two X products ended
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Speaker 6: up doing is they started using options to kind of
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Speaker 6: do their best to get that two x daily expos
10:00
Speaker 6: So there is some sort of like self policing from
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Speaker 6: the banks and their risk departments, if you will. But
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Speaker 6: I would say regarding what Eric was saying, like I
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Speaker 6: think if you take out just the index ones, the
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Speaker 6: three x q's or two two x in vers s
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Speaker 6: and P five hundred, if I look at the data
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Speaker 6: there and like the amount of trading and the flows
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Speaker 6: like those look really healthy, Like everything there doesn't look
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Speaker 6: like it's like changing too much. But when you look
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Speaker 6: at some of these single stock ETFs, you don't see
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Speaker 6: the same level of outflows. So if you look at
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Speaker 6: the index leverage ETFs over their lifetime, they've actually seen
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Speaker 6: thirty six billion dollars in outflow. So basically, as people
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Speaker 6: are earning money, they're taking money out, they're being smart.
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Speaker 6: There's a lot of money going to the short side
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Speaker 6: that people using as hedges. We are not seeing that
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Speaker 6: same level of like intelligent use of the single stock ETFs.
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Speaker 6: It all comes back to, like what's happening on that front,
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Speaker 6: And like I said, I'm focused on a handful of
10:48
Speaker 6: smaller names that are getting pushed likely getting pushed around here.
10:52
Speaker 6: So it kind of reminds me if you go back
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Speaker 6: to like junior gold miner stocks. Basically, there's a few
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Speaker 6: examples of ETFs where the actual ets we're impacting underlying holdings.
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Speaker 6: R ETFs and twenty twenty one are a good example
11:04
Speaker 6: of some names. We just had an ETF called the
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Speaker 6: small cap Cash cows ETFs TICK or CALF. It basically
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Speaker 6: had limits on the holdings that could hold and it
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Speaker 6: said it could only be two percent in the portfolio.
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Speaker 6: The problem is if it gets two percent of a
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Speaker 6: portfolio and like one hundred billion dollar fund and the
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Speaker 6: stock isn't that big, you end up owning twenty five
11:22
Speaker 6: to thirty percent of the underlying stock. So they had
11:23
Speaker 6: to change their methodology because they were like, this fish
11:26
Speaker 6: is getting too big for the ponded swimming in. We
11:28
Speaker 6: need to put some guardrails on. And I think there
11:31
Speaker 6: are some names where like some of these ets, these
11:33
Speaker 6: single stock etss, there probably should be some guardrails or
11:36
Speaker 6: if there isn't anyone listening to this trading those names,
11:39
Speaker 6: they should be very much aware of the assets and
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Speaker 6: trading volume that's happening and these single stock ETFs.
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Speaker 2: Just to clarify one thing, what are you seeing when
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Speaker 2: you're when people are investing in or using leverage single
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Speaker 2: stock ETFs. If you're seeing there's some outflows in the
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Speaker 2: index stuff? Are people just letting it roll in the
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Speaker 2: single stock yes? What does that do?
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Speaker 6: I think part of it is like the category is
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Speaker 6: growing right like one, it's growing because they're worth launching
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Speaker 6: new ets. I think we're over seven hundred and fifty
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Speaker 6: lever gtfs. I don't know how many those are single
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Speaker 6: stock but it's it's a lot, and they're brand new.
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Speaker 6: They only came out in twenty twenty two, don't quote
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Speaker 6: me on that exact date, but they're they're relatively new
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Speaker 6: in the last four years. So part of it is
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Speaker 6: this is a growing category and it's new.
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Speaker 3: But like from the inception of the first one, which was.
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Speaker 6: June twenty twenty two, they have taken in thirty six billion.
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Speaker 6: They haven't really had that much in the way of outflows,
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Speaker 6: whereas like if you look at the index stuff, we
12:27
Speaker 6: see people taking money out as these things going up,
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Speaker 6: we see constant money going into the short side. We're
12:32
Speaker 6: not seeing that in a single stock in the same way.
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Speaker 6: So I'd say, like there is part of it it's
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Speaker 6: brand new, we don't know, but like people are pouring
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Speaker 6: in and they're holding it there, and that's one of
12:40
Speaker 6: the reasons why it's growing so quickly, because when the
12:42
Speaker 6: market is going up kind of it's not exactly a
12:44
Speaker 6: straight line. But if you look over the last little while,
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Speaker 6: it's basically gone up continuously, and when that happens in
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Speaker 6: a lever GTF, it actually compounds. When it's violatile and
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Speaker 6: going up and down, that's when you have the leverage
12:53
Speaker 6: of ky that Eric was talking about. When it's just
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Speaker 6: going up eighty percent of the time on a daily basis,
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Speaker 6: you actually compound those assets and that's part of the
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Speaker 6: reason why we're seeing the growth. Todd has written about this.
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Speaker 2: I've written about it. We peaked at like.
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Speaker 6: Before twenty twenty two, we had never seen a point
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Speaker 6: where the ratio of long to short went above five x.
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Speaker 6: We're at nineteen x. Like we're the long side of
13:12
Speaker 6: this is getting a little bit long in the tooth
13:15
Speaker 6: for lack of a better term.
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Speaker 4: Yeah, look a couple things I did just look James,
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Speaker 4: like the two X Tesla and the two X Navidia
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Speaker 4: did they have like negative They have outflows over the
13:26
Speaker 4: last couple of years. And if you look at their
13:28
Speaker 4: chart day to day, it's in and out, in and out,
13:30
Speaker 4: in and out. It's not like it's all going in.
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Speaker 4: I do think, and what he was pointing out is
13:34
Speaker 4: that these traders who use these are not dumb at
13:37
Speaker 4: this point. They've been around for fifteen years. They know
13:39
Speaker 4: how to They basically here's the move. You go into it,
13:42
Speaker 4: and if it goes up, you basically take profits and
13:46
Speaker 4: then you put some of that money in the negative
13:48
Speaker 4: one and you hope that one like reverses and goes back,
13:51
Speaker 4: and you just go back and forth hoping to make
13:52
Speaker 4: money between them. That's why the two x long products
13:57
Speaker 4: tend to have outflows. That's people taking profits. It's like
13:59
Speaker 4: a money printing machine for them. And this was a
14:02
Speaker 4: big thing with XIV, the inverse vall ETF. It was misunderstood. Yes,
14:06
Speaker 4: it had a spectacular crash, went down ninety percent in
14:09
Speaker 4: one day. We all remember rest in Peace. It terminated,
14:14
Speaker 4: but that ETF made money during its lifetime. It generated
14:18
Speaker 4: more money for people than it lost. The only thing
14:20
Speaker 4: is if you had been in the last day when
14:22
Speaker 4: the music stopped, it would suck, but you might have
14:25
Speaker 4: been the person who had actually taken profits the whole time.
14:28
Speaker 4: It wouldn't be a big of a deal. So I
14:30
Speaker 4: think if you're using these products, the key is to
14:33
Speaker 4: you monitor them every day, look at them and have
14:37
Speaker 4: a plan, and if it goes up, you should take profits.
14:40
Speaker 4: Probably that's what people who use them do and that's
14:43
Speaker 4: why the volume, I think is so high. So again
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Speaker 4: I would equate it to a part of the casino
14:48
Speaker 4: where people are doing a certain type of trading and gambling.
14:51
Speaker 4: It would appear they're doing the right thing here, which
14:55
Speaker 4: is to not hold it long term, even though you
14:57
Speaker 4: can get lucky and compounding happens.
14:58
Speaker 3: But I wouldn't count on that.
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Speaker 4: I think you'd need to assume that won't happen, because
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Speaker 4: if you look at the two x Tesla and the
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Speaker 4: negative two x, they're both about down since they came
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Speaker 4: out because of the volatility of Tesla, but.
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Speaker 3: Other ones have gone up.
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Speaker 4: TQQQ is up thirty eight thousand percent since it came out,
15:14
Speaker 4: and you know that thing is generated fifty billion dollars
15:17
Speaker 4: for its investors, believe it or not.
15:32
Speaker 2: Todd Everything that's ever gone wrong and finance is usually
15:35
Speaker 2: involved leverage, and during this sk Heinex moment, the South
15:40
Speaker 2: Korean regulator, where there is a leveraged sk Heinex product,
15:45
Speaker 2: said that they had regretted approving the leverage singles dot etf.
15:49
Speaker 2: Are we gonna regret this soon enough?
15:53
Speaker 5: I don't know, but those headlines are not a good
15:56
Speaker 5: thing for what that's worth. But that's also less developed market.
16:00
Speaker 5: We have a very deep market here with plenty of liquidity,
16:03
Speaker 5: so I'm sure there'll be some blow ups here and there,
16:05
Speaker 5: but I'm not sure I would equate the Korean market
16:08
Speaker 5: to the US market.
16:09
Speaker 2: Here lots of retail activity though.
16:11
Speaker 5: Yeah, I mean you're going to read stories about retail
16:13
Speaker 5: blowing up their accounts here. There was a great article
16:15
Speaker 5: in the Korea Times about how some people were in
16:17
Speaker 5: the two x Hiinex products and they now like basically
16:21
Speaker 5: lost their savings because that fund is down seventy percent
16:24
Speaker 5: from its high, at least the one on Hong Kong.
16:26
Speaker 5: But in terms of the single stocks, there's four hundred
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Speaker 5: of them now and they're all over the market cap
16:33
Speaker 5: to two hundred and fifty of them, by the way,
16:35
Speaker 5: have less than twenty five million in assets. It's a
16:37
Speaker 5: lot of zombies, I think, as you guys like to
16:39
Speaker 5: use them. So it also says, okay, yes, there's a
16:42
Speaker 5: lot of product here, people aren't really buying into their
16:44
Speaker 5: a lot of tickets, so I think that's a good thing.
16:48
Speaker 5: But what I do find interesting is if the path
16:51
Speaker 5: of rates goes higher, that may put more strain on
16:54
Speaker 5: the ability for banks to want to lend out swaps too.
16:56
Speaker 5: That's kind of a more plumbing issue. And James mention
17:00
Speaker 5: micro strategy for years ago that product kind of basically broke.
17:03
Speaker 5: There is a two x Sands product too that has
17:05
Speaker 5: a small silitic call options also, and I wonder if
17:07
Speaker 5: that name is getting too volatile.
17:09
Speaker 4: But I mean to me, this idea of a broken
17:13
Speaker 4: egg once in a while is fine. Like you can't
17:16
Speaker 4: make everything perfect all the time. You have these ETFs,
17:20
Speaker 4: and we again we called this small small pond problem.
17:23
Speaker 4: And occasionally the ETF grows a little too big for
17:26
Speaker 4: the size it's in. Something has to adjust or an
17:29
Speaker 4: XIV where it terminates. And that's probably what will happen.
17:32
Speaker 4: If there is a huge sell off, we'll probably see
17:34
Speaker 4: a couple of terminations. But I think for anybody worry
17:36
Speaker 4: that this would get like a bigger and worse the
17:38
Speaker 4: good news for everybody, like, who's a worry word about this?
17:42
Speaker 4: The SEC will not allow three x or four x
17:44
Speaker 4: or five x stock ETFs. Had they allowed those, we
17:47
Speaker 4: would have like a termination event every week or two.
17:49
Speaker 3: It would be really it would be a huge distraction.
17:52
Speaker 3: I would be against.
17:54
Speaker 2: I don't know.
17:54
Speaker 4: I don't know that. I don't know, because that's written
17:56
Speaker 4: into the code. You can't have three x stock of course,
18:00
Speaker 4: although no one's tried an ETN yet.
18:02
Speaker 5: There's four xsm P No, no, no, single stock.
18:05
Speaker 3: Yeah, yeah, single stock.
18:06
Speaker 5: True.
18:07
Speaker 4: That's the thing that because if you have three four
18:09
Speaker 4: x S and P, it's not that bad. Honestly, a
18:11
Speaker 4: three x four x single stock that can really go
18:14
Speaker 4: to like if all you need is like a twenty
18:16
Speaker 4: five percent move in that that's like Colgate palm Olive.
18:18
Speaker 2: But the four xs and P that's it still has
18:21
Speaker 2: to be an exchange treated note to note right.
18:22
Speaker 3: Yeah, but that one again, the S and P.
18:26
Speaker 4: What's the volatility of the stender deviation is probably like
18:29
Speaker 4: what twelve percent, it's.
18:31
Speaker 3: Just not doesn't move as much.
18:33
Speaker 4: You won't have a liquidation event unless you had like
18:35
Speaker 4: a because there's up limit down by the way of
18:38
Speaker 4: seven percent, so it technically could never go bust in
18:40
Speaker 4: a day.
18:41
Speaker 2: James, I want to ask you seven hundred and fifty
18:44
Speaker 2: lever gtfs, four of one hundred of them are are
18:47
Speaker 2: single stock. Both you and Todd. When you think of
18:49
Speaker 2: the leverage category, who's the biggest name and what are
18:52
Speaker 2: they doing that distinguishes their strategy?
18:55
Speaker 6: Yeah, I actually I'm looking at the numbers right now.
18:57
Speaker 6: We have four hundred and forty and single security levered
18:59
Speaker 6: long and fifty six in single security leverage shorts. So
19:02
Speaker 6: we're over five hundred now and like a couple hundred
19:05
Speaker 6: of them came in the last few weeks. So I
19:06
Speaker 6: mean one of those issuers we have to call out
19:08
Speaker 6: is Qurgi because they're a huge reason for the huge
19:10
Speaker 6: number of launches in the last few weeks. But leverage shares,
19:13
Speaker 6: which started in Europe with leveragehairs, had the single stock
19:15
Speaker 6: Europe had these single stock ETFs long before the US
19:18
Speaker 6: ever did. And then you have Direction and pro Shares
19:21
Speaker 6: for example. They they're the leverage Kings of the heyday.
19:24
Speaker 6: They had basically a borderline monopoly or doopoly, I should say,
19:27
Speaker 6: before we had the SEC change the rules to allow
19:29
Speaker 6: other issuers to launch leverage products. You have Rex, you
19:33
Speaker 6: have Tuttle, you have Tuttle that's partnered with REX. I mean,
19:36
Speaker 6: there's a whole bunch of what ends up happening is
19:39
Speaker 6: you have you have these issuers that came in and
19:41
Speaker 6: they fart.
19:42
Speaker 3: Granted Share is a great example.
19:43
Speaker 6: They were a commodity shop, that's what they did. They
19:45
Speaker 6: had one of the cheapest goal ETFs when they came out,
19:47
Speaker 6: but they launched leverage products in Europe, and they brought
19:49
Speaker 6: them here and now they're basically primarily a leverage ETFs shop.
19:53
Speaker 6: And part of it is because what Eric was told
19:54
Speaker 6: at the beginning, these things charged one one and a
19:55
Speaker 6: half percent. You're trading it on a daily basis. You
19:58
Speaker 6: don't really care about that.
20:00
Speaker 3: The power of the dark side, Joel, it's a lot
20:03
Speaker 3: of money.
20:03
Speaker 4: I know, because here's the thing. Who in the hell
20:05
Speaker 4: wants to compete with Vanguard? And now even like cheap
20:09
Speaker 4: active like DFA and Evantis charge like nothing, and Blackrock
20:13
Speaker 4: like it's almost it's just like, who needs it. Let's
20:17
Speaker 4: launch all these crazy ones. Hope one sticks and we'll
20:20
Speaker 4: be set for life. And I think that's just the
20:24
Speaker 4: way the market is right now. It's polarized, and Ethan
20:27
Speaker 4: had a good note. He called it the Jack Bogel paradox.
20:30
Speaker 4: The more money that goes into low cost passive from
20:33
Speaker 4: Vanguard and Blackrock, the more there's going to be crazy
20:38
Speaker 4: launches because it would be so hard to compete there
20:40
Speaker 4: that people are just going to like use their brains
20:42
Speaker 4: to come up with the next sort of weird fun
20:44
Speaker 4: gadget for retail to play with.
20:46
Speaker 5: I like that. James mentioned the duopoly of direction and
20:49
Speaker 5: pro shares, and then Corgi is the enigma because they
20:52
Speaker 5: are launching it half the cost of these products.
20:55
Speaker 2: Yeah.
20:55
Speaker 4: So by the way, Joel, you got to hear this
20:57
Speaker 4: that so Corgi is competing with everybody everywhere. So they
21:01
Speaker 4: got regular beta. They'll do everything. But we just ran
21:05
Speaker 4: the numbers. Henry on my team has all the numbers
21:07
Speaker 4: for filings. They have one hundred and sixty ETFs on
21:11
Speaker 4: the market already. They have three hundred and fifty or
21:14
Speaker 4: sixty filed.
21:16
Speaker 2: If they sometime, that's all this year too, right, like
21:18
Speaker 2: they did. They didn't have a single ETF three months
21:20
Speaker 2: before this year.
21:21
Speaker 4: They launched their first ETF in November, okay last year.
21:24
Speaker 4: But if they launch what they have filed, which will
21:27
Speaker 4: all be ready to launch in the next two and
21:28
Speaker 4: a half months, they will have upwards of about five
21:31
Speaker 4: hundred ETFs within one year of their existence. That'll be
21:35
Speaker 4: the most of anybody, like black Rock is like for
21:37
Speaker 4: eighty five.
21:38
Speaker 1: Wow.
21:39
Speaker 4: So like this has a decent chance of being the
21:42
Speaker 4: biggest etf issu or by number of products within one year.
21:45
Speaker 2: Wow.
21:46
Speaker 3: Isn't that insane?
21:46
Speaker 2: Somebody is very very busy over there, Todd. I'm curious,
21:50
Speaker 2: is there a leveraged ETF that sort of changed your
21:54
Speaker 2: mind at all about about what the space is capable of.
22:00
Speaker 5: I mean, don't have to be the single stocks. I
22:01
Speaker 5: guess right too. The one that really opened up the
22:04
Speaker 5: space I think was Nvidia right from granted sure v
22:06
Speaker 5: Oh yeah that was like that I think caught the
22:09
Speaker 5: attention and said, oh, if you can find a name
22:12
Speaker 5: with you know it's about to go on a world
22:15
Speaker 5: class run.
22:16
Speaker 2: You can make a lot of money.
22:17
Speaker 5: Well here Mikron is the most recent example too.
22:19
Speaker 4: Yeah, this is the beautiful thing about it. Let's most
22:22
Speaker 4: stocks go up right generally, and if you pick a
22:25
Speaker 4: like quantum stock or a tech stock that's early, you
22:30
Speaker 4: get flows, but then you also get assets from the
22:32
Speaker 4: market going up. So like NVDL probably only had like
22:35
Speaker 4: a billion and a half of flows, but it got
22:37
Speaker 4: to six billion because the video was so hot. So
22:39
Speaker 4: that's like a great way to increase your assets, gives
22:42
Speaker 4: you more revenue. So I look back and I'm like,
22:46
Speaker 4: oh my god, it was so simple, just two x
22:48
Speaker 4: good stocks, like I should have done. It was so
22:50
Speaker 4: obvious in retrospect.
22:52
Speaker 5: The interesting thing about this is the larger the space gets.
22:56
Speaker 5: That means we're in a more powerful ble market. So
22:58
Speaker 5: it's kind of a two way streetwear. All right, we're
23:01
Speaker 5: gonna keep talking about this leverage impact, but that means
23:03
Speaker 5: the market's still rising because of the two x exposure.
23:07
Speaker 5: And James had mentioned the ratio of ever longed inverse earlier,
23:11
Speaker 5: and I think that's becoming like an interesting sentiment barometer.
23:13
Speaker 5: Right historically used the options market investor surveys to measure
23:17
Speaker 5: how enthusiastic people are. Leverage is a newer version of that.
23:20
Speaker 5: It's yes, the approximate around for twenty years, but it's
23:22
Speaker 5: only until recently where their usage rate has really gotten up.
23:26
Speaker 5: So I kind of look at that as a barometer.
23:27
Speaker 2: So what do you think the nineteen x means?
23:30
Speaker 5: People are very enthusiastic about tech? And I'm not here
23:34
Speaker 5: to say when tech slows down, but it's a great
23:37
Speaker 5: time to diversify.
23:39
Speaker 4: And you know, it's interesting when the SpaceX ETFs launched, Nobody, Yeah,
23:43
Speaker 4: what do we learn from that? Well, it was interesting
23:45
Speaker 4: nobody launched a one x inverse.
23:47
Speaker 3: It's like they just forgot to do something.
23:49
Speaker 4: It was like two vanilla and that was a little
23:51
Speaker 4: bit of a sign of like how crazy things we're getting.
23:53
Speaker 4: But I do think they'll see a lot more inverse products.
23:56
Speaker 4: If the market goes flattered down the market, the ETF market,
24:00
Speaker 4: it will respond, just like you'll see more value ETFs
24:03
Speaker 4: in a down market, or you'll see more natural resource
24:05
Speaker 4: them ETFs. The market will just figure it out and
24:08
Speaker 4: we'll probably see some inverse ETFs and that nineteen x
24:12
Speaker 4: will come down, and it will, but I would say
24:15
Speaker 4: that that nineteen to one ratio it's a signal that
24:19
Speaker 4: the market is just so exuberant right now, especially tech.
24:23
Speaker 5: When it does correct back to say three to one,
24:26
Speaker 5: four to one, great time to buy stocks. Not a recommendation,
24:29
Speaker 5: but usually a good time to buy stocks.
24:31
Speaker 3: Yeah, it's like a signal.
24:32
Speaker 5: Yeah, it's a new sentiment barometer for the for the
24:34
Speaker 5: kind of modern market.
24:35
Speaker 2: James, what do we not seeing yet that you expect
24:38
Speaker 2: it will be a trend to watch?
24:40
Speaker 6: Actually, I wish I knew. I mean, one thing that
24:42
Speaker 6: is interesting. We're seeing other issuers they launched these hit products.
24:45
Speaker 6: The round Hill is a good example. They launch Dram,
24:47
Speaker 6: which is the most successful ETF launch we've ever seen.
24:49
Speaker 6: It invests in you know, semis and memory makers, and
24:53
Speaker 6: they also launched their own two X version of DRAM
24:55
Speaker 6: despite all these other issuers filing. So we're seeing other
24:57
Speaker 6: issuers that we kind of hinted a we a whole
25:00
Speaker 6: bunch of names that are like now getting into space,
25:01
Speaker 6: Like we have a hit product. We also need to
25:04
Speaker 6: own the leverage version of this product because we don't
25:06
Speaker 6: want somebody else to get it. But going back to
25:07
Speaker 6: what we're talk about those leverage ratios, I want to
25:09
Speaker 6: throw some other numbers out there that nineteen x was
25:12
Speaker 6: just the whole space including index. If you just look
25:14
Speaker 6: at the single stock, the ratio is actually thirty eight
25:17
Speaker 6: to one.
25:17
Speaker 2: Wow. And then if you.
25:18
Speaker 6: Include that's what the leverage, and if you include leverage,
25:21
Speaker 6: it's forty five to one. So like it's actually even
25:25
Speaker 6: worse than that if you take into account when you're
25:27
Speaker 6: just looking at the single stock, but again, single stocks
25:28
Speaker 6: brand new, it's we've been they've only been really around
25:31
Speaker 6: and mostly a bull market and there's a lot of
25:32
Speaker 6: interest coming in. But if you broad in that att
25:35
Speaker 6: it goes to twenty two x to one when you
25:36
Speaker 6: incorporate leverage. So you wait by how much leverage or
25:39
Speaker 6: actually is in the system.
25:40
Speaker 4: That dram case is interesting. That's the I think that
25:42
Speaker 4: maybe the first time someone two x themselves court is
25:45
Speaker 4: following for like a photonics and lithography ETF, and then
25:49
Speaker 4: the next filing is a two x.
25:51
Speaker 3: Photonics and lithography.
25:53
Speaker 4: They're two xing before the thing's even a hit. That's
25:55
Speaker 4: like three two xing yourself, which is like a whole
25:58
Speaker 4: other dimension of thought.
26:00
Speaker 5: It's the pasta and you want the truffles too.
26:02
Speaker 4: Yes, yeah, look, I just consider ETF's a big ten
26:07
Speaker 4: and I consider this to be the trading wing.
26:09
Speaker 3: As you know.
26:10
Speaker 4: Our solution to all this is just to have movie ratings.
26:13
Speaker 4: These are our rated products. Just call them are rated
26:16
Speaker 4: in our case of red light, and that way the
26:18
Speaker 4: people go into them are like, yeah, I like to
26:20
Speaker 4: do our I like this stuff, and there's somebody who
26:23
Speaker 4: isn't looking for that will be like, wow, why are
26:25
Speaker 4: these red light and they read like I don't want
26:27
Speaker 4: That's not for me. That's the only thing I would
26:29
Speaker 4: add to all this is just to protect the innocent.
26:31
Speaker 4: There should be maybe some label like parental advisory, you know,
26:34
Speaker 4: or a red light or something, which is what we think.
26:37
Speaker 4: But for the most part, I just try not to
26:39
Speaker 4: judge from a moral basis. If people want to speculate
26:42
Speaker 4: and gamble, how far is in yours casino?
26:44
Speaker 2: Uh? Have it?
26:46
Speaker 4: Atlantic City? Okay, Okay, we'll drive there and we're gonna
26:48
Speaker 4: withdraw all your money. No yep, and we're gonna go
26:52
Speaker 4: to the roulette table. We're gonna put it all on
26:53
Speaker 4: red and if black comes up, we just lost one
26:56
Speaker 4: hundred percent of your money.
26:57
Speaker 3: And it's completely legal. These are aren't even close to
27:00
Speaker 3: being that dangerous, all right? How do you like that?
27:04
Speaker 3: For some what about it is just.
27:05
Speaker 5: You just broke my brain a little bit there?
27:07
Speaker 2: Yeah?
27:07
Speaker 4: Yeah, Like that's what I'm saying. Like you could go
27:11
Speaker 4: and just you could go member super size me if
27:15
Speaker 4: you want. You can just eat McDonald's every meal.
27:17
Speaker 3: You shouldn't. But I just think people who use these
27:20
Speaker 3: use them as a cheap thrill.
27:21
Speaker 6: I agree one hundred percent with what Eric said, and
27:23
Speaker 6: I honestly I would go a little. The only thing
27:25
Speaker 6: I would add is like we might need something more
27:27
Speaker 6: than R for some of these single stock lebtyts more
27:29
Speaker 6: like NC seventeen or whatever. Those things are x rated
27:32
Speaker 6: because they are like real power tools.
27:34
Speaker 4: Well if they're two X and they roll futures. I
27:36
Speaker 4: think that's where you go NC seventeen because that's like
27:38
Speaker 4: a whole another.
27:39
Speaker 5: I will say, I would like issuers to say, hey,
27:42
Speaker 5: we're buying options because we can't get more swap es
27:44
Speaker 5: with true think that's the next step of this.
27:46
Speaker 2: I agree.
27:46
Speaker 3: Yeah.
27:46
Speaker 4: And by the way, if what you ding these things
27:49
Speaker 4: on is if they don't delivered, Like let's say you
27:51
Speaker 4: went to the liquor store and the Jack Daniels was
27:53
Speaker 4: half filled with apple juice, that's a problem the fact
27:56
Speaker 4: that you want the whiskey in there. So you want
27:59
Speaker 4: these things to give you two X every day or
28:00
Speaker 4: negative two X. And I checked a couple in spotscheck.
28:02
Speaker 3: They're largely really good.
28:04
Speaker 4: They're within a couple basis points of giving you that.
28:07
Speaker 4: That's what you should judge these on, not whether the
28:10
Speaker 4: intent of the investor is moral or not.
28:12
Speaker 2: Todd, what's the trend in this leverage space that you're
28:15
Speaker 2: going to be looking out for.
28:16
Speaker 5: I saw last week in the filing system a bunch
28:20
Speaker 5: of two X thematic ETFs. We've had sectors for a
28:24
Speaker 5: long time, the indo C single stocks. Now it seems
28:27
Speaker 5: to be moving towards two x nuclear, two X infrastructure,
28:31
Speaker 5: two X defense.
28:33
Speaker 2: So you get a little bit more like diversity and a.
28:36
Speaker 5: Little more diversity, and just trying to amplify exposure to
28:39
Speaker 5: any sort of big themes that are out there. And
28:42
Speaker 5: we've had two xmbs for now, but now you're getting
28:43
Speaker 5: more niche in the thematic space, and then I don't know,
28:46
Speaker 5: I think just more at the single stocks basically because
28:48
Speaker 5: we got a lot IPOs coming down the line and
28:50
Speaker 5: they're already for those.
28:51
Speaker 2: Okay, there we go, Todd James, thanks for joining us
28:54
Speaker 2: on trainings, Thanks for having me, thank you, Thanks for
29:04
Speaker 2: listening to Trillions until next time. You can find us
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