October 11, 2024 • 35 mins
Katie and Matt discuss large ponies, small horses, puzzle hunts, portfolio trading, Jane Street’s lack of a CEO, tax deferral, covered calls and yieldmaxxing.
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Speaker 1 (00:03):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:10):
Hello and welcome to the Money Stuff Podcast, your weekly
podcast where we talk about stuff related to money. I'm
Matt Levine and I write the Money Stuff column for
Bloomberg Opinion.
Speaker 1 (00:21):
And I'm Katie Greifeld, a reporter for Bloomberg News and
an anchor for Bloomberg Television.
Speaker 2 (00:27):
And he were talking about just one topic today.
Speaker 1 (00:29):
Yeah.
Speaker 2 (00:29):
That topic is you showed a horse this week.
Speaker 1 (00:34):
I was gonna say ets, but yeah, okay, so yeah
I did. I rode my horse this weekend. His name
is Gus. He's about fifteen hands. For the equestrians in
the audience, which is all of the audience after listening
to the Money Stuff podcast, it's a good sized size,
(00:55):
mine size. So he is technically a horse. The only
to listen to me. Listen to me. A dividing line
between a horse.
Speaker 2 (01:05):
See think he's a person.
Speaker 1 (01:07):
No, no, no, he does have a personality. But the
dividing line between a horse and a pony is just tight.
Some people think it's age. No, it's just tight. So
he for a while because I got him before he
turned three, like a couple months before he turned three,
so he was still a baby and still growing. For
a while, I had a large pony, but he has
grown to the point where he is now technically a horse,
(01:28):
which we're very thrilled for him for.
Speaker 2 (01:30):
So you are, on occasion a competitive I.
Speaker 1 (01:36):
Am so I ride dressage. There's a thing called the
United States Dressage Federation. On my older pony, whose name
is Batman. I've had him since I was twelve. Batman
is a pony. Batman is a large pony, small horse,
but the line is fuzzier there because he's he's like
fourteen two hands for the equestrians in the audience. I
(01:57):
got up pretty high in the levels with Batman. We
got up to third life. It goes training. Let me
tell you about it. Okay, we can cut all of
this if it's boring. Oh no, So when you when
you showed your sage in the United States, there's intro level,
there's training level first, second, third, fourth, then you get
into like Grand Prix and stuff like that.
Speaker 2 (02:19):
I wish that the audience see demonstrating what Prix looks like.
Speaker 1 (02:24):
I tried to like embody the horse doing Grand Prix.
So with Batman, we got up to third level and
we did pretty good. Gus is just starting out. This
was his second show ever. We showed training level. He
did a great job. I will say I was so
proud of him.
Speaker 2 (02:39):
From Instagram, I got the impression that you and Gus
one we.
Speaker 1 (02:44):
Want a blue ribbon. But for context, we're showing training level.
Like I'm a pretty good rider at this point, so
it's like pretty easy and the classes were super small.
I actually posted that on my close friend's story.
Speaker 2 (02:57):
Oh no, I'm.
Speaker 1 (03:00):
It's totally fine because it felt a little bit embarrassing
because it was such a small class and it's training level.
But Gus did a great job. Yeah, he got a
little bit scared. The wind was blowing in a way
he didn't like, but you know, he was really brave
about it. So hats off to Gus. It really is
(03:21):
you have to understand horses are flight animals. They don't fight,
and the horse ancestors who survived were the really scared
ones who started running at the first sign of danger.
So I mean it's written in their ancestral coat to
be scared of things.
Speaker 2 (03:38):
Like there's a nice metaphor there or something.
Speaker 1 (03:43):
So that transitions nicely to what we're talking about today.
Speaker 2 (03:46):
Sadly, we're actually talking about it. Yeah, yeah, your favorite topic.
Speaker 1 (03:50):
You know, you would think I would be more excited
about what we're doing today. I wouldn't think that we're
talking about some pretty nitty gritty stuff when it comes
to ETFs at the top.
Speaker 2 (04:00):
No, we're talking about I don't know. I guess we're talking.
Speaker 1 (04:02):
About well, we're talking about taxes and how to dodge them.
Speaker 2 (04:05):
Yeah.
Speaker 1 (04:06):
Yeah, we're also talking about derivatives enhanced exchange traded funds,
which re chilled traders love because they're being hawked them
on YouTube. And then we're gonna talk about Jamee Street.
Speaker 2 (04:18):
You we're gonna start by dying on Jane Street.
Speaker 1 (04:20):
Let's start with James Straw. I forget how you described it.
Speaker 2 (04:26):
They're like vampire.
Speaker 1 (04:28):
No, no, They're like these this secretive market maker that
we read about all the time.
Speaker 2 (04:34):
I do feel like Jane Street sort of went from
nothing to extreme prominence, and like the course of my
being aware of financial markets, and like there was a
point where they were truly under the radar, nobody had
heard of them thing and now there are several chapters
of a Michael Lewis book. You know this, you know
they represent fifteen percent of stock trading or whatever the numbers.
(04:57):
So they're pretty big, and they get a lot of
articles about them because they're pretty interesting, and each of
the articles has to say they're very press shy and
at yeah, you know, they're not that pressure the information. Yeah,
but I feel like the press they get is good
in the sense that it's like, look at these guys.
They make so much money. And my first thought was like,
(05:18):
that's gotta be good for recruiting, but of course, like
it's bad for recruiting. There are a lot of people
who want to go into finance to make money, and
you want to hire the other people, the ones who
are going to go into finance, like solve weird puzzles
and like Jane Street, to be clear, I sometimes do
puzzle hunts in New York City.
Speaker 1 (05:35):
So what does that mean, Matt. It's a puzzle hunt.
Speaker 2 (05:38):
It's like it's a little bit like dressage, but no,
you like, it's like a scavenger hunt, but like the
clues are weird.
Speaker 1 (05:43):
Puzzles like geo cash.
Speaker 2 (05:45):
I don't know, Okay, it's like a scavenger hunt, but
a complicated puzzle cliss and it's a very financial industry thing.
And like you basically you go and there's like eight
teams from Goldman and like three teams from Jane Street,
and then like a bunch of other hig freakoncy trading firms,
and like it's always like Jane Street like a big
puzzle hunt firm, you know, like you go to Jane Street.
Speaker 1 (06:05):
Do they dominate the puzzle hunts.
Speaker 2 (06:07):
No, it's like pretty competitive the puzzle hunts.
Speaker 1 (06:09):
Cool.
Speaker 2 (06:09):
Look, I think they're good at puzzle hunts. So it's
like real puzzle solving people. If you do out too
much of a reputation for being a giant lucrative pot
of money, then you'll attract people who want the giant
lucrative pot of money, and those people you might hypothesize
will be worse at solving puzzles. I wrote something like
that and someone emailed me to say, you're right. I've
(06:30):
known people who worked to Jane Street, and like, early
on it was people who liked puzzles and didn't like
staying that late at work, and then they made more money,
so they got people who liked money and want to
stay later at work. So the culture has deteriortor oh
my god, in the sense that people like work harder
and make more money.
Speaker 1 (06:47):
Well, I was going to say, like, how do you
control for that in the interview setting, Well.
Speaker 2 (06:51):
You ask them puzzles.
Speaker 1 (06:52):
Yeah, and you see if they're having fun.
Speaker 2 (06:55):
Yeah, it's a little that's funny, right, you can't really,
there's only so many puzzles can do. If you're not
having fun doing puzzles, right, Yeah, you're really good at
all the puzzles and you like don't have that sparking
your eye, you're still probably.
Speaker 1 (07:06):
Fine, right, there's not a certain light in your eyes.
Speaker 2 (07:10):
Yeah, if you're just like grudgingly good at puzzles, you'll
be okay, Yeah, fine, yeah, because the puzzles do result
in money.
Speaker 1 (07:16):
Yeah, if you work at Jane Street, do you have
to like trading ETFs?
Speaker 3 (07:20):
Uh?
Speaker 1 (07:20):
No, Okay, well it seems like a lot of people
at Jane Street do.
Speaker 2 (07:24):
Yeah. But like Jane Street is in the news because
the Ft had another like profile of them that had
a lot of interesting facts and sort of quotes, and
they do quote they're like head of fixed income saying
basically like their business models, like they automate something and
then they go up one level of abstraction and they
automate that so they can sort of do higher and
(07:44):
hire more complicated, more value adding things by like automating
all the stuff below it. And like that's kind of
the common pattern and equities trading for the last twenty years.
It is not really the pattern and fixed income trading,
and like Jane Street has been kind of pushing bond
trading to be more automated. But the point of that
is that if you like solving puzzles and automating things,
(08:07):
you don't have to care that much about trading ETFs because.
Speaker 3 (08:09):
Like, you know, you're.
Speaker 2 (08:11):
Puzzle. It's another puzzle. It's like you know, the computer
is doing something amount of the ETF trading for you,
or like some of the pricing for you. But it's
clearly a place where people like the psychological aspect of trading.
One of the better pictures of Jane Street it comes
from Michael Lewis's book about Sam Beckman Free who worked
there for a while, and it's a lot of like
puzzles and people betting against each other and people learning
(08:34):
the perils of adverse selection firsthand by like having their
interviewers like trick them. So you know, it's a it's
a trading firm but it's not like people whose first
love is ETFs like you, right.
Speaker 1 (08:46):
Right, So talk to me about portfolio trading, where of
course ETFs factor in mightily. Portfolio trading is something that
I write about every couple of years and sort of
relearn the mechanics of it every of years. When I
have to write about it, I would say that I
get it, but I don't understand it.
Speaker 2 (09:03):
So portfolio is trading a portfolio of bonds. Basically, it's
like there are investors who will need to sell a
lot of bonds at once, right, who like their thing
is not like I'm going to like slightly adjust the
exposure of my bond portfolio, but like I'm an endowment
and I'm moving from forty percent bonds to thirty percent bonds.
I'm selling, you know, a giant pile of bonds, And
(09:26):
traditionally you would do that. You could call a bank
and sell each bond and it would take a while
because they'd price each bond and you'd sort of like
pay a bit ask reread on each bond, and it
was like inefficient. And people realize that trading a whole
portfolio of bonds, you can price the portfolio itself. Rather
than sort of think individually about each individual bond. And
in particular, what people like Jane Street realized is like
(09:51):
they are all these bondtfs, bond ETFs. You can like
hand in some bonds and get back shares with the ETF.
The bonds that you hand in are going to be
bonds that are supposed to go on the ETF. There's
a lot of flexibility to create shares of the ETF
because like a bond index, ETF just can never like
exactly contain the index. It's like impossible to recreate a
(10:13):
bond innecks precisely like a big bond because like a
lot of bonds, and like you know, you can't like
buy fractions of bonds, and like bonds are not always
out liquid, and so every bond ETF is going to
you know, have some sampling where they're like sort of
tracking their index, but they're not exactly the index. What
that means is like if someone wants to tell you
a thousand bonds, you can go to an ETF and
be like, overy this thousand bonds, would you like them
(10:33):
in exchange for shares of the ETF, And the ETF
will like do some math and be like, yeah, we'll
take eight hundred and seventy six of those bonds and
then you just got rid of all those bonds. And
so Jane Street and like other you know, bond market
makers who are also ETF market makers can do this
transaction where they will buy some pension funds a thousand
bonds from them and hold some of them on their
balance sheet, but also squash a lot of them into
(10:54):
an ATF get back these like very easily tradeable, fungible
ETF shares, And so they've like kind of turned this
complicated problem of buying all these bonds, they've reduced it
mostly to a similar problem of like selling ETF shares.
So it's a much more efficient way to do it.
And it's become a big part of bond trading in
the last like ten years. And it's like very electronified
(11:16):
if people are doing it with computer models rather than
like putting their finger in the air and trying to
figure out how much each bond is worth. Yeah, it's
like a move to like kind of equities like trading
for bonds.
Speaker 1 (11:24):
Yeah, and it hinges on the creation and redemption mechanism
that is inherent to ETFs.
Speaker 2 (11:30):
I'm not sure it always always does, because like you
could sort of have the same concepts and just hold
the bonds in your balance sheet. But yeah, and practice.
Speaker 1 (11:36):
Like a huge balance.
Speaker 2 (11:37):
Sheet and is like using an ETFs as kind of
the balance sheet to.
Speaker 1 (11:41):
Buy My understanding and maybe this is because you know,
I'm coming from the ETF perspective, is that portfolio trading
picked up in a big way as bond ETFs.
Speaker 2 (11:51):
No, that's right, that's right. Yeah, that's right.
Speaker 1 (11:53):
Yeah, that's right.
Speaker 2 (11:53):
It is. It is very closely linked to ETFs.
Speaker 1 (11:56):
I'm kind of surprised that portfolio trading isn't bigger though
I know it's becoming a bigger part part of overall
bond trading, but I think it's still in like single
digit percentage of overall bond trading.
Speaker 2 (12:06):
I mean, why did you trade bond?
Speaker 1 (12:08):
Why did you trade?
Speaker 2 (12:10):
You know, I've written about this acause I have been
thinking about private credit. Like there's historically you buy bonds,
you know, like a ten year bond. You you know,
You're like, I have a ten year liability, so I'm
going to buy a ten year bond to match it,
and I'm just hold it for ten years, right, So
why do you trade bonds. I mean, one reason you
trade bonds is because you are a pension pond that's
like decided to move some of your allocation out of
bonds or whatever. But a lot of the reasons you
(12:30):
trade bonds is like you like a particular bond, right,
Like you're some sort of like credit fund manager where
you are making some sort of relative value trade that
one bond is good and one bond is bad, and
so then you're not like, oh, buy my hundred bonds
at once, right. But yeah, I mean there are a
lot of people who have needs to move whole portfolios
and that's becoming a big business.
Speaker 1 (12:48):
Oh let's talk about the fact that Jane Street doesn't
have a CEO. We've talked about this before. I do
love it. It's so cool because again you think about
this secretive trading firm. Paik As the Ft says. I
feel like the fact that they don't have a CEO
and they're run by like this like faceless entity does
kind of add to that image.
Speaker 2 (13:10):
You know they have, like they'd like four founders. Yeah,
couldn't name them. There's one guy who's still there's like
one of the founders. And for a while I just
looked yesterday and he doesn't shop up on LinkedIn or
I couldn't find him, but like for a while, his
LinkedIn just said like I had his name, and it's
a like Trader had like quantitative trading for him. It's
like a top resident, like a top linkin. I was
thinking about that when I was writing about the guy
(13:31):
who has been suing David Einhorn or green Light for
months because he wants to call himself the former head
of macro at green Light and green Light is suing
him and he's suing them and it's a mess, and
it's like really really good trolling, and it's like one
way to live is to like sue, to be able
to call yourself the job title you think you deserve.
Another way to live is just trader on your LinkedIn.
(13:54):
Like it's a different it's a different level. But yeah,
they know have a CEO. They run everything by committee.
I don't know, like I wrote this, like it just
they give off the impression of just being like a
group of buddies who'd like to solve puzzles together and
like the puzzles create a lot of money for them, right,
it doesn't seem like a traditional like hierarchical you know,
business organization.
Speaker 1 (14:13):
Yeah, specifically, the company calls itself a functionally organized structure
consisting of various management and risk committees. Just amazing. I
mean if this was a smaller company, I'd be like,
I don't know, I don't know how long that can last.
But obviously they're doing well for it.
Speaker 2 (14:28):
That feels like the sort of thing that can last
more easily if you're a smaller company, right, I mean,
like one thing in this a FT article is like
they've become really big. It is harder to be non
hierarchical when you have that many people. You know, a
lot of how that business works is like they all
trust each other and so there's not a real, you know,
deep hierarchical supervision. And that's harder to do if there's
three thousand people instead of three hundred. And also, they
(14:51):
make so much money, and so all those people have
grown accustomed to making a certain amount of money. And
the article's like you they're one like even flat year,
and people are going to be really dissatisfied because you know,
you're sort of relying on the money growing every year
to make everyone.
Speaker 1 (15:08):
Yeah, I guess why I would be skeptical with a
small company is just because I would assume human ego
comes in at some point where like one guy or
gal wants to say I'm in charge, it's me, I'm
I'm responsible for our success and I call the shots.
Speaker 2 (15:21):
That's just this trait a large company, except that there's
more people might want to do that.
Speaker 1 (15:26):
But I guess I'm saying I'm obviously it worked for
them another large company and it's still working. Is there
any conditions under which where this couldn't work for Jane Street?
Speaker 2 (15:36):
Oh?
Speaker 1 (15:36):
Yeah, when it happens, we'll talk about it. Yeah, let's
talk about taxes. There's a really interesting ETF filing this week,
(15:59):
the Cambria tack. So we're ETF and Matt what you
were describing with portfolio trading, where you know, this big
institution comes with this like big basket of bonds, maybe
random bonds, they give them to a Jane Street and
then they get ETF shares in exchange. That's kind of
like the process of this ETF. And I have to say,
(16:22):
I'm not familiar with not that familiar with swap funds
or exchange funds, but this is basically those. But in
the ETF wrapper. Maybe you can make heads or tails
of this.
Speaker 2 (16:32):
Yeah, So a swap fund is like conceptually you have
like a big undiversified stock position. For instance, you work
at a company and you want a lot of your
own company stock, and you want to get out of
that position and like get into an SMP five hundred fund, right,
you want to diversify, and so to have a more
normal diversified portfolio and not just on your own company stock.
(16:56):
Then natural thing to do is you sell the stock
you buy n SMP fund. But when you do that,
you pay taxes on your stock. And if it's you
know you've owned it for all time, it's appreciated a lot.
You pay a lot of taxes. People figured out as
like if you contribute property into a partnership, when you
form a partnership and you get back shares of the partnership,
this is not taxified, but that is come on and
(17:17):
make it so that's not a taxable transaction. So like
you don't have any gain, you don't have to pay
any taxes. You just get shares of the partnership, and
when you eventually sell your shares of the partnership, you
pay taxes. And so what people do is like they
get ten tech company employees of different companies and they
all put their shares into a pot and they get
back ownership, the partial ownership of the pot. And so
(17:38):
now instead of owning their undiversified share in their own company,
they own like a slice of shares of ten companies,
and so they have a more diversified portfolio. And these
ETF guys realize you could do that in ETF where
basically you go out to like a bunch of retail
investors who have portfolios at like Fidelity or whatever where
they own not like a bunch of ETFs, but they
(17:58):
own like you know, Tesla and Berkshire, Hathaway and whatever. Right, Yeah,
and they can all PLoP that into a pot and
get back and the pot is an ETF, and they
get back shares of the ETF and now they go
from having a fairly short list of holdings to having
a more divers like a share of a more diversial
plot set of holdings. And yeah, pay taxes.
Speaker 1 (18:17):
So the part that sort of breaks my brain is
the CTF. The ticker is tax which is a great ticker.
I can't believe that that hasn't already been used expected
to launch in December. So it's going to run a
strategy that favors value and quality shares with low or
no dividend yields to avoid being taxed on those payouts.
So what people come to them with the stocks that
(18:41):
they own aren't necessarily the stocks that are going to
be in the CTF.
Speaker 2 (18:46):
I guess that's right.
Speaker 1 (18:47):
I mean, unless they're soliciting people with specifically value in
quality shares, well, I think they are.
Speaker 2 (18:53):
There are some limitations on you know, you need to
have like a certain amount of diversivation in your portfolio already,
so there are limits. I'm like what you can bring in,
Like if you come in with like I only have Tesla,
they'll say no, yeah, but yeah they can they can
rotate out of stuff. We talked on the podcast a
couple of weeks ago. I was like, I used to
own I call index mutual funds. Yeah, and I've moved
to ats because they're tax advantages. If you get emails
(19:14):
about like what are the tax advantage, the tax advantage
is like when someone puts money into an ETF, the
ETF doesn't go buy like the underlying stock, and when
someone takes money out of the ETF. The ETF doesn't
sell the stock. There's this weird creation in kind creation
redemption mechanism where like Jane Street goes and buys the
stocky and like contributes it to the ETF. And the
reason for that is like there's like these weird old
(19:36):
tax rulings saying that if you do it in this way,
the ETF doesn't incur capital gains taxes on the stock
that it gets rid of because I'm not selling it,
it's getting rid of it. And and so people in
the ETF world are very focused on like never selling stock.
So you know, if you contribute sty to this ETF,
(19:57):
the ETF might want to rotate out of that stock
into something different, but like they can't sell it. That's
not necessarily a problem because as like Bloomberg's Zach Miter
has written about, there is a mechanism for an ETF
to say I don't want to own this stock. I
want to own that stock. And basically what will happen is, like,
you know, a Jane Street, an authorized participant will come
(20:18):
to it with the stock it wants and hand that
in in a special creation basket to get new shares. Yeah,
and it'll take out a redemption basket of the old
shairs so that you can it's called a heartbeat transaction.
Oh god, it's a way for them to avoid every
selling stock. So it's a long answer to your question. Yes,
they can move from what people put in to what
they want, but they have to do it through these
(20:40):
like in kind creation and redemption transactions because the goal
is to never pay taxes. Not never, but you know, yeah,
defer taxes.
Speaker 1 (20:47):
I mean that's my understanding. Is that again, like you
can bring them whatever I mean, not quite whatever, but yeah,
and then they magic it into value shares.
Speaker 2 (20:57):
Yeah. I'll also say I wrote this much like with
the bond ETFs, they don't have to like have an
index and then like mats that index exactly right, Like
they can you know, if you bring them stuff and
you're like, yeah, it's pretty value eat, then they can just.
Speaker 1 (21:09):
Hold that, right, doesn't emulate the spirit.
Speaker 2 (21:11):
They don't need like zero tracking ert or whatever index
they have, because like they're giving you something else, right,
They're giving you this like tax advantage, So like yeah,
if you have like a little tracking.
Speaker 1 (21:18):
Ert, it's fine, I do wonder. So the idea is
like they're going to have these investors with these stocks
coming to them. I want to know, like, how are
they're soliciting yes, people to come to them. Is this
like a builded and they will come situation? Do they
have people lined up already? I wonder how much sort
of chumming of the waters that they've done.
Speaker 2 (21:39):
Yeah, I don't know. My sense is that this is
like an advisor's product, right, Like this is like a
thing that you can go out and pitch to financial
advisors and like, oh, that's a great idea, right, and
then like the financial advisor is like a cool thing
to tell her client, you know, like if you want
to diversify your like portfolio of six stocks, here's a
way to do it without paying taxes. Like that's a
cool piece of value added advice for the advisor to
(22:01):
give the client. It's not necessarily something that you watch
a YouTube tutorial about and then and then do it.
Speaker 1 (22:08):
Right, Are you trying to transition?
Speaker 2 (22:10):
I think I'm trying to transition.
Speaker 1 (22:11):
Well I have a few more things, Okay, So in
the same way, like I wonder how many people like
they've already lined up or maybe they launch and then
they go out to the financial advisors et cetera. Or
maybe they're already in touch with that network. It's interesting
and fun to think that, you know, you and I
could go just buy shares of this ETF for what reason,
I don't know why we would, but because it's an ETF,
(22:34):
anyone can buy it. There have no control over who
actually owns this thing.
Speaker 2 (22:38):
Yeah, nor did they care. I mean, they love it
if it's just more people bought it.
Speaker 1 (22:42):
But wouldn't that be weird if they did a little weird?
Speaker 2 (22:46):
I mean my assumption is it's like any other equity.
I don't like the tilt towards value, right, just want
to own a value You after me like this one's
performance is good. Maybe you have a thesis that is,
like the people whose accounts at Fidelity have a lot
of concentrated appreciated positions are really good investors, and this
ETF will somehow attract their really good portfolios and it
(23:08):
will have a it will have a better portfolio through
like the wisdom of the crowd of.
Speaker 1 (23:13):
People with Yeah, maybe it does. It's a little shaky,
I would say. I just I wonder about the retail investor,
who's you know going through one.
Speaker 2 (23:25):
That if you're just like browsing. You know, robin Hood,
and you see a thing with a ticker tax Like,
that's pretty good.
Speaker 1 (23:30):
Yeah you might.
Speaker 2 (23:31):
You might just buy it exactly. I like, I like
not paying taxes all Yeah.
Speaker 1 (23:35):
I am fascinated. So again, according to this article written
by Justina Lee and Wildna Hirich, this is expected to
launch in December. I am so interested to see how
big it gets, if at all, I don't know. It's interesting.
First of it's kind an etf land.
Speaker 2 (23:51):
You do need people to buy it, yeah, like, I
guess the point of it is actually to let people
transform their parts, yeah, like actualist and then hold it
for a long time and not pay taxes. But eventually
you want to be able to sell.
Speaker 1 (24:05):
The thing, right, But I imagine that's where the bulk
of its asset growth will come from.
Speaker 2 (24:10):
Yeah, and those people will be sort of buy and
hold investors because their whole purposes do not pay taxes. Yeah,
you don't need.
Speaker 3 (24:18):
Anything to buy it.
Speaker 1 (24:33):
So how about YouTube? I mean, I don't know if
anyone's going to be uh pitching tax on YouTube? Maybe though,
But anyway, this isn't a good segue. Help me out?
Speaker 2 (24:42):
Was good? So the taxi thing is interesting because, like
as I said, it does kind of feel like a
financial advisor product, right. It feels like the sort of
thing that like you're like, I want to diversify, and
your advisor's like, wait, let me show you something.
Speaker 1 (24:55):
Mm hmmm.
Speaker 2 (24:56):
A lot of ETFs are almost the opposite of financi
advisor products. They're like a way to let anyone with
like a Robinhood account buy a thing that you could
historically have gotten from a financial advisor. And so if
you're like in a sort of like somewhat upper tier
financial advisor relationship, they will sell you all sorts of
(25:19):
weird derivatives if you're willing to listen. And these are
called structured notes. And there's actually like a recent court
case where like the founder of a big tech company
is like wealth advisor, like First Republic put all of
his money into like these terrible structured notes that like
paid like five percent fees, and like they kept you know,
(25:39):
they're like four year notes, and they kept rolling him
every nine months because they want to get new fees.
That business people there's some skepticism about that business. But anyway,
you can get like all sorts of weird derivatives from
your financial advisor in the form of structured notes. But
historically you could only get that from like your financial advisor.
You could just go out in the market and buy
(26:00):
all these weird derotas and ETF. People realized that they
could sell a lot of these weird derotors to people
in the form of ETFs, and that people had a
deep hunger for that and would go on YouTube and
watch videos about like buy right strategies where you like,
you know, buy some stocks and then you sell call
options every month and you get you you know, as
(26:22):
they say, earn yield on the stocks, yeah, which, like
anyone in the options the world will get really angry
if you say you're earning yield by selling options, because
that's not like yield. Yeah, good people do it. Or like,
you know, there's like we've talked, i think on the
podcast about buffer ets we have, which are like you
buy a stock and you kind of collar it, or
you buy the SMP and you put a collar on it,
(26:43):
so you can't lose that much money, but you also
can't make that much money. Yeah, And there's other stuff,
you know, like the liberty ets, which you also talked about,
are just you know, they're essentially Derodo's products, and you
can sell all that stuff to retail, you can package
it into an ETF and then anyone who wants to
can buy it. There's a guy in a Bloomberg article
saying it's like potato chips, it's like sneakers. Anyone can
(27:04):
buy it, which is not historically true. A lot of like,
you know, products that financial advisors sold, and so they
talk you about like democratizing access to this stuff that
before you have to have an advisor, you know, you
have to have a relationship with a bank. Now you
can click a button on your Robinhood account. And the
downside of that is like you might wonder do people
(27:25):
know what they're getting? But one, they can read read it,
and watch YouTube where people will tell them probably a
great length, what they're getting. And two again this business,
as a financial advisory business does not have an unblemished reputation.
Like some number of financial advisors also wouldn't tell their
(27:48):
clients what they're getting, but they would be proving their
hands together about the five percent fees, and then like
clients would get blown up on these things. So it's like, yeah,
buy like the lower fee, you know, relatively more transparent
ETF version of it. That's so bad.
Speaker 1 (28:03):
Yeah, there's some great reporting in this article because Denisa
Taykova and Fildna Hirich again wrote this piece. So they
watched all the YouTube videos they you know, scraped Reddit,
et cetera. They found thirty eight year old Todd Aken.
He has a growing YouTube channel that promises to teach
followers how to feed off these lucrative ETF payouts in
(28:24):
a diversified portfolio. I let the dividends replace my nine
to five. That's the motto. I live and die with
the results. So I was.
Speaker 2 (28:32):
Surprised dividends are technically it's like hm hm, it's like
technically a horse. They're technically dividends in that they are
difidends from the ETF, but they're not like did they're option.
Speaker 1 (28:46):
Let's talk about that a little bit. I mean, they
did quote some people who were criticizing that, and one
of the big criticisms of these is that it's return
of principle, right is the fancy word for it.
Speaker 2 (28:56):
It's not return of principle either, it's.
Speaker 1 (28:58):
What is it? Then? Is it to prenou Is it
return of capital?
Speaker 2 (29:02):
But what I'm yeah sorry. As a tax matter, it
might be return for I don't know. Yeah, but like
you know, a lot of these ETFs, what happens is
that like every month you get a ten percent cash
distribution and also the value of the thing goes down
by eleven percent. Yeah, but what it is is that
it's option premium. Like you're selling options every month, and
like if the options move against you, then you lose
(29:23):
more money than you may but like you get paid
for the option. Yeah.
Speaker 1 (29:25):
Well to that point, they have a great example in here.
You take a look at the Yield Max Coin Option
Income Strategy ETF. It's based on Coinbase. I believe it's
sent more than one hundred percent of its current share
value back to holders as cash in the past year.
That's despite the fact on its holtal Road turn bas
is so far in twenty twenty four it is trailing
(29:47):
coin Base itself.
Speaker 2 (29:48):
It's down and absolutely dums too. Yeah, the coinbase is up,
this thing is down.
Speaker 1 (29:52):
But does the end investor care if they're getting cash
back in some form, like they're getting a payout in
some form, Do they really care if it's not.
Speaker 2 (30:02):
They're getting back less than they put it? Yeah, it's
they yielded more than one hundred percent of the current
stock price, but it is less than one hundred percent
of the block price a year ago. They've gotten back
less than they put in.
Speaker 1 (30:13):
Yeah, well that's what I struggle with, and I don't
know if I want to keep this in but.
Speaker 2 (30:17):
Like not yield. Yeah, it's option premium. Like you buy
a stock, right, you sell options on the stock, so
you get paid five ten percent of the value of
the stock in option pain. Right. Then if the stock
goes up, you don't get most of the gains of
the stock going up because your gains are capped at
the option because you're selling out of many co options.
(30:37):
If stock goes down, you take that entire loss. You
do this every month, right, So every time the stock
goes down, you take the entire loss, and then you
sell options struck at like whatever ten percent above the
current price. And so the stock goes down, you sell
options struck below where you start it okay, and then
the stock goes back up. You don't get back to
where you started. You do get some option pain. It
(30:58):
is over and over again. You have a very ball
stock like coinbase, where it goes down a lot you
lose money goes up, you don't make all the money back.
Keep doing this, you keep getting the option premium every month,
which is valuable, but you lose much of the appreciation
of the stock, and you bear all of the losses
of the stock. And over the course of a year
coinbase goes up, you don't get most of the games,
but you do get the losses every time it goes down,
(31:18):
and you end up making back less than you put in,
even though you're getting paid option premier every month.
Speaker 1 (31:26):
But I guess like that option premium every month is
enough that these people keep buying because these things have
exploded they are so popular.
Speaker 2 (31:34):
Well, this is like a classic strategy, right, I mean,
like this is by writing. Right, It's like you buy
a stock and you sell call options. And I was
thinking about, like one reason this thing exists is like
you can just do that yourself. But if you do
it yourself, you have to sell like one hundred share.
You know, options contract is one hundred shares, and so
you have to buy a hundred shares of coinbase, which
(31:56):
is like, you know, seventeen eighteen thousand dollars and so
this so you know, you can buy one shot of
the ETF if you want, and so do you get
the same exposure for a lower dollar amount. So it
is a popular strategy, but it you know, people talking
about it as a volatility defending strategy, which kind of
(32:16):
is because you get the premium every month. It's like
when the stock goes down, you don't You're don't really
shield that, except.
Speaker 1 (32:21):
Yeah, I do like that. They quoted Hamilton Rainer in here.
So he manages Jeffie, which is like the JP Morgan
equity premium making ETF, which is.
Speaker 2 (32:32):
A totally normal by right, started.
Speaker 1 (32:34):
This whole craze. One of the things that really contributed
to the boom, and these types of ETFs. And he's
so funny because he's he's kind of old school, like
he managed these types of strategies and mutual funds and
then brought them over to the ETF rapper. They have
been enormously popular and it's become this like Frankenstein's Monster
sort of situation because obviously he doesn't like things such
(32:57):
as the yield max coin option income strategy ETF, and
he's quoted in the story saying that, like, not everything
needs to be in the ETF rapper et cetera, et cetera,
and these types of funds are a good example of
that in his view of what doesn't need to be
in the ETF wrapper.
Speaker 2 (33:12):
But why not you know, like strategy feels a little gambling, right,
This is a little bit of like a you know,
like a retail day trader gambling product. But if people
want that exposure, Like why should they have to trade
one hundreds share lots of options? Why not do it
in the ETF forum. Yeah, I don't know.
Speaker 1 (33:30):
Yeah, this is like let the people trade.
Speaker 2 (33:32):
You know, like the people selling these things talk about
democratizing these financial products, and I don't love these Like
I wouldn't buy any of these things, but like that's
just me. Like it's so clear that there is a
demand for this stuff, and you don't want to be
too dismissive of it because it is people like watching
YouTube videos and like learning about this stuff. As someone
(33:54):
who like grew up in the world of equity derivatives,
it's impressive how like widespread colledge of equity derivatives has
become the world of redhead. Right, there's like some truth
to the idea that this says, like democratizing sophisticated investing strategies. Now,
they're not always good investing strategies, right, And that was
(34:15):
the Money Stuff Podcast.
Speaker 1 (34:16):
I'm Matt Levian and I'm Katie Greifeld.
Speaker 2 (34:18):
You can find my work by subscribing to The money
Stuff newsletter on Bloomberg dot com.
Speaker 1 (34:23):
And you can find me on Bloomberg TV every day
on Open Interest between nine to eleven am Eastern.
Speaker 2 (34:29):
We'd love to hear from you. You can send an
email to Moneypod at Bloomberg dot net, ask us a
question and we might answer it on air.
Speaker 1 (34:36):
You can also subscribe to our show wherever you're listening
right now and leave us a review. It helps more
people find the show.
Speaker 2 (34:41):
The Money Stuff podcast is produced by Anna Masarakus and
Moses Onen.
Speaker 1 (34:46):
Our theme music was composed by Blake Maples.
Speaker 2 (34:48):
Brandon Francis Nunhim is our.
Speaker 1 (34:49):
Executive producer, and Stage Bauman is Bloomberg's head of Podcasts.
Speaker 2 (34:53):
Thanks for listening to The Money Stuff Podcasts. We'll be
back next week with more stuff.
Speaker 3 (35:00):
The la
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:10):
Hello and welcome to the Money Stuff Podcast, your weekly
podcast where we talk about stuff related to money. I'm
Matt Levine and I write the Money Stuff column for
Bloomberg Opinion.
Speaker 1 (00:21):
And I'm Katie Greifeld, a reporter for Bloomberg News and
an anchor for Bloomberg Television.
Speaker 2 (00:27):
And he were talking about just one topic today.
Speaker 1 (00:29):
Yeah.
Speaker 2 (00:29):
That topic is you showed a horse this week.
Speaker 1 (00:34):
I was gonna say ets, but yeah, okay, so yeah
I did. I rode my horse this weekend. His name
is Gus. He's about fifteen hands. For the equestrians in
the audience, which is all of the audience after listening
to the Money Stuff podcast, it's a good sized size,
(00:55):
mine size. So he is technically a horse. The only
to listen to me. Listen to me. A dividing line
between a horse.
Speaker 2 (01:05):
See think he's a person.
Speaker 1 (01:07):
No, no, no, he does have a personality. But the
dividing line between a horse and a pony is just tight.
Some people think it's age. No, it's just tight. So
he for a while because I got him before he
turned three, like a couple months before he turned three,
so he was still a baby and still growing. For
a while, I had a large pony, but he has
grown to the point where he is now technically a horse,
(01:28):
which we're very thrilled for him for.
Speaker 2 (01:30):
So you are, on occasion a competitive I.
Speaker 1 (01:36):
Am so I ride dressage. There's a thing called the
United States Dressage Federation. On my older pony, whose name
is Batman. I've had him since I was twelve. Batman
is a pony. Batman is a large pony, small horse,
but the line is fuzzier there because he's he's like
fourteen two hands for the equestrians in the audience. I
(01:57):
got up pretty high in the levels with Batman. We
got up to third life. It goes training. Let me
tell you about it. Okay, we can cut all of
this if it's boring. Oh no, So when you when
you showed your sage in the United States, there's intro level,
there's training level first, second, third, fourth, then you get
into like Grand Prix and stuff like that.
Speaker 2 (02:19):
I wish that the audience see demonstrating what Prix looks like.
Speaker 1 (02:24):
I tried to like embody the horse doing Grand Prix.
So with Batman, we got up to third level and
we did pretty good. Gus is just starting out. This
was his second show ever. We showed training level. He
did a great job. I will say I was so
proud of him.
Speaker 2 (02:39):
From Instagram, I got the impression that you and Gus
one we.
Speaker 1 (02:44):
Want a blue ribbon. But for context, we're showing training level.
Like I'm a pretty good rider at this point, so
it's like pretty easy and the classes were super small.
I actually posted that on my close friend's story.
Speaker 2 (02:57):
Oh no, I'm.
Speaker 1 (03:00):
It's totally fine because it felt a little bit embarrassing
because it was such a small class and it's training level.
But Gus did a great job. Yeah, he got a
little bit scared. The wind was blowing in a way
he didn't like, but you know, he was really brave
about it. So hats off to Gus. It really is
(03:21):
you have to understand horses are flight animals. They don't fight,
and the horse ancestors who survived were the really scared
ones who started running at the first sign of danger.
So I mean it's written in their ancestral coat to
be scared of things.
Speaker 2 (03:38):
Like there's a nice metaphor there or something.
Speaker 1 (03:43):
So that transitions nicely to what we're talking about today.
Speaker 2 (03:46):
Sadly, we're actually talking about it. Yeah, yeah, your favorite topic.
Speaker 1 (03:50):
You know, you would think I would be more excited
about what we're doing today. I wouldn't think that we're
talking about some pretty nitty gritty stuff when it comes
to ETFs at the top.
Speaker 2 (04:00):
No, we're talking about I don't know. I guess we're talking.
Speaker 1 (04:02):
About well, we're talking about taxes and how to dodge them.
Speaker 2 (04:05):
Yeah.
Speaker 1 (04:06):
Yeah, we're also talking about derivatives enhanced exchange traded funds,
which re chilled traders love because they're being hawked them
on YouTube. And then we're gonna talk about Jamee Street.
Speaker 2 (04:18):
You we're gonna start by dying on Jane Street.
Speaker 1 (04:20):
Let's start with James Straw. I forget how you described it.
Speaker 2 (04:26):
They're like vampire.
Speaker 1 (04:28):
No, no, They're like these this secretive market maker that
we read about all the time.
Speaker 2 (04:34):
I do feel like Jane Street sort of went from
nothing to extreme prominence, and like the course of my
being aware of financial markets, and like there was a
point where they were truly under the radar, nobody had
heard of them thing and now there are several chapters
of a Michael Lewis book. You know this, you know
they represent fifteen percent of stock trading or whatever the numbers.
(04:57):
So they're pretty big, and they get a lot of
articles about them because they're pretty interesting, and each of
the articles has to say they're very press shy and
at yeah, you know, they're not that pressure the information. Yeah,
but I feel like the press they get is good
in the sense that it's like, look at these guys.
They make so much money. And my first thought was like,
(05:18):
that's gotta be good for recruiting, but of course, like
it's bad for recruiting. There are a lot of people
who want to go into finance to make money, and
you want to hire the other people, the ones who
are going to go into finance, like solve weird puzzles
and like Jane Street, to be clear, I sometimes do
puzzle hunts in New York City.
Speaker 1 (05:35):
So what does that mean, Matt. It's a puzzle hunt.
Speaker 2 (05:38):
It's like it's a little bit like dressage, but no,
you like, it's like a scavenger hunt, but like the
clues are weird.
Speaker 1 (05:43):
Puzzles like geo cash.
Speaker 2 (05:45):
I don't know, Okay, it's like a scavenger hunt, but
a complicated puzzle cliss and it's a very financial industry thing.
And like you basically you go and there's like eight
teams from Goldman and like three teams from Jane Street,
and then like a bunch of other hig freakoncy trading firms,
and like it's always like Jane Street like a big
puzzle hunt firm, you know, like you go to Jane Street.
Speaker 1 (06:05):
Do they dominate the puzzle hunts.
Speaker 2 (06:07):
No, it's like pretty competitive the puzzle hunts.
Speaker 1 (06:09):
Cool.
Speaker 2 (06:09):
Look, I think they're good at puzzle hunts. So it's
like real puzzle solving people. If you do out too
much of a reputation for being a giant lucrative pot
of money, then you'll attract people who want the giant
lucrative pot of money, and those people you might hypothesize
will be worse at solving puzzles. I wrote something like
that and someone emailed me to say, you're right. I've
(06:30):
known people who worked to Jane Street, and like, early
on it was people who liked puzzles and didn't like
staying that late at work, and then they made more money,
so they got people who liked money and want to
stay later at work. So the culture has deteriortor oh
my god, in the sense that people like work harder
and make more money.
Speaker 1 (06:47):
Well, I was going to say, like, how do you
control for that in the interview setting, Well.
Speaker 2 (06:51):
You ask them puzzles.
Speaker 1 (06:52):
Yeah, and you see if they're having fun.
Speaker 2 (06:55):
Yeah, it's a little that's funny, right, you can't really,
there's only so many puzzles can do. If you're not
having fun doing puzzles, right, Yeah, you're really good at
all the puzzles and you like don't have that sparking
your eye, you're still probably.
Speaker 1 (07:06):
Fine, right, there's not a certain light in your eyes.
Speaker 2 (07:10):
Yeah, if you're just like grudgingly good at puzzles, you'll
be okay, Yeah, fine, yeah, because the puzzles do result
in money.
Speaker 1 (07:16):
Yeah, if you work at Jane Street, do you have
to like trading ETFs?
Speaker 3 (07:20):
Uh?
Speaker 1 (07:20):
No, Okay, well it seems like a lot of people
at Jane Street do.
Speaker 2 (07:24):
Yeah. But like Jane Street is in the news because
the Ft had another like profile of them that had
a lot of interesting facts and sort of quotes, and
they do quote they're like head of fixed income saying
basically like their business models, like they automate something and
then they go up one level of abstraction and they
automate that so they can sort of do higher and
(07:44):
hire more complicated, more value adding things by like automating
all the stuff below it. And like that's kind of
the common pattern and equities trading for the last twenty years.
It is not really the pattern and fixed income trading,
and like Jane Street has been kind of pushing bond
trading to be more automated. But the point of that
is that if you like solving puzzles and automating things,
(08:07):
you don't have to care that much about trading ETFs because.
Speaker 3 (08:09):
Like, you know, you're.
Speaker 2 (08:11):
Puzzle. It's another puzzle. It's like you know, the computer
is doing something amount of the ETF trading for you,
or like some of the pricing for you. But it's
clearly a place where people like the psychological aspect of trading.
One of the better pictures of Jane Street it comes
from Michael Lewis's book about Sam Beckman Free who worked
there for a while, and it's a lot of like
puzzles and people betting against each other and people learning
(08:34):
the perils of adverse selection firsthand by like having their
interviewers like trick them. So you know, it's a it's
a trading firm but it's not like people whose first
love is ETFs like you, right.
Speaker 1 (08:46):
Right, So talk to me about portfolio trading, where of
course ETFs factor in mightily. Portfolio trading is something that
I write about every couple of years and sort of
relearn the mechanics of it every of years. When I
have to write about it, I would say that I
get it, but I don't understand it.
Speaker 2 (09:03):
So portfolio is trading a portfolio of bonds. Basically, it's
like there are investors who will need to sell a
lot of bonds at once, right, who like their thing
is not like I'm going to like slightly adjust the
exposure of my bond portfolio, but like I'm an endowment
and I'm moving from forty percent bonds to thirty percent bonds.
I'm selling, you know, a giant pile of bonds, And
(09:26):
traditionally you would do that. You could call a bank
and sell each bond and it would take a while
because they'd price each bond and you'd sort of like
pay a bit ask reread on each bond, and it
was like inefficient. And people realize that trading a whole
portfolio of bonds, you can price the portfolio itself. Rather
than sort of think individually about each individual bond. And
in particular, what people like Jane Street realized is like
(09:51):
they are all these bondtfs, bond ETFs. You can like
hand in some bonds and get back shares with the ETF.
The bonds that you hand in are going to be
bonds that are supposed to go on the ETF. There's
a lot of flexibility to create shares of the ETF
because like a bond index, ETF just can never like
exactly contain the index. It's like impossible to recreate a
(10:13):
bond innecks precisely like a big bond because like a
lot of bonds, and like you know, you can't like
buy fractions of bonds, and like bonds are not always
out liquid, and so every bond ETF is going to
you know, have some sampling where they're like sort of
tracking their index, but they're not exactly the index. What
that means is like if someone wants to tell you
a thousand bonds, you can go to an ETF and
be like, overy this thousand bonds, would you like them
(10:33):
in exchange for shares of the ETF, And the ETF
will like do some math and be like, yeah, we'll
take eight hundred and seventy six of those bonds and
then you just got rid of all those bonds. And
so Jane Street and like other you know, bond market
makers who are also ETF market makers can do this
transaction where they will buy some pension funds a thousand
bonds from them and hold some of them on their
balance sheet, but also squash a lot of them into
(10:54):
an ATF get back these like very easily tradeable, fungible
ETF shares, And so they've like kind of turned this
complicated problem of buying all these bonds, they've reduced it
mostly to a similar problem of like selling ETF shares.
So it's a much more efficient way to do it.
And it's become a big part of bond trading in
the last like ten years. And it's like very electronified
(11:16):
if people are doing it with computer models rather than
like putting their finger in the air and trying to
figure out how much each bond is worth. Yeah, it's
like a move to like kind of equities like trading
for bonds.
Speaker 1 (11:24):
Yeah, and it hinges on the creation and redemption mechanism
that is inherent to ETFs.
Speaker 2 (11:30):
I'm not sure it always always does, because like you
could sort of have the same concepts and just hold
the bonds in your balance sheet. But yeah, and practice.
Speaker 1 (11:36):
Like a huge balance.
Speaker 2 (11:37):
Sheet and is like using an ETFs as kind of
the balance sheet to.
Speaker 1 (11:41):
Buy My understanding and maybe this is because you know,
I'm coming from the ETF perspective, is that portfolio trading
picked up in a big way as bond ETFs.
Speaker 2 (11:51):
No, that's right, that's right. Yeah, that's right.
Speaker 1 (11:53):
Yeah, that's right.
Speaker 2 (11:53):
It is. It is very closely linked to ETFs.
Speaker 1 (11:56):
I'm kind of surprised that portfolio trading isn't bigger though
I know it's becoming a bigger part part of overall
bond trading, but I think it's still in like single
digit percentage of overall bond trading.
Speaker 2 (12:06):
I mean, why did you trade bond?
Speaker 1 (12:08):
Why did you trade?
Speaker 2 (12:10):
You know, I've written about this acause I have been
thinking about private credit. Like there's historically you buy bonds,
you know, like a ten year bond. You you know,
You're like, I have a ten year liability, so I'm
going to buy a ten year bond to match it,
and I'm just hold it for ten years, right, So
why do you trade bonds. I mean, one reason you
trade bonds is because you are a pension pond that's
like decided to move some of your allocation out of
bonds or whatever. But a lot of the reasons you
(12:30):
trade bonds is like you like a particular bond, right,
Like you're some sort of like credit fund manager where
you are making some sort of relative value trade that
one bond is good and one bond is bad, and
so then you're not like, oh, buy my hundred bonds
at once, right. But yeah, I mean there are a
lot of people who have needs to move whole portfolios
and that's becoming a big business.
Speaker 1 (12:48):
Oh let's talk about the fact that Jane Street doesn't
have a CEO. We've talked about this before. I do
love it. It's so cool because again you think about
this secretive trading firm. Paik As the Ft says. I
feel like the fact that they don't have a CEO
and they're run by like this like faceless entity does
kind of add to that image.
Speaker 2 (13:10):
You know they have, like they'd like four founders. Yeah,
couldn't name them. There's one guy who's still there's like
one of the founders. And for a while I just
looked yesterday and he doesn't shop up on LinkedIn or
I couldn't find him, but like for a while, his
LinkedIn just said like I had his name, and it's
a like Trader had like quantitative trading for him. It's
like a top resident, like a top linkin. I was
thinking about that when I was writing about the guy
(13:31):
who has been suing David Einhorn or green Light for
months because he wants to call himself the former head
of macro at green Light and green Light is suing
him and he's suing them and it's a mess, and
it's like really really good trolling, and it's like one
way to live is to like sue, to be able
to call yourself the job title you think you deserve.
Another way to live is just trader on your LinkedIn.
(13:54):
Like it's a different it's a different level. But yeah,
they know have a CEO. They run everything by committee.
I don't know, like I wrote this, like it just
they give off the impression of just being like a
group of buddies who'd like to solve puzzles together and
like the puzzles create a lot of money for them, right,
it doesn't seem like a traditional like hierarchical you know,
business organization.
Speaker 1 (14:13):
Yeah, specifically, the company calls itself a functionally organized structure
consisting of various management and risk committees. Just amazing. I
mean if this was a smaller company, I'd be like,
I don't know, I don't know how long that can last.
But obviously they're doing well for it.
Speaker 2 (14:28):
That feels like the sort of thing that can last
more easily if you're a smaller company, right, I mean,
like one thing in this a FT article is like
they've become really big. It is harder to be non
hierarchical when you have that many people. You know, a
lot of how that business works is like they all
trust each other and so there's not a real, you know,
deep hierarchical supervision. And that's harder to do if there's
three thousand people instead of three hundred. And also, they
(14:51):
make so much money, and so all those people have
grown accustomed to making a certain amount of money. And
the article's like you they're one like even flat year,
and people are going to be really dissatisfied because you know,
you're sort of relying on the money growing every year
to make everyone.
Speaker 1 (15:08):
Yeah, I guess why I would be skeptical with a
small company is just because I would assume human ego
comes in at some point where like one guy or
gal wants to say I'm in charge, it's me, I'm
I'm responsible for our success and I call the shots.
Speaker 2 (15:21):
That's just this trait a large company, except that there's
more people might want to do that.
Speaker 1 (15:26):
But I guess I'm saying I'm obviously it worked for
them another large company and it's still working. Is there
any conditions under which where this couldn't work for Jane Street?
Speaker 2 (15:36):
Oh?
Speaker 1 (15:36):
Yeah, when it happens, we'll talk about it. Yeah, let's
talk about taxes. There's a really interesting ETF filing this week,
(15:59):
the Cambria tack. So we're ETF and Matt what you
were describing with portfolio trading, where you know, this big
institution comes with this like big basket of bonds, maybe
random bonds, they give them to a Jane Street and
then they get ETF shares in exchange. That's kind of
like the process of this ETF. And I have to say,
(16:22):
I'm not familiar with not that familiar with swap funds
or exchange funds, but this is basically those. But in
the ETF wrapper. Maybe you can make heads or tails
of this.
Speaker 2 (16:32):
Yeah, So a swap fund is like conceptually you have
like a big undiversified stock position. For instance, you work
at a company and you want a lot of your
own company stock, and you want to get out of
that position and like get into an SMP five hundred fund, right,
you want to diversify, and so to have a more
normal diversified portfolio and not just on your own company stock.
(16:56):
Then natural thing to do is you sell the stock
you buy n SMP fund. But when you do that,
you pay taxes on your stock. And if it's you
know you've owned it for all time, it's appreciated a lot.
You pay a lot of taxes. People figured out as
like if you contribute property into a partnership, when you
form a partnership and you get back shares of the partnership,
this is not taxified, but that is come on and
(17:17):
make it so that's not a taxable transaction. So like
you don't have any gain, you don't have to pay
any taxes. You just get shares of the partnership, and
when you eventually sell your shares of the partnership, you
pay taxes. And so what people do is like they
get ten tech company employees of different companies and they
all put their shares into a pot and they get
back ownership, the partial ownership of the pot. And so
(17:38):
now instead of owning their undiversified share in their own company,
they own like a slice of shares of ten companies,
and so they have a more diversified portfolio. And these
ETF guys realize you could do that in ETF where
basically you go out to like a bunch of retail
investors who have portfolios at like Fidelity or whatever where
they own not like a bunch of ETFs, but they
(17:58):
own like you know, Tesla and Berkshire, Hathaway and whatever. Right, Yeah,
and they can all PLoP that into a pot and
get back and the pot is an ETF, and they
get back shares of the ETF and now they go
from having a fairly short list of holdings to having
a more divers like a share of a more diversial
plot set of holdings. And yeah, pay taxes.
Speaker 1 (18:17):
So the part that sort of breaks my brain is
the CTF. The ticker is tax which is a great ticker.
I can't believe that that hasn't already been used expected
to launch in December. So it's going to run a
strategy that favors value and quality shares with low or
no dividend yields to avoid being taxed on those payouts.
So what people come to them with the stocks that
(18:41):
they own aren't necessarily the stocks that are going to
be in the CTF.
Speaker 2 (18:46):
I guess that's right.
Speaker 1 (18:47):
I mean, unless they're soliciting people with specifically value in
quality shares, well, I think they are.
Speaker 2 (18:53):
There are some limitations on you know, you need to
have like a certain amount of diversivation in your portfolio already,
so there are limits. I'm like what you can bring in,
Like if you come in with like I only have Tesla,
they'll say no, yeah, but yeah they can they can
rotate out of stuff. We talked on the podcast a
couple of weeks ago. I was like, I used to
own I call index mutual funds. Yeah, and I've moved
to ats because they're tax advantages. If you get emails
(19:14):
about like what are the tax advantage, the tax advantage
is like when someone puts money into an ETF, the
ETF doesn't go buy like the underlying stock, and when
someone takes money out of the ETF. The ETF doesn't
sell the stock. There's this weird creation in kind creation
redemption mechanism where like Jane Street goes and buys the
stocky and like contributes it to the ETF. And the
reason for that is like there's like these weird old
(19:36):
tax rulings saying that if you do it in this way,
the ETF doesn't incur capital gains taxes on the stock
that it gets rid of because I'm not selling it,
it's getting rid of it. And and so people in
the ETF world are very focused on like never selling stock.
So you know, if you contribute sty to this ETF,
(19:57):
the ETF might want to rotate out of that stock
into something different, but like they can't sell it. That's
not necessarily a problem because as like Bloomberg's Zach Miter
has written about, there is a mechanism for an ETF
to say I don't want to own this stock. I
want to own that stock. And basically what will happen is, like,
you know, a Jane Street, an authorized participant will come
(20:18):
to it with the stock it wants and hand that
in in a special creation basket to get new shares. Yeah,
and it'll take out a redemption basket of the old
shairs so that you can it's called a heartbeat transaction.
Oh god, it's a way for them to avoid every
selling stock. So it's a long answer to your question. Yes,
they can move from what people put in to what
they want, but they have to do it through these
(20:40):
like in kind creation and redemption transactions because the goal
is to never pay taxes. Not never, but you know, yeah,
defer taxes.
Speaker 1 (20:47):
I mean that's my understanding. Is that again, like you
can bring them whatever I mean, not quite whatever, but yeah,
and then they magic it into value shares.
Speaker 2 (20:57):
Yeah. I'll also say I wrote this much like with
the bond ETFs, they don't have to like have an
index and then like mats that index exactly right, Like
they can you know, if you bring them stuff and
you're like, yeah, it's pretty value eat, then they can just.
Speaker 1 (21:09):
Hold that, right, doesn't emulate the spirit.
Speaker 2 (21:11):
They don't need like zero tracking ert or whatever index
they have, because like they're giving you something else, right,
They're giving you this like tax advantage, So like yeah,
if you have like a little tracking.
Speaker 1 (21:18):
Ert, it's fine, I do wonder. So the idea is
like they're going to have these investors with these stocks
coming to them. I want to know, like, how are
they're soliciting yes, people to come to them. Is this
like a builded and they will come situation? Do they
have people lined up already? I wonder how much sort
of chumming of the waters that they've done.
Speaker 2 (21:39):
Yeah, I don't know. My sense is that this is
like an advisor's product, right, Like this is like a
thing that you can go out and pitch to financial
advisors and like, oh, that's a great idea, right, and
then like the financial advisor is like a cool thing
to tell her client, you know, like if you want
to diversify your like portfolio of six stocks, here's a
way to do it without paying taxes. Like that's a
cool piece of value added advice for the advisor to
(22:01):
give the client. It's not necessarily something that you watch
a YouTube tutorial about and then and then do it.
Speaker 1 (22:08):
Right, Are you trying to transition?
Speaker 2 (22:10):
I think I'm trying to transition.
Speaker 1 (22:11):
Well I have a few more things, Okay, So in
the same way, like I wonder how many people like
they've already lined up or maybe they launch and then
they go out to the financial advisors et cetera. Or
maybe they're already in touch with that network. It's interesting
and fun to think that, you know, you and I
could go just buy shares of this ETF for what reason,
I don't know why we would, but because it's an ETF,
(22:34):
anyone can buy it. There have no control over who
actually owns this thing.
Speaker 2 (22:38):
Yeah, nor did they care. I mean, they love it
if it's just more people bought it.
Speaker 1 (22:42):
But wouldn't that be weird if they did a little weird?
Speaker 2 (22:46):
I mean my assumption is it's like any other equity.
I don't like the tilt towards value, right, just want
to own a value You after me like this one's
performance is good. Maybe you have a thesis that is,
like the people whose accounts at Fidelity have a lot
of concentrated appreciated positions are really good investors, and this
ETF will somehow attract their really good portfolios and it
(23:08):
will have a it will have a better portfolio through
like the wisdom of the crowd of.
Speaker 1 (23:13):
People with Yeah, maybe it does. It's a little shaky,
I would say. I just I wonder about the retail investor,
who's you know going through one.
Speaker 2 (23:25):
That if you're just like browsing. You know, robin Hood,
and you see a thing with a ticker tax Like,
that's pretty good.
Speaker 1 (23:30):
Yeah you might.
Speaker 2 (23:31):
You might just buy it exactly. I like, I like
not paying taxes all Yeah.
Speaker 1 (23:35):
I am fascinated. So again, according to this article written
by Justina Lee and Wildna Hirich, this is expected to
launch in December. I am so interested to see how
big it gets, if at all, I don't know. It's interesting.
First of it's kind an etf land.
Speaker 2 (23:51):
You do need people to buy it, yeah, like, I
guess the point of it is actually to let people
transform their parts, yeah, like actualist and then hold it
for a long time and not pay taxes. But eventually
you want to be able to sell.
Speaker 1 (24:05):
The thing, right, But I imagine that's where the bulk
of its asset growth will come from.
Speaker 2 (24:10):
Yeah, and those people will be sort of buy and
hold investors because their whole purposes do not pay taxes. Yeah,
you don't need.
Speaker 3 (24:18):
Anything to buy it.
Speaker 1 (24:33):
So how about YouTube? I mean, I don't know if
anyone's going to be uh pitching tax on YouTube? Maybe though,
But anyway, this isn't a good segue. Help me out?
Speaker 2 (24:42):
Was good? So the taxi thing is interesting because, like
as I said, it does kind of feel like a
financial advisor product, right. It feels like the sort of
thing that like you're like, I want to diversify, and
your advisor's like, wait, let me show you something.
Speaker 1 (24:55):
Mm hmmm.
Speaker 2 (24:56):
A lot of ETFs are almost the opposite of financi
advisor products. They're like a way to let anyone with
like a Robinhood account buy a thing that you could
historically have gotten from a financial advisor. And so if
you're like in a sort of like somewhat upper tier
financial advisor relationship, they will sell you all sorts of
(25:19):
weird derivatives if you're willing to listen. And these are
called structured notes. And there's actually like a recent court
case where like the founder of a big tech company
is like wealth advisor, like First Republic put all of
his money into like these terrible structured notes that like
paid like five percent fees, and like they kept you know,
(25:39):
they're like four year notes, and they kept rolling him
every nine months because they want to get new fees.
That business people there's some skepticism about that business. But anyway,
you can get like all sorts of weird derivatives from
your financial advisor in the form of structured notes. But
historically you could only get that from like your financial advisor.
You could just go out in the market and buy
(26:00):
all these weird derotas and ETF. People realized that they
could sell a lot of these weird derotors to people
in the form of ETFs, and that people had a
deep hunger for that and would go on YouTube and
watch videos about like buy right strategies where you like,
you know, buy some stocks and then you sell call
options every month and you get you you know, as
(26:22):
they say, earn yield on the stocks, yeah, which, like
anyone in the options the world will get really angry
if you say you're earning yield by selling options, because
that's not like yield. Yeah, good people do it. Or like,
you know, there's like we've talked, i think on the
podcast about buffer ets we have, which are like you
buy a stock and you kind of collar it, or
you buy the SMP and you put a collar on it,
(26:43):
so you can't lose that much money, but you also
can't make that much money. Yeah, And there's other stuff,
you know, like the liberty ets, which you also talked about,
are just you know, they're essentially Derodo's products, and you
can sell all that stuff to retail, you can package
it into an ETF and then anyone who wants to
can buy it. There's a guy in a Bloomberg article
saying it's like potato chips, it's like sneakers. Anyone can
(27:04):
buy it, which is not historically true. A lot of like,
you know, products that financial advisors sold, and so they
talk you about like democratizing access to this stuff that
before you have to have an advisor, you know, you
have to have a relationship with a bank. Now you
can click a button on your Robinhood account. And the
downside of that is like you might wonder do people
(27:25):
know what they're getting? But one, they can read read it,
and watch YouTube where people will tell them probably a
great length, what they're getting. And two again this business,
as a financial advisory business does not have an unblemished reputation.
Like some number of financial advisors also wouldn't tell their
(27:48):
clients what they're getting, but they would be proving their
hands together about the five percent fees, and then like
clients would get blown up on these things. So it's like, yeah,
buy like the lower fee, you know, relatively more transparent
ETF version of it. That's so bad.
Speaker 1 (28:03):
Yeah, there's some great reporting in this article because Denisa
Taykova and Fildna Hirich again wrote this piece. So they
watched all the YouTube videos they you know, scraped Reddit,
et cetera. They found thirty eight year old Todd Aken.
He has a growing YouTube channel that promises to teach
followers how to feed off these lucrative ETF payouts in
(28:24):
a diversified portfolio. I let the dividends replace my nine
to five. That's the motto. I live and die with
the results. So I was.
Speaker 2 (28:32):
Surprised dividends are technically it's like hm hm, it's like
technically a horse. They're technically dividends in that they are
difidends from the ETF, but they're not like did they're option.
Speaker 1 (28:46):
Let's talk about that a little bit. I mean, they
did quote some people who were criticizing that, and one
of the big criticisms of these is that it's return
of principle, right is the fancy word for it.
Speaker 2 (28:56):
It's not return of principle either, it's.
Speaker 1 (28:58):
What is it? Then? Is it to prenou Is it
return of capital?
Speaker 2 (29:02):
But what I'm yeah sorry. As a tax matter, it
might be return for I don't know. Yeah, but like
you know, a lot of these ETFs, what happens is
that like every month you get a ten percent cash
distribution and also the value of the thing goes down
by eleven percent. Yeah, but what it is is that
it's option premium. Like you're selling options every month, and
like if the options move against you, then you lose
(29:23):
more money than you may but like you get paid
for the option. Yeah.
Speaker 1 (29:25):
Well to that point, they have a great example in here.
You take a look at the Yield Max Coin Option
Income Strategy ETF. It's based on Coinbase. I believe it's
sent more than one hundred percent of its current share
value back to holders as cash in the past year.
That's despite the fact on its holtal Road turn bas
is so far in twenty twenty four it is trailing
(29:47):
coin Base itself.
Speaker 2 (29:48):
It's down and absolutely dums too. Yeah, the coinbase is up,
this thing is down.
Speaker 1 (29:52):
But does the end investor care if they're getting cash
back in some form, like they're getting a payout in
some form, Do they really care if it's not.
Speaker 2 (30:02):
They're getting back less than they put it? Yeah, it's
they yielded more than one hundred percent of the current
stock price, but it is less than one hundred percent
of the block price a year ago. They've gotten back
less than they put in.
Speaker 1 (30:13):
Yeah, well that's what I struggle with, and I don't
know if I want to keep this in but.
Speaker 2 (30:17):
Like not yield. Yeah, it's option premium. Like you buy
a stock, right, you sell options on the stock, so
you get paid five ten percent of the value of
the stock in option pain. Right. Then if the stock
goes up, you don't get most of the gains of
the stock going up because your gains are capped at
the option because you're selling out of many co options.
(30:37):
If stock goes down, you take that entire loss. You
do this every month, right, So every time the stock
goes down, you take the entire loss, and then you
sell options struck at like whatever ten percent above the
current price. And so the stock goes down, you sell
options struck below where you start it okay, and then
the stock goes back up. You don't get back to
where you started. You do get some option pain. It
(30:58):
is over and over again. You have a very ball
stock like coinbase, where it goes down a lot you
lose money goes up, you don't make all the money back.
Keep doing this, you keep getting the option premium every month,
which is valuable, but you lose much of the appreciation
of the stock, and you bear all of the losses
of the stock. And over the course of a year
coinbase goes up, you don't get most of the games,
but you do get the losses every time it goes down,
(31:18):
and you end up making back less than you put in,
even though you're getting paid option premier every month.
Speaker 1 (31:26):
But I guess like that option premium every month is
enough that these people keep buying because these things have
exploded they are so popular.
Speaker 2 (31:34):
Well, this is like a classic strategy, right, I mean,
like this is by writing. Right, It's like you buy
a stock and you sell call options. And I was
thinking about, like one reason this thing exists is like
you can just do that yourself. But if you do
it yourself, you have to sell like one hundred share.
You know, options contract is one hundred shares, and so
you have to buy a hundred shares of coinbase, which
(31:56):
is like, you know, seventeen eighteen thousand dollars and so
this so you know, you can buy one shot of
the ETF if you want, and so do you get
the same exposure for a lower dollar amount. So it
is a popular strategy, but it you know, people talking
about it as a volatility defending strategy, which kind of
(32:16):
is because you get the premium every month. It's like
when the stock goes down, you don't You're don't really
shield that, except.
Speaker 1 (32:21):
Yeah, I do like that. They quoted Hamilton Rainer in here.
So he manages Jeffie, which is like the JP Morgan
equity premium making ETF, which is.
Speaker 2 (32:32):
A totally normal by right, started.
Speaker 1 (32:34):
This whole craze. One of the things that really contributed
to the boom, and these types of ETFs. And he's
so funny because he's he's kind of old school, like
he managed these types of strategies and mutual funds and
then brought them over to the ETF rapper. They have
been enormously popular and it's become this like Frankenstein's Monster
sort of situation because obviously he doesn't like things such
(32:57):
as the yield max coin option income strategy ETF, and
he's quoted in the story saying that, like, not everything
needs to be in the ETF rapper et cetera, et cetera,
and these types of funds are a good example of
that in his view of what doesn't need to be
in the ETF wrapper.
Speaker 2 (33:12):
But why not you know, like strategy feels a little gambling, right,
This is a little bit of like a you know,
like a retail day trader gambling product. But if people
want that exposure, Like why should they have to trade
one hundreds share lots of options? Why not do it
in the ETF forum. Yeah, I don't know.
Speaker 1 (33:30):
Yeah, this is like let the people trade.
Speaker 2 (33:32):
You know, like the people selling these things talk about
democratizing these financial products, and I don't love these Like
I wouldn't buy any of these things, but like that's
just me. Like it's so clear that there is a
demand for this stuff, and you don't want to be
too dismissive of it because it is people like watching
YouTube videos and like learning about this stuff. As someone
(33:54):
who like grew up in the world of equity derivatives,
it's impressive how like widespread colledge of equity derivatives has
become the world of redhead. Right, there's like some truth
to the idea that this says, like democratizing sophisticated investing strategies. Now,
they're not always good investing strategies, right, And that was
(34:15):
the Money Stuff Podcast.
Speaker 1 (34:16):
I'm Matt Levian and I'm Katie Greifeld.
Speaker 2 (34:18):
You can find my work by subscribing to The money
Stuff newsletter on Bloomberg dot com.
Speaker 1 (34:23):
And you can find me on Bloomberg TV every day
on Open Interest between nine to eleven am Eastern.
Speaker 2 (34:29):
We'd love to hear from you. You can send an
email to Moneypod at Bloomberg dot net, ask us a
question and we might answer it on air.
Speaker 1 (34:36):
You can also subscribe to our show wherever you're listening
right now and leave us a review. It helps more
people find the show.
Speaker 2 (34:41):
The Money Stuff podcast is produced by Anna Masarakus and
Moses Onen.
Speaker 1 (34:46):
Our theme music was composed by Blake Maples.
Speaker 2 (34:48):
Brandon Francis Nunhim is our.
Speaker 1 (34:49):
Executive producer, and Stage Bauman is Bloomberg's head of Podcasts.
Speaker 2 (34:53):
Thanks for listening to The Money Stuff Podcasts. We'll be
back next week with more stuff.
Speaker 3 (35:00):
The la
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