Jamie: (0:05) Hello, everyone, and welcome to another episode of Hedge Fund Huddle. That's where we dive into different areas of the hedge fund world looking to peel back the curtain and show you the listeners just how the magic happens. My name is Jamie Mcdonald. I'm your host as usual, and this week we are focusing on the hot topic of ETFs. Now, I say hot topic, because it is impossible to deny the relentless popularity of these exchange traded funds. There are now more ETFs than stocks to trade. Their assets under management is now over $13 trillion, that's doubled since 2020, and there are new laws that have meant more structures can be run inside ETFs than ever before. ETFs are becoming the way to invest. So, what's going on? And can anything stop them? Well, lucky enough. I have two experts to help me answer those questions. Today we have Wes Gray, who's Alpha Architect, CEO and CIO. He has an MBA and PhD in finance from the University of Chicago. He was formerly a finance professor at Drexel University, and was also formerly a captain in the US Marine Corps. Harley Bassman is managing partner at Simplify. He's the creator of the Move Index. Previously he worked at Pimco,and is the author of The Convexity Maven. Wes and Harley welcome to the show.
Wesley Gray: Thanks for having me.
Harley Bassman: Thank you very much. Great to be here.
Jamie: (1:26) So just to begin with, guys, we're going to start with some pretty broad questions. If you could both introduce yourselves, tell me about your journey to get where you are today, how you got into the world of ETFs. And the first question being, what's your version of why ETFs continue to go from strength to strength, and maybe, Wes, we'll start with you.
Wesley Gray: (1:44) Yeah, sure. So we started our business about 15 years ago, around 2010. And then, several years later, we identified the ETF as the world's greatest tax, efficient investment vehicle and dived on that grenade and basically been in the business ever since. And we currently operate around what is it? 60 funds and $14 billion worth of ETFs. And I think the reason ETFs have dominated and will continue to dominate is simple. They're affordable. They're tax efficient, and they are very transparent, and consumers generally like those features.
Jamie: (2:20) Okay, and let's just talk about your clients, if you don't mind. So who's the who's the typical client who comes your way, and what sort of service do you provide them.
Wesley Gray: (2:27) So we see everything but predominantly, we typically have investment strategies that are relatively evergreen in the sense that we don't focus on the triple lever Bitcoin ETFs at our shop. It's kind of more like fuddy duddy old school traditional investment approaches, and various forms of that. And then, usually the client that comes to us is very focused on tax efficiency. And so one of the things we specialize and focus on is, how do we leverage the ETF wrapper to maximize the tax efficiency of the investment strategy you're trying to put in there. So that's going to be your family offices, big institutions, big asset managers that have taxable clients.
Jamie: Got it. And Harley, same question to you.
Harley Bassman: (3:13) Well, I’m also a U Chicago, so I'm a I’m a monetorist, which is popular sometimes, and other times not. I spent 26 years at Merrill Lynch, where I at various times ran mortgage trading and option trading. In a nutshell. I'm a derivatives geek! I'm a convexity geek, and that's kind of where I've specialized in. I was at Credit Suisse for a while at Pimco for a while. I retired, and then got drawn back into the ETF world at Simplify, when the rules changed and allowed derivatives to get put into ETFs. This is a real game changer. It's a way to go and offer civilians professional tools. And that's where I focus on. And the ETF wrapper is at this stage of the game, aside from being tax efficient, which is great, it just allows you to put a lot of interesting things into an ETF that ordinarily you couldn't do. It also allows there to be trading, and I call it asset management, like rolling option trades or things like that which would be very time consuming, I mean, for an individual, maybe they could do it. For any kind of large RIA, there's no way they could go and trade anything and drop it into 100 accounts separately. So we actually sell to institutions also, it's almost shocking, because they could do a lot of the stuff we do. But at the fees we charge it's just much cheaper for us to do it than for them to do it.
Jamie: So I'm going to get a little geeky. Is this the rule in 2020 which the SEC announced 18F4. This is what changed what could go inside the ETF.
Harley Bassman: I believe so, yeah. Wes.
Wesley Gray: (4:43) Yeah, that's a derivative policy overhaul where I mean, basically in the old days, just to like, I know, you have a lot of hedge fund managers on here, so, as you know, like, if I have a hundred dollars and I do a hundred dollars long and a hundred dollars short. I haven't actually taken a lot of risk, right? Because I'm basically long the market short the market. And I'm betting on a spread bet. So you shouldn't be penalized as being massively leveraged or risky if you're doing a strategy like that, we should be able to think sensibly and say, Wait a second. This is actually not a lot of risk. Therefore, you should be able to do it in the ETF. So basically, the SEC overhauled that program where you can be smart about assessing risk and risk management, like actual investment strategy, and not just look at what they call like the gross leverage and say, Oh, that's just highly levered an example of like a market neutral, long, short strategy. It may look like it has a lot of gross leverage and be very risky. But obviously it's not very risky, because you're just betting on a little spread bet between stocks.
Harley Bassman: (5:47) Wes has a very good point there. There's two kinds of levera. There's the I guess, the bad kind that people always talk about where you actually have economic leverage, these 2 x and 3 x funds. That's economic leverage. You make or lose 2 or 3 times your money. So you bet 100 you could make or lose 300. That's economic leverage. There's then notional leverage, which is totally different. And that's where you go and use so, for instance, if you could buy the 2 year treasury. or you can buy a 2 years futures contract, or you could buy the 1st €8 contracts. It's all the same risk, but they all have different amounts of dollars posted on your screen, and this is very important to recognize, and most people are involved in notional leverage, not economic leverage.
Jamie: (6:32) Okay, yeah, that is a good point. Well, I think we'll come back to that point of leverage a bit later, because Wes, I want to talk to you about a hedge funds,ability to become an ETF. But first of all, if you could just like walk us through a little bit, and maybe compare it with mutual funds, just for people who don't quite understand the difference with the tax and cost structures of ETFs. Things like expense ratios relative to mutual funds? And is there a difference between the way it works in the US and Europe?
Wesley Gray: (6:58) Yeah. So let me just walk through the tax piece, and I'll way oversimplify this just to highlight the mechanisms. This is not exactly correct. But a lot of people, at least in the US Audience, are going to probably be familiar with 1031 exchanges with real estate, where, I go buy a commercial building, It goes from a dollar to a hundred dollars. I don't like it. I'll go buy another commercial building, but I can use a 1031 exchange and roll into the other building without having to pay tax. Essentially, there's a very similar mechanism through the ETF structure. So again, oversimplify example. In ETF versus mutual fund, or really a mutual fund hedge fund or an sma, let's say that Harley buys Exxon at $1 or sorry. That's a bad example. He buys Nvidia at $1. It goes to a thousand dollars, and Harley's like, you know what I'm tired of these growth stocks. I want to go buy value stocks. So in a mutual fund, in a managed account or a hedge fund, what would happen? Well, I would sell Nvidia. incurring a massive capital gain, take the proceeds, and turn around and go buy Exxon. Now, an ETF could do that if it wanted to. But why would you, if you have another capability? So, ETFs have an ability to transact in kind via baskets, and when you transact via basket, it's non-taxable under the RIC statute. So, what would the ETF do, that's different than all other ways of doing this? Well, the ETF would say, well, we’re not going to sell Nvidia, because then we got to pay a taxable gain right now. We're going to redeem Nvidia out and then create in cash or in this example here, Exxon, and by doing this through the basket formation, the ETFwill not have a taxable event, so it can basically switch from Nvidia to Exxon with no distributor liability. Now, that doesn't mean the tax is gone. It just means that it's in the nav of the ETF, and you'll pay it eventually, when you sell the ETF. But you're able to compound tax deferred for 20, 30, 40 years if you wanted to. So that's a very key difference in the taxation of ETF structures versus all the others, and why,, for taxable investors at least, this is a you know. It's a big, big deal. It's like a 401(k) for all your money effectively.
Jamie: (9:25) Yeah, so, but Wes, I'm trying to think of what defines something as an ETF. For example, there's got to be a diversified portfolio for it to qualify as an ETF. Am I correct so many different assets do you need?
Wesley Gray: (9:37) Yeah. So, all ETFs and mutual funds have to qualify. Well, they don't have to, but generally they qualify as what they call a RIC or a regulated investment company, and the reason you want to do that is a mutual fund or an ETF is set up as a C corporation and C corporations just broadly get double taxed. But you wouldn't want to get double taxed on like, let's say you sell a stock in an ETF. You don't want to pay tax at that level, and then also pay again when you dividend it out. So, they all want to be qualified as a RIC to avoid double taxation. The key ways to qualify as a RIC is, there is a tax diversification requirement, so no single security can be over 25% of the total. and then the other rule for the RIC statute, and this one's more complicated is the sum of all your 5% and higher positions can't be more than 50% of the total. So for for brain dead math, you're going to have to have like a 20 stock portfolio or more, just vaguely to qualify. And that's like a key component. And then the other big component of RIC statute is not exactly, but for all intents and purposes you have to distribute all dividend, interest, income, and capital gains every year to avoid the double taxation. So, all mutual funds and ETFs do that, and they're very similar. Except, again, ETFs have this very unique ability, in particular to minimize capital gain leakage through the custom rebalance process which mutual funds just really can't do pragmatically.
Harley Bassman: (11:06) Let me add one thing here to Wes's point. People get hung up on the idea of paying taxes. They don't want to give money to the government. The really bigger deal here is this in his example of Nvidia. From a buck to a thousand. If it was taxed, you get your $1,000 profit, but you'd pay $400 to the government, so you can only reinvest $600. And that's the bigger deal actually is, you're reducing your ability to reinvest. So that would just destroys investing that way. Even if you're I mean, if you're writing a check, you'd be happy to do that. It's being able to maintain the dollar investment as time goes by.
Wesley Gray: (11:41) Yeah. Compound tax deferral. Which is why Warren Buffett's so rich, and a lot of people that never pay taxes get so rich.
Jamie: (11:49) Harley, let's turn it over to you and discuss how somebody comes up with a good idea for an ETF. I was looking on the Simplify website. Something which struck me was was the Simplify US equity plus bitcoin ETF. And it's amazing that you're able to do that now. So how do you go about coming up with these ideas? How do you go about structuring them? You know that sort of thought process.
Harley Bassman: (12:14) Well, there's two different ideas over here. One is to actually come up with the idea, the other is actually processing it, which can be a challenge, I'll say, at our firm, I kind of describe it as I go into the forest, and get a stick, and I whip the pigs and bring these good looking pigs back to the factory. They walk into the factory, and then they get processed. I run around, and that gets nice bacon and a cellophane wrapper and sell them. That's where I'm involved in stuff. The actual processing of the ETF is kind of a different animal, which Wes is involved in. Coming up with an idea, a lot of times, it could be driven by customer inquiry. But other times it's just a matter of going to the bar having a drink and thinking about what we can offer people. A lot of it is offering professional notions to civilians which they have no access to. Sometimes just the access alone is good enough to sell the product. Other times the creation of the idea. There's an ease of use which is a value. So like, the ETFs where they go and they buy 10 or 20 oil stocks. Yeah, anyone could do that. It is not hard ignoring the tax implications, but it's a hassle so providing a service for that. So there's a whole range of things. This is why you have more ETFs than stocks right now is because it's basically it's a service industry as opposed to an advisor industry.
Jamie: (13:35) But we are at a stage now in the market, where, in terms of the progress that's being made in terms of ETF production, you are really only limited by your own imagination at this point. There's very little that can't be expressed within the correctly formed ETF. Does that sound about right?
Harley Bassman: (13:52) That's true, but I think what you're seeing is a slow process over here, like, remember the original mutual fund. You invested your money you called up Fidelity or Vanguard, or whoever, and and you'd give them a check at 4 o'clock. and you'd get in or out at the nav at 4 o'clock, trading once a day. Market's up at noon. You want to sell, but it goes down at 4 o'clock and you're sorry. That's okay. It was still a convenience. The ETF allowed you to go and basically trade that mutual fund all day long on a liquid Stock Exchange with total transparency and see everything going on, that's like level one. Level 2 is now adding in more interesting ideas that are either futures or options or whatever into a package. That's where we're at right now. Number 3, which is we're on the cusp of, is active into a ETF, a kind of a hedge fund into an ETF. And that's the new territory that we're working on at. At Simplify we have a number of these things. We have a healthcare ETF. That's an actively managed. But we also have a fund that does a commodity trend following. It's your standard ordinary, like Paul Tudor Jones trend following, the math there is not too hard to go figure out. but instead of being a hedge fund, where you pay large fees, where it takes you 5 months to get out right. You have to give 60 day notice for a 3 month exit, I mean, we go and let you in and out in a day. And for a much lower fee so slowly you're going to see the ETF world cannibalize the Hedge Fund world. It's going to take a while to happen. But but you will see this slow process happen as we commoditize products for civilians.
Jamie: (15:34) I wanted to ask about synthetic versus physical ETFs. And the angle I'm thinking about with this is ETF popularity is exploding, and with that is going to attract a lot of people who want to get inverted commas in on the action. They're like, okay, there's a lot of people making a lot of money in ETFs. I want to get in, and with that is going to attract, as it inevitably does in finance possibly some bad actors. So, if you're if you're out there looking at ETF trading like, what are the things to look for in the fact sheet? If people are out there, and they're not as experienced as you guys are in the world of ETFs. You know what is meant by physical versus synthetic ETF. I just assumed that I mean even the word synthetic might be like -Oh! Here we go again. This sounds like some leverage is being used where I don't know what it is, so what comfort can you give people, or how should people approach investing in ETFs, and what should they be looking for on the fact sheets.
Wesley Gray: (16:30) So in general, I would say in what they're called registered funds, because we have to like, go through the SEC, do a registration statement, and our business is like the most regulated thing on the planet Earth. I think the SEC does a very good job of ensuring that you have to transparently convey what the risk and what the heck you're doing. Also, there's a level at the broker dealer level where, if you have like complex products or things that do weird leverage strategies. Generally, the broker dealer like your Schwab Fidelity. What have you? It's going to have a warning, hey? You were about to buy a product that could light your hair on fire. Are you sure you want to do this? Check the box? So I think that, I'm also kind of like an individual, free market guy. And like, if you do stupid stuff at some level, that's your problem. And you know we're not here to babysit you and I think our industry does do a pretty good job of like, and it should be pretty obvious when you buy the 3 X Bitcoin ETF that you could get your face ripped off. I'm not that worried about it. So what I would be more worried about to the audience is when you're in private space, unregistered space where now there aren't regulators, there's not a bunch of compliance and lawyers everywhere to protect you, That's where I'd be careful. But I honestly just read the prospectus. And when you see the big red X that says this is dangerous, and you click through it. Well, that's your problem at this point, you know. You at least acknowledged it, and I don't think we hide. You know things that are crazy anymore in ETF space. It should be pretty obvious to most people.
Harley Bassman: (18:06) Yeah, there's a story in the Wall Street Journal a few weeks ago about people who got hoodwinked by an insurance kind of product that wasn't really there. And that's very sad. That's outright fraud. There's very rare to have fraud in the ETF space where it's a registered product. The SEC is all over you. This is the most highly regulated business out there as it should be. We are dealing with people's money. It is the Government's job to go ensure that there's no bad actors out there, so I don't think you're going to go and have that kind of issue, however, what you might have is getting into the wrong product for you relative to your goals and your risk. If something looks too good to be true, it might well be. If you have a very high yielding product. It's not fraud. It's just it's a lot of risk, and there could be risk there. It's like when you buy high yield junk bonds. You're getting a much higher yield. But. by the way, they're called junk bonds for a reason. So I think it's very important to match your goals and expectations with the product. And of course you should go look at the underlying company and make sure they have the ability to go and deliver what they advertise. And once again, most of I mean all the larger ones are fine, the medium sized ones, they're pretty good also the younger ones, you got to go look through it and see who's there and why they're doing it. And and you know, just do your homework on stuff. But but in general, if you buy a listed product you're going to be, there's not going to be fraud. There's just gonna be market risk.
Jamie: (19:32) So, Harley, I wanted to go back to what you said about actively versus passively managed ETFs. Maybe you guys can give a little history about that, because I know that's an area which is starting from a small base, but is growing pretty fast. And Wes, then maybe you can touch on we've spoken before that I worked at a long, short equity shop which doesn't actually fit that well into an ETF type structure. It's just it's it's too fast. And and there's too many moving parts. It's a bit complicated. But a more simple sort of long only managed fund. Why would they not turn themselves into an ETF at this point? So maybe, Harley, you can start with. You know what's going on in managed versus passive ETFs.
Harley Bassman: (20:15) Well, I mean the expression a hedge fund is a compensation scheme masquerading as an asset class. Once you go into ETF space, you're going to have transparent lower fees, and you'll know what's going on. This is why you're seeing this kind of growth in the product. The difficulty in active and also just going away from pure listed products is that what we have to do is when you buy or sell these products. At the end of the day the market maker has to come to the issuer us and buy or sell, redeem or create shares. We have to go and buy or sell from them at the 4 o'clock closing NAV. Now this is easy to do for a listed product, because you could put in a market on close order. You're guaranteed to get the 4 o'clock price. For the products, a lot of products I deal in like these long day options or mortgage securities, there is no closing price, and therefore the skill for us is to basically buy or sell somewhere near 4 o'clock to get that 4 o'clock price, because to the extent we don't get that price, we are either adding or subtracting value from the remaining shareholders. That's the trick, and when you get involved in an active strategy with less liquid items it becomes more challenging to do that. So I view that as the limiting factor to doing this. The other thing is going to be this, we've approached a number of the larger hedge funds out to the name brand guys you know about this. And the problem is, is they're not comfortable showing all the trades they have on and that's the challenge. So we have a healthcare ETF. We'll show the stocks we own. We're not going to move the market, and they're all listed. You get other trades where you put on more complex strategies. They don't want to advertise those. And that is a is a limiting factor, especially people who are involved in more, I won't say sexy markets. But off the beaten path market. You see some of these, the bigger hedge funds that make a lot of money. They're not buying SPY and just going for it, man, they're doing other things that are more interesting, and they don't want that to be known by their competitors or by other people in the market to front run them. So that's the ultimate challenge of the hedge fund into ETF is transacting at NAV at 4 o'clock. and then the transparency.
Wesley Gray: (22:29) And I'll just dovetail, because it goes right into the question that you mentioned about. Why doesn't every hedge fund strategy go into the ETF and Harley outlined it beautifully like I mean, the bottom line is, you cannot close capacity on an ETF, and you have to be transparent about your positions right? So to the extent that you're trading in something that has capacity. And it's not a problem to be transparent. Like, if I say, Hey, guys, I'm going to go buy Microsoft today. Who cares, right? If I say in another scenario, hey? I'm going to go by Joe's chicken shack a 10 million dollars market cap, special situation stock. Well, you know, I might move the stock 100%. And fundamentally, that's just not going to work. So anything that where transparency is going to kill the golden goose. and or that's intricately tied back to capacity like there's just if you have too many dollars chasing too few opportunities, it'll blow the trade up. It does not make sense to have an ETF, but any strategy that has some runway for capacity. Transparency. It may hurt it at the margin, but the tax benefits, the ease, and all these other things improve it, like you were talking about like plain vanilla kind of long, only. Well, duh, we should probably put that in ETF. You know your day traded long, short, quant 1,000 long 1,000 short, market neutral strategy. That's probably not going to be a great ETF. Right? So it just it depends. An ETF is not a panacea for everything. It's just very good for things that transparency doesn't kill it. And capacity, there's some capacity in that marketplace that it could take a billion dollars and not blink an eye.
Harley Bassman: (24:15) I think it's important that the issuer actually be very cognizant of liquidity and everything else. The idea might be clever. It might draw money in, but I view it as a fiduciary duty for us to go and offer products that can be managed properly and offer value. Right now, you’ve seen in the paper about the company microstrategy that they go, and they buy bitcoin, and there's some 2 x 3 x kind of versions of this. as far as I can tell from reading the paper they've gotten over their skis on the amount of product they can buy to create the leverage. And they're not going into the option market to go and buy the leverage because they can't get swap lines from their dealers. Well, this is really a bad idea, because they’re paying like gigantic option premiums for these options as they should, because the stock's volatile. But they don't have direct access anymore. They're paying an option premium that's going to burn away. And these funds are they're not going to deliver. And you listen to what they're saying is they're saying we're targeting a 2 x not we're going to deliver. We're targeting that. And these funds recently have not been going. They've been going, they've been lagging on the upside and accelerating the downside. And the market doesn't move. You're going to burn that premium away. This is a product that's really kind of suspect. I mean, it's a good idea. If it's 10 million, once it gets to to a billion or so, it's a problem Wes, what do you think of those.
Wesley Gray: (25:35) Yeah, I agree. That's one area, you had initial question about, like, you know, what should investors be worried about. And this has been under debate amongst regulators for a while now, and trust me, I'm like a libertarian. I'm not into having a million rules for everything. But this is an area where I do believe, for leverage or complex products, there should be like even a bigger kind of like cigarette smoking might kill you, warning sign, because Harley's point, like they still allow a lot of things where, like anyone with common sense would be like, who the hell would ever launch that product like, obviously, there's no liquidity there, and it's going to have a bad ending. But the SEC let it go through. And yeah, there's a sure warning. There's a few warnings on that thing, but it would be nice to have like disclaimer: You will probably die if you buy this. Just make it even more painfully obvious. But we're not there yet, and that proposal's been up before, and it got, I don't know if there's vested interest or whatever. Or maybe people just don't want more regulation. But yeah, and there is a rule, you're not supposed to have over 50% of the assets in ETF that are deemed illiquid because you have to run another thing called LRMP, liquidity risk management programs. The problem is, the SEC says, well, you have to have a reasonable assessment of liquidity. Well, the the problem with that is, you opened up the gate to like, well, what's reasonable like? Maybe Harley and I might say. Well, you know that strategy there, that's absolutely insane, because it's reasonable to say that there is no liquidity at any scale there. But then someone else might be like, well, I think it's reasonable that there'll be liquidity. And so the problem is, they let a little bit of gray zone on liquidityrisk management policies, and you kind of get a self define what is a liquid? And obviously, when people get a self-defined Illiquid. Well, you might magically find that, there's maybe way more illiquid stuff in there than you might have thought.
Jamie: (27:32) Well, I'm sure we can all think of like credit markets which are liquid for a long time, and then, when they freeze up, history is not a great predictor of the future, and that liquidity is not a. It's not something you can rely on.
Harley Bassman: (27:44) Well, I will throw a lifeline to regulators as much as they can be troublesome. They've tried to do stuff. The problem is, you can't capture the idea. They have bar limits. They have other things. But, for instance. let's just say use leverage ratios. I'd rather have 5 x or 10 x. The US tenure note, than one x bitcoin. But how do you go and make a rule for that, and say, well, you can do, Bitcoin, but you can't do treasuries, I mean, you just say there's a leverage limit. There's a volume limit, they're trying to go and make reasonable rules. But there's always things on the margin that are challenging. And the government really can't go and do line by line, saying, this is legal. This is not. They got to do these grand things, and then just hope to God that that will cover the process, and there'll be good actors out there. The Gfc 809 was kind of the problem there. They didn't have quite enough rules. They kind of relied upon good actors. But it wasn't line item saying, if someone can't afford a house and you can't sell it to them. They didn't have that rule. They thought common sense would cover. It turns out it doesn't. So these are challenges. It's a feature, not a bug in some ways, because it does allow for creativity. If you go and make a line for everything, then you have nothing. Sometimes you gotta take a little risk to go and get the larger good.
Wesley Gray: (29:08) I agree, and that's the trade-off. But like it's just innovation versus regulation overload. And in some sense, as a boutique operator and someone that helps other people do innovation, I know Harley and Simplify, they're in this bucket. We probably in general would want less reg, so we get more flexibility. But obviously, like the monopolist competitors out there like your ishares, they're so big they love more regulation. They love more compliance, because that's just squeezing us in our ability to compete to do innovation. So there's always going to be a trade off like, do you want the market to be more innovative and come up with new ideas quicker? But we maybe have some bad eggs and things pop through? Or do you just go like overlord. And then guess who's going to win that game? The guys who are the biggest that have the most money, they can jam more rules. So Harley and I are out of business because we're like, Hey, we need 50 million dollars just to pay for compliance to deal with all the rules. Right? So you always have trade-offs in these markets. And that's why we have to think through these things.
Jamie: (30:18) Couple of different style questions. Firstly, I had one about ownership. When it comes to things like voting rights. I mean, if you're the owner of an index, you're another step removed from voting at any of these AGMs, or being in touch with the company, and then with the ETF, it's another step removed. So how does that work, I mean who is controlling the voting rights when it comes to these companies at AGMs.
Wesley Gray: (30:43) The advisors who are hired by the trust to advise the ETF. They have a fiduciary obligation to do that on your behalf. If you run an ETF, you have an obligation to vote those securities in the best interest of your shareholders in your investment mandate. And what is that? So that means, if you have, like an ESG mandate, let's say, and that's part of your your role. And that's what you've sold people. Well, you know. Obviously, you don't want to say like Exxon's the greatest thing ever for solar, because that would be against your rules, but but you you are under that obligation as the fiduciary who's providing advice to the fund to vote the proxies in the in the interest of whatever you're trying to achieve.
Jamie: (31:26) So you're just voting in line with the objectives set out with the fund.
Wesley Gray: (31:29) Now they have new technologies of, I don't know how they do this legally, where they're like delegating the vote down to maybe collect opinions from the shareholder base, but I still think, from a regulatory 40 act standpoint, that the actual bona fide advisors who are hired to provide investment advice to the Trust still probably have to legally vote them. I'm not an expert on like kind of the new ways that they're trying to syndicate votes and get input because I know there's people out there doing that.
Harley Bassman: (31:58) Well, you do see in the paper all the time, Larry Fink is the financial overlord taking over the country. I mean. What do you do? They run the biggest fund out there, and they vote the shares. This is a challenge to go and do it, because certainly everyone's not going to vote the same way. But when they vote they vote all the same way, you just got to once again hope that there's. good spirit and fiduciary work going on over here. And I would say in general that I kind of trust these guys. The real big boys are mostly good actors. I'm not much more worried about the Flashdance people.
Wesley Gray (32:35): We have a firm on our platform called Strive, which is owned by Vivek Ramaswamy. He is like a famous politician, and actually the whole mission of Strive was to make it where it's all about excellence and capitalism. And we're going to vote. And do those mandates, we're not going to do the Larry Fink control the boardroom type stuff. So they actually weirdly did, their whole pitch was like, the investment process is basically going to be the same. except we're going to be active and vote differently at the at the proxy vote box. And we have also funds on our platform that are like extreme ESG as well. We don't really care. I'm just selling a shovel here to make sure that you can fulfill your dreams in life. But you do see this as kind of an internal competition where people extract away from the investment benefits of what you're doing. And they're very focused on the activism. And providing your vote or your input to the marketplace on board matters.
Jamie: (33:39) So Wes, I'm actually looking at the Strive 500 ETF fact sheet. Yeah. How does that differ from from basically spiders.
Wesley Gray (33:47): It's fundamentally, it's going to be 99.99% same. What's different in that particular case is their activism behind the scene, with their whole pitch, it was like,
Jamie: They are only voting for shareholder value.
Wesley Gray: Yes, We don't care about these other things. How do we maximize shareholder like Milton Friedman, old school Chicago style? That's what we're going to do, and that's what we promote. So if you vote vote with your money and you buy our, SP500 fund versus Joe blows SP 500 fund, you can at least be assured that we will be voting in this way. So as you can imagine in the States, you know. 50% of people are like, well, that's a terrible idea. But there's another 50% of people. Or I guess after last election, maybe you know, 52% of the people that are like hell. Yeah, let's do that. So it's just it's a marketplace for ideas, and there's a big swath of consumers that wanted that which is what Strive was trying to go after.
Jamie: Got it. and we're sticking with you. I won't mention numbers unless you allow me to. But someone's listening, and they got a 25 million dollar fund. And they're like, all right, I want to flip this into an ETF. I'm going to give you a call. How long does it take? How much does it cost? Basic numbers.
Wesley Gray: (35:07) Yeah, I'll give you basic numbers just back of the envelope just to basically prevent a million coming calls my way here. And so I'm gonna sandbag this.
Jamie: How much commission am I getting on the, oh.
Wesley Gray: Yeah, yeah, exactly. Well, we're in the ETF business. So there's not a lot of commissions for anybody. Unfortunately.
Jamie: I’ll take Christmas drinks.
Wesley Gray: That'll work. We could. We could facilitate that. But but generally, just generically speaking, you want to go to like we're called like a white label provider, like someone who's basically going to do all the monkey work behind the scenes. And you just go launch the fund and sell it. It's usually like around a 4 month process soup to nuts. So hey, let's do this great 4 months from now we probably can have an ETF plus or minus some noise. Right? Depend on complexity. and then cost wise. Generally generically speaking, like, you're all in kind of startup cost is around 50 grand. So just take 50 grand, light it on fire. Great! You're going to have an ETF we can launch. And then your annual burn rate for someone to basically do everything outside of like selling this fund and sending me the spreadsheet with intellectual property. It's probably going to be all in soup to nuts, probably around 200K a year, and just for easy math considered fixed. So what the heck does that mean? Well, I'm not saying you could charge 1%. But let's pretend we got blessed. And you could actually charge 1%. Well, if it cost me 200K a year. Well, I need 20 million just to break even right. And then the beautiful thing, though, is it's kind of like software. The first CD is extremely expensive and has massive fixed cost. But after you get past that fixed cost you have a lot of operating leverage, so your marginal cost production for every new CD you produce is like a penny, right? So it's roughly analogous to the ETFbusiness. Like a lot of fixed costs. A lot of burning money on fire. But if you can get to that, break even and scale, it's a very profitable business, but if you can't, it's the worst idea on the planet Earth.
Jamie: (37:05) Harley, last question to you where we're sort of wrapping up. We've got a change in government coming in the US, obviously, as we head towards the end of 2024. Regulation wise, do you see any big changes that are going to happen in the finance world whether it's related to ETF or not. I just wondered if a kind of a deregulation is going to happen.
Harley Bassman: (37:23) Look with Donald trump, and I try to avoid politics too much.
Jamie: Yeah, we're not a politics show.
Harley Bassman: Well, no, I mean, take him seriously, but not literally, is the common theme here. It's unclear what he wants to do, and I think people should not be surprised with what happens either way. Do I think there's going to be giant changes in policy. No, I don't. I do think that it is important to consider the possible outcomes. I mean, tariffs would be a negative for prices for the economy. But tariffs may be a good public policy to go onshore, vital national interest goods. So I mean, there's a money issue. And there's a public policy issue, unclear where that balance is immigration. Once again. the economy is GDP equals people, times, hours, times, productivity. That's it. People, hours, productivity. We've had immigration into the country of some number, 4 million. 20 million. I'm not sure. And that's why supported by GDP. If we reduce that that will be a negative for GDP once again might be a good public policy from your standpoint, to go and reduce illegal immigration. I have no problem with that, but there is a trade off, and people should be considering how those might play off and go from there. My motto is sizing is more important than entry level. Sizing is more important than entry level. Do not try to pick tops and bottom. You will not do that. That will never happen. You want to be big enough in a trade. So if you're right, it makes an impact. If you're wrong, you're not stopped out. People get in trouble. Invariably, it's not because they have a bad idea. They have it on too big. And I think if you do that going ahead, you may well have an insight or a thought about what's going to happen in the next 90 days or the next year. Size it properly, and you'll be okay.
Jamie: (39:20) We used to have an expression when I was in the hedge fund world that only monkeys pick bottoms. So there you go. Before we wrap up, tell us a little bit about the Convexity Maven. How do people read it? How do people get hold of you if they want to.
Harley Bassman: (39:32) So I write a commentary intermittently. Every 4 to 8 weeks. It's free. They're all posted on my website, Convexitymaven.com. You could send me an email, and I'll add you to the list. And the idea is, I try to go and and write about interesting thoughts for the market. Sometimes a little high level, but focusing on ways to go and get yourself in a position where you have a better risk return payoff for an idea. And of course, I'm managing partner at Simplify. We just bought a brand new product, today we're reporting on Tuesday 10th, a very interesting product where you're buying a 7 year call option on the 10 year treasury. It is extraordinarily powerful as a 43 duration. So it's 3 times as powerful as the 30 year treasury. It's a very interesting product for capital efficiency, and we try to once again bring ideas like that where it's suitable for people. And and you go to my website and you'll find the commentary on it right there.
Jamie: Awesome stuff. And same to you, Wes. How do people get in touch with you if they want to.
Wesley Gray: (40:38) Yep. So if you're interested in launching an ETF, you would go to ETFarchitect.com, and we'll tell you everything about it, and then, if you're interested in like geeky quant research, and Alpha architect things, you would go to alphaarchitect.com where we have a weekly published blog you learn about like our funds and service offerings, or what have you so? And I'm on X, which I still call Twitter. It's just @alphaarchitect, that's where I usually hang out from a social media perspective.
Jamie: Harley Wes. This has been such a pleasure. Thank you for talking to us, to me today about the world of ETFs, which is hot and getting hotter by the sounds of things. So thank you both very much.
Jamie: Thanks once again for listening everyone, and please, as usual, give us a follow like us, or subscribe to us wherever you get your podcasts. The information contained in this podcast does not constitute a recommendation from any LSEG entity to the listener. The views expressed in this podcast are not necessarily those of LSEG and LSEG is not providing any investment, financial, economic, legal, accounting, or tax advice or recommendations in this podcast. Neither LSEG nor any of its affiliates make any representation or warranty as to the accuracy or completeness of the statements, or any information contained in this podcast and any and all liability, therefore, whether direct or indirect, is expressly disclaimed for further information, visit the show notes of this podcast or lseg.com.
