Tis, I'm Joel Webber and I'm Eric Belchunis.
What are we gonna talk about today?
We wrote a note I think it was like two or three weeks ago, no industry for old analysts because the products that are coming out are getting crazier and crazier and more. They use a ton of derivatives. Now it is a very different industry in terms of new products. Now the flows still go to very vanilla, but a lot of the new stuff is getting pretty wild, and there's been some of the old dogs in the industry have been like, Hey, I don't really like this. I
don't like where this is going. Athanasios on my team probably plays that role. And Dave Nadig, who I really was one of one of my biggest influences from the Index Universe days back in the back in like the two thousands, he wrote a substack called trust in a Black Hat World about this, and I thought we should really explore this idea of all of these new products
being thrown at investors. I think I am more on the libertarian side here, but I also understand the arguments that some of these you know, products are not good for people, and so I thought we should mix that up right now and just get it all out in the open.
So joining us on this episode Dave Nodding of Natti dot Com. He's taken to Substack. He's an ETF expert and veteran and also Wildona Hirich, processor reporter with Bloomberg News.
This time on Trillions Trust. Dave Fildona, Welcome to Trillions.
Thanks for having me, Thanks for having us, Uh, Dave, your paper Trust in a black hat world.
Where did the idea come from?
Well, look, I think it's very clear that the regulatory environment is going to be different going forward than it has been for the last at least oh, I don't know, forty years.
It's saying more than regulatory, it's everything.
Well, yeah, but I'm going to I'm trying to I'm trying to keep it narrow so that we don't get into a big discuss about lots of things. But just from the perspective of a financial advisor and investor buying products off the shelf, the world you're buying those products
and is different. Right, We're clearly working towards a world that is more corporate friendly than it has been in the past, that is more deregulated than it has been in the past, and if we look at things like product launches and what's approved and how they're sold, the guardrails that have protected investors for a long time are being pulled down as we speak. We can argue about whether it's good or bad, and that's not really the conversation.
I think that's important. The question is what do you do about it? And to me, the answer is you need to be much more careful about both what you're buying and who you're buying it from then we have been in the past. So it's not just that this kind of product or that kind of product is good or bad. It's can you trust these kinds of players to be on your side when something goes wrong, Like when the market's going up every year and everything's great,
nobody cares. This is all about what happens when we have a down twenty percent day, or you have a broken trade, or something breaks in the derivatives markets.
Everything that you've said is so saying, Eric, how could you take issue with any of that?
Well, well, of course we got to break this down.
Okay, when with the you like saw him tweet this.
Well he's been ranting about it for a couple months on LinkedIn mostly and then the paper I think brought a lot of that together where I could read it all in one spot.
Yeah, but he's on alone again.
Athanastios is very similar, and I'm sure they represent a portion of people who all feel this way. So I think we just have to go through some of these new products. Let's start with the hot topic of today, which is putting private credit in private equity into ETFs. You bring up XOVR, which is an ETF that recently changed strategies to include some private equity and it added SpaceX,
and SpaceX I think is a ten percent holding. Kathy Wood has an Interval Fund, which people say is a better form, for a better format to deliver private equity in where you can only get out once in a while, but nobody cares. I mean that fund has almost nothing and it's Kathy Wood. Here comes this new fund, XOVR, and people as soon as it puts SpaceX, the flows came. And it just seems to me the market wants private equity in the ETF, even if it's not the perfect
way and comes with a bunch of public equities. And again it's pretty small. But what's the problem here?
Essentially, So, the problem with XOVR is not that it's doing something wrong right, it's using the same fifteen percent the liquid bucket that every fund gets a chance to own the problem is that putting SpaceX in as the point to own the fund is both disingenuous. The most you're gonna get is ten percent exposure, and that exposure could go down significantly if you're part of a big
rash of money coming in. So you're selling a fund based on maybe ten percent of its exposure, and then the very thing that you're investing in is problematic to price. They price this at one eighty five in December, it's still priced at one eighty five today. You can go on Forge or any number of these sort of alternative platforms like Karta where you could trade SpaceX stock as an individual investor, and it's trading anywhere from one hundred
and forty to two hundred and forty. So there's an enormous band around what the SpaceX position is actually worth. I think there's real transparency issues, among other things. These aren't even indirectly investing in SpaceX, they're investing in another vehicle called an SPV, which or may or may not have fees on it. They will not tell us whether or not that position is being eroded by a continuous
feed drain. So that lack of transparency and the lack of ability to price it accurately means that there's perverse incentives. They're only ever gonna mark this up because they get paid more when they mark it up.
I'm with Dave here, this is like a game of telephone that's gotten really distorted with Bildana. What do you think?
I think what we're all getting at is this good for the investor?
Right?
So that's like the crux of the question is a good or bad I've spoken with a number of issuers recently who have, for example, single stock levered products, and I asked them, like, what if in a year you look back and one of your products has just done just really terribly and people are like retail investors are calling you and complaining or have lost tremendous amounts of money, Like, do you have a sense of guilt or I don't know, some sort of sense that maybe things should have been
clearer for the end investor on how risky some of these things are and all of them to a t said, this is America, Like people are free to buy what they want and if it means losing money, sometimes that's just what happens. That's the market called risk.
Your point isn't the illiquidity, it's more of what's it being priced at every day, almost like there's some you know, there's been some mets back in the day that held stuff that didn't trade, and even bond ETFs in a crisis. Sometimes those bonds are stale, they don't have pricing. So what if they marked it more often? Would that solve your problem?
I mean I suggested that they go interact with these platforms on like say a weekly basis like put yourself out there that you'll trade ten basis points of your SpaceX position in or out. Once a week you'll set a new mark that's based on live trading. That would be great, that would be transparency, that would be an actual value add to the market. This is the opposite of that. Not only are they not doing that, they're obscuring the very way they're acquiring these shares. That's the issue.
It's not that these securities can't and shouldn't be held by anybody I'm not against SpaceX, I'm against the way this is.
Yeah, you know what, I agree with him on that detail. I think XOVR should just market. And this is what Cliff Asten is brought up actually with the State Street one, which is going to hold private credit, which is if they start marking it, this could get interesting because a lot of people buy privates in the institutional world because they don't move. They like that NAB never moving because it lowers volatility. They call it volatility laundering, or at
least Cliff Astnest does so. In essence, by not marking it, you're kind of getting that institutional lowvall. But I think they should market, and why not. You're right, these other platforms have. Okay, so I'm half with Dave there.
Well you're being a purist here too, Dave, Right, Like, you have this thing called it an ETF. It's got this rapper that has superpowers. One of those things that investors that come to expect has been transparency. And if you're not being fully transparent in that rapper, it's like, well, you're doing something that's against the will of the ETF.
Right, And I'm not arguing that these products should be all shut down. What I'm saying is that the ETF market historically has had the characteristic of being a white hat, generally being on investor's side, and you had to be said to do your due diligence, but you could count on the fact that as an industry, ETFs were largely on investor's side. With the current raft of ETFs, I don't think you can make that claim. I think XOVR is on er share side and will always be on er share side.
Well, you you already did one thing, which is you changed Eric's mind slightly.
So that's a win. Yeah, you eat out a win already. So you want to keep going? Do you want to keep playing this game?
Yeah? So let's look at the private credit ETF, the Share Street Apollo private product credit ETF that I won't go into the sec versus State Street shenanigans.
That happened, but that's a little wonky.
But this market, this product is out and according to State Street, they hold twenty one percent in privates, which goes above that fifteen percent threshold.
Do you have issues with that?
And State Treat obviously launched the ETF industry, and are we like, how do you deal with something like that. If you think that product is black hat but the issuer's white like, what's your take on?
So again, I think there are good ways to do this, and they are bad ways to do this. As structured, I think this Apollo State Street product is problematic. The only they what they hold right now is irrelevant by prospectives. They could have thirty five percent in the Polo bonds and another fifteen percent in other liquid stuff, so half of this fund could be in what we would all rationally call illiquid private credit. That thirty five percent bucket
that Apollo is going to be responsible for. The only reason we know anything about how that's going to work is because the SEC forced their hand on a bunch of disclosure they chose to leave out of their formal documents. So they're not in the SAI, they're not in the prospectus, and they're critical right, So what are they on the hook for providing a bid every fifteen minutes for up
to twenty five percent of the portfolio on a given day. Now, maybe that's the right number, maybe it's not, but we have no way of knowing because they didn't show us a liquidity study. It's not like what Bitwise did with bitcoin, where they published acres of research to get everybody comfortable. This is completely just trust us. We believe twenty five percent is enough. We believe these every fifteen minute bids are enough, and that's what you have to count on.
And if the fund goes from one hundred billion dollars to fifty billion dollars in one day and they have to unload half the portfolio, oh well, well it seems like this is setting us up to be right back in third avenue.
Yeah.
Well, hold on a second, though. But here's the thing about ETFs.
Even if we had that worst case scenario and only twenty five percent of the private credit, which again is only thirty five percent of the portfolio at max, so you're looking at maybe a slice of the portfolio is illiquid, frozen, the market makers of this world will still make a market in it. They'll just stretch out the arbitrage band, so it'll trade at a premium or discount, probably a discount. And you know J ANDK traded a discount at eight
percent during the financial crisis for the same reason. So I just think that investors would rather have all that jazz and have the ETF turn into a semi closed end fund in those situations, then have it in a more proper wrapper like an interval fund or e a mutual fund or a hedge fund which they have no trust in.
But do you know that these funds are just going to be sold on yield?
Right?
That's the only way this fund is being sold is hey, mister financial advisor, buy our private credit ETF because you'll get better yields for the same credit quality as you will get somewhere else. Nobody is saying we want privates because it's structurally different. They just want the better yield. So they're not buying this as a long term speculative play. They're buying yield. And when that yield locks up, as
you said, I think that's going to be a problem. Again, not saying the products should go away, I'm saying advisors need to ask themselves. Do you trust Apollo to be on your side when we have a credit crisis?
I don't.
They're going to be very much on one side.
Well follows, But do you trust State Street? State Street? Now this is an active fund. If it was passive, I would agree with you. But State Street has PMS and I talk to them. They're like, we're out there trying to find good deals, and they in the perspectives they can go beyond Apollo if they need to.
So I think, in in.
As essence, you are giving your trust to stay streat as an active manager to work all this out. And I think, I don't know, maybe it's a good guinea pig, like we'll see how this works.
It's only a portion of privates. I don't know. I this time, I'm not convinced by Dave.
Here's the positive coming back. I think it's going to be great that we get to see how they're marking these bonds every day. It's too bad that you have to have like a pH d in Excel to actually track it day to day. But we are getting I mean, already we're getting interesting pricing on private credit by digging into the fund, but you're gonna have to track it by hand because half the stuff doesn't have an icon.
Bill Donald, let's send these guys back to the corners. Get some water.
I have to say, this is so fun to just sit here and listen.
I'm glad that we could join.
Can we do this every week?
Are you ready for Round three?
Glad that we could join.
Yes, hold on, well, just on the private credit stuff like what if anything jumps out at you and begs for a little bit more finessing.
So it's early days still, but like super early days launch. But one way to maybe track the appetite from people for this is obviously via flows, and they are not there are no, they're non existent. Yeah so far unless there's some huge delay in the data coming out, but there hasn't been much going on.
The volume's ok, eight million the first year. It's not bad.
It's pretty good actually, and then the assets were fifty so they had seed.
But yeah, you're right. Also it's credit.
I just think xov are getting private equity would be a bigger rockstar launch. This is still bonds and it's still more boring and slow moving.
Hey, do you need a pep tacotol?
No, I'm good, I'm ready to go.
Yeah, take the towel off. You're going back in.
I'm like Matt Foley.
I've been down the basement eating no dos for the past five hours.
Okay, get back in there.
You don't take any ribshots, okay, okay, okay, ready. So here you have this thing called leverage ets for chaos goblins. So what's a chaos goblin. Yeah, that's a great visual. By the way, that sounds like a good band name. I thought pretty much.
Jim Kramer. Jim Kramer is the ultimate chaos goblin. Right, He's just gonna say whatever he's gonna say. The more chaotic it is, the better. And look, a lot of a lot of Wall Street finance, a lot of Wall Street medias are just chaos goblins. And that's largely what a lot of these sort of crazy like ninety percent yield on bitcoin type products are. Four They're not actually
particularly useful. They are headline grabbing, hoping to catch people unawares so that they can, you know, in the case of like the yield Max stuff, just get all their money back and wash it through their return of capital gains situation.
Okay, well there's two things. There's leverage ETFs and there's yield max. Let's go yield max first, since you brought it up. Okay, yield max is basically like I was the Money Show, which is all retail like a lot of like older investors, and I spoke at the inside the booth room, which is like I feel like a carnival barkroom up there, trying to get people attracted to my whole thing.
It's good practice ground to speaking honestly.
So I'm going over like a presentation called etf Hot Sauce the pros and cons, and people are like, there's like twelve people there. I start going over yield Max and I show these yields and it's like ninety eighty one hundred percent, and like the people start coming over. I can see jewel. My audience doubled. It was like Pavlovian dogs. I was like ringing some bell and I was like wow, And I said, wait, guys, all you're really doing is giving your total return and taking it
back in the form of yield. It's you're almost like taking from one hand and giving it to the other. I don't think they care. I think I just think, you know we have this, you know that Journey song. Anyway you want it. They some corporations have taken on that as a commercial. Any way you want it, that's
the way we'll get it. I think, if if you want your return in the form of yield through these right out of the money options writing strategies, well we'll give it to you that way, If that makes you feel good, you get to all in the income. I don't know that's how I see it. I agree with you. I wouldn't tell my mom to invest in these. But if somebody was just love seeing that income versus going and seeing total return, is that Is there any harm in that?
Also, Dave, did he just admit to being a chaos goblin?
I think so. Look the again, nobody's doing anything illegal here. This to me is about as an advisor, where are you putting your trust relationships? As an investor, where you're putting your trust relationships. There is nothing wrong with taking a volatile asset like bitcoin and trying to turn it into yield. There are lots of people trying to do
that all across the ETF industry. What's wrong, or what I have problems with, is that to find out the fact that your eighty four percent yield is actually showing up as return of your own capital every single time you have to go three pages deep and then open a PDF. They're not leading with the most critical feature of this product, which is it is a way to generate return of capital, not to generate actual meaningful income.
So they're not on your side. They're trying to convince you that you're getting something that you're not actually getting. There are other ways to do that. I actually think our old friends like Direction and pro Shares and the leverage side, who now are in this game as well, are actually examples of doing this about as gray hat as you can. They're over disclosed. They're warning you against these things. They're putting the warts out front and then
convincing you of the benefits of the products. They're much more on your side in this case.
Who said, are you on bil Donna?
I don't want to take sides here. I like both of you a lot.
Okay, son right there?
Yeah, exactly.
Part two of this one is the double leverage stock ETFs okay, NVDL. The Donna's covered this, ye, And these have been surprise hits. Some are five six billions. I mean sometimes the team were like, dude, what are we doing here? We should just put We feel like we missed the easiest idea ever. Just slap leverage on a stock that's doing well and like and then you can just go buy an island.
Okay, anyway, but there's even crazier stuff now. And I think we discussed one of them once the battle shares battle shares, yea, and now we're getting one hundred hundred like.
Yeah, parlay shares, right exactly. So look, sports gambling is legal. This is a portion of that. And I'll go one further.
I get it.
These are not products that I would say you should buy and hold, but if you trade them, you know, I think these are for young people who are degenerates and just love gambling, and we'll learn the hard way and then become Vanguard investors in their thirties on that's one thing. Or they are hot sauce fun for board as hell Vanguard investors who are basically decided to marry Vanguard and wait thirty years for all the compounding and that magic to happen. But you know, I'm sorry, it's
like watching paint dry. So they have ten percent to go hog wild, in which you could argue is a behavioral hack not to touch the other ninety percent. If that keeps them having a little fun and occupied with their speculative foem, well then maybe it's it's fine. And these products, again, they are one percent of all assets, but maybe seventy eight percent of the volume something like that.
So I do see them as rated our products. I see them as dangerous, but I do see them as just like the same old story as the old days of ets with the triple leveraged index funds and people who like to have fun. And then there'll be a hard rain and it'll wash a lot of these products away and then we'll start over again.
There's there's a list. I was looking at a list of upcoming ETFs like they're set to launch in the coming days, and there's some there's some really good ones. There's Spcy Spicy and it's one hundred percent SMCI one hundred percent in the video for example. There you go, This is the type of thing that I think would fall on the discat.
Yeah, and I'm sure it's free too, right.
Yeah, they do all charge one percent.
That's why it's Yeah, I mean, we're kind of like lottery tickets for the issuers in a way.
So, but people hardly know.
If you don't hold it a long time, the expense ratio isn't as meaningful versus a mutual fun one percent the whole long term.
But that they still get paid, right, That's the problem is once they're trading, they get paid on the fact that there's now enough inventory out there because people are trading them like crazy. That's how you end up with five billion in there, not because people are holding five billion for six months.
But is there anything wrong with being a degen as a.
Young person only on the weekends?
Yeah, or having ten percent to gen.
Look, I'm not telling people they can't gamble, right, I'm not saying casino shouldn't exist. Again, My point here is these products are not on your side, and I also think that they hide real structural issues like the battle shares products. For example, two times Tesla minus one times Ford. That product, if you model it out, which I have, there is no world in which that looks like you think it looks.
It is so.
Wildly path dependent that if you hold it for more than a day or two, you're getting some strange pattern of returns, which is not Tesla winning and Ford losing. It's some it's it's just a weird pattern of returns. So these are going to be very unpredictable. People are buying them because they think they're going to get what
they say on the on the hood. But you know your three x in video if you hold it for four days isn't gonna look like three X in video, because the more volatile the thing under the hood is, the less predictable the path dependency is.
Now those are all like hot sauce. And I think this debate is going to go on for a long time. And thank you for giving us all your points, and you know.
I agree says that.
But one thing you brought up.
We had a call earlier because I had so much to go over with him, and you said something like about Blackrock, and I thought that was interesting because all these are like smaller issuers.
I get it.
But you said Blackrock even caught your radar a little bit with their abandonment of ESG, and how maybe they have a little black hat in that case, and I wanted to explore that.
Oh one hundred percent. So I look, whether you're I know you were, Eric, and you and I don't disagree.
You don't.
You and I don't agree on ESG very much. But my point is, if you're an institutional investor, and let's say you're on the committee for the Episcopal Church Endowment and you made a giant investment and a bunch of Blackrock funds because they met your stated mandate written into your rules about whether you can invest in oil, and now they've walked away from those very premises. They are not on your side. They have abandoned a mandate that you gave them money for. That is a black hat move.
Now you can argue it's the right call, it's the right thing for the country. I'm not making any of those points. My point is if I've given money to somebody based on how they're going to run my money and they changed that and they don't immediately give me my money back, that is a black hat move. And I think it's also true that you're going to see firms like Blackrock launch whatever they need to launch to
stay competitive. They've already doing it with buffered funds. You know they're going to say we'll never do single stock leverage, but I'm never going to say never.
I agree they are very opportunistic.
But would you say this thing about Vanguard because Vanguard wasn't as pronounced about ESG. But they also they think they withdrew from the Climate Asset Managers thing. They did a little stepping back, but they were never that loud in the first place.
Yeah, I think Vanguard is just gonna be Vanguard, and look the things Vanguard needs to be paying attention to, like say, fixing their website and updating their customer service plan, those they don't seem to be investing in those either. So it's they're clearly just going to continue to be cheap and plenty of people are gonna love that.
Sing and real quick.
I used to watch him and Matt Hogan go up on a stage and like I was like in the front row, and these guys gave one of the greatest presentations every year. Now Matt Hogan has gone full crypto, and I wanted to ask Dave just last about about that. You have crypto in here, your your little mix. You say it's not good for it's an anti American thing, but I know you love Matt, and I was curious of your how you've maybe.
Worked out reconciled.
Yeah, what about a US spot like a bit B. Let's talk BitB Matt versus. Let's just take all the crazy crypto stuff and the all coins off the table, just the straight spot bitcoin ETF thoughts.
I think that there are black hat and white hat players in crypto, and I would put in not just because I love Matt. I would put bit wise very much in the white hat camp because they're the ones doing the research for the benefit of investors to get these products across the line with real information. There's a big difference between that and what we're seeing elsewhere in
the crypto ecosystem. So my diss on crypto is that if you're putting all your money in crypto, you're effectively betting on the fact that America is in decline, right because you're counting on bitcoin going to five hundred thousand dollars per bitcoin. That is not good for the dollar. Like, I think we need to recognize that. I don't think all crypto is evil, and I don't think crypto shouldn't be in ets, but I do think there are good ways and bad ways.
To do it.
What if it's a bet against the US government not being fiscally responsible, not against the America itself, and it was invented in America, Well maybe.
We don't know.
Okay, No, No, I.
Think I think it's a fair point. I will say that I think it is very true that if you're taking your shiny rocks out of the country and putting them on an island somewhere, you're not betting on America, You're betting on something else.
But what if we have the strategic crypto Reserve?
Oh god, dude, we have another hour?
Yeah, I know, Damn is that an off ramp or what? I don't know. If we can do that, then we're going to go straight into the lake on that ran you know.
I think that's what I've been on those. I think we call that a mic drop.
It.
Dave Nating, thanks for joining us on Trillions.
Thanks for having us, Thanks for having me.
Thanks for listening to Trillions until next time. You can find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify, or wherever else.
You'd like to listen. We'd love to hear from you.
We're on Twitter, I'm at Joel Webber Show.
He's at Airic Vultunas.
This episode of Trillions was produced by Magnus Hendrickson. Bye