What the Actual ETF Is Going on Right Now

are you managing otherwise? Day three of the quarantine. And when you have two little kids around, I think it makes it a little more cabin feverish sometimes, But at the same time, it's kind of nice having them home. And I work from home two days a week anyway, so it's not that big of a stretch. So what is your best work from home tip? Um? Basically, for I write a lot, and I just roll out of

bed pretty much, start drinking coffee and get writing. I find that early in the morning you are most inspired, you have the greatest natural energy, so I just don't waste time in the morning. I roll rate until ten and I'm highly productive. The afternoon is tougher. That's a pro tip there. Okay, So this episode of Trillions, we felt like we needed to take stock of the reality right now, which is not kind. There's a lot of red in the world. Where do you think we should start?

I mean, look, I think the SMP five is something almost everybody at this point owns, whether it's through an active mutual fund or individual stocks or more increasingly passive in e t F like s p Y or I V v or OO. And last time I checked, I mean,

it's going up eight percent, down nine percent. It's I equate it to being in a little rowboat and there's just in the middle of the ocean and there's a storm and the waves are just massive, and you're hoping that when you slide down the one wave there's another one to catch you. And it's just it's really um chaotic and discombobulating, a little scary. I'm getting kind of tired of it, and I think other people are. I've talked to market makers all week and they're telling me

they're exhausted. So for this episode, we wanted to talk about sort of the some five observations are the biggest themes that are relating to e t s right now. We're also going to have Katie Greyfield come on, who's covering ets for Bloomberg News amidst all this chaos, this time on Trilliance Carnage. Katie, Welcome back to Trillians. Thanks for having me. What do you guys think is the number one thing people should just know about how e

t s are performing right now? Um? You know, for me, I look at two things, volume and the e t F price versus its net asset value, and those two things are like thermometers to me. E t F s are all seeing heightened volume three or four times their average. This is part of what they're they were designed for is to be a liquidity buffer release valve so that all the pressure wasn't on the stocks and bonds. And I think they do a great job of that, and sell off after sell off they seem to gain new

fans along the way. I don't think this would be that much different. And I think you look at something like Spy that one traded a hundred and thirteen billion on February. No exchange traded listed equity or fund has ever traded over a hundred billion, and all told, in the past three weeks, it's traded about one point two trillion worth of shares. It normally does that in three months. So across the board, whether it's h Y, G or SPY, the volumes are very high. A lot of people are

turning to E t F too quickly. Tweak portfolios make short positions, and I you know, the volume tells you people trust them, use them. There's been a couple of little hiccups, but nothing worse than that, and so I would give them a strong B plus or even an A UH for their performance in this sell off and handling what I think is the craziest market I've seen since two thousand eight, if not worse. The other thing that's happening right now is this dislocation with the nav

right what is what is that about? Right? So um N A V s are UH the fair value of what the E t F holds of the basket, and the E t F trades in real time, and so it can sometimes move a little ahead or behind, or you know, above or below that fair value. And that's what people watch and what makes them nervous. And if you see a ton of stress, you will see the e t F price move a little bit, but largely the dislocations from NAV have been a little higher, uh

than in than in normal times. Uh. There's a lot of arguments that the e t F is sort of the true market in real time. Generally speaking, the e t F price is kind of what you can, you know, sell the car for, and then the NAV is, you know, again, the best they can do. It's saying here's the fair value of it. And in normal times those things are right on top of each other, but in stressful situations the price can deviate a little bit from that NAV.

And Katie, what are you hearing from you know, investors in in in the newsroom, in our reporting in terms of how e t F s are faring well, I've been all over that NAV discount that Eric was just talking about, specifically in the bond space, because that's where you're seeing the biggest dislocations, the weirdest sort of moves, whereas you know, equity e t F s aren't having

those same problems, those same discounts. And what I've been talking a lot about with investors and advisors is you know, whether this is the start of the death spiral which we hear about with E t F sometimes, that you know, in times of sell off, when you are seeing the price of the E t F dip way below that n A V value, whether that will exacerbate a sell off in the underlying markets. But doesn't seem like we're seeing any signs of that so far, because the underlying

bond markets just aren't trading. There's no liquidity there, whereas the E t F is actually the much more liquid tradeable vehicle. And I think um, when you think of the bond ETFs like l q D investment grade bonds, I think that's been stuck at about a two. So the price of l q D has been living at about two percent below the net asset value. T lts wavered between like three percent and you know, one percent.

But even even plain vanilla stuff like b n D, the Vanguard Total bond has been um one night, I think it closed at five percent, but it's been hovering more about one five. But I think that tells you that at any time somebody market maker a P could sell the bonds and buy the E t F and pocket the difference as a risk free profit. But what it tells you is there is a lot of faith that you can sell those bonds, and so the e t F would be the place to go to a

point and then someone would arbitrage it. So the lack we call that's why we call that discount or that dislocation the arbitrage band, and those stretching times of turmoil. But I you know, I think after last time in two eight, there was a lot of like go you know, h YG was trading a like seven percent discounts and people were like wondering if it was broken and that kind of thing. I think the tone shifted a lot

this time. Especially. We've talked to Eric Kazotski, our MUNI analyst, and Damian are emerging markets analysts in b I and they look to E M B and H y D so to speak as where the bonds are probably going. So the E t F sort of like leading where the bonds will probably catch up to because they're less liquid.

And so I think there's been a definitely a tone change in people maybe looking at the E t F is an indicator, a metric, and but I will say to Katie's point, the idea of getting out of an E T F. The middlemen in this world have to make a little money, So the price of the e t F does incorporate what those people need to make in that arbor. And so a fair way to put it is, maybe you pay up a little bit to get out in these crazy times. It's not like it's

the e t F is perfect. I just think it's a measure of the bond liquidity us the cost of arbitrage um. But I think for people who are retail investors, two takeaways here. If you don't need to trade in these times, don't I think you know, somebody referred to it as adult swim. You know, just stay home because none of these dislocations matter long term. Your total return of the e t F will match the index give or take the tracking, or they won't show up in

the long term return. So that's one thing. The second thing is if you do need a trade, I would use limit orders in times like this, and I would stay away from the market opener clothes because things get really crazy as market makers are figuring out what's going on that day, So the middle of the day limit orders. I think those are two good tools to navigate this. Speaking of retail um I'm wondering what's been happening with flows and what you guys have been watching on that front.

Something good's been catching my eyes. Flows into spy Um Eric. I know that's more of the trader type e t F, but prior to Wednesday it had been just on a tear. It received nine billion and inflows last week, an additional seven point five billion on Monday, and uh, you know that kind of caused people to scratch their heads because anyone who's been paying attention knows that the stock market

has just been doing terribly. But you know, JP Morgan has a theory that this is just create to lend activity, where these aren't actual inflows, it's not a good measure of investor sentiment. But basically, these new shares are being created in order for investors to basically short the e t F. So that was a little bit interesting. Another thing is that ultra short bond funds have received a

lot of interest in this sell off. It it feels like they're the only section of the e t F market that hasn't seen outflows of some magnitude, which I think just speaks to how desperate people are for cash right now, especially as liquidity drives up in most markets. Yeah, and to riff off that, people sometimes equate e t f s with equities or risk on. They forget that they are e t s for things that you run

to when this guy is falling. And I think those short duration e t f s, it's amazing how much they've taken in because it was a year where only cash worked. It seemed like everything was negative except for cash. And they've in the month of March. Those ultra short bondy tfs have superseded any month and the month isn't even over, So that tells you how cash is king right now in this market. I also think in the flow category spy I w M, the cues those flows to me move a lot like the waves I was

talking about in the rowboat. You know, five billion in one day, two billion out the next. It's very hard to read what what's going on because those things are used as derivatives by some investors, so they could be shorting, they could be hedging. You just it's hard to tell. The retail type flows though, um are pretty strong, which is good. It shows you there's a base bid out there.

Vanguard in particular, the Vanguard f who has taken in cash every single day during this sell off, and and a lot like a half a billion, a billion even took in money when the market was down twelve It's pretty uh, pretty miraculous. And other Vanguard ETFs have also do the same, although not surprising. We look at Vanguard and past sell offs and in two thousand and eight they took in money every month. They're just kind of

a machine. Their investors are just pretty unshakable. And I do see some sentiment on Twitter with advisors who are just not selling. They're just they're just going to coach their clients into hanging in there, because I think over time a lot of people have just been enlightened with the fact that it's very hard to to time these things and when do you go in, when do you

take out? Well, you know, and I think a lot of people are just like, look, I'm just gonna continue my sort of drip drip drip inflows into the market. And we've done polls and the flows show that for the most part, the retail investor base in ETFs is hanging in there. And you know, we watch those flows because if those starts to turn negative, we're in a whole different ball game, but so far they've held strong

and that's arguably a good sign. So one takeaway and all this is that perhaps retail investors have more of a stomach and especially bogol heads, uh than professionals. Yeah, that's probably a takeaway. Yeah, or institutional maybe. Yeah. There's also um the Internet has allowed the spread of information. I think people are more enlightened to the difficulty of trading.

I also think though, that there's been a shift in the advisor business from the broker commission model where a mutual fund pays the broker to put the client in it. Those tend to be more churning type brokers where they churn your account. The new model is fiduciary, where the advisor gets a percentage of the client's assets. And in that model, the advisors shoulders shoulder with the clients, so their knowledge kicks in and they're like, look, I've seen

this happen, just hang in there. In addition, advisors get, you know, good fees compared to the fun world. They get like points to one percent to advise you on your wealth. And one of the biggest value propositions now is behavioral coaching and so they're going to really hit that hard and so I think that's another buffer. So I think you've got vanguard people, You've got this these new school advisors who are more about the big long than the big short. And I think you've just got

the spread of information and past sell offs. If anybody's gen X or above, they know that two eight was rough, but the next ten years were amazing. So Katie, I know that you haven't interest in what's happening in the bond world, and that's one that I know. UH investors have have have long expressed concerns about what are you

seeing on the stuff that you're reporting? Something that I found really interesting over the past week, and I don't have a good explanation for why it's happening, so please enlighten me. But it's it's really the high quality tickers

that you're seeing have these big discounts. You know t LT that's a Treasury E, T S, b N D l q D. Those are all in gressive investment grade products mostly whereas it's the risky names like J and K and H y G that are actually trading at small premiums, and those were the names that people are really focused on it was you know, all of those concerns were really centered on junk debt, but those ones are actually pretty well behaved, whereas it's the higher quality

stuff that is that has these big discounts. And I don't really know why that's happening, and I haven't heard a good answer yet. I agree with you. I think h y G has superseded anybody's expectations in this sell off. But I think l q D and t l T might have underwhelmed in terms of their ability to track in these times. And we do have a theory and b I my colleague in London, Tom, who's been looking

at discounts. One thing he noticed is he looked at the discount in the bonds by maturity, and you can see a direct correlation to the higher the maturity, the longer the maturity, a deeper the discount. And so h y G, a lot of people don't realize, has a duration of only three years. It's not it doesn't have a lot of long dated stuff in there, whereas l q D the duration is nine years and t l

T is twenty. And I talked to some market makers that they'll say things like yeah, long dated off the run treasuries, no bid, you know, stuff like that, and the word long seems to be in their dialogue a lot. So, Uh, the long end of the curve, I think is where the bids have dried up the most, and I think h y G avoids that to a degree. But junk has been sold off violently a couple of days, and that's good. I mean, h y G has has really

I think hung in there. I think it might have closed it a discount of one percent one day, but it's been within one percent most of the time. And also it's seen a lot of outflows and they've been pretty orderly. Seems like people are getting in and out in an orderly fashion, which is I think more than people thought was gonna happen. Okay, so I want to talk about exotics and and the ETFs in that world, Katie, what are you seeing in that space? Well, it's feast

and famine in the leveraged e t F world. Um, Eric, you and I were talking about t VIX yesterday, which is just I mean, over its lifetime it's down well over nine, but it is just on a tear, with the VIX obviously ripping higher this week as of rate. Now as of Wednesday, it's up over percent for the year, which is you know, it's by far the best performing

exchange traded product. And uh that's two times levered. And again this this this e t N has had a really tough time of things, but it's clearly it's moment to shine. But you know, on the flip side of the coin, you've seen some of these levered oil e t f s have to be liquidated. Um pro shares had too, in particular this week oil you and oil D So you're seeing some shakeout, you know, obviously in the oil spaces, oil plunges. But t VIX again, it's

just having a great time. And you know t VIX there it gets a red light in our traffic lights system obviously, and it gets the highest score of third getting it for thirteen reasons. I mean most stuff is like four or five tops. So t VIX is like highly dangerous, full of nasty surprises. But all the things that are nasty surprises in it are now helping it, whether that's daily resetting of leverage or the roll costs in the futures market which is now turning into roll yield.

So all kinds of weird math that hurts t vix normally is actually kicking in. And you know the exotics are obviously highly dangerous, But there, I gotta be honest, fascinating because if you look at your to date returns of all e tps, you might see one you know that that's to be having a good year, and occasionally you've seen one almost get to within a calendar year. T vix is over a thousand percent in your date returns. That's never happened, a quadruple digit returns within a year,

and it did it in a month. But you gotta be careful because this thing is still down what since it came out. And the other thing is I do see some retail usage of it. If you look at the Fidelity site, t vix is I think in their top twenty five most traded on the platform. So um, you know, I really hope retail investors aren't messing with it, or if they do, they're the day trader types that know exactly how this thing works. If you want to learn more about leverage products, we have a great episode

that specifically about that. Eric, you just kept talking about t VX there and the only thing I wanted to know was whether or not your dad Ken bell Junis which from another episode of Our Two Dads, we know Um has used t VX before. How's uh, how's old Ken doing with t VX right now? Yeah, he loves the reverse splits that it has, which a lot of leveraged e t P s are going through right now reverse splits, so to keep it from going to zero.

But um, you know the problem with his t VX holding that he never sold, which I told him to, but he didn't, is that even if you autit like three or four years ago when he did, even with this thousand percent spike, you're still down. So it's you know, very that does very little to his holding. You have to time it perfectly to really benefit it from. So I told him to stick to betting on college football games,

which aren't gonna be happening in the near term. I know he well, he had, well, he had his friend come in to watch the tournament, his friend Dennis, and they were just gonna, like, you know, drink beer and watch the tournament. I was almost gonna go join him, but I just couldn't. But and now the tournament's not going on, I'm like what are you guys gonna do with yourselves? So I guess they're gonna have to play board games. Okay, Katie, what's your clothing thought for this episode?

I mean, I'm all about the fixed income right now, and I'm curious to see who wins this tug of war. You know, will the price of these bond ETFs rush up to meet the nava or you know, will those bonds, those underlying bonds fall to meet the price. I'm curious to see who wins. Yeah, totally. I think fixed income is where the most tension is right now. Um, even though equities are down big and they're the bigger part of your portfolio for most people. I know that's a hold,

you know, that's a major scene. But the fixed income to me, within the e t F s is a much more dynamic place right now because of the way an e t F trades on exchange, but the bonds don't. And that tension is something we're gonna watch. And one thing to watch is this active bond mutual funds, which have avoided the sort of active to passive move because they've tended to outperform their benchmark. The aggregate bond indecks because they tilted to high yield a lot of them.

That's biting back high yields down a lot, and they're now underperforming the agg down on the year. If they start to see outflows in any like significant way, that could put a little more pressure selling pressure on bonds and the bond ETFs. And so the bond market to me has um that extra little bit of anxiety because of that and the illiquidity the bonds. Then the stock market is more just about okay, how is it reacting to what Trump said today? How are the fundamentals looking?

And the e t F seemed to be pretty kosher over there, not saying it's, you know, a good place to be in terms of returns, but the way the e t F s work over there to me is h takes less of my attention. And I'm with Katie. I think the bond e t F areas um really where a lot of the nerdy eyeballs are right now. Katie, thanks for joining us on Trilliance, Thanks for having everybody else. Thanks for joining us, and please stay safe out there.

Thanks for listening to truths. Until next time, you can find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify, and 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 Eric Falltunus, and you can find Katie at kate grape Folks. This episode of Trillions was produced by Magnus Hendrickson. Francesca Leady is the head of bloom podcast by oo oo oo