Loading summary
Transcript82 lines
- [00:00]
Michael Batnik
Today's Animal Spirits Talk. Your book is brought to you by Aptus Capital Advisors. Go to aptiscapitaladvisors.com to learn more about their whole suite of active ETFs, managed portfolios, OCIO services, investment support. They do a lot aptiscapitaladvisors.Com to learn more.
- [00:18]
Ben Carlson
Welcome to Animal Spirits, a show about markets, life and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Red Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.
- [00:47]
Michael Batnik
Welcome to Animal Spirits with Michael and Ben. Michael, one of the topics we've talked about with fund providers over the years. I love seeing this shift in people is, especially if they're more quantitative based. Their initial thought is, I've developed the greatest model investing model or portfolio or strategy in the world. I'm going to put it out there and people are just going to flock to it and people are going to look at me and they're going to say, wow, you are amazing. I can't believe you created this investment product. And what happens is they quickly realize like, the greatest investment product or strategy in the world means nothing if investors or advisors can't or won't stick with it. And so eventually you have to make a strategy or fund or a product that people will actually use and that people can actually stick with. I think our friend Wes can I.
- [01:37]
JD Gardner
Just add one, one little caveat to what you said. It's not just about sticking with it, because of course that's, that's a component. But before sticking with it, it's buying it.
- [01:44]
Michael Batnik
Yes. And being comfortable with it. Right. Understanding it. I remember our friend Wes Gray did this study a number of years ago at Alpha Architect where he, he looked at like, let's say you could pick the best stocks over the next five years in advance. And he looked at what the drawdown would be and the drawdown would be massive, even with these big returns. And the point was like, no one could stick with this. Anyway, we talked to J.D. gardner today, who is the CIO and founder of Aptis Capital Advisors, and I remember when he first came out with their first strategy and it was this super hard charging momentum strategy. I think he came to see you in the offices. He pitched me on the phone and.
- [02:20]
JD Gardner
It was like close To a decade ago.
- [02:22]
Michael Batnik
Yeah, a long time ago. High tracking error. This thing was going to be. I'm sure the returns probably ended up great for that type of strategy, but it was something that it wasn't. It was hard to pitch that to people, especially advisors like, wait, what is this thing? You're just high octane. Doesn't make a lot of sense. They are probably one, I would guess one of the faster growing active ETF shops that there is right now. They manage, I think more than $4 billion if I'm, if I'm looking at the numbers correctly, a suite of products and a lot of them are options based. And when you hear this story, a lot of people might freak out when they hear about options if they don't understand all that stuff. You know, I think part of it is the, the terminology, the gamma and delta and stuff like it's the Greek letters.
- [03:06]
JD Gardner
Yeah.
- [03:06]
Michael Batnik
You know. But a lot of this stuff makes a lot of sense for people that are trying to figure out the go between, between stocks and bonds or whatever it is. So we had a great conversation with JD today talking about their different suite of products, how they think about managing option strategies. So if you never heard of them before, Remember, check out aptiscapitaladvisors.com here's our talk with JD Gardner from Aptis.
- [03:31]
JD Gardner
JD. You guys are one of the more successful asset management firms that people might not have heard of. I don't know what ratio that is, but maybe it's the JD ratio. So for listeners who are not familiar with Aptis, what's your story?
- [03:44]
Ben Carlson
Yeah, the quick version is Aptis is we have two sides. We have an asset management business where we're focused on Options based active ETFs. And that's a whole world we're pretty excited about. We want to continue to build that lineup and be what we would consider the premier options based provider out there. And then the other side of our business is what we just call our services side and that consists of OCIO support, outsourced chief investment officer support to RIAs. We do a lot of middle office work. So anything related to the independent advisory space kind of falls under the services arm. And so we've just kind of blended those two worlds together over time just because the opportunity has been, you know, that's how we've kind of got a foothold in the space.
- [04:33]
Michael Batnik
We've seen a huge influx of ETFs in the option space from anywhere from till downside, hedge, risk to income. What was the opportunity that you saw to be able to use options and ETFs because this is relatively new thing still.
- [04:50]
Ben Carlson
Yeah. So the big answer to that, Ben, is the active ETF rule that passed in 2019. I think officially we kind of bet the farm on that. So we saw like when we launched our firm, the ETF specifically, we feel like the whole world and still to a certain extent today views ETFs as like s and P tracking machines. And that's true. The vehicle is great for that. But we saw an opportunity to put active, active option management within the wrapper and still get some of those efficiencies from like a tax standpoint. And we felt like shareholders could really benefit. And so that was kind of what drove us to say, hey, look, we, we want to be options based, take some of the background, inject them into a 40s ACT wrapper as efficiently as possible. And, and the, so there was a, a structural need and then we think there's, there's an allocation need. We're, we're big time advocates that, you know, we think risk assets are going to outperform more conservative assets and we want to give folks the exposure to that. And last thing I'd say on that bit is like when you're launching ETFs from Fairhope, Alabama, the big decision is do you launch something that's better than what already exists and you know that there's a market for, or do you launch something completely new and you have to go explain that? And we have kind of a combination of both strategies.
- [06:14]
JD Gardner
So there's a lot of other providers in this space. Why don't you name names? Who's the worst? I'm just kidding.
- [06:21]
Ben Carlson
So I was thinking about how to dance out of that question.
- [06:25]
JD Gardner
So are you, are you working with advisors and helping them construct portfolios within the etf or is that like a separate business entirely? Like what's, and, and, and what's the profile of the typical advisor that you all are working with? Because these products are pretty sophisticated.
- [06:41]
Ben Carlson
Yes, they are, but they're, they're not, they're answer, I'll answer it this way. There's a, there's kind of a strategy discussion and that could happen with, you know, a wirehouse advisor, an independent advisor, whoever. That's kind of where they're doing a lot of house, a lot of in house work. And you're just trying to educate on, here's the strategy, here's how it impacts allocations, here's how we'd use it. The other side is when you partner with an advisor to like really drive efficiencies on the investment front and the ops front. It's a completely different conversation at that point because you're doing a lot more than just, you know, educating on the strategy itself. And that the sweet spot there is usually like 500 to 2 billion is kind of the sweet spot of firms we work with. We work with firms smaller and we work with firms bigger, obviously, but that's the sweet spot.
- [07:31]
Michael Batnik
And when you're doing this education on option strategies, how deep in the weeds are you having to get? Because if you really go into could go over the head of a lot of people, especially if they're not investing people. And I'm guessing a lot of the advisors are reaching out to you because they say, listen, I want to focus on financial planning and running my business. The investing side of things, I want to leave to someone else. That's just not our forte. So how deep in the weeds do you get on this stuff when educating?
- [07:54]
Ben Carlson
Yeah, I think that's exactly right. Ben. A big reason for outreach. This is an obvious point, but I think higher compounded returns are attractive to everybody. And I think a lot of people are starting to get fed up with, you know, if you look at like what traditional fix is done, I think there's like a natural shift to more options based, like look at buffered. Look at all the stuff that you see. Like we're going to be, at least I'm biased, but I think we're going to be a beneficiary of this shift because I think we're kind of the best in the options based space. Saying that as the founder and obviously there's some bias there, but I think the numbers support it. But from an education standpoint, I think we're probably not great at a lot of things. One of the things that I'd say we're decent at is having a conversation about somewhat complex strategies, but using like language and descriptors that are easy to digest because like, we realize advisors love it when we produce good results at the portfolio level. They love it even more when we're good partners to help them educate their clients. And that's, you have to be able to communicate in a way that, you know, use a lot of analogies that are easy to understand rather than talk about derivatives of derivatives.
- [09:12]
JD Gardner
So you all have a suite of ETFs and we're going to get into some of them. Do you, when you launch an etf, like, do you have any sense of what's going to take or what you think an advisor might think your best idea is or is. Do you still get surprised?
- [09:27]
Ben Carlson
Yeah. No. So this is, this is honestly the, the cheat code that we've had is we work, we are in the trenches with advisors and we've seen the good, the bad and the ugly. And it, like, even our bit, our whole, in our, our entire services side of our business, that whole thing was birthed out of like numerous conversations. Like when we were up in your office, whenever it was 15 or 16, you know, we were like naive enough to think we're just going to go tell a cool story, have a great strategy, and we're going to raise assets. And it'd be like you would call me and ask me about, I'm not just using you as an example, but, you know, I'd come pitch a product to you and you'd call me about some like, small cap allocation and what I thought about it and it's like, I'll help you with this, but I'd rather you buy my F fund. And so the after 500 of those conversations, it's like, you know what? We probably need to have a services biz. And so all the strategy ideas, there's definitely some thought about, like, what could the allocations use. But there's also a ton of like, okay, we've seen X amount of dollars flow to these buffered strategies. Let's launch something that's better than that. Like, that's. So we just, we have a cheat code in terms of like product roadmap.
- [10:41]
JD Gardner
So obviously you, you guys went through that experience and you found your, you found your path. But so, so it all worked out. But if, if you could have gone back to that point in time, what, what do you think was your biggest misunderstanding between what you thought you were launching and what advisors would actually be willing to buy?
- [10:58]
Ben Carlson
Yeah, freaking great question. The, the, if I could change anything, the early years would be, I would be less convicted that, hey, I'm gonna, I'm gonna like launch super high active share tracking era. Who, who cares about tracking error? Like, we're just gonna educate through it and, and we'll get there. Like, if you look at our suite, ultimately what we do now is, hey, just give them the beta. Like allow more beta to be injected instead. Cause, like, I would go to Ben's office and say, hey, Ben, like, our first strategy was like this like crazy active share momentum where it was either going to be the best performing strategy or the worst. And when it was the best, guess what happened. Ben was like, J.D. i can't buy enough of this. And when it was the worst, Ben's like, I'm selling all of it. And so instead of like having those types of strategies, we just kind of said, okay, well, we know there's a market for hedged equity. Let's launch what we view as the best version of that. We know that there's an opportunity to improve fixed and let's just like sneak beta into allocations, but do it in a way that we're, we protect downside. And that seems to have really resonated.
- [12:11]
Michael Batnik
So I like in your story, you have all talked, and I've had a number of conversations with Brian Jacobs, who's I guess one of the newer members of your team, friend of the show here. And he always talks about how you guys think there's a better way to do fixed income. Right? And I think this is something that a lot of advisors, I'm sure one of the reasons this has worked for you, because for years advisors were asking for this. They're saying, we got fixed over here, it's giving us nothing. We've got stocks over here and there's a huge wedge, like what's in the middle. And it was really hard for advisors to figure out what is that middle ground. And I think option strategies have kind of filled that void. But when you implement these strategies for advisors and for clients, what are you telling them in terms of allocation? Are you saying, hey, we're going to take a little bit of fixed income from this bucket, a little bit equity from this bucket, and it's going to be the middle ground? Is that how you kind of play it? Or are there different ways to think about that?
- [13:05]
Ben Carlson
Depends on, depends on where their current portfolios sit, that, that's a huge thing. But like we, we view some of our strategies differently. Like, we view, and this is like my view, it may not be the advisor's view, so you have to be, you have to kind of cater to that. But a lot of times, like our fixed income replacement in Armand is, hey, if you've got ag, if you've got any type of ag, like exposure, this is a replacement, It's a swap, one for one. But, but a lot of times, especially if you're dealing with a firm that allocates to liquid alts, you're going to have like, it's a little more nuanced and how you're going to view the allocation shift. But ultimately what we say is if you take a 6040 portfolio, which the whole world is based on a 6040 portfolio, if you said like, hey, can we make your business 75, 25 and do that where drawdown is like something you're comfortable with, we think your clients are happier long term, your business grows faster. Because like, this is one thing I think the asset management world gets wrong is like, like Ben, if you generate a 10% compounded return, and Michael, you generate an 8% compounded return over five years and we go to 99 out of 100 clients and say, do you want bins, 10% or my like the answer is I want bins. Well, Michael, the way the asset management business works is you say, no, no, no, no, hold on, hold on. My sharp ratio is higher than Ben's. And, and our argument is always like, that's almost an irrelevant measure to the end user. What matters more is like, give me the highest CAGR possible, highest compounded annual growth rate, but I need to know the denominator is a drawdown that I'm not going to like run for the hills for. And that's like, to me, it's like the light is shining on options based strategies.
- [14:57]
JD Gardner
So you think, I love that. That was really great. You think that your strategies would allow an advisor to be comfortable shifting a client from 60, 40 to 75, 25, 100%.
- [15:11]
Ben Carlson
So I probably shouldn't say 100% on this, but in my opinion is 100%. And we've got, so we're on our eighth year of GIPS numbers on our models. And so one of our greatest advantages is when you're talking about complexity of options based strategies. And an advisor says like, well, okay, well explain how we can just say, well, here's how we do it with our models. And the secret ingredient of those models is because the world is this Vanguard and BlackRock 6040 World, you have to deliver something that's different. Where the message is powerful results speak to that, but it can't be that different. And so that's kind of where our models are. That's kind of how we've built them.
- [15:54]
JD Gardner
So let's talk about your etf. So what was the first one that you guys launched? And is that, is that the biggest one or. Not necessarily.
- [16:00]
Ben Carlson
No, no. So we say, we say Aptis is the house that De Risk built. So we launched, we had a couple strategies. We ended up blending those strategies and then we started, you know, we launched DE risk in 18 and that was where, you know, we were more equity focused, hedged equity. And then we launched De Risk. You know, if you're in the hedged equity space. There's, there's plenty of competitors. It's really hard to get people's eyes off of something they've already used. There's inertia in, you know, there's cap gains, all that crap. Well, in fixed income it was like, well, there's really not many cap gains to worry about. Let's, let's just launch a better fixed income strategy. And that was de Risk. And that's kind of like what really, you know, we had some pretty lean years, let's call it, and then we launched de Risk and the world kind of changed for us.
- [16:50]
JD Gardner
So let's talk about de Risk. What is it? The ticker is drsk. What is this?
- [16:53]
Ben Carlson
Yeah, drsk. It is what we would call a replacement for, for fixed income. Not everybody views it that way, but the track record will speak for itself. Just when you compare it to ag, which is kind of how we allocate thinking of, hey, what's an appropriate benchmark? But, but what it is is to me, and keep in mind, I'm, I'm biased, so. But to me it's one of the best expressions of long volatility out there. Because you own 90 to 95%. There's three components. You own 90 to 95% in investment grade corporate bonds. So the duration is like, if we really extend duration, we're going to be roughly half the actual. So there's not a ton of like, what's my duration? Like all the stuff that I think is somewhat of a waste of time, but it's that like 5% of the portfolio that is a combination of long calls, both index and individual names and long puts. That is a, how we pair those together gives like what we call is like, it's a Trojan horse for more equity exposure in an allocation that's wrapped up in bond like volatility. And so if you look at the compounded returns, you know, I will shy away from using exact numbers. But it's, it's pretty, it's substantial outperformance with very similar risk. And that's kind of what doesn't take a lot when you show an advisor those numbers to get them to listen.
- [18:19]
Michael Batnik
The big thing for this strategy is you're getting the income from selling those puts in those calls.
- [18:22]
Ben Carlson
No, no, no, we're long. It's a long volume strategy. So we have, so we're long puts. We're long calls.
- [18:29]
Michael Batnik
Oh, yes. So hoping for that upside piece to. I got you. Okay.
- [18:34]
Ben Carlson
Yeah, yeah. So think about like if you look at the basket now we're going to own like I can take 5% of my capital in the fund and I can allocate to say, a handful of single names and index exposure. That 5% can give me 100% notional exposure pretty easily. So if I pair that, let's say all of these calls have six to nine months to expiration. So you have like, you know, you have. Tom, you've got kind of inherent leverage that's baked into options. But you also have this thing called defined risk where If I put 50 basis points in a single name call option, worst case scenario, I lose 50 bips. So there's no short volume blower. The you pair that with, with puts, long puts. So like before I talk long puts, the question, Ben, it's like, okay, well you've just given me 5% or 4 and a half percent in long calls. Well, if the market sells off 30% like that sucker's going to zero, right? Well, two comments back. One would be if the Vix goes to plus 80 or if it's if, if you get an 80 reading on the Vix, like 80, you're going to lose less money than you actually think because volume is just so elevated. But we pair these calls with puts that are much shorter to expiration, therefore have much more convexity, meaning they're like the gamma, a higher gamma. So. So like they can change, they can blow up in price much faster than your calls erode in value.
- [20:07]
Michael Batnik
So you're playing both sides of it.
- [20:09]
Ben Carlson
Oh yeah, we are. We're long volume, like in the tails we're going to be better in the tails, we're going to be fine within the tails we're going to be better on a right tail, better in a left tail environment.
- [20:18]
Michael Batnik
And I'm curious when you're implementing these option strategies because obviously the nature of the market and where the volatility is and where rates are, that can change the pricing of these options. How dynamic are you having to be? Is this all rules based or do you actually have to make some active decisions on these things?
- [20:33]
Ben Carlson
Yeah, this is the separator of Aptis, in my opinion, from the options based space. Like, I think if you look at the assets devoted to options based, the amount of path dependency is. It's a completely. I think it's, it's not many allocators truly understand the path dependency they're absorbing in option strategies where we're different is sure there's path dependency, there always is when you're owning options. But we are so active in how we manage the hedging component, the long call component that I think we, I think that's what's required like to deliver options based strategies in path dependent wrappers. Like I think that's, there's a use case for that but we just want to be as efficient and as effective as possible. So we're actively managing this stuff every single day.
- [21:22]
JD Gardner
So let's say I'm an advisor and I look at Dresden versus the AG and I'm thinking to myself, wait a minute, similar drawdowns, way better performance. But what's like the, oh like if I'm trying to replace bonds and JD and his team are active and they do something stupid like I don't want my bonds to be the reason why a client fires me because I had to, you know, get a little bit greedy. So is there any risk in that? Or how do, how do advisors digest that and then explain to a client hey, I'm giving you the ag but like with options it's just what's, what's the story?
- [21:59]
Ben Carlson
I'm thankful for this fellas because y'all are asking great questions. It. So going back to what I said earlier on kind of, I think you know, you asked, hey, if you could do it again, what would you change? So what we say is like if you're, if your strategy's worst case scenario is not digestible, let's don't launch the strategy. And so our worst case scenario in a DE Risk specifically is like I lose zero sleep on de risk, like absolutely none. Because if the world like what is the worst case scenario? The worst case scenario is if the market pins and doesn't move. Vols go nowhere and we just bleed out option premium. And even if we do, we still have a 5% yield coming off the bond portfolio. So it's like okay, our worst case scenario is very, very manageable. The worst case scenario in client size would be a extremely welcome. Like right now we're filming this March 4th, there's a little bit of all out there. Like it's, it's, this is what we love. You know, this is, this is a great thing for us because we are able to monetize things, move things around, restructure so long winded. But I think our worst case scenario is just not going to get us fired.
- [23:12]
JD Gardner
I guess maybe how, how are advisors explaining de risk to their clients? Like what's, what's the story? We're going to take some of your bonds and we're going to put it going to take 95 cents and put into bonds. We're going to take 5 cents and put it in. It's just.
- [23:24]
Ben Carlson
Yeah, yeah, yeah.
- [23:25]
JD Gardner
That sounds like a lot.
- [23:27]
Ben Carlson
Yeah, it is, it is a lot. At the strategy level, we spend, I would say 85% of our time, like harping on repetitively, your, your conversations with clients should live at the asset allocation level. What are you doing at the allocation level to improve outcome? Why does that matter? Because that's the majority of returns. And so like, I would say I'm not, I'm not avoiding that question. If it comes up, like, hey, explain this. I would just say it very rarely comes up. If you, if you have a powerful allocation story and you have proven results, like there's just not that many like Mr. And Ms. Jones that are like, explain the deltas that we're going to hold. Like it just doesn't get there.
- [24:11]
JD Gardner
So we can move off the investor in a second. But last question, are you seeing advisors like maybe dip their toe and then ultimately replace all of the ag or how are they incorporating this into their, into their fixed income sleeve art?
- [24:21]
Ben Carlson
Our entire business has been built this way. It's like we kind of sound a little bit like crazy, I guess. And it's like, hey, well I'm going to do this with one client or hey, I'm going to do this with like a small allocation. And then if eight months later performance is what it is, it's like, hey, we're just going to completely eliminate all AG in favor of De Risk. You know, it's a tow before you jump kind of thing.
- [24:46]
Michael Batnik
So let's talk about some of your equity strategies now. So your, your biggest strategy is the collard investment opportunity. So it's acio and that's bigger than De Risk now. Right, but that's a newer strategy. Yes, fill us in on that one.
- [24:59]
Ben Carlson
Yeah, the market for that is just so big, like the addressable market for hedged equity. So De Risk is going back to what I said. De Risk is a different thing. ACO is a what we would consider a better version of what already exists. Why is it a better version? So if you think about a typical collar strategy, and for the record, my team would probably hate and appreciate this, but like, I am an anti short volume, I am a long volume advocate. You will not talk to anybody. That's more like, I just think the presence of long volume allows you to take way more risk. And that optionality just does wonders for investors. But ACO has a component of both. So most Collared strategies like your long, your long S and P exposure or beta exposure, you short an index, you buy a put. You short a call on the index, you buy a put on the index. Right? So the short calls effectively your ceiling, the long puts effectively your floor. Well, if you're, if you're selling a call and buying a put on the same underlying, obviously those puts are going to be more expensive. So what that translates to is you've just created this equity basket that has a ceiling that is tighter than the distance of the floor. Does that make sense? So if you're, let's just make numbers up. If you're, this is going to be roughly close. If you're plus 5 on the upside, well, to fund a costless collar with the premiums of selling a call 5% higher, you're going to have to buy a put that's caught 8% lower. So if you tell any investor in the world, my opinion is like, hey, we own this thing, you could make five or lose eight. How does that sound?
- [26:43]
JD Gardner
Terrible.
- [26:43]
Ben Carlson
It's like, I'm not into that. So Acio, we're long in equity basket and we pick and choose. Remember, I'm anti shortfall. We pick and choose what we sell when we sell it, how much we sell it when we close it. There's active nature there. But we're doing this on single names. So we're not selling index fall, we're selling single name fall.
- [27:06]
JD Gardner
And the benefit of that. The benefit of that is what exactly?
- [27:09]
Ben Carlson
The benefit of that is we take those proceeds and we can tighten up our put.
- [27:13]
Michael Batnik
So more volatility means more income from those options.
- [27:17]
Ben Carlson
So we flip, we flip the, like we're going to be call it plus 10 minus 5 rather than plus 5 minus 8. And if you keep that structure intact, you're going to naturally outperform other hedged equity strategies over time.
- [27:31]
JD Gardner
What about the, the individual names? How are, how are you selecting those?
- [27:36]
Ben Carlson
Yeah, so I could give you like the, this is how we make it complicated, but ultimately it is, we want to correlate with the S and P because if you don't correlate with the S and P, you blow up your. Like you can't hedge the basket with an index hedge.
- [27:52]
JD Gardner
All right, so you're not necessarily looking for alpha on the stock selection level. Right. So.
- [27:55]
Ben Carlson
No, no.
- [27:56]
JD Gardner
So then, so then the pitch, so the pitch for the strategy is what, like, what's, what's the clean pitch?
- [28:01]
Ben Carlson
Yeah, the clean pitch is if you compare it. Like the easy pitch is if you Compare it to like a 60 40. We, we're going to absolutely destroy 6040. If you look at the numbers, if you look at like, you know, people spend a ton of time with like blended allocations, liquid alts, it's like, well you could just own aco and it gives you way more up capture with actually less drawdown. And so the clean pitch is just look at the numbers and upside versus downside. The more complicated pitch is if you already own hedged equity. Like we have to talk through the improvements of the structure itself.
- [28:39]
Michael Batnik
So most of your strategies, you would say the biggest, one of the biggest benefits of options is just the fact that you can reduce your drawdown risk and depending on which options you use, that changes how much of the drawdown you get. But that's, that's one of the biggest selling points.
- [28:52]
Ben Carlson
I would assume that is the secondary selling point. In my opinion. It, so it's where everybody flocks is like, well I like, I like knowing my drawdowns contained. But what we like, it's not that the drawdowns contained, it's the risk that I can absorb elsewhere where like if you, if you are, and I know that I'm probably more convicted that I need to be here, but if you think, if you think equities are going to outperform bonds for the next 10 years, well, isn't it beneficial if you could own more of those things? And so when I say, hey, you know guys, let's don't be 60, 40, let's be 75, 25, what do you think the first pushback you get is? It's like, well, my clients can't handle that vault. And having the hedge in place allows that conversation to be made easier. But then when you have like a 2023 or 2024 and if you look at the allocation impact, it's like, okay, I can get behind this.
- [29:49]
JD Gardner
What do you think are some of the biggest misconceptions about option based ETFs?
- [29:54]
Ben Carlson
Maybe it's not a misconception, but one of the things that drives me nuts is like active options based strategies that do one trade annually and charge 80 basis points a year for it. That would be one thing that I just don't think people fully the marketing appeal of. Like, you know, I can be whatever buffered numbers you want to put. Like that sounds really interesting, but if you actually look at what's happening, there's all types of path dependency. You're paying way too much for it. That, that would be kind of my one Gripe in the options based space, which there's, there's been assets rolling in to those types of things.
- [30:35]
Michael Batnik
So this, it's really hard to do a quantitative rules based strategy for one of these things. Right. Where you can just set it and forget it.
- [30:43]
Ben Carlson
Well, it's not hard. It's really easy. You can just set it and forget it and walk away. And the marketing appeal, like firms do a really good job of like how easy this is to explain to a client because it's one like, well, that's okay, but it's just not that effective when it comes to actually producing higher keggers.
- [31:02]
Michael Batnik
Right. If you want to squeeze the most out of it, out of the income, out of the upside, downside, whatever it is, you have to actively manage these kind of strategies.
- [31:09]
Ben Carlson
Yeah. And the other thing too, which is probably a better answer is, and I'm not going to speak on specific strategies, but one of the most successful strategies ever to me is the best it's active based option strategy kind of birthed out of 2022. But it was like, it's the best definition of performance chasing that you will ever see. And it's like, it's one of the short ball strategies where it's like, hey, look at all this income you're producing off option premium. I always like, like we have so many conversations where it's like, hey, we sold option premium for 100,000 bucks. It's like, well, that's going to be really painful when you buy it back for a million. Like that's, that's what a lot of people just don't. They see that initial option premium that they sold, they don't realize that like, what does it look like when we keep getting our face ripped off from a rising risk asset market?
- [32:02]
Michael Batnik
Right. I like that because one of the things that Michael and I have always talked about over the years when thinking through any kind of alternative strategy is that it has to be able to survive a bull market. Right. If you're just focusing on downside volatility or income or whatever it is, that's great. But that stuff doesn't happen nearly as much. Three out of every four years the market goes up. You have to figure out how to survive those kind of periods. So that's, that's what you're more focused on is how do we get more of the ceiling with, with also some protection.
- [32:29]
Ben Carlson
You have to, you have to compound capital. If you do not compound capital, your, your shelf life is, is much, much shorter.
- [32:36]
JD Gardner
So what's the, what's the trade off here, like what should, what should advisors and end users be thinking about? Because you know better than most, there are no free lunches. And so if you're telling me that I could have, I can have something that gives me ag, like downside capture, but with significantly higher returns. Where's doesn't that sound like a free lunch? Like what am I missing?
- [32:58]
Ben Carlson
It's not a free launch. You're still taking like that, that excess return is just coming from beta. Like that's one question I get a lot is well, how do these models produce alpha? And it's like, well it's really just more beta. That's, that's the answer. So I think the bigger question to that comment is, you know, what is the discrepancy between like risk assets and conservative assets going to be over the next 10 plus years? And if you're in the camp that there's not going to be one, then we don't really appeal. If you're in the camp that hey, there's going to be a significant difference then like we're, we're pretty dang appealing at that point. So the trade off is like yes, you're absorbing short term volume, like more uptick in like the daily volume of a portfolio. But what you're getting back is like the ability to compound at higher rates over longer period of time and do it really tax efficiently. That's the other thing I know y'all mentioned, Brian, he, he harps on, hey, we get you know, 5% yields. Well if inflation's 3 and your tax rate's 40%, like what, what are you really getting?
- [34:05]
JD Gardner
5%.
- [34:08]
Ben Carlson
That's.
- [34:09]
Michael Batnik
We don't need to like, we don't need to get into CPA stuff here, but tell us what the difference is between owning option type of strategies in an ETF wrapper. From a tax perspective.
- [34:19]
Ben Carlson
Yeah, I would point to our ETFs just their cap gains distributions. That would be for a more technical answer. Let's review that after the show. But I think just the benefit of S&P 500, this is what got me into the ETF space is reviewing ETF all ETF portfolios for ultra high net worth families. And it's like okay, where are these cap gains distributions? And so if you can compound like your pre tax and post tax compounding returns in a perfect world they're going to be like very, very close. And the ETF wrapper itself allows you to access an inherently tax inefficient option based strategies much more like you can close that gap. And that's been the high level answer of like, hey, if I can compound at 10% pre tax, hopefully my post tax isn't 6%. Like, like that's where we want to reduce the tax drag.
- [35:17]
JD Gardner
So JD you said one of the advantages that you all have is you're really in there with the trend in the trenches with advisors. You're not just whiteboarding and thinking about the best strategy. You're thinking about what's the best strategy I can deliver the people that people are going to actually buy. And I think you guys have obviously done an incredible job with that. So for advisors that are just discovering Aptis and want to learn more about how you work with them, where you fit into their portfolio, where can we send them?
- [35:39]
Ben Carlson
Yeah, the easiest place would be the website we've got. They can sign up for content, they can hit us, we produce. I've got, I would say like the best thing that we've done is like we've attracted really good people and we have content machines. And so, you know, we work with a lot of advisors just providing content where, you know, that's the only thing we do great. We'd love to do more for you, but the website, the blog, the content hub, if you come, if you come there, I think, I think you'll find some useful.
- [36:13]
Michael Batnik
What's the website? JD hit us with it.
- [36:14]
Ben Carlson
Aptiscapitaladvisors.com Appreciate it.
- [36:17]
Michael Batnik
Thanks JD okay, thanks to JD member aptiscapitaladvisors.Com to learn more, email us animalspiritscompoundnews.com.