WEBVTT
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Infrastructures all around us. Explore tolls
the pro shares DJ Brookfield global infrastructure ETF
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that invest in infrastructure owners and operators. Investing involves risk, including the possible
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loss of principle. Carefully consider the
investment objectives, risks, charges and expenses
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before investing. This and other information
can be found in the summary and full
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prospectuses. Read them carefully before investing. OBTAIN THEM AT PRO Sharescom. Pro
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shares are distributed by Sei Investments Distribution
Code, which is not affiliated with the
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funds advisor. Welcome to let's Talk
Ats. I'm your host, Jason Capool,
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and I've been monitoring the investment space
throughout my entire career. Here at
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seeking Alpha. I'm an ETF strategist
and my role is to uncover and bring
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forward news and information to the investor
community that is meaningful and actionable. Each
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week, a different guest and I
will take an indepth look at a particular
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aspect of the rapidly evolving exchange traded
fund space, with a focus on how
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investors can best utilize ets to reach
their investment goals. Before we begin,
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a brief disclaimer. This podcast is
for entertainment and educational purposes only. Nothing
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said here should be taken as investment
advice. All opinions expressed on this show
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are those of individuals expressing them alone. A full set of disclosures will be
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included at the end of this show. You can subscribe to let's talk ets
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on apple podcasts, Google podcasts,
spotify, for whichever podcast platforms you prefer
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for reference purposes. This podcast is
being recorded on the afternoon of September Thirteen,
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two thousand and twenty one. Joining
Seeking Alpha today is our guests Paul
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Kim, who's the chief executive officer
over at simplify ETF. Pole holds an
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MBA from the Wharton School of the
University of Pennsylvania, as well as a
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bachelor's degree in economics from Dartmouth College. Additionally, pulls a CFA charter holder
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as well, and prior to cofounding
simplify, Paul was the managing director of
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Ets Strategy at principal global investors.
He's also held roles at Pimco, Willi
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Stein and partners and Lazard, as
well as others, but Paul has spent
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a bulk of his career as a
key innovator and architect in the ETF industry
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and we're very excited to have him
here to join us and discuss our topic
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around how the options exchange traded fund
markets can be utilized inside of an individuals
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portfolio. So, without further introduction, I'd like to introduce our guest today,
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Paul Kim x Jason. What a
great intro and thank you for this
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opportunity. Absolutely. How's everything going
over there today? We've been busy.
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We're going very quickly and in terms
of both people, in terms of assets
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and clients, and increasingly in the
number of ones that we have listed,
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and so all of those things mean
we're constantly busy talking to and working with
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and learning from our clients. It's
been a really, really fun ride so
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far. Great I love to hear
it. I'm glad that the balls going
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in the right direction. You know. So, Paul, the way we
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usually like to kick things off and
kind of start off the podcast is to
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allow our audience to learn a little
bit more about who we're speaking with.
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So I know I gave you a
little bit of a brief introduction, but
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I think it's always a little better
from directly from the horse's mouth itself kind
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of see if you could give us
a little bit of a detailed introduction,
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I guess, to both yourself simplify
ets, what you guys are all about,
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your objectives and information kind of around
that space. Sure. So simplify
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is a SEC registered area. We
only focus on etfs and are particular focus
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with a ets because it's obviously very
competitive and fairly mature market at this point.
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is in the realm of using options
or, quote quote, long volatility
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type strategies to enhance potential returns,
to hedge against risks and just deliver very
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unique profiles of investment strategies, and
so that's been sort of fun building it
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essentially a fin tech startup. And
then, in terms of my background,
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this is my third simplify will be
my they're start up ETF platform. The
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first two were with very big branded
asset managers. So my first job in
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the ETF industry was with Pimco really
as an intern in Oh and, right
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during the crisis, and then joined
full time after my Mba and oh I'm
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and it's been it was a fun
ride, about almost eight years and really
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help start pimcoes ETF platform from Ground
Zero, encompassing mostly fixed income etfs.
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Initially some passive strategies, but mostly
actively manage fixed income strategies, which were
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a novel innovation at the time and
continue to be a very small fraction of
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the market but growing much faster than
the broader market at this point. But
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it was fun. It was fun
having a startup experience with a within a
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very large established brand and sort of
navigating the dynamics of trying to matter to
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a big you know, but himnoth
of organization and sort of martial resources and
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things like that. So that was
a great experience, culminating sort of halfway
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through in the launch of bond with
bill gross where we took the flagship strategy,
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his total return fund or strategy,
and brought it into ETF vehicle.
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And again that was a very big
sort of innovation at the time and it
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was kind of surprising to see such
a large flagship strategy being brought into the
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market. So that was a great
foundational experience where I made a lot of
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relationships, learned the ropes of the
industry, learned the challenges and the advantages
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of DTF vehicle and then I took
that learning I was hired by principle in
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early two thousand and fifteen and really
mandated to build out an ETF platform for
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them from again, from scratch,
and this one had a different sort of
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puzzle, and that principle was an
established asset manager with a lot of assets
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and and these across different vehicles and
unlike Pimco, which was very particularly focused
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on fixed income, principle was much
more of a multi asset and as allocation
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focus provider, probably little less of
a brand name right, versus PIMPCO,
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which is super wellknown in fixed income. So challenging that and creating sort of
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a ETF platform that took advantage of
again the strength, sort of made may
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do with the relative weaknesses and took
advantage of the respective distribution. Lo and
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behold, sort of five years into
principle, I, along with some of
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my co founders, thought of a
really, really interesting development on the horizon
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and specifically I noticed that the ETF
sort of vehicle was position to take advantage
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of a very important regulatory change in
the regulation of derivatives. The SEC came
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out in October of twenty two thousand
and twenty two thousand and nineteen regulations around
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the use of the rivatves and it's
been long proposed in the past, but
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the new rules took all register investment
companies and couding etfs from a very limited
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use of derivatives into a much more
flexible one, and I thought that would
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allow ets to essentially provide institutional caliber
strategies, think private funds and hedge funds,
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inside of thetf rapper, and so
that's really what motivated this third platform
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that we're working on. Is that
sort of change, but bigger pictures,
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the democratizing and providing access for investors. Yeah, that's very interesting and it's
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obviously you have a kind of well
engrossed background of just years and years of
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being in this space and growing out, you know, and learning all the
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INS and outs of ets on multiple
different layers, and it's interesting that you
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guys are using this technique with options
layered into the ets, which is to
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some degree relatively new in the aspect
of how it's being brought forward to the
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market. I was curious if you
could elaborate, you know, some of
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the reasonings behind that approach. You
know, how's it actually even done,
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and I guess what are some of
the pros and cons, or maybe perhaps
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risks reward might be a better way
to place it. You know what's that
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approach all about? So options are
interesting because they provide very, very unique
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exposures, right. So I think
the ETF landscape has done very well providing
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vanilla market exposures as well as Non
Vanilla right that your sector funds and thematic
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ets, for example. Options create
the possibility of creating nonlinear or custom payoffs.
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So if you have a broad range
of potential returns from any any portfolio,
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putting in options means you could put
floors, you could put ceilings,
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you could transform and move around the
belly of the distribution. And really,
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for us we're focus a lot on
the tails and particular and so risk as
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sets generally have a profile that looks
like, you know, generally positive because
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you are compensated for taking risk.
But at the same time, every once
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in a while extreme markets kick in
and you have the potential downside of that
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risk. Right, you have a
chance to lose a lot of money.
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And so options are interesting in that
they create new ways of protecting portfolios from
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that downside or trading off some of
that upside return and protecting some of that
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downside. So it just creates another
tool kid and in the ETF wrapper.
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It's particularly interesting because some of the
common knocks against options are that, hey,
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look, these are very they lack
transparency in some forms. Right,
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if they're embedded inside of a hedge
fund, how do you know what someone
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is doing is what they claim they're
doing in a ETF portfolio? Some of
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the key disadvantages of options in the
past complexity, you know, sort of
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opaque use of them and pricing.
All of these things and increasingly, potentially
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even tax efficiency, lend themselves well
for the ETF vehicle. So a couple
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of our strategies we have. I'll
talk about simple one, are downside hedged
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SMP strategy, ticker SPD. We
basically take almost a hundred percent exposure to
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smp five hundred and we lay our
layer on an option overlay. So we're
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buying puts and the combination of equity
plus puts creates basically a downside hedge strategy
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that the hedges can protect when market
sell off. In normal environments, De
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smp five hundred that it holds is
expected to generate a positive return and during
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sort of most years you pay a
little bit insurance costs and and sort of
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stuff for a dragon performance, but
hopefully the downside protection more than makes up
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for it over time and and at
the least provides some sort of much needed
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diversification and risk mitigation when market sell
off. Yeah, it's interesting because I
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think obviously one of the main corner
stones to investing, which I think everyone
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will agree on, is it's all
about management and how you manage your positions,
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depending on your portfolio per se,
and just looking at some of the
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ets that you guys have, some
of them I found to be pretty interesting.
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Obviously they all to some degree manage
risk, but with interest rates.
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You have another one, I believe
that's around volatility, s fall and P
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fix, and it's it's just an
interesting approach that you guys can use and
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I was hoping that you can maybe
speak on behalf of a little bit of
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that space specifically. In my opinion, I would I personally would be love
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to hear about the volatility aspect to
be protected against and and what that kind
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of looks like. And I assume
that most of the funds that you guys
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have follow a similar strategy, options
layered, and I'm just curious if there's
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anything different about them in terms of
types of option or not types or amounts
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of options that you're using with in
a ETF and kind of just what that
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looks like. Sure, so how
do we think about the use of options?
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Again, you could have an infinite
combination of these things, right,
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that's that's a lot of customization and
power. But on the other side,
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what you build matters a lot,
right. So it's an open sandbox.
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Our courseuite three sort of spfive hundred
products, as well as our first as,
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that one hundred ETF and then increasing
and will have other Betas. The
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course sweet is really intended to give
a relatively low tracking error exposure to under
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lying Betas and then overlaying puts and
our calls to sort of push around distributions.
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So manipulating sort of the tails.
P fix is really interesting. It's
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our simplify interest rate hedge ETF and, unlike all of our other etfs that
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primarily rely on listed options, p
fix really reaches into the sort of tool
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kit we've signed is does and these
are agreements governing access to large rivers providers
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like, you know, the Goldman's
and Morgan standings of the world, and
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really access the part of the world
that's been really only accessible by the largest
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hedge funds and asset managers, right
the pimpcoes or the large hedge funds out
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there. Certainly most retail investors,
as well as even a high net worth
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investors, are not able to access
that part of the world. But why
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is that access interesting? Here in
the right and the world of interest rate
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derivatives, the largest transactions and the
most flexible coverage is actually in the OTC
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world where again, large corporations and
asset managers sort of hedge interest rate risk
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or tradeoff fixed versus floating exposures,
and so that that sort of market place
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is inaccessible through the normal listed options. So yes, you could buy puts
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on Treasury bond etfs, but they
don't go very far and they tend to
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be very expensive. But if you
are able to access that OTC world,
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in our case the world of swaptions, all of a sudden you could get
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a very long term interest rate option. In our case we're looking at the
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seven year right, so very distant
in the future. Why? Because sometimes
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one wants to hedge the direction of
a move, in this case interest rates.
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We think there's a lot of reasons
why interest rates will go up,
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but it's really hard to know when
or why. And so if you want
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it to hedge a long term problem
but not have to exactly get that timing
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right, a very long maturity option
could be really interesting. The price you
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pay, though, is they tend
to be expensive, and so in this
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strategy, what makes it really really
interesting is that the cost of that insurance
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is heavily subsidized by writers of that
insurance, in this case international insurance companies
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that need to get some of this
risk off their books. So creates this
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really, really compelling long term interest
rate hedge that really doesn't cost a lot
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of carry, as it's called,
I either cost you pay for that insurance
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and it packages this product that was
again not accessible to your average investor inside
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of an ETF. And so now
any ETF user could access the OTC market
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and hedge their portfolios from interest rates
using a very convenient eitf rapper, and
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that sort of the sort of DNA
we're trying to get to right provide institutional
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caliber almost hedge fun like exposures,
but in an accessible way where Ura's and
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advisors and you're just generally do it
yourself. Investor could start looking at these
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tools and get world class, institutional
caliber access. Alpha trader is a weekly
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00:16:48.649 --> 00:16:52.490
investor focused podcast produced by seeking Alpha
that will dive into the most impactful market
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00:16:52.610 --> 00:16:56.529
news and in set the stage for
upcoming market events. We are your hosts,
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00:16:56.809 --> 00:17:02.559
Aaron task and Steven Alpha. Episodes
are available every Tuesday and will include
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discussions with market experts on topics that
are relevant to active traders who are seeking
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00:17:07.200 --> 00:17:17.390
out be sure to subscribe so you
never miss an episode. The interesting it
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because I feel like it's a it's
an area that's untapped to some degree,
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and I was actually going to ask
you are there any areas of the ETF
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market that options are maybe under utilized? Kind of what I'm driving at is,
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is there a sector or industry that
options based ets might not even be
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available or are very limited? I
know that you guys cover a Fintech area,
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the simplify voltfin tech disruption ETF ticker
vfin, but are there obviously many
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out of their industries, subsectors and
gaps out there that can potentially be filled
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in the near future, and I
was just kind of curious to see what
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that landscape looks like in your eyes. Yeah, so if you look at
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the current sort of use of options
in the ETF world, the predominant to
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buckets are income, right call writing
type of strategies. That's that's where a
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lot of the assets are and a
lot of history is and selling options,
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ie selling some form of insurance,
is a very ink high income generating strategy
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and you see, you know,
yields often in the double digits for some
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of these type of strategies and in
a world where yields are so low,
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you can see why it's attractive.
On the other side you see a lot
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of assets and hedge strategies, whether
they're buffer strategies or or sort of collar
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type strategies, and there these type
of strategies have been around again often decades,
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and other vehicles like mutual funds or
structured notes, and you're trading off
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some degree of certainty, ie.
Bands of potential distributions, but you're paying
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for that by get off and giving
up meaningful upside or incurring a lot of
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cost. So I think that that
type of sort of those two buckets still
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have room to run. Right,
they're generally only offered in some of the
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largest Betas. You could see,
these type of strategies slowly rolling out two
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sectors and industries as well. So
I think that could be ongoing. The
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third bucket is sort of where we
specialize in. It's sort of hey,
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let's let's try to really really do
what's not been done recently. Let's look
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at tail strategies, let's look at
creative ways to not give up the upside
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but try to meaningfully protect against sharp
moves down. So that combination of looking
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again, quote unquote, towards the
extremes or the tails of a distribution,
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I think that is very early innings. That's where we're really focused on and
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trying to build that kind of concept
into portfolios. Ie, people care when
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they lose money a lot to try
to find the way to add more downside
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protection and but people also need to
keep up with inflation and their investment objectives
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and it's getting increasingly hard to do. The last thing you want to do
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is give up too much of your
upside, right. so that combination the
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sweet spot. We think there's a
lot more to come there. Yeah,
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that balancing act of finding exactly what
the investor is looking for. Obviously,
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like you mentioned, to cover both
ends a question. I did want to
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kind of run past you is you
know, who do you believe are the
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right investors that should be consider ring
option based ets as a part of their
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underlying strategy? I think that certain
people might think that that it's a more
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of an advanced investor. Perhaps it
doesn't have to be, and I would
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just kind of curious to understand a
little bit of your taken insight on the
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types of individuals that might be in
a position to look into it in more
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detail learn a little bit more about
it. You know, how does it
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fit into the traditional portfolio? Is
Its supplementive, supplementative, additive? kind
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of curious around the little that sure
so. If it depends again on the
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sort of desired outcome. I think
if the investor trying to optimize for income
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right, that's often a very broad
spectrum of investors, off from retirees,
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off in very retail. I think
income generating strategies using options continues to be
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bigger and growing part of that that
sort of tool kit. So I think
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that is more of your average investor
right with advisors again optimizing for income.
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The buffort strategy, similarly, I
think those have been much more of a
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retail retire play as well, because, hey, as you're getting closer,
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as a client is getting closer to
retiring or just entered retirement, the last
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thing they could do is stomach a
long cycle of, you know, a
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draw down, right, and so
buffer strategies again exchange much more certainty of
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downside protection but give up a lot
of the upside. And it makes sense
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in that context. Right, you're
more about protecting the nest egg than trying
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to really swing swing for the fences, the last bucket again, where we
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traffic. It's really thinking about most
a very quantitative and probabilistic view of the
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world. Are there ways to manipulate
portfolios and distributions that again diminish the probability
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of significant downside, maintain a reasonable
probabilities of upside and embed some sort of
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potential option payoffs that, you know, if things go just the right way,
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for very modest cost, you have
a lot of upside, what's called
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asymmetric payoffs, like the building up
portfolios using those kind of sophisticated lenses of
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probabilities of risk premia. This is
getting into the quat world, right,
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of systematic hedge funds and answer of
that sort of realm which is still very,
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very minorready of the sort of assets
today, but a growing share.
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And so I think that Lens is
also interesting and we could play in all
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three buckets and have strategies that attract
the end users in all three. But
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I think the third one is really
where there's a lot of novelty and a
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lot of innovation going on. Yeah, it's interesting. In appears that it
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can fit for a lot of individuals
and I guess maybe market education might be
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something that just growing, like you
mentioned, in the space overall, people
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are becoming more and more aware of
this type of investment vehicle and how it
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can be introduced to their portfolio and
advantages that they can take out of it.
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So it's kind of just with the
course of time it'll become more and
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more prevalent to each individual, depending
on their overall situation. Yeah, especially
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if it's in a very transparent vehicle
like an ETF it it's going to have
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price history, it's going to have
portfolio disclosure. Education is a little easier,
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right when you know what's what a
portfolio comprises than it is when you
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have sort of a black box where
you get sort of quarterly statements, right,
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and so I think that's part of
the opportunity. It also keeps away
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a lot of sort of providers who
value that sort of you know, disclosure,
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sort of protection. But our perspective
is we're embracing the transparency of etfs.
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Were providing access at that democratizing it. So we we love sort of
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showing our portfolios and our approaches and
we get comments back from our clients as
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well, and so we're constantly trying
to iterate and improve. Yeah, absolutely,
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and you guys kind of are on
that frontier of kind of bringing this
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to market to some level, and
I was just going to ask you what
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sort of response have you seen from
the market participants out there, not,
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I guess, only just around simplify
ets, but also kind of the idea
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of options and ETF market place as
a whole. I know you guys are
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relatively new, launch back in two
thousand and twenty, but you know what
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sort of receptions you know, been
like that out there for the market and
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is there, you know, I
guess you could say longer term trends that
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you can see down the road and
that you know, five year spand not.
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You know, obviously you don't have
a crystal ball in front of you,
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but you could kind of get a
feel for what might be the future.
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Yeah, and that's and some cases, necessity is the mother of invention,
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right. And so we have these
big portfolio problems, whether again elevated
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and almost nose bleed valuations and concerns
around sort the sustainability of these prices on
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one hand, low bond yields and
sort of inability to hedge and protect portfolios,
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low yields and income, so how
did people sort of take care of
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themselves? And the increasing cost of
living right. All these things are these
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big problems and your regular vanilla asset
classes are part of that problem right there.
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The definition of low yields mean US
high bond prices, a definition of
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high valuations means high prices and stocks, and so options create an opportunity to
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do something about these portfolio problems and
interesting ways, and I think that's generated
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a lot of interest and we're certainly
seeing that. When we talk to our
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clients it's starts with that problem and
we help sort of address the big ones
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on the table and will work our
way through as many problems as we can,
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buffy, but big picture, I
think options are benefiting from a lot
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of trends, not just these big
problems and needing a solution there, but
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the stigma around derivatives and options has
largely gone away. The financial crisis is
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very, you know, distant in
the rearview. A lot of these options
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are listed and have no counterparty risk
as an exchange listed sort of exposure,
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and so that helps a lot,
and the transparency of pricing and the volumes
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available online I'll help. And then
beyond that, I think demographically, if
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you look at the sort of younger
generations, they've lashed onto the upside potential
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right there. They're they're certainly the
Robin Hood crowd has been known to trade
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a lot of options, single stock
options, and have embraced with it,
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Ay know it or not, upside
convexity in these specific trades. And once
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that's sort of stigma moves towards you
know, comfort, and I think it
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is largely comfort at this point.
I think we've seen that demand trend grow
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and we've seen in particularly single stock
options increase the tune of five x of
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sort of you know, sort of
pretty periods on sort of outstanding contracts.
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Continue see the growth cross all types
of the rooms trading, especially enlisted options,
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and and asset managers are starting to
use them again for income, for
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hedging. So I think the growing
sort of use and liquidity and comfort with
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options bodes well and the grand scheme
of things, it's still very small in
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exposures relative to you know, Vanilla
stocks and bonds and I think that has
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a lot of him to grow.
That's great and I mean, I guess
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with the growing aspect of like you
mentioned the Robin Hood Trader and becoming more
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mainstream to some level, it's it's
an alternative that you know, once things
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catch on, they can tend to
be, you know, exposed and blown
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up on a shorter time than traditionally
in the past, which is which is
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great to hear. And I know
that we are coming a little bit to
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the tail end of this podcast,
I did want to kind of give you
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a little bit of an opportunity to
kind of give you the last word to
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our audience. I know that we
obviously spoke about a couple of different funds
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that you guys have and around the
option space, but I wasn't sure if
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there was anything that we didn't perhaps
cover, if there was something that you
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want an outline and also, obviously
where individuals can possibly connect with you learn
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more about simplify ets and some of
the funds that you guys have to offer.
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Sure our website first is a simplify
that US and certainly all of our
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etfs are listed there and many of
my colleagues are sort of known thought leaders
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or I think of your Michael Greens, Harley bassman's and then increasingly others on
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our team have sort of this sort
of social reach, which has been great
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because it's a way to sort of
start conversations and and also just attract a
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lot more sort of core followers or, you know, kind of fans whoever
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help spreading the awareness and, you
know, giving a lot of feedback as
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well. I think in terms of
last words, I think we're very,
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very early innings, not just as
a company but I think as an industry.
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The ets have a long way to
go and I think generationally that preference
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is only growing over time, and
so we just want to carve out a
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really thoughtful part of that market.
Our brand is very much working with advisors.
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Although Our Name is simplify, some
of our strategies aren't off the cuff
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simple right, and so I think
we try, we strive for simplicity,
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but it's simple enough, right,
and often these type of strategies, simple
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enough is still a pretty high bar. But what we are doing is bringing
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again very unique tools and exposures for
advisors that they just haven't had access to
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before, and and not just to
provide access, but to deliver meaningful access
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that helps their business. And so
I think that's what we're trying to do,
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is great ways to generate more attractive
risk reward combinations, really focused on
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the downside and then, as a
firm, not giving up the upside,
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because that upside is what's going to
keep up with inflation and keep up with
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the increasing investment needs of our clients. Awesome. Yeah, and I love
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it, bringing a new avenue,
I guess, to the market in terms
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of, you know, exploiting the
options market in the ETF world and wrapping
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it all together and finding new overlapping
opportunities that maybe weren't previously known by individuals
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out there. And again, obviously
want to thank you, Paul, for
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00:31:34.029 --> 00:31:40.069
joining us again. It's Paul Kim, cofounder and CEO simplify ets, for
373
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joining us today on the let's talk
ets podcast. Is Insights on the option
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00:31:45.150 --> 00:31:48.339
base. Ets have been great and
we appreciate all the knowledge you were able
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00:31:48.380 --> 00:31:52.619
to share with us today, but
until next time, this is your host,
376
00:31:52.660 --> 00:31:57.299
Jason Capool's signing off. For disclosure
purposes, Jason Capool is not long
377
00:31:57.380 --> 00:32:04.049
any ets discussed. Paul Kim is
long all etfs discussed on this podcast.
378
00:32:05.210 --> 00:32:08.490
This podcast is brought to you by
tolls. The PRO shares Dj Brookfield Global
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Infrastructure ETF. Look for Ticker Toolz. Pro shares are distributed by Sei investments
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Code, which is not affiliated with the
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funds advisor. Welcome to let's Talk
Ats. I'm your host, Jason Capool,
8
00:00:35.539 --> 00:00:40.090
and I've been monitoring the investment space
throughout my entire career. Here at
9
00:00:40.170 --> 00:00:44.609
seeking Alpha. I'm an ETF strategist
and my role is to uncover and bring
10
00:00:44.810 --> 00:00:50.600
forward news and information to the investor
community that is meaningful and actionable. Each
11
00:00:50.640 --> 00:00:54.520
week, a different guest and I
will take an indepth look at a particular
12
00:00:54.560 --> 00:00:59.640
aspect of the rapidly evolving exchange traded
fund space, with a focus on how
13
00:00:59.880 --> 00:01:04.950
investors can best utilize ets to reach
their investment goals. Before we begin,
14
00:01:06.030 --> 00:01:11.390
a brief disclaimer. This podcast is
for entertainment and educational purposes only. Nothing
15
00:01:11.590 --> 00:01:17.870
said here should be taken as investment
advice. All opinions expressed on this show
16
00:01:18.349 --> 00:01:23.180
are those of individuals expressing them alone. A full set of disclosures will be
17
00:01:23.219 --> 00:01:26.140
included at the end of this show. You can subscribe to let's talk ets
18
00:01:26.340 --> 00:01:34.010
on apple podcasts, Google podcasts,
spotify, for whichever podcast platforms you prefer
19
00:01:34.890 --> 00:01:40.329
for reference purposes. This podcast is
being recorded on the afternoon of September Thirteen,
20
00:01:40.370 --> 00:01:44.170
two thousand and twenty one. Joining
Seeking Alpha today is our guests Paul
21
00:01:44.250 --> 00:01:49.760
Kim, who's the chief executive officer
over at simplify ETF. Pole holds an
22
00:01:49.840 --> 00:01:53.200
MBA from the Wharton School of the
University of Pennsylvania, as well as a
23
00:01:53.239 --> 00:02:00.040
bachelor's degree in economics from Dartmouth College. Additionally, pulls a CFA charter holder
24
00:02:00.200 --> 00:02:06.549
as well, and prior to cofounding
simplify, Paul was the managing director of
25
00:02:06.909 --> 00:02:14.030
Ets Strategy at principal global investors.
He's also held roles at Pimco, Willi
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00:02:14.110 --> 00:02:17.780
Stein and partners and Lazard, as
well as others, but Paul has spent
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a bulk of his career as a
key innovator and architect in the ETF industry
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and we're very excited to have him
here to join us and discuss our topic
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around how the options exchange traded fund
markets can be utilized inside of an individuals
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portfolio. So, without further introduction, I'd like to introduce our guest today,
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Paul Kim x Jason. What a
great intro and thank you for this
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opportunity. Absolutely. How's everything going
over there today? We've been busy.
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We're going very quickly and in terms
of both people, in terms of assets
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and clients, and increasingly in the
number of ones that we have listed,
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and so all of those things mean
we're constantly busy talking to and working with
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and learning from our clients. It's
been a really, really fun ride so
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far. Great I love to hear
it. I'm glad that the balls going
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in the right direction. You know. So, Paul, the way we
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usually like to kick things off and
kind of start off the podcast is to
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allow our audience to learn a little
bit more about who we're speaking with.
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So I know I gave you a
little bit of a brief introduction, but
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I think it's always a little better
from directly from the horse's mouth itself kind
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of see if you could give us
a little bit of a detailed introduction,
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I guess, to both yourself simplify
ets, what you guys are all about,
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your objectives and information kind of around
that space. Sure. So simplify
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is a SEC registered area. We
only focus on etfs and are particular focus
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with a ets because it's obviously very
competitive and fairly mature market at this point.
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is in the realm of using options
or, quote quote, long volatility
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type strategies to enhance potential returns,
to hedge against risks and just deliver very
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unique profiles of investment strategies, and
so that's been sort of fun building it
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essentially a fin tech startup. And
then, in terms of my background,
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this is my third simplify will be
my they're start up ETF platform. The
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first two were with very big branded
asset managers. So my first job in
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the ETF industry was with Pimco really
as an intern in Oh and, right
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during the crisis, and then joined
full time after my Mba and oh I'm
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and it's been it was a fun
ride, about almost eight years and really
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help start pimcoes ETF platform from Ground
Zero, encompassing mostly fixed income etfs.
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Initially some passive strategies, but mostly
actively manage fixed income strategies, which were
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a novel innovation at the time and
continue to be a very small fraction of
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the market but growing much faster than
the broader market at this point. But
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it was fun. It was fun
having a startup experience with a within a
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very large established brand and sort of
navigating the dynamics of trying to matter to
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a big you know, but himnoth
of organization and sort of martial resources and
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things like that. So that was
a great experience, culminating sort of halfway
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through in the launch of bond with
bill gross where we took the flagship strategy,
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his total return fund or strategy,
and brought it into ETF vehicle.
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And again that was a very big
sort of innovation at the time and it
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was kind of surprising to see such
a large flagship strategy being brought into the
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market. So that was a great
foundational experience where I made a lot of
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relationships, learned the ropes of the
industry, learned the challenges and the advantages
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of DTF vehicle and then I took
that learning I was hired by principle in
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early two thousand and fifteen and really
mandated to build out an ETF platform for
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them from again, from scratch,
and this one had a different sort of
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puzzle, and that principle was an
established asset manager with a lot of assets
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and and these across different vehicles and
unlike Pimco, which was very particularly focused
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on fixed income, principle was much
more of a multi asset and as allocation
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focus provider, probably little less of
a brand name right, versus PIMPCO,
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which is super wellknown in fixed income. So challenging that and creating sort of
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a ETF platform that took advantage of
again the strength, sort of made may
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do with the relative weaknesses and took
advantage of the respective distribution. Lo and
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behold, sort of five years into
principle, I, along with some of
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my co founders, thought of a
really, really interesting development on the horizon
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and specifically I noticed that the ETF
sort of vehicle was position to take advantage
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of a very important regulatory change in
the regulation of derivatives. The SEC came
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out in October of twenty two thousand
and twenty two thousand and nineteen regulations around
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the use of the rivatves and it's
been long proposed in the past, but
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the new rules took all register investment
companies and couding etfs from a very limited
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use of derivatives into a much more
flexible one, and I thought that would
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allow ets to essentially provide institutional caliber
strategies, think private funds and hedge funds,
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inside of thetf rapper, and so
that's really what motivated this third platform
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that we're working on. Is that
sort of change, but bigger pictures,
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the democratizing and providing access for investors. Yeah, that's very interesting and it's
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obviously you have a kind of well
engrossed background of just years and years of
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being in this space and growing out, you know, and learning all the
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INS and outs of ets on multiple
different layers, and it's interesting that you
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guys are using this technique with options
layered into the ets, which is to
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some degree relatively new in the aspect
of how it's being brought forward to the
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market. I was curious if you
could elaborate, you know, some of
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the reasonings behind that approach. You
know, how's it actually even done,
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and I guess what are some of
the pros and cons, or maybe perhaps
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risks reward might be a better way
to place it. You know what's that
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approach all about? So options are
interesting because they provide very, very unique
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exposures, right. So I think
the ETF landscape has done very well providing
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vanilla market exposures as well as Non
Vanilla right that your sector funds and thematic
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ets, for example. Options create
the possibility of creating nonlinear or custom payoffs.
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So if you have a broad range
of potential returns from any any portfolio,
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putting in options means you could put
floors, you could put ceilings,
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you could transform and move around the
belly of the distribution. And really,
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for us we're focus a lot on
the tails and particular and so risk as
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sets generally have a profile that looks
like, you know, generally positive because
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you are compensated for taking risk.
But at the same time, every once
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in a while extreme markets kick in
and you have the potential downside of that
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risk. Right, you have a
chance to lose a lot of money.
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And so options are interesting in that
they create new ways of protecting portfolios from
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that downside or trading off some of
that upside return and protecting some of that
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downside. So it just creates another
tool kid and in the ETF wrapper.
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It's particularly interesting because some of the
common knocks against options are that, hey,
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look, these are very they lack
transparency in some forms. Right,
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if they're embedded inside of a hedge
fund, how do you know what someone
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is doing is what they claim they're
doing in a ETF portfolio? Some of
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the key disadvantages of options in the
past complexity, you know, sort of
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opaque use of them and pricing.
All of these things and increasingly, potentially
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even tax efficiency, lend themselves well
for the ETF vehicle. So a couple
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of our strategies we have. I'll
talk about simple one, are downside hedged
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SMP strategy, ticker SPD. We
basically take almost a hundred percent exposure to
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smp five hundred and we lay our
layer on an option overlay. So we're
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buying puts and the combination of equity
plus puts creates basically a downside hedge strategy
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that the hedges can protect when market
sell off. In normal environments, De
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smp five hundred that it holds is
expected to generate a positive return and during
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sort of most years you pay a
little bit insurance costs and and sort of
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stuff for a dragon performance, but
hopefully the downside protection more than makes up
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for it over time and and at
the least provides some sort of much needed
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diversification and risk mitigation when market sell
off. Yeah, it's interesting because I
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think obviously one of the main corner
stones to investing, which I think everyone
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will agree on, is it's all
about management and how you manage your positions,
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depending on your portfolio per se,
and just looking at some of the
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ets that you guys have, some
of them I found to be pretty interesting.
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Obviously they all to some degree manage
risk, but with interest rates.
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You have another one, I believe
that's around volatility, s fall and P
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fix, and it's it's just an
interesting approach that you guys can use and
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I was hoping that you can maybe
speak on behalf of a little bit of
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that space specifically. In my opinion, I would I personally would be love
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to hear about the volatility aspect to
be protected against and and what that kind
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of looks like. And I assume
that most of the funds that you guys
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have follow a similar strategy, options
layered, and I'm just curious if there's
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anything different about them in terms of
types of option or not types or amounts
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of options that you're using with in
a ETF and kind of just what that
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looks like. Sure, so how
do we think about the use of options?
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Again, you could have an infinite
combination of these things, right,
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that's that's a lot of customization and
power. But on the other side,
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what you build matters a lot,
right. So it's an open sandbox.
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Our courseuite three sort of spfive hundred
products, as well as our first as,
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that one hundred ETF and then increasing
and will have other Betas. The
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course sweet is really intended to give
a relatively low tracking error exposure to under
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lying Betas and then overlaying puts and
our calls to sort of push around distributions.
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So manipulating sort of the tails.
P fix is really interesting. It's
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our simplify interest rate hedge ETF and, unlike all of our other etfs that
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primarily rely on listed options, p
fix really reaches into the sort of tool
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kit we've signed is does and these
are agreements governing access to large rivers providers
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like, you know, the Goldman's
and Morgan standings of the world, and
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really access the part of the world
that's been really only accessible by the largest
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hedge funds and asset managers, right
the pimpcoes or the large hedge funds out
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there. Certainly most retail investors,
as well as even a high net worth
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investors, are not able to access
that part of the world. But why
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is that access interesting? Here in
the right and the world of interest rate
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derivatives, the largest transactions and the
most flexible coverage is actually in the OTC
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world where again, large corporations and
asset managers sort of hedge interest rate risk
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or tradeoff fixed versus floating exposures,
and so that that sort of market place
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is inaccessible through the normal listed options. So yes, you could buy puts
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on Treasury bond etfs, but they
don't go very far and they tend to
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be very expensive. But if you
are able to access that OTC world,
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in our case the world of swaptions, all of a sudden you could get
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a very long term interest rate option. In our case we're looking at the
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seven year right, so very distant
in the future. Why? Because sometimes
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one wants to hedge the direction of
a move, in this case interest rates.
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We think there's a lot of reasons
why interest rates will go up,
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but it's really hard to know when
or why. And so if you want
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it to hedge a long term problem
but not have to exactly get that timing
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right, a very long maturity option
could be really interesting. The price you
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pay, though, is they tend
to be expensive, and so in this
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strategy, what makes it really really
interesting is that the cost of that insurance
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is heavily subsidized by writers of that
insurance, in this case international insurance companies
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that need to get some of this
risk off their books. So creates this
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really, really compelling long term interest
rate hedge that really doesn't cost a lot
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of carry, as it's called,
I either cost you pay for that insurance
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and it packages this product that was
again not accessible to your average investor inside
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of an ETF. And so now
any ETF user could access the OTC market
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and hedge their portfolios from interest rates
using a very convenient eitf rapper, and
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that sort of the sort of DNA
we're trying to get to right provide institutional
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00:16:22.190 --> 00:16:29.230
caliber almost hedge fun like exposures,
but in an accessible way where Ura's and
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00:16:29.830 --> 00:16:34.980
advisors and you're just generally do it
yourself. Investor could start looking at these
192
00:16:36.100 --> 00:16:48.529
tools and get world class, institutional
caliber access. Alpha trader is a weekly
193
00:16:48.649 --> 00:16:52.490
investor focused podcast produced by seeking Alpha
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194
00:16:52.610 --> 00:16:56.529
news and in set the stage for
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195
00:16:56.809 --> 00:17:02.559
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196
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discussions with market experts on topics that
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197
00:17:07.200 --> 00:17:17.390
out be sure to subscribe so you
never miss an episode. The interesting it
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because I feel like it's a it's
an area that's untapped to some degree,
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and I was actually going to ask
you are there any areas of the ETF
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market that options are maybe under utilized? Kind of what I'm driving at is,
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is there a sector or industry that
options based ets might not even be
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available or are very limited? I
know that you guys cover a Fintech area,
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the simplify voltfin tech disruption ETF ticker
vfin, but are there obviously many
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out of their industries, subsectors and
gaps out there that can potentially be filled
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in the near future, and I
was just kind of curious to see what
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that landscape looks like in your eyes. Yeah, so if you look at
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the current sort of use of options
in the ETF world, the predominant to
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buckets are income, right call writing
type of strategies. That's that's where a
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lot of the assets are and a
lot of history is and selling options,
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ie selling some form of insurance,
is a very ink high income generating strategy
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and you see, you know,
yields often in the double digits for some
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of these type of strategies and in
a world where yields are so low,
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you can see why it's attractive.
On the other side you see a lot
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of assets and hedge strategies, whether
they're buffer strategies or or sort of collar
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type strategies, and there these type
of strategies have been around again often decades,
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and other vehicles like mutual funds or
structured notes, and you're trading off
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some degree of certainty, ie.
Bands of potential distributions, but you're paying
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for that by get off and giving
up meaningful upside or incurring a lot of
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cost. So I think that that
type of sort of those two buckets still
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have room to run. Right,
they're generally only offered in some of the
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largest Betas. You could see,
these type of strategies slowly rolling out two
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sectors and industries as well. So
I think that could be ongoing. The
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third bucket is sort of where we
specialize in. It's sort of hey,
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let's let's try to really really do
what's not been done recently. Let's look
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at tail strategies, let's look at
creative ways to not give up the upside
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but try to meaningfully protect against sharp
moves down. So that combination of looking
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again, quote unquote, towards the
extremes or the tails of a distribution,
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I think that is very early innings. That's where we're really focused on and
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trying to build that kind of concept
into portfolios. Ie, people care when
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they lose money a lot to try
to find the way to add more downside
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protection and but people also need to
keep up with inflation and their investment objectives
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and it's getting increasingly hard to do. The last thing you want to do
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is give up too much of your
upside, right. so that combination the
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sweet spot. We think there's a
lot more to come there. Yeah,
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that balancing act of finding exactly what
the investor is looking for. Obviously,
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like you mentioned, to cover both
ends a question. I did want to
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kind of run past you is you
know, who do you believe are the
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right investors that should be consider ring
option based ets as a part of their
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underlying strategy? I think that certain
people might think that that it's a more
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of an advanced investor. Perhaps it
doesn't have to be, and I would
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just kind of curious to understand a
little bit of your taken insight on the
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types of individuals that might be in
a position to look into it in more
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detail learn a little bit more about
it. You know, how does it
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fit into the traditional portfolio? Is
Its supplementive, supplementative, additive? kind
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of curious around the little that sure
so. If it depends again on the
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sort of desired outcome. I think
if the investor trying to optimize for income
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right, that's often a very broad
spectrum of investors, off from retirees,
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off in very retail. I think
income generating strategies using options continues to be
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bigger and growing part of that that
sort of tool kit. So I think
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that is more of your average investor
right with advisors again optimizing for income.
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The buffort strategy, similarly, I
think those have been much more of a
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retail retire play as well, because, hey, as you're getting closer,
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as a client is getting closer to
retiring or just entered retirement, the last
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thing they could do is stomach a
long cycle of, you know, a
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draw down, right, and so
buffer strategies again exchange much more certainty of
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downside protection but give up a lot
of the upside. And it makes sense
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in that context. Right, you're
more about protecting the nest egg than trying
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to really swing swing for the fences, the last bucket again, where we
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traffic. It's really thinking about most
a very quantitative and probabilistic view of the
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world. Are there ways to manipulate
portfolios and distributions that again diminish the probability
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of significant downside, maintain a reasonable
probabilities of upside and embed some sort of
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potential option payoffs that, you know, if things go just the right way,
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for very modest cost, you have
a lot of upside, what's called
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asymmetric payoffs, like the building up
portfolios using those kind of sophisticated lenses of
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probabilities of risk premia. This is
getting into the quat world, right,
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of systematic hedge funds and answer of
that sort of realm which is still very,
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very minorready of the sort of assets
today, but a growing share.
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And so I think that Lens is
also interesting and we could play in all
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three buckets and have strategies that attract
the end users in all three. But
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I think the third one is really
where there's a lot of novelty and a
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lot of innovation going on. Yeah, it's interesting. In appears that it
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can fit for a lot of individuals
and I guess maybe market education might be
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something that just growing, like you
mentioned, in the space overall, people
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are becoming more and more aware of
this type of investment vehicle and how it
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can be introduced to their portfolio and
advantages that they can take out of it.
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So it's kind of just with the
course of time it'll become more and
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more prevalent to each individual, depending
on their overall situation. Yeah, especially
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if it's in a very transparent vehicle
like an ETF it it's going to have
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price history, it's going to have
portfolio disclosure. Education is a little easier,
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right when you know what's what a
portfolio comprises than it is when you
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have sort of a black box where
you get sort of quarterly statements, right,
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and so I think that's part of
the opportunity. It also keeps away
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a lot of sort of providers who
value that sort of you know, disclosure,
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sort of protection. But our perspective
is we're embracing the transparency of etfs.
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Were providing access at that democratizing it. So we we love sort of
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showing our portfolios and our approaches and
we get comments back from our clients as
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well, and so we're constantly trying
to iterate and improve. Yeah, absolutely,
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and you guys kind of are on
that frontier of kind of bringing this
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to market to some level, and
I was just going to ask you what
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sort of response have you seen from
the market participants out there, not,
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I guess, only just around simplify
ets, but also kind of the idea
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of options and ETF market place as
a whole. I know you guys are
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relatively new, launch back in two
thousand and twenty, but you know what
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sort of receptions you know, been
like that out there for the market and
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is there, you know, I
guess you could say longer term trends that
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you can see down the road and
that you know, five year spand not.
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You know, obviously you don't have
a crystal ball in front of you,
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but you could kind of get a
feel for what might be the future.
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Yeah, and that's and some cases, necessity is the mother of invention,
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right. And so we have these
big portfolio problems, whether again elevated
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and almost nose bleed valuations and concerns
around sort the sustainability of these prices on
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one hand, low bond yields and
sort of inability to hedge and protect portfolios,
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low yields and income, so how
did people sort of take care of
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themselves? And the increasing cost of
living right. All these things are these
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big problems and your regular vanilla asset
classes are part of that problem right there.
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The definition of low yields mean US
high bond prices, a definition of
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high valuations means high prices and stocks, and so options create an opportunity to
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do something about these portfolio problems and
interesting ways, and I think that's generated
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a lot of interest and we're certainly
seeing that. When we talk to our
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clients it's starts with that problem and
we help sort of address the big ones
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on the table and will work our
way through as many problems as we can,
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buffy, but big picture, I
think options are benefiting from a lot
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of trends, not just these big
problems and needing a solution there, but
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the stigma around derivatives and options has
largely gone away. The financial crisis is
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very, you know, distant in
the rearview. A lot of these options
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are listed and have no counterparty risk
as an exchange listed sort of exposure,
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and so that helps a lot,
and the transparency of pricing and the volumes
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available online I'll help. And then
beyond that, I think demographically, if
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you look at the sort of younger
generations, they've lashed onto the upside potential
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right there. They're they're certainly the
Robin Hood crowd has been known to trade
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a lot of options, single stock
options, and have embraced with it,
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Ay know it or not, upside
convexity in these specific trades. And once
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that's sort of stigma moves towards you
know, comfort, and I think it
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is largely comfort at this point.
I think we've seen that demand trend grow
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and we've seen in particularly single stock
options increase the tune of five x of
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sort of you know, sort of
pretty periods on sort of outstanding contracts.
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Continue see the growth cross all types
of the rooms trading, especially enlisted options,
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and and asset managers are starting to
use them again for income, for
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hedging. So I think the growing
sort of use and liquidity and comfort with
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options bodes well and the grand scheme
of things, it's still very small in
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exposures relative to you know, Vanilla
stocks and bonds and I think that has
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a lot of him to grow.
That's great and I mean, I guess
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with the growing aspect of like you
mentioned the Robin Hood Trader and becoming more
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mainstream to some level, it's it's
an alternative that you know, once things
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catch on, they can tend to
be, you know, exposed and blown
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up on a shorter time than traditionally
in the past, which is which is
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great to hear. And I know
that we are coming a little bit to
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the tail end of this podcast,
I did want to kind of give you
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a little bit of an opportunity to
kind of give you the last word to
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our audience. I know that we
obviously spoke about a couple of different funds
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that you guys have and around the
option space, but I wasn't sure if
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there was anything that we didn't perhaps
cover, if there was something that you
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want an outline and also, obviously
where individuals can possibly connect with you learn
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more about simplify ets and some of
the funds that you guys have to offer.
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Sure our website first is a simplify
that US and certainly all of our
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etfs are listed there and many of
my colleagues are sort of known thought leaders
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or I think of your Michael Greens, Harley bassman's and then increasingly others on
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our team have sort of this sort
of social reach, which has been great
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because it's a way to sort of
start conversations and and also just attract a
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lot more sort of core followers or, you know, kind of fans whoever
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help spreading the awareness and, you
know, giving a lot of feedback as
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well. I think in terms of
last words, I think we're very,
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very early innings, not just as
a company but I think as an industry.
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The ets have a long way to
go and I think generationally that preference
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is only growing over time, and
so we just want to carve out a
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really thoughtful part of that market.
Our brand is very much working with advisors.
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Although Our Name is simplify, some
of our strategies aren't off the cuff
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simple right, and so I think
we try, we strive for simplicity,
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but it's simple enough, right,
and often these type of strategies, simple
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enough is still a pretty high bar. But what we are doing is bringing
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again very unique tools and exposures for
advisors that they just haven't had access to
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before, and and not just to
provide access, but to deliver meaningful access
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that helps their business. And so
I think that's what we're trying to do,
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is great ways to generate more attractive
risk reward combinations, really focused on
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the downside and then, as a
firm, not giving up the upside,
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because that upside is what's going to
keep up with inflation and keep up with
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the increasing investment needs of our clients. Awesome. Yeah, and I love
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it, bringing a new avenue,
I guess, to the market in terms
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of, you know, exploiting the
options market in the ETF world and wrapping
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it all together and finding new overlapping
opportunities that maybe weren't previously known by individuals
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out there. And again, obviously
want to thank you, Paul, for
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joining us again. It's Paul Kim, cofounder and CEO simplify ets, for
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joining us today on the let's talk
ets podcast. Is Insights on the option
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base. Ets have been great and
we appreciate all the knowledge you were able
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to share with us today, but
until next time, this is your host,
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Jason Capool's signing off. For disclosure
purposes, Jason Capool is not long
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00:31:57.380 --> 00:32:04.049
any ets discussed. Paul Kim is
long all etfs discussed on this podcast.
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00:32:05.210 --> 00:32:08.490
This podcast is brought to you by
tolls. The PRO shares Dj Brookfield Global
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00:32:08.529 --> 00:32:15.119
Infrastructure ETF. Look for Ticker Toolz. Pro shares are distributed by Sei investments
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00:32:15.200 --> 00:32:19.440
distribution come, which is not affiliated
with the funds adviser.
