Chaos Factor: ARKF, 10Q, 10%

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So.

You're on vacation next week.

I am.

I'll be in the mountains of Colorado.

Skiing.

Yeah.

You know, the snow isn't great this time of year, but

you know.

Love of the game.

What are we going to do for money stuff?

We should do something.

We should have some mailbags.

We should have some mailbags.

I will log on to Zoom for an hour, and we'll take questions from the audience.

Okay.

Not live.

Not live, but that would be fun, maybe one day.

Right.

So if you want Katie to answer questions

with me,

send them to us now.

We need them.

Should we tell them where to send questions?

I believe it's moneypot at bloomberg.net.

That sounds right.

No one really knows.

Yeah.

Just yell them into the sky and it'll get to us.

Definitely don't DM me on Twitter.

Do you still go on Twitter?

Not never, but I don't look at my notifications or DMs anymore.

Yeah.

I'm pretty much.

It's kind of sad.

It's really sad.

Yeah.

This is like, you know,

especially 20% of my life for years.

That's the thing.

Like, during

the day during the pandemic,

it scratched so many social issues.

I don't know.

I still go on all the time, but I don't tweet as much anymore.

I don't.

I'm not like performatively quitting, but I still like tweet my columns when I remember to, but I don't read it.

I used to tweet a cat, like My Friday cat.

I remember some of your Twitter shticks.

I feel like you had good Twitter sticks.

I did have good shticks.

Do you still do it?

No.

No.

And like yesterday on Fed Day, usually I tweet time for the best day of our lives with a photo of your own pal.

I haven't done that in a while.

I feel like, you know.

No longer the best day of our lives.

No.

Yeah.

Yesterday was the best day of your life?

No, it was fine.

I mean,

they cut 25 basis points, which is pretty cool.

Would have been awesome for the chaos factor if they either held rates or cut 50 basis points.

Yeah, yeah, yeah.

You want just like

expectations.

Want to burn the world down.

Yeah, yeah, yeah.

But I really just want to talk about

this is going to be

the clanging is transition.

So talk about whatever is on

the piece of paper in front of me.

I really want to talk about the Arc Innovation ETF and whatever the heck is going on with these IPO trades.

That was pretty good.

It's been weighing on you for now.

It has been.

Every day I wake up.

I've had none of that.

Hello, and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money.

I'm Matt Levine, and I write the Money Stuff column for Bloomberg Opinion.

And I'm Katie Greife, a reporter for Bloomberg News and an anchor for Bloomberg Television.

Katie, I gather that you're fascinated by Arc ETFs.

I open my eyes in the morning horizontal in bed and I just think about heartbeat trades.

Yeah.

But this isn't strictly a heartbeat.

I don't know exactly what the qualifications are.

If you take a look at the chart of inflows and outflows, it looks like a heartbeat, but I don't think that there are taxes involved.

It's not a tax heartbeat, but it's a different kind of heartbeat.

Yeah.

Right.

So ARC runs some ETFs.

Kathy Wood, famous

ETF active active manager.

And because they're like active ETFs and because she's like a celebrity tech investor, they get to invest in hot tech IPOs, which hasn't been a thing for a long time, but it's coming back, right?

There's been some hot tech IPOs, some of which have gone up a lot.

And so this Arc ETF gets to get small-ish allocations in some hot tech IPOs.

And if you think those IPOs will go up, you'll be like, oh, I'd like to invest in this Arc ETF ETF to get my tiny slice of exposure to that.

But if you're really tidy-minded about it, you're like, well, I don't want all the other stuff in this ETF.

I just want this IPO exposure.

I can't get the IPO exposure myself because I am not on the list of people who get allocated shares on these IPOs.

But I can get

exposure to the ETF because anyone can get exposure to the ETF.

And then the further thought you could have is I could hedge my exposure to everything else in the ETF by, you know, for instance, shorting all of the stocks that are currently in the ETF, which it discloses.

So that I'd be left with, you know, if you're long the ETF and short all of the stocks in the ETF, you're left only with like the possibility of it getting an IPO allocation and the IPF going up.

And so it seems like people are doing some sort of trade like that.

And the best way to operationalize that trade is not to buy the ETF and short the stocks.

The best way to do it is to borrow all of the stocks that are in the ETF, deliver them to ARC, to the ETF, to create the ETF, get back shares of the ETF.

Now you have the ETF, and you're effectively short the underlying slice because you borrowed them and gave them to ARC.

And then when the IPO happens, you reverse the trade.

You deliver back the shares, get back the underlying stuff.

You deliver the underlying stuff back to your share lender, and you're left with only the popped IPO.

Yeah.

I guess what I don't understand about this is how big of a gamble is it to do this in the Arc innovation ETF?

Like, I wonder if the person or whoever was behind this trade knew for sure that they're getting allocated some of Klarna or some of Bullish.

My impression is that in Bullish, it was pretty telegraphed that Arc was getting some of it, but I'm not sure.

These are trades that have been going on, and like they went on with the IPO of Bullish a while back and then Klarna last week.

And Robin Wigglesworth at the FT has been reporting about it.

But like

my impression is that the main, the flagship Arc Innovation ETF, got an allocation in Bullish and not in klarna another arc etf got an allocation in klarna and so like f yeah so so like

people did this

i mean no one really knows but it looks like this trade right it looks like the trade is you heartbeat in you like borrow the underlying shares you heartbeat into the etfs you take your stuff out the next day to capture the ipo it looks like people did that with arc innovation around the Klarna IPO and there was no allocation and so it just like missed.

It's not a huge risk because you're long and short, the same thing, basically.

I'm just wondering, like, I wonder if we'll start to see this pop up in other sort of shiny, active ETFs.

Sure.

I don't know how many shiny, active ETFs there.

There's not a ton, but there's definitely some that you might think would get allocated.

Yeah.

Like, in general, you know, index funds don't buy IPOs because they're not in the index.

And so you don't see, you know, the traditional ETFs, you don't see this as a big thing.

But like someone like Kathy Wood, who is an investor in sort of speculative tech companies, it does make sense that she would be interested in buying in IPOs.

And it does make sense that someone would notice that and be like, I can create my own IPO allocation by

engineering the ARC ETFs.

Yeah.

Because, for example, there's an ETF dedicated just to buying IPO stocks, like recent IPO stocks.

Which accomplishes nothing whatsoever.

I know, but the trade here is the IPO pop.

The trade here is not Klarna.

It's not

this.

It's the IPO pop.

Yeah.

It's the one day.

Yeah.

I don't think they're getting allocated IPOs.

Yeah, I mean, like, maybe that's the next step, right?

You're like, hey, guys, I buy all the IPOs.

You want to allocate me an IPO?

But, you know,

traditionally, the way you get allocated an IPO is like, one, you are a big investor who pays a lot of commissions to a bank.

And two, you are a long-term investor who creates a good relationship with the management of the company.

So the company is like, I want those people to own 7% of my stock.

So I'm going to to allocate them in the IPO.

And then like you have a nice relationship where you are a long-term holder, you own the stock, you have a nice mark-to-market gain because they sold you the stock at the IPO price.

Those are the people that the banks and the companies want to allocate at the IPO.

Someone whose business is, I buy recent IPOs and then sell them when they're no longer recent, it's not that good.

Yeah.

And it's also a smaller fund.

I think it's in like the hundreds of millions.

Right.

Like when you're a bank and a company and you're allocating the IPO, you're in many cases literally sitting down with a list and going through it and being like, these guys are good.

And you don't want to have a thousand names on that list and get to like, oh, we're going to give this guy 50 shares.

Right.

Yeah.

You want to be efficient, right?

So if you have a big investor, you give them a big, big slug of shares.

So, right.

Because Kathy Wood is a celebrity, because the Arc Innovation ATF is pretty big.

because

she is a long-term supporter of like some of the companies.

In her five-year timeframe.

she's a good institutional investor to have in your stock.

And so it makes sense that she gets allocated IPS.

But it's not obvious that every active ETF would also

have the same benefit.

This isn't something that I've sought comment on,

but I do wonder how Kathy Wood and the ARC team feel about this trade.

Oh, yeah.

Like assuming this trade is what it seems like, which is someone massively inflating the assets of these ETFs.

By billions of dollars.

By billions of dollars for like a week.

week.

Yeah.

In order to extract a large chunk of the IPO pop, right?

Like the ArcF trade was like on the order of like, you know, it's like a one-ish billion dollar ETF, and someone pumped in on the order of like $700 million.

I might be a little wrong about that, but it's like that kind of thing.

It's like basically doubling the size of the ETF.

When you do that, you now own half of the ETF.

And then you take your money out, so you take out half of the ETF.

It also means you take out half of essentially the IPO shares, right?

So the person doing this, or the people doing this, are extracting kind of half of that IPO pop for themselves,

meaning that the long-term retail investors who love Kathy Wood and are invested in the ETF don't get that half of the IPO pop.

It just goes to someone who is just doing this arbitrage.

So they must feel bad about it.

Yeah.

It's not good.

It's not like what they want.

Yeah.

They do extract like an extra two days of management fees.

Can they stop it though?

You know, when I wrote about it, I was like, you call them up and you say, I'd like to pump a billion dollars in, and you say yes, because that's life in the ETF business.

Like, it is.

That's the point of an ETF is like people can create and redeem.

You can't gain it.

There are ways to, I believe, you know, most ETFs like have ways to limit creations and redemptions.

I don't know.

I mean,

you can't stop money flowing in or out, but not every inflow or outflow has to result in a creation or redemption.

Yes, it does.

That's what an inflow is.

No, but people always say that it doesn't necessarily always create a creation or redemption.

What would it do?

Like, if enough people are netting each other out.

Yeah, but like net inflows create creations.

Yeah, net inflows.

But I'm saying they can't stop people trading on the exchange, but this is not a trade on the exchange.

This is a creation.

Yeah.

Okay.

Like, create this to make sense.

It's a creation.

It just makes sense.

Someone has borrowed a big package of the underlying, delivered it to the ETF, and gotten out these shares, which is why you see this heartbeat luck where the the assets of the ETF increase a lot.

Yeah, okay, fair.

Okay, then how would they limit that?

One answer is like the person doing this is either an authorized participant in the ETF, like someone who has a relationship with Arc who can create and redeem shares, or they're like some hedge fund working through an authorized participant.

Because again, you have to do a creation.

So like these assets are coming into the ETF from someone.

And the ETF can say,

hey, knock that off.

Yeah.

Or you'll stop being an authorized participant.

That's one fairly straightforward approach.

I assume most ETFs have some other way to limit creations to avoid getting

too big.

I don't know if they do.

I don't know either.

There was a recent example of this.

You had this one very popular small cap fund, ticker CAF, which ended up switching indexes because I think at one point, like for its holdings, it held more than 20% of the outstanding shares.

And you should be able to stop that.

Yeah, but you can't.

Like you have to like switch your strategy.

Yeah, I don't know if they can stop it.

I mean, they haven't yet.

I don't know either.

But you do touch on the fact that this is...

This is the thing.

The ARC ETFs are like a modern wrapper for like Kathy Wood running an investment fund.

But also, ETFs are plumbing, right?

We've talked about...

portfolio trades in the bond market, right?

Like an ETF is like a piece of plumbing that allows people to do bond trades, right?

This is like a portfolio trade, right?

This is like, it's a widget that you can take down and be like, I'm going to extract the IPO value out of this ETF.

And so you can just do it.

And it just operates independently in the stock market and has its own set of rules.

And like, you know,

Kathy Wood is actively managing it, but it's like, it's not purely her investment vehicle.

It's also this like, you know,

property of the market.

Yeah.

That's an interesting way to look at it, that it's basically just a portfolio trade, but in equities.

It's almost the reverse of a portfolio trade, right?

A portfolio trade is like you have a bunch of bonds and you go to a market maker and you're like, I'm going to sell this bunch of bonds.

And the market maker is like, well, I can probably squeeze most of them into an ETF and I'll take the rest.

And you can sort of like squeeze your stuff into the ETF.

Here it's like, I want to extract exactly one security from the ETF.

And it's the reverse of the portfolio trade.

I want the needle.

Forget about all the hay.

And you can just do it.

Yeah.

I was going to say, you do touch on the fact that this is a fun whodunit.

Like, who is doing this?

And it has to be be a fairly small universe of potential suspects.

It seems to me that the most logical person to do it would be one of the authorized participants who can trade directly with the fund.

Yeah.

But maybe that's like a little too

confrontational, and it's like someone trading through an authorized participant.

Yeah, let's see.

I don't want to name names necessarily.

But I mean, you look at some of ARC's filings, it looks like their APs, or at least the busiest APs, are Hudson River, Jane Street, ABN, AMRO, Bank of America, BNP, Virtu, etc.

Right.

The normal people.

Anyway, if you're the one behind the arc trade,

right to moneypod at bloomberg.net.

I feel like at this point, like this has been pretty widely rumored and praised.

And if someone was going to claim credit for that, they would have been like, yeah, we did that.

I feel like there's probably some reason not to claim credit for it.

Also, it's like imitatable, right?

Like now anyone can do it.

That's true.

I don't know how many opportunities there will be to do it.

Seems like a lot of squeezing for

not like enough juice, but I don't know.

You know, it's like a few days of stock borrow cost

for potentially like low tens of millions of dollars of gains.

It's like, it's real.

I will say, though, that like

if I had to guess, I would say that like this trade became exciting when there was that rash of IPOs that like went up 100%.

Yeah.

And then like they actually did it on like Bullish IPO, which did well, and Clarino, which did fine.

And then

I think we talked about this.

The IPOs earlier this year had huge pops because no one had seen an IPO in years.

And now it's like, yeah, you know, like StubHub went public this week and went down.

So it's like, it's not as exciting a trade now if you're not expecting 100% pop on every IPO.

That's true.

So maybe it was just a brief, sweet moment in time, but it'll be fun to see if this continues and if it spreads.

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So, you know how I anchor a financial news TV show?

No,

I've heard rumors.

Okay, well, surprise, that's what I do when I leave this room.

It's called the close.

It's from 3 to 5 p.m.

daily.

This isn't just a plug.

I bring it up because after the closing bell, usually companies report their earnings.

And because the U.S.

follows a quarterly earnings schedule, that means that there's almost always earnings to break on air, which is exciting.

And I look forward to it.

But maybe now instead of doing that four times a year, I'll only do it twice a year.

More time with your horse.

That's

no, more time.

No, I still have to be here.

Just killing time on air.

Yeah.

Unlike now.

I bring this up.

Yeah, you bring it up because

Trump is just randomly out there being like, yeah.

Hey, if the SEC wants to, we could move to six-month reporting for companies instead of reporting every three months.

I'm surprised he cares.

You know,

someone mentioned it to him, so he truthed about it.

It just doesn't seem.

Nobody cares, cares.

It seems like an off-the-beaten track issue for him.

He tried it last term.

He did.

Back before the unitary executive.

It is an odd thing to care about in the scheme of things.

Yeah.

But it marginally increases the power and reduces the oversight over corporate executives, right?

Like if if you only have to report every six months, then you have more time to do stuff without anyone paying attention to it.

It's probably good for like the lifestyle of corporate executives.

Well, I was going to say I love this topic because I can honestly see both sides of the argument.

One being,

okay, the quarterly reporting schedule, investors like transparency.

That's been proven.

We should have as much information as we possibly can.

But then on the other side, three months is arbitrary.

And I could be persuaded that it does incentivize shorter-term thinking on some level.

Aaron Powell, yeah, I think a lot about this.

Like, there's no necessary reason that reporting every three months should encourage shorter-term thinking.

Like, it's just a mistake to think that investors only care about next quarter's earnings, right?

And, like, the shorter the reporting cycle, then the less long-term they'll care about.

Like, that can't be true, right?

Like, companies report every three months and they report guidance and they report like, you know, their investments for the long term.

And, like, people understand that.

I think you're being really generous.

Like everyone loves to say that the U.S.

stock market only rewards short-term thinking.

And like, you know, who really loves to say that?

It's Elon Musk, who's like got a trillion-dollar company and did for a long time before it made money.

Right.

And like, even now, its valuation is entirely based on like, ooh, robots in the future.

Yeah.

It's just like false to think that the U.S.

stock market only cares about next quarter's earnings, right?

Yeah.

There's just like no reason to think that.

Now,

it is the case that like there is volatility around quarterly earnings right like people do look at quarterly earnings and use them as a data point to extrapolate future earnings and if you have bad earnings this quarter people

maybe they're not gonna have good earnings in the long run right and so like there are like high frequency data points but it's not logically entailed that like if you report every three months then people only pay attention to three month earnings right and that's clearly the case that yeah it does long-term bets get made.

Yeah, it just does introduce volatility into the stock price.

And you could see a CEO who's getting beaten up on his earnings call maybe doing things

to minimize that.

Yes, but

his or her earnings call.

Cliff Nazis' point about volatility laundering where

if you have a private investment that doesn't get marked to market every day, it is in some sense less volatile than most public stocks.

Yeah.

But only in the sense that you don't look every day, right?

Yeah.

Like it's not economically less volatile.

It's just like you see the price of one thing every day and you don't see the price of the other thing every day.

Yeah.

It's a little like that, where like, if you just stop reporting earnings, then

you have less earnings volatility.

You have less news-driven volatility.

But you're just masking like what is actually happening.

And the other thing is like, I'm not sure you get less stock price volatility, right?

Yeah.

Because you have.

You still have trading, right?

It's just like if definitive financial statements and like, you know, guidance get reported every six months instead of every three months then you have a six-month window where people are trading based on other stuff right body language body language

TV appearances TV appearances rumor people talk a ton about alternative data right like sophisticated hedge funds are constantly using information other than quarterly financial statements to

build their models of like how a company is doing, right?

They're looking at credit card data or famously satellite pictures of parking lots to see how many people are coming to the stores.

And if you get rid of some of the quarterly financial reporting, then

those pieces of data will be relatively more valuable.

They will still exist.

Hedge funds will still trade on them.

But

you won't, right?

There'll be a lot more information asymmetry because some people will have information about how companies are doing and other people won't.

And then the other kind of trading that could happen in six months is insider trading, right?

Because like the more time you have between announcing news, the more opportunity there is to

from knowing the news yourself.

That'd be great for this podcast.

Look,

it wouldn't be great for my TV show having fewer earnings reports, but.

And more insider trading.

Yeah.

It'd be fun to have the insider traders on.

I like to imagine that this goes through, that the U.S.

moves to...

companies only needing to report every six months and think about what that would happen.

Because in Europe, they are mandated to only report every six months, but many still file quarterly reports.

So I wonder if the companies who report more frequently would get rewarded for that from investors, whether you would see companies like switch around and what the psychological effect would be from that.

Like if you were reporting on a quarterly basis and then went to a six-month basis, you know, would that be taken as, oh, shoot, there's bad news coming and they're delaying it.

Yeah.

Like, I think if you're a normal company, it's a little hard to reduce the frequency of your reporting, right?

I mean, I think when you think about who would report six months, like some of it is like, you know, Trump brothers-backed crypto treasury companies, right?

Where it's like, eh, eh.

American Bitcoin, basically.

I do think another part of the answer is like part of the reason people talk about this is

some form of like, it is too burdensome to be a U.S.

public company these days.

And that is part of why big, cool tech startups are staying private longer.

And, you know, ordinary people can't invest in them and their pro-owned case and all that stuff.

And so it is possible that like, if you went to like Sam Altman and you were like, hey, would you take OpenAI public?

And he was like, I have to report every quarter.

And you're like, no, good news.

You only have to report every six months.

You might be like, okay, fine, I'll do it.

Right.

Like, I think it's a pretty marginal benefit, but there's probably some quite cool tech startup that would feel like, you know, by saving money on reporting costs and also by just having less frequent reporting and less frequent like shareholder interference, it would like change the bargain of whether or not it's a good idea to go public, right?

Yeah.

So like some new public companies would report on a six-month schedule.

Aaron Powell.

Well, to that point, Adina Friedman, who is the CEO of Nasdaq, posted on LinkedIn basically that they supported the reforms to reduce the burden on public companies.

Because I mean, you have heard that trotted out as a reason for why companies are staying private.

It's always hard for me to imagine that

the costs of having your accountants do your reports every three months is what's keeping

Stripe private.

But I do there's probably at some margin that's probably true.

Truish.

And I say Stripe, right?

But

in fact, the problem is that it is hard for smallish

companies to go public.

Yeah.

And this is perhaps a material cost savings.

Yeah.

We need more small caps.

And the sort of thing where it's one thing for a big existing public company to say, okay, we're going to six-month reporting.

But it's another thing for a smallish company to come public, saying we're only going to report every six months.

And everyone's saying, okay, that's fine.

Yeah.

I sort of stated it as a fact that investors like information and want transparency.

But I do think there's this transparency barbell that's developed for investors where you think about ETFs, for example.

And part of the reason why ETFs have just killed mutual funds is because people like to see the daily holdings.

But then you think about what's going on in private markets and folks seem perfectly happy to try and plow into that.

So I don't actually think that I can state it as a fact that investors like as much information as possible.

Well, there's different kinds of investors, right?

I mean,

active asset managers who are making investing decisions want to make informed investing decisions, right?

But no, right.

I mean, like, we talk all the time about like the retail love for SpaceX and Stripe and OpenAI.

And like

those people aren't getting financial statements at any frequency, right?

That's just like, sure, I trust you, right?

So it makes sense.

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We have seven minutes to talk about structured products and what a boom we're seeing.

Yeah, I don't know.

I love structured products.

I know you do.

Why do people who aren't you love structured products?

Like, why are we seeing this boom?

Are we just bored?

Is the SP 500 not enough?

The structured products aren't boredom.

They're like storytelling.

Like, the simplest structured product, the structured product that I think of is like the paradigm structured product.

If you give me $100,

I can take $95, give or take, and buy a treasury bill,

$96.

Okay.

And buy a treasury bill, right?

That will mature at $100 in a year.

Right.

And then I have $4 to do something weird with.

The simplest weird thing is I spend those $4 on like

not the money call option on the S ⁇ P.

And so I say to you, if you give me $100, I'll give you back some percentage of the return of the S ⁇ P or like, this is a return of the S ⁇ P up to some cap or something in a year.

But I'll always give you your $100 back.

If the S ⁇ P crashes...

50%, you still get all your money back.

Okay.

And you get S ⁇ P upside, right?

And all I've done is I've bought a call option, I've bought a treasury bill.

And you're like, oh, wow, stocks that can never go down, right?

And so I write about this periodically.

That's the simplest structured product.

That's not like the main structured product of the current boom.

But like that story of like, you're going to give me money.

I'm going to park boast of it in T-bills.

And I'm going to use the rest to buy weird options to give you like some weird payoff profile.

You know, there are people whose job is to sit in a lab cooking up.

that sort of thing.

And then there are other people whose job is to like put a nice story on that.

So we're talking about this like Bloomberg big take about the boom in structured products.

And they talk about like half of structured products in America are auto-callables.

Yeah.

An auto-callable is an installment put purchased by a bank

from retail investors, right?

And so, you know, if you're a bank, like you have a lot of people who want to buy index puts from you, and you're like, where will I get index puts?

And you go to the lab and you're like, I would like to cook up an installment index put product that I can buy from somebody.

Maybe I could buy it from like an insurance company or Berkshire Hathaway or something.

And then you're like, no, no, I can buy it from retail investors.

If instead of saying, I'm going to buy an installment index put from you, you say, I'm going to sell you a bond that pays you 10% interest.

Amazing.

And it pays you 10% interest every quarter, unless the stock market goes up, in which case I pay it off early.

And then no problem.

It's auto-called, right?

One other catch is that if the stock market goes down 20%,

you lose all the money.

Right.

That's just an installment put, right?

But like, instead of saying that, you say, this is a note that pays a very high coupon, gets called early in certain circumstances, and

it's the losses of the stock market in certain circumstances.

Like that's like a great trade.

It's like, you're not selling excitement.

You're selling, look, you get 10% a year.

You can't lose.

The worst thing that happens, probably, is you get paid off early.

No problem.

No problem.

But then there are other products, too, that are like the reverse, that are like, we pay you if the stock market goes down, right?

Because you put any set set of options into this thing.

And so you have like this unlimited range of like stories and payoff structures that you can sell to retail investors.

And this article

quotes a guy, like a financial advisor, saying that his client said to him, this sounds illegal.

It sounds too good to be true.

Yeah.

Because you could like, you know, like, why are we seeing a boom in it?

There are two kinds of structured products.

Go on.

There are selling options and buying options, right?

So like the autocallable is like the bank is buying an option from the customer.

The The one that I started with, the like you get the S P but you can't go down, that's the bank is selling an option to the customer.

This thing I started with, that only works if you can buy a treasury bill for significantly less than $100.

Because then you have money to buy options with.

Yeah.

So like in a very low interest rate environment, it is hard to do really cool structured products because

you just don't have a lot of like I find that exciting work with because we've now entered theoretically a rate cutting cycle.

Yeah.

There are structured products the other way, right?

Where like

if rates are low, it's very exciting to go to a customer and say, I'll pay you 8% a year.

And the way you get 8% a year is it's not interest, it's option premium, right?

So there are structured products for all environments.

Yeah.

I do think it's interesting.

They also quote someone in here saying that, you know, structured products aren't bought.

They're sold.

That can apply to a myriad of things, but it also applies here.

People say that about many, many, many things in finance, but I think they most say it about structured notes.

And they mean it here.

But what's interesting is that now you have.

Because no one, no retail investor is like, you know what I would like to do is sell installment puts to a bank.

Well, now you have an autocallables ETF.

It launched in June.

So there are theoretically investors out there who are just buying this on their own, who aren't necessarily having it made.

Advisor sold ETF.

Yeah, but it now exists where you don't need to have an advisor sell this to you.

Yeah, plaguing on you look at the description of that and it's like, oh, you got a 10% yield.

Yeah, that's true.

Maybe you plug it into Investopedia and figure out what an autocallable is.

A 10% yield.

Yeah, I'm sure there are plenty of folks who just sort by yield.

Right.

Right.

It's a 10% yield.

Don't worry about the rest of it.

The other thing I think is interesting about structured notes is like, I think of the autocallables business as banks buying crash insurance from retail retail so they can sell crash insurance to other investors.

But the overall structured notes business is a, is a bigger business.

And

the article quotes Ben Eifert saying, everybody loves this business.

It prints money most of the time.

And then usually they find a way to lose money when the markets are crashing.

That's the banks.

It is true that selling structured notes is a way to make a lot of money.

Like the edge on these trades is like one to three percent.

But somehow banks end up with positions in these notes that sometimes blow up in crises, which is not what's supposed to happen with the autocallable, which is really supposed to be the banks buying crisis insurance from the retail customers.

But again, there's lots of different profiles, and some of them are more the bank selling crisis insurance.

What would you say your favorite structured product is?

I mean,

I do like the autocallable just because it's like...

So do a lot of people, it seems like.

But the other thing in the story is that the banks are now offloading their structured note risk to hedge funds because that's what banks do with everything now.

Yeah, another theme we've talked about.

Yeah, the bank has a relationship with the customer, but like they're not going to take all this risk on their own balance sheet, so they'll find some hedge fund to take the structured note risk.

Cool.

All right.

Unfortunately, that's all the time we have.

So we'll see you next week.

Send in your questions, please.

Yeah, if they're not good enough, maybe I just won't open the laptop.

We'll see.

Be skiing.

And that was the Money Stuff Podcast.

I'm Matt Levine.

And I'm Katie Greifeld.

You can find my work by subscribing to the Money Stuff newsletter on Bloomberg.com.

And you can find me on Bloomberg TV every day on the close between 3 and 5 p.m.

Eastern.

We'd love to hear from you.

You can send an email to moneypod at bloomberg.net.

Ask us a question, and we might answer it on the air.

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The Money Stuff Podcast is produced by Anna Mazarakis and Moses Andam.

Our theme music was composed by Blake Maples.

Amy Keen is our executive producer.

And Sage Bauman is Bloomberg's head of podcasts.

Thanks for listening to the Money Stuff Podcast.

We'll be back next week with more stuff.

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