Lead-Lag Live

Matt Markiewicz on Leveraged ETF Strategies, Market Volatility Cautions, and Long-Term Investment Horizons

• Michael A. Gayed, CFA

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Discover the complex world of leveraged and inverse ETFs with Wall Street veteran Matt Markiewicz from TradrETFs, who brings 27 years of industry insight to the table. Get ready to unravel the intricacies behind these financial instruments designed for short-term amplified returns, and understand why they may not be the best fit for long-term investments. Matt, with his extensive experience at iShares and beyond, shares how smaller players like TradrETFs navigate a space dominated by giants like BlackRock and Vanguard, offering unique perspectives and innovative strategies.

Our conversation sheds light on common misconceptions about leveraged products, likening leverage to financial tools we use every day, such as mortgages, while highlighting the need for caution, particularly amid market volatility. We explore the dynamics of the ETF industry, where understanding daily resets and compounding effects becomes crucial for effective investment management. Matt also delves into the mechanics of ETFs, including the use of swaps for leverage and the significance of diversifying counterparties to mitigate risks during financial downturns.

Looking to the future, Matt presents new horizons for ETFs beyond equities, especially in treasury investments. TradrETFs is pioneering new paths by offering products that aim to deliver consistent leveraged returns over a month, aligning with longer-term investment goals. From semiconductor exposure to international investor needs, this episode is packed with insights and practical advice for both seasoned investors and those new to leveraged ETFs. Engage with us in this enlightening conversation and gain a deeper understanding of how these financial products can fit within a diversified portfolio.

DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of TradrETFs and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Speaker 1:

As I mentioned, this industry is the leveraged ETF and inverse ETF industry has been around for 18 years. All 200 plus products outside of the ones, the 12 that we just launched. They're built the same way. They're constructed in the same manner in that they give you an amplified or leveraged return on a reference asset for a particular period of time. It's important on a reference asset for a particular period of time. That's important. Now, that particular period of time for those 200 ETFs is one day. So the two times levered S&P 500 ETF with the ticker SSO $5 billion fund that resets its leverage back to two every single day. So if you hold that product over a longer period of time, for any more than a day, you are not necessarily going to get two times exposure on the S&P 500.

Speaker 2:

I'm excited for this conversation with Matt Markevich of Trader ETFs, not only because I think what they're doing is unique as far as their suite of leverage fundamentals, because they're a client of mine, so this is a sponsored conversation from Trader ETFs. If any of you want to ask any questions, as we're live here for the roughly 30-minute time window, it doesn't matter if you're watching on X, youtube, linkedin, I can see your posts. Let's make this interactive. This is going to be a really, I think, intriguing way to think about how do you trade levered funds and why certain levered funds not all levered funds are created equal. I think it's sort of the. Again, this is a sponsored conversation from Trader ETFs C-R-A-D-R-E-T-Fscom. So, with all that said, my name is Michael Guyatt, publisher of the Lead Lag Report. Joining me for roughly 30 minutes is Matt Markevich. Matt, I've got to know you a little bit over the last I don't know three weeks or so here, but introduce yourself to the audience. Who are you? What's your background? What have you done, bro?

Speaker 1:

Yeah, hey, thanks for having me on, mike. Appreciate it Finally. I've been reading your stuff for years and it's really nice to be doing something for real with you right now, which is great. So really nice to meet everybody.

Speaker 1:

Matt Markovich is my name, 27 years on Wall Street. Currently I am the head of product and capital markets and a brand of ETFs called Trader. We launched this brand in May of this year, so the name may be unfamiliar to some of you. However, we have had four tickers in the marketplace for several years, including SARC, tarc, tslq and NVDS, which is our short NVIDIA ETF. I've been in the ETF world since early 2009.

Speaker 1:

I joined BlackRock or actually at that point it was iShares before BlackRock had bought the ETF firm All of Barclays Global Investors actually in December of 2009. Barclays Global Investors actually in December of 2009. So it was there kind of when we were a little independent before we got swallowed up by the world's largest asset manager but had a great six and a half almost seven years there as part of the capital markets team doing a lot of work with RIAs, advisors, hedge funds, as well as most of the sell side that kind of has Delta One desks that are using ETFs as a way to express certain investment views. We launched 150 ETFs when I was at iShares. That's a pretty sizable number and I've gotten a lot of experience launching ETFs, understanding how to build products, and I went off on my own after I left BlackRock started an ETF issuer.

Speaker 1:

More on the thematic side, we launched three thematic ETFs and that got me in the world of learning how to do things I don't want to say by myself, but with smaller teams and being more resourceful to kind of market the ETFs and get the name out there. And yeah, so, as I said, I've been part of Trader since we launched the brand in May and before that as Axis Investments. That's AXS Investments is the parent company for the Trader brand. They've been there for almost three years. So yeah, mike, that's a little bit about me.

Speaker 2:

So I gotta ask you you mentioned 150 different ETFs launched at iShares how much of this industry is pure survivorship bias? Just launch as many products as possible, hopefully one of them or a few of them stick, and then close the rest.

Speaker 1:

Well, it just really depends on what kind of side of the coin you're on right, because a lot of the smaller issuers, like we are now let's call it upstart issuers you can't really take that approach. You have to be a little more targeted and have a, I'd say, a more educated guess as to what's going to work. Because, as the world's largest asset manager, blackrock can kind of put anything out there, see if it sticks. And if they spend a couple million dollars to launch and market upon it, it doesn't really work out and hey, that's okay. Most ETF issuers don't really have that leeway to kind of do that from a financial perspective. So it would be great to kind of just throw the spaghetti against the wall and see what sticks, but the reality is when you're running a business, that's not quite possible. So, the bigger issuers, sure, it might happen, but in general, the other 80 issuers in the ETF space you can't do that.

Speaker 2:

I want to expand on this more because I think it's an interesting direction to go. The reality is Vanguard, BlackRock they have a lock on the vast majority of assets, which means if you're going to be an issuer, you've got to do something really different to stand out To play in a part of the sandbox. They will not come in and interfere with. Leveraged funds are kind of unique from that perspective. I can't ever imagine Vanguard doing a levered fund or BlackRock doing a levered fund, certainly in the way that you have done at Trader ETFs. Let's talk about the appeal of leveraged funds broadly. First of all, how did it even come to pass that we have these levered products the way we do now?

Speaker 1:

Well, leverage funds in the United States have been around since 2006. And so we're talking over 18 years. The product category has been in existence. It's seen fits and starts, ups and downs. I think we're in a little bit of a renaissance right now for leveraged ETFs.

Speaker 1:

As people understand, one of the only true ways to beat a benchmark is just by owning that benchmark or owning more of it in a more capital efficient manner. Everyone thinks leverage is I shouldn't say everybody, but there's this idea that leverage in ETFs is a bit of a dirty word, but at the end of the day, leverage is used throughout all facets of people's personal lives. I mean idea that leverage in ETFs is a bit of a dirty word, right, but at the end of the day, leverage is used throughout all facets of people's personal lives. I mean, if anyone owns a house, most likely they had a mortgage. That's leverage. So you're using what little money you do have to buy an asset of greater value for money that you don't have. But the problem is with the house. You know it's an illiquid asset. Obviously it provides, you know, a roof over your head, shelter, all that you know satisfies basic human needs. But at the end of the day. You're not a hundred percent, you know using it as an investment right. You're using it to kind of, you know, provide a home for your family, let's say so in investing.

Speaker 1:

Using leverage is pretty common, and especially with professional investors, and, as I said, it's just a way to use capital more efficiently. So it's something that, from a structural standpoint, when you're building a product, not every ETF issuer can do it, or not many of them, because you have to actually have a registered investment advisor You're facing off against counterparties, many of which are larger banks that are providing you the credit for the total return swaps that are underpinning most of the products, and those financial institutions want to make sure that there's not only a legit entity but there's an entity behind that that knows what they're doing. That's why there really aren't many ATF issuers again, as I said that are using swaps, because it does take a while to kind of set up that whole arrangement with the counterparties.

Speaker 2:

So I did want to expand on the swaps point. But before you get too grainy on that, we know that markets have an upward bias. So a lot of people might think well, if markets have an upward bias, why not just own any of these levered funds for the long run? And you and I both know the reason why that doesn't work. But I want you to explain why owning a levered equity proxy in the long term can actually be really, really bad.

Speaker 1:

Yeah, as I mentioned, this industry is the leveraged ETF and inverse ETF industry has been around for 18 years, all 200 plus products outside of the ones, the 12 that we just launched. They're built the same way. They're constructed in the same manner in that they give you an amplified or leveraged return on a reference asset for a particular period of time. It's important Now, that particular period of time for those 200 ETFs is one day.

Speaker 1:

So the two times levered S&P 500 ETF with the ticker SSO $5 billion fund that resets its leverage back to two every single day. So if you hold that product Over a longer period of time, for any more than a day, you are not necessarily going to get two times exposure on the S&P 500. And over the longer term, there are several let's call it forces at work, mainly due to compounding, that will make it so that you don't necessarily get that two times leverage. You may get more or you may get less, and that's the problem that we are attempting to solve. Believe we have solved for it in the 12 ETFs that we've just launched.

Speaker 2:

And the real issue there. You said compounding, but the real issue there is the path behavior, daily right when you're 2x and doing a reset. So the problem is and I've done studies on this is that when you're in a very volatile environment, where the market goes up big, then down big, then up big, then down big, you're actually leveraging at the wrong time. You're 2x into the following day at the higher base before another big drop, and then you're 2x at the lower base when actually you should probably be a bit more to get back to break even because you've lost capital from the leverage on the prior day. So a lot of this really does have to do with just daily sequencing behavior, which is purely a function of volatility.

Speaker 1:

That's it and sort of what you mentioned, that pattern. Essentially you're locking in your losses on several consecutive down days so that you're not maintaining that leverage ratio. You're actually going to be getting less if you hold it over the long term. When you're locking in with that daily reset over the course of a couple of days um, you know, a couple days. So they're in in certain market environments the dailies are expected to outperform, uh, what we call a calendar reset etf, um, and that that would be in an uptrending market.

Speaker 1:

So when you see, you know there can be volatility, of course, mike, but at the end of the day, when you see something like let'sVIDIA that's a great example that is just up for four days, down for one, up for five days, down for two in a row, that type of trending market, the daily reset product is expected to outperform. A calendar reset product is expected to outperform a calendar reset product. I don't want to say that's an anomaly, right, but that certainly you kind of see those results play out In a sideways market or in a downtrending market. We would expect the calendar reset ETFs to actually give you that leverage that you were looking for and do so with less volatility. I think that's another thing here that a lot of people forget is the volatility in the dailies when you're holding it for a longer term has been higher than a longer reset period.

Speaker 2:

So I think this is where a lot of people get tripped up right Now. A lot of people will tripped up right Now. A lot of people will say, okay, that's fine, they recognize that and they want these products because they're short term traders. You and I have talked about this before, but from what you've seen, it doesn't seem like those that claim to be short term traders are really short term traders. They're actually owning a lot of the daily reset products for longer than they might otherwise consider to be prudent.

Speaker 1:

Yeah, and I think that really gets down to. In my mind, there are two reasons for that. The first is when you leverage an ETF or a stock in your own account using the brokerage platform's leverage, it's expensive. In your own account using the brokerage platforms leverage, it's expensive, right. It's. Also it's kind of a pain right To be.

Speaker 1:

If you get a call, a margin call, you got to sell. What do I sell? Right, there's a lot more portfolio management that needs to go on in that instance. So you can use leverage in your accounts, right, and this is more maybe from a retail perspective right, you can use leverage, but it's not cheap and you have to worry about doing that rebalancing yourself. So that's the first reason. The second reason is when these products the daily reset products came onto the scene 18 years ago, it was the first time anything like this has been introduced, so you don't want to do the rebalancing yourself. It's cheaper to do the leverage with an ETF than it is versus just kind of, let's say, in 2006, buying SPY yourself and levering it up two times, just easier to buy the product.

Speaker 1:

The problem is that performance resets every day and a lot of investors retail in particular. They didn't understand that they're not getting that leverage over a longer period of time. However, when the markets are trending and everyone's making money, you're happy and you just continue to use the product, even though you are fully aware it's not a perfect solution. It's a mousetrap, it's just not the best mousetrap. The mousetrap is better than getting leverage in your account but for, let's say, swing trading or owning it for a month or two, because you believe that earning season is really going to provide a spark into your end and there's a seasonality trade right November, december good months for US stocks you don't want to use a daily product if you're going to be owning it, owning US equities, owning that product over a longer period of time, again because of that volatility drag that we're seeing here.

Speaker 2:

So your answer to this as a firm is let's not do daily, because at the moment, one of those volatility spikes, a lot of these levered funds that are daily will get smashed and stay smashed for a while. I was looking at some of these 3X levered FANG type funds that are daily will get smashed and stay smashed for a while. I was looking at some of these 3x levered fang type funds that are out there and they're barely above the 2021 highs. Why? Because their daily reset into 2022, horrendous decline kept on compounding and leveraging to your point, creating almost like a permanent loss and despite having this huge move since 2023, they're still not they're barely above the prior higher watermark. So talk to me about the calendar reset First of all. How did the idea even come up among you, among the team, and talk about the different timeframes and how people should think about them?

Speaker 1:

Yeah, so we do run four daily reset ETFs, as I mentioned on the onset right A short Tesla ETF, a short NVIDIA ETF and then we have two leverage ETFs that are a riff on the ARKK ETF. So two times long ARKK and two times short ARKK, and those are again. Those are all daily resets and from managing these products for a couple of years, we would get feedback from investors. Hey, I bought your Tesla ETF at so-and-so date yeah, it was three months ago. Tesla is actually down 5% over that period. Your Tesla ETF should be down 10%, but it's actually down 30%. What's going on here? It's not working correctly and there are a couple of things to play here. The first thing is, especially if you're an advisor, you shouldn't be using these products for your clients. There's obviously a daily reset and if your client has a longer term investment horizon, there's complete mismatch there. So there's a huge suitability issue from that perspective. And the second thing, from individuals and from financial advisors and really kind of hit home that, wow, these folks are not using the product correctly. What if we could build a product that would enable them to have some confidence that over the course of a certain time period let's call it a month that over the course of a certain time period let's call it a month they could feel very confident that they would get two times the return of the underlying asset or some multiple of the underlying asset, and you wouldn't have to worry about that volatility from day to day. Right, that really impacts that. Compounding out impacts the return. That really impacts that. Compounding out impacts the return. And at the end of the day, if SPY is down 3% for the month of October, our SPY M ETF will be down 6%. So it's not like everything always goes up, of course, and you know that when you're entering into the products, when you're entering into the products. But at the end of the day, we really saw a need from, especially the advisor community, tactical traders, that they did not understand that they were using these products, the daily resets over a longer time. They really didn't. Why is my return stream different from what I expected? So you'll hear me say a lot.

Speaker 1:

These products match outcome with expectation. So that you know, like I said, spy is up 3% in the quarter. You're going to be up 6% if you own our SPYQ ETF and you hold it. This is important now If you held it from the day that the product resets. Let's just take the fourth quarter, for instance. You held it from at the close on September 30th, when the product got its performance reset, to the last trading day of the fourth quarter. That's how you measure that performance. That's the two times right. So you can look at the nav and kind of figure that out and remember the effective leverage will float throughout the month. So if the SPY is down for the quarter, your effective leverage will be higher. So you'll be getting more leverage on that product because we're not resetting it every day.

Speaker 1:

Dips in the market, mike, to start to kind of come into these products, I don't know. The last couple of days here we've seen some weakness, nothing crazy right, there's no panic in the market. But we've gotten a lot of indication that they're going to start looking heavily at using our products to take advantage of the dips versus the dailies again, because with the dailies, to take advantage of the dips versus the dailies again, because with the dailies you're essentially locking in those losses for a period of a couple of days and that's going to put you in a tougher spot when the market rebounds.

Speaker 2:

So this is maybe this is my own naive attempt, but think about the math of this. Let's say conceivably, somehow the market is down 50% a month, then the leverage would be towards the end of the month, basically 3X, right, it's 2X. Then half of that you're adding 1.5 times, right? Is that the idea that that's the floating multiplier?

Speaker 1:

Yeah, around there. Yeah, just putting the math aside, the multiplier does float, but you will be more levered, right, if you bought it right before the end of the month, say, and the reference asset was down 40% or something like that Right, and the idea there, from what I'm hearing, is that in the very long-term that should result in a better capture of the long-term upward drift, because you're not deleveraging at the wrong time.

Speaker 2:

Actually, quite the opposite, you're actually leveraging into the decline further because of that float going up.

Speaker 1:

Correct. I mean, that's just the natural float of how the fund is managed right, and we will be putting on I don't know whether it's next week or next few days imminently we will have the effective leverage. If you could bring up a fund page, that would be good. We are going to stick the effective leverage in the fund facts so that investors know if they bought it that day. It's not going to be a real time, it's going to be an end of day calculation. Yeah, see, like next to the median bid-ask spread there, right next to the AUM, there'll be an effective leverage number right there. So you know, oh wow, if I bought it right here, I'd get over two times leverage if I held it to the end of the month. So I think that's going to be useful too. We've had a bunch of requests from investors to add that, so that's in the works.

Speaker 2:

You mentioned swaps before. A lot of people may not be familiar with what swaps are. They think about leverage. They think about margin account, literally borrowing dollars. Explain the mechanics of how the leverage is achieved.

Speaker 1:

So a swap is simply a contract between two parties whereby one party in this case we'll call it a bank where we have signed agreements, contractual agreement they are contractually obligated to deliver a certain performance. So let's take our SPY-M ETF, for instance. Our counterparties there know that on the last day of the month they need to deliver in terms of cash to the fund two times the performance that happened over the course of that month. So they do the hedging and everything on their side. This is not a listed contract, right? These are OTC.

Speaker 1:

Total return swaps are called, and again, it's an arrangement. It's an agreement for one party to deliver performance of an asset to another party, and this was obviously, during the financial crisis, a huge problem because you had leverage in the financial system with investment banks and if the banks went under, or when they did, there was definitely talk of, well, how are those obligations going to be met? If you're a fund and you're five times levered on a position and you're at investment bank ABC that is looking to go under, well, how are you going to be made whole on that investment? Because they are contractually obligated? So that's why you have multiple counterparties to diversify that risk, right? So you don't have all your eggs in one basket per se with just one counterparty. So that's really all a swap is. It's an agreement to deliver performance, a contractual agreement. And you do it, mike, in a very capital efficient way, because what we're doing is we're posting a margin and then the rest of the money earns interest. So there's a financing aspect to it. We're paying to financing the trade, but we have all this cash in the account that's sitting there at this point making fairly attractive return, short term return, money market return on the cash. That's kind of sitting in there.

Speaker 1:

So a lot of people will look at the expense ratio and say, oh, that's 1%. Wow, that's high for a management fee. 1.3%. It's like, okay, well, you can think that way, but go try and do it in your Fidelity account at 6% and try to rebalance it. So we're bringing an institutional quality solution to the retail audience right, because they can't do that themselves. And then, no, especially international. There are a lot of international investors in our fund that aren't allowed to use leverage. So any leverage inverse ticker, it's an easy solution for them because they don't even have the option to use margin accounts in their home country. And that's another thing. I think that we're blessed here with our financial system and kind of the options available and all the flexibility and crazy products we have and that doesn't exist in most of the countries around the world. So there is a large appeal for these leveraged products, in particular to foreign investors.

Speaker 2:

You mentioned being a newer issuer and I'm still blown away that so many people confuse volume and asset size with liquidity. So explain why the size of a fund, and, in particular, your ETFs, really doesn't matter when it comes to getting in and out.

Speaker 1:

Yeah. So there's a, I guess, a term that we use a lot in the ETF industry. It's just called the hidden liquidity, right, and an ETF's liquidity on screen at the end of the day is really backstopped by how liquid that underlying portfolio is. Right, because the ETF is just a wrapper. The ETF is just a collection of assets. That's a portfolio that happens to be exchange traded and it's transparent, it's tax efficient.

Speaker 1:

And you look at that ticker and you say, wow, it only trades 10 000 shares a day. Are our socks and etf rents? That's right. That's our uh, 2x monthly socks. Etf, that's for semiconductor exposure. And you look at it and say, oh, this thing is traded 10 000 shares a day. It's, uh, you know, less than 2 million of assets. I, I can't buy this, even though when you look at the spread and they're reasonable, and you think, well, how is something that is so small and just really doesn't trade much, how are the spreads fairly tight? I don't quite get that.

Speaker 1:

And at the end of the day, again, the liquidity of the ETF is underpinned by what it holds. And since we're holding a swap on the SOX ETF, that's the iShares Semiconductor ETF, soxx $15 billion fund or whatever it is that trades like water. That's where the liquidity comes for our SOXM ETF and the same is for SPYAM NVDW. That's our 1.75 times weekly NVIDIA ETF. A lot of successful single stock ETFs out there, but none of them give you weekly exposure. So we have weekly exposure to Tesla and weekly exposure to NVIDIA. We're the only ones who offer that. So what you really have to look at when you're looking at the true liquidity of an ETF is what does it hold? And since really our ETFs are just backstopped by cash, that's all it is there's very little cost for that underlying market maker or liquidity provider. When they're providing that liquidity, they're not going out and buying shares of SPY or shares of NVIDIA. When they have to create new shares, mike, they're actually delivering cash to the fund and we're the ones who put it to work.

Speaker 1:

An ETF is much more liquid. Any ETF. This goes. Forget just not just the trader ETFs goes. Forget, just not just the trader ETFs. Etfs are more liquid than meets the eye and it's always a good time to remind people to always use a limit order when you're trading 99% of the ETFs out there. Put a limit in at the ask.

Speaker 1:

There's plenty of hidden liquidity out there and many liquidity providers that when they see your order they're going to rush to fill it because that's a fair price. You have all these market makers that are keeping each other honest, so to speak, so that there's not much ability to arb at one price or the other in ETFs. It's because you have a lot of market maker eyes looking at it, especially for products like ours or our most recent ones, that again, their underliers are based on the movement of SPY and Qs talking the most liquid securities in the world. They're easy to price and they're super easy to trade, so that liquidity will, let's call it, carry over to the ETF itself. And if you look at a few of our ETFs MQQQ that's our 2X monthly Q's ETF We've had some very large trades, hundreds of thousands of shares trade at one clip, one print at the offer, multiple times the average daily volume, with no impact to the spread. And that gets back to that hidden liquidity aspect of ETFs.

Speaker 2:

Matt, we're going to do more of these conversations, getting different traders in as well. There's a how to think about leveraged funds, but for those that want to learn more about the funds and maybe interact more with you, where would you point them, to Point them to our website.

Speaker 1:

That's traderetftradretfscom. We have a submission forum on there to contact us and, yeah, we're a big team ready to kind of help you with whatever you need.

Speaker 2:

Everybody learn more about the funds at TraderETFscom. Again, this is a sponsored conversation. Trader ETFs is a client of mine. I do believe in what they're doing. I think it's unique for a lot of perspectives and hopefully those that are watching this will consider that if you're going to do a levered fund, by the way, you don't have necessarily to do it with equities. You can also do it with treasuries, which is going to be an interesting play, I think, whatever it's worth in the months ahead and Trader ETFs has an ETF for that in trying to track effectively the long duration treasury side. All right, Thank you, man. I appreciate it. Thank you everybody for watching. I'll see you next episode. Thanks, mike. Cheers everybody.

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