Lead-Lag Live

Howard Chan on Balancing Income and Growth, Democratizing Investment Strategies, and Tax-Efficient Yield Premium ETFs

• Michael A. Gayed, CFA

Share episode

Unravel the complexities of balancing income and growth in your investment portfolio with Howard Chan, the visionary founder and CEO of Kurv Investment Management. Discover how recent SEC rule changes have unlocked a world of tax-efficient, institutional-grade strategies for every investor, making sophisticated option-based approaches accessible through ETFs. Howard guides us through Kurv's mission to democratize these advanced strategies, addressing the perennial trade-off between income and growth, especially in the tech sector's fast-paced environment.

Explore the realm of dividend equity ETFs, where innovation meets income generation in unexpected ways. Traditional sectors may dominate with higher dividend payouts, but we reveal a yield premium ETF strategy that transforms tech stock volatility into a steady income stream through covered calls. This innovative approach is not just a theoretical exercise; it's a practical solution for those prioritizing cash flow as retirement approaches. By juxtaposing this strategy with conventional income-generating methods, we illustrate how it can seamlessly integrate into a comprehensive income-focused portfolio.

Tech exposure in portfolios doesn't have to be a gamble. Our discussion sheds light on momentum-weighting strategies and covered call writing, revealing how these can mitigate risk while maintaining growth potential. We unravel how these strategies have led to Kurv's consistent outperformance of benchmarks like the NASDAQ 100, offering both strategic growth and income opportunities. The conversation extends to the tax efficiency of Yield Premium ETFs and the nuances of quarterly rebalancing, equipping you with insights to manage transaction costs effectively while capitalizing on market movements.

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 Kurv Investment Management 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 securitie

Today's sponsor is Deftform, the simplified form builder you've been waiting for. Stop using overpriced and bloated alternatives. Deftform gives you everything you need to create unlimited forms and collect unlimited responses.

Visit deftform.com and use the code LEADLAG to get 20% off the Lifetime package.

 Sign up to The Lead-Lag Report on Substack and get 30% off the annual subscription today by visiting http://theleadlag.report/leadlaglive.


Foodies unite…with HowUdish!

It’s social media with a secret sauce: FOOD! The world’s first network for food enthusiasts. HowUdish connects foodies across the world!

Share kitchen tips and recipe hacks. Discover hidden gem food joints and street food. Find foodies like you, connect, chat and organize meet-ups!

HowUdish makes it simple to connect through food anywhere in the world.

So, how do YOU dish? Download HowUdish on the Apple App Store today: Support the show

Speaker 1:

The first set of problems we try to tackle and to try to solve is this age old issue of picking the tradeoff between income and growth. We started focusing on technology. Obviously, that's been a topic on a lot of people's mind this year specifically, and oftentimes advisors who are building their clients portfolios have to choose between the income that they can provide to their clients or the growth that's in the portfolio, and so what we've done is we've developed two suite of products to address this particular issue.

Speaker 2:

I am hoping that we are doing. We're going to do these webinars once a month with Howard and his team A lot of really interesting things. We're going to be talking about interesting ideas on tax efficient income and also what do you do if you're bearish on tech and tech stocks. They have an interesting solution that I think we're going to talk about at length here. So, with all that said, my name is Michael Guyad, publisher of the Lead Lagarport. This is the Curve Investment Management webinar, introducing here Howard Chan, the man behind it, howard. So you and I have gotten to know each other a little bit over the last several weeks here, but introduce yourself to the audience. Who are you? What's your background?

Speaker 1:

What have you done throughout your career? What do you do now? Yeah, so my name is Howard Chan. I'm the founder and CEO of Curve Investment Management. We're relatively, you know, our ETFs just reached a first year anniversary mark for some of our ETFs, but the team is actually have been working together for quite some time. Many of us actually previously worked at PIMCO, and so hopefully, through our discussion today, we can show we're trying to bring some of the stuff that hopefully was not accessible before now to all investors of all sizes, and this accessibility thing is very important to us.

Speaker 2:

And then, obviously, tax is something that we constantly think about, so yeah, it is interesting that we really have gotten to a point where institutional strategies are now easily accessible in ETF wrappers. A large part of that obviously has to do with the ETF rule change from 2019. I think it was a stride that sort of enabled all these derivative type of strategies to be put into that wrapper. What is it about institutional strategies that make them so powerful?

Speaker 1:

Yeah, so we'll have some slides on this, but the mission for Curve is to make accessible, tax efficient and institutional grade strategies to investors of all sizes, and I think you're correct. What actually made Curve possible was actually two SEC rule changes. That happened in 2019, 2020. The rule changed the way in which we can incorporate some derivatives, like options, into investment strategies. But you know, a lot of this is not new.

Speaker 1:

Um, large institutional strategy, uh, investors like pension plan plans and endowments have been using these strategies to generate, you know, returns in their portfolios, right, um right. And now what we want to do is bring them in a format that's accessible by everybody. But I will say that our strategies are different than the traditional institutional strategies because traditionally, the strategies are used by non-taxable entities. Pension funds and endowments don't have to pay taxes, and typically people who use ETFs are advisors and individuals who have to pay taxes. And typically people who use ETFs are advisors and individuals who have to pay taxes. So now we kind of layer on this extra components like how can we make these institutional strategies as tax efficient as possible so that they get the benefits of the return without sort of the tax drag that you often see with derivative strategies?

Speaker 2:

Let's get into it. I know you've got a deck. I think this will be good for the audience to see and to get into, so feel free to share this for us. Let's kind of walk through things here.

Speaker 1:

Yeah, so we'll talk about a few equity income strategies and the reason why we developed them and maybe just for your audience who are not familiar with curve, again, our mission is to democratize access of tax efficient and institutional grade strategies investment strategies to investors. And as we got down this path, we actually have also other investment solutions, tax deferral strategies like 351s that we've been working with a lot of clients. So it's sort of this whole realm of mixing, uh, investment strategies and then thinking about tax efficiencies around it. Uh, as I mentioned before, um, the team had we formally, you know, have built strategies and work together at Goldman and PIMCO and we're bringing that expertise into this ETF format. We, as Curve, as a company, sits in this cross-section of option-based strategies, which there are multiple ETF issuers in this space. But I think a little bit more unique about us is that we think about the tax consequences a lot and then we, we, we build our strategies, you know, leveraging our expertise. And I think one thing, two things that maybe the new option strategies are allowing that you previously couldn't access is first, it lets you tap into risk premia that previously wasn't really accessible. It's kind of like volatility risk freemia. And then the other thing that options are really good at is to have asymmetric upside and downside risk management, and we'll kind of go into that a little bit more, but that's something that I think is a little bit new in putting these kinds of strategies into a portfolio.

Speaker 1:

But, of course, tax is not the only thing. We want to develop strategies that obviously outperform their benchmark and outperform within a portfolio to generate and maximize total return, and so, in that vein, the first set of problems we try to tackle and to try to solve is this age old issue of picking the trade-off between income and growth. We started focusing on technology. Obviously, that's been a topic on a lot of people's mind this year specifically, and oftentimes advisors who are building their clients' portfolios have to choose between the income that they can provide to their clients or the growth that's in the portfolio, and so what we've done is we've developed two suite of products to address this particular issue.

Speaker 1:

The first is the Curve Yield Premium ETFs. These tend to be developed for those who are closer to retirement or are in retirement and that's trying to supplement their income. It's because our focus here is very steady monthly distributions and it's sort of an a la carte approach and I'll go through what that means. And then the second is our tech titans ETF and this is meant to have both you know, a little bit best of both worlds have some income and have some growth exposure and tends to be aimed at folks who are a little bit earlier in their investment careers so they can get the benefits of growth without sacrificing income in their portfolio. And with all of our strategies try to build in some sort of tax efficiency in it. And that I can go into detail.

Speaker 2:

So what I'm hearing from you, which I think is interesting, is on the tech side. Tech is known as the capital appreciation growth sector. Right, it certainly has been the last two years. So you're effectively creating a product that shifts that more towards that cashflow income side. Right, Less about capital appreciation, much more about income, but still total return, something that is appealing.

Speaker 1:

Yeah, we want to make that trade-off a little bit easier for advisors and their clients. So this actually this slide hopefully demonstrates that. So we, we, we seeing you know, if you're an advisor who needs to um generate a certain amount of income for your clients, right, you typically will go. And if you want to have some equity exposure, you want to look at some dividend equity ETF. So we list some of the largest ones that are in the market, right? So if you take the sector weightings for these particular ETF relative to the S&P 500, right, the market cap, there's no distortion in the market, public markets. What you tend to see is that these dividend income ETFs tend to overweight sectors like industrial utilities, energies, financials, and then they underweight information technology. So the tech sector right, and the reason is on the right-hand side is that tech companies don't distribute dividends. So if you're a dividend growth dividend equity ETF, you're you naturally want you're avoiding essentially the the the stocks that don't distribute dividend.

Speaker 1:

But one thing to note is that these ETFs tend to have an exposure. They're overweighting essentially old parts of the economy. So if folks who have been in the markets for a while, you know financials and ExxonMobil used to be the largest components in the Dow right and they faded. And this these are sort of the older parts of the economy and they're they're underweight, essentially the new parts of the company, the part of the economy that has growth. So that is a little bit awkward in terms of trying to get market exposure because you're you're over underweighting parts of the economy. That may not be beneficial, right? So what we want to do is try to make that trade off a little bit easier, and so we developed the first strategy, the yield premium ETF strategies, and the strategy here is to try to look to generate as consistently monthly income as possible by actually transforming the risk premium that I mentioned, which is volatility.

Speaker 1:

We're turning essentially volatility into income, and so the basis of the strategy is that, essentially, we're writing cover calls on individual names, tech names, and cover call strategies are really good in certain market environments, market environments in which stocks are going down, it's trading sideways or it's slowly increasing in price. You trade some of the upside for the income that you're generating, and so this is why, when I mentioned that the suite is tend to be used by folks who are closer to retirement is because they have less focus on price appreciation. They want their focuses as consistency in terms of income generation. They need the income to be predictable as they approach retirement or are in retirement. And so we have six names that we write these cover calls in. They are the names that you've seen Tesla, netflix, amazon, microsoft, google and Apple and essentially what a cover call is? You're transforming sort of the volatility of these underlying stocks into income, income.

Speaker 1:

So when you write a cover call, you receive a premium for that call and if it expires, out of the money, you, you, you reap the full premium that you get from that call option.

Speaker 1:

And so you'll see on the chart here the distribution rate. You'll see they're they're less volatile stocks that the stock that's probably the least volatile here is Apple. That has a distribution rate about, you know, 12% right, so that's the lowest there. So the lower the volatility, the lowest distribution, and then the higher volatilities, like Netflix and uh and Tesla, who's uh, you know has been very volatile this year. They generally have higher distribution rates. So the higher, higher volatility turning into higher income. We've also shown that oftentimes people think that cover call strategies limit completely your upside the way we generate or write our cover calls. We still want to preserve some of that price appreciation, we write a bit out of the money in terms of the call. So in terms of cumulative total returns, since there's actually, we're still able to generate pretty healthy total return from these names, even though we're writing cover calls on these particular names.

Speaker 2:

Is it fair to say so? I'll go back to that point, which I think is very well said, through your turning volatility into income. It's interesting, right? Because when you have high volatility in markets, people tend to gravitate towards dividend stocks because of that, to your point, old industrial world type of allocations, consumer staples, lower beta, healthcare, lower beta utilities, much lower beta on a relative basis, is it?

Speaker 1:

fair to say that if somebody is looking for very, very high distribution rates, they should actually welcome that volatility with these kind of products. I mean, it ultimately depends on the investment objective of the end client, right. So you know, I think the way that people are using these are what the group tends to be income focused investors. So they care more about cashflow, more than the price appreciation. Now, this can a subgroup of that would be sort of people approaching retirement, right, that wants that steady income. And maybe I'll skip maybe a couple of slides down is that, you know, if we look at sort of traditional ways of generating income, right, you generally have fixed income, right. So you CD base rate 5% is pretty good, right. Money market instrument treasuries are at now 4%. We've escaped that zero interest rate environment, right. And they, you know, potentially use corporate bond munis to generate some additional income, right. But unfortunately, as we got entered into this higher base rate environment, we also had inflation coming in. So now the cost of living is a little bit higher. So even though base rate's higher, you actually have to generate slightly higher yield than the base rate to match the inflation period that we just generated.

Speaker 1:

So what we did was we actually took a kind of a sample reference portfolio with the particular allocation and that reference portfolio generally have generated about four and a half percent, five percent that's. That's close to base rate and that that makes sense, right? And so so you know, oftentimes people said you know, you have all these single name, you know ETFs. How do you does it actually fit into a traditional income portfolio, right? How would people use it? Actually fit into a traditional income portfolio, right? How would people use it? And so the way that we we kind of look at it is that it could be used as a sleeve in terms of your income generation. So what we did was we took a look at the top line is the traditional income portfolios as generating about 4.6%.

Speaker 1:

Um, and you know, with the reason why we have six names is we actually wanted an a la carte menu. Depending on what your client is in terms of what their income needs is, you can change the proportion of the different names to get to the income target that you want. So, kind of Occam's razor, we picked just the simplest, equally weighted, of the six. That average distribution rate for that portfolio is about 22% and so if we were to combine these two, so 80% of a traditional income portfolio plus 20% of that curve yield premium ETFs, you get a distribution rate about 8%, which is close to twice that distribution rate of a traditional portfolio, and you can actually look.

Speaker 1:

On the right-hand side is that the traditional income portfolio has kind of inconsistent income distribution. Right, companies distribute dividends on different times. Reits can adjust their dividend rate, so there's some volatility in terms of distribution. We aim to be as stable in terms of our distribution for each one of these names. Just going back to the slide, this is the distribution for the last 12, 13 months for each one of the funds and we try to keep it as stable as possible. And so when you incorporate that into the portfolio together, you can actually see on the bottom slide, which is that you have a baseline, very stable distribution that your clients can count on, and then on top of that, the traditional income portfolio can add additional income generation into the portfolio into the portfolio.

Speaker 2:

But can I? Can I, because I think the if you go back to that prior slide about the NAV erosion, I think that should be explained because it's not really intuitive what that means. I mean, I think people will hear that term but they don't know what that actually implies in practice. So let's, let's go through a little bit of a sort of explainer on what that term is, why it matters.

Speaker 1:

Yes, so, yes. So when you have a higher dividend rate ETFs and this doesn't have to be cover call ETFs, it happens in cover call ETFs, it happens in also dividend growth equity ETFs is that there's a tendency, if you over distribute your eroding NAV and the easiest way I think about it is you, as an advisor, give us, as a manager, a hundred dollars to to generate returns, right, and so I invest in different things. I generate $5 of additional return in a portfolio. The maximum I should distribute is that $5 back to you, right? But oftentimes a lot of these dividend focused ETFs, they have a distribution yield they want to target.

Speaker 1:

So let's say, I want to target 7%, right? So you give me $100, I made 105, but you meet that 7% target. I'm distributing you $7, around $7. So that 5% is extra. I made that in terms of returns. But the extra $2, I'm actually eating into your original principle that you've given me right. So that is eroding into NAV and that's an effect that you want to avoid, right? Because if I wanted to meet 100% distribution rate, you give me $100, I can return you $100. That a hundred percent distribution rate you give me a hundred dollars, I can return you a hundred dollars, that's a hundred percent distribution rate. But that's not the ultimate desire, the outcome for your portfolio. You want to distribute the returns that you make on the principle that you've given an asset manager.

Speaker 2:

There's very much a convenience factor to this right Because you know conceivably investors could do this on their own if they're savvy enough when it comes to selling out the calls right, but it's a lot of work.

Speaker 1:

Yeah, and I think the thing is to be able to. You know, I will say, for advisors who have an execution desk that can trade options, it lowers the operational difficulty but, as with many options, there's an expiry so you have to roll these particular options. It's not a one and done kind of scenario, but actually what we found from a feedback is that the efficiency gain sometimes it's not in the entry of the strategies, the exit. So when you want no longer to have a cover call strategy in your ETF, if you do it yourself, you have to buy back the call. You have to undo all of the positions that you put in. So in an ETF format you enter by buying a share and then you can exit by selling the share, so you don't have to unwind the multiple sort of option positions that you have in your portfolio. The other thing I think you know a wise advisor would say is you know, I'm not just looking at income, right, what? What does the return, total return of your portfolio looks like? So we actually did the same same reference portfolio that we've talked about. Year to date. That performance for that portfolio is about 9% and obviously, with tech, has done really well in 2024. So it's pretty obvious that the equally weighted cover call tech ETFs would generate pretty attractive returns 26%, 27% and when you combine it in an 80-20 portfolio obviously it's going to have an addition to the performance right. But I think that the very interesting statistic here to actually is to look at the volatility. So if you look at the reference portfolio, the volatility of that income portfolio is about 5%. Tech is much more volatile. That's what we're transforming into income, so it's about 11%. But when you combine the two portfolio, actually, if you look at the volatility of the combined portfolio is actually less than either of the other two portfolios. And that's largely because most of the assets in the reference income portfolio generally are fixed income based instruments. And then now, now that you can add an equity instrument that also generates income, so now both growth and income, that's actually an additional diversifier into your portfolio. And that correlation has returned. The negative correlation between fixed income and equity has returned in 2024.

Speaker 1:

As I mentioned here, with the traditional yield premium ETFs you do have some limited upside to generate the very consistent income and we've had essentially clients that says well, I want to fully participate in the growth of technology stocks. Right, that's part of you know, if I'm earlier in my career, I want to compound my returns, I want to participate in the growth and to get some income in my strategy. So here we then actually developed the Technology Titans options to actually have asymmetric upside and downside management in the ETFs. That's kind of I would say kind of new in the market that hopefully people find interesting as well. The basis for the strategy comes from the fact that based on our research, we've seen actually technology companies, larger technology companies have outperformed the broad market. This seems like a story for 2024 that most of the market has been driven by the magnificent seven. We want to broaden that out a little bit to like 15 to 20 stocks. But if you look at per calendar year performance of the top 15 names relative to the overall NASDAQ index, there's a persistence outperformance on the largest one and our explanation is obviously a lot of these tech companies are generally are monopolistic, so they have very extremely, you know, I seen a high pricing power and usually it's a little counterintuitive because as as a company grows larger, you expect the growth rate to slow down. Right, because they're larger and larger of the market. But with tech companies a little bit different is that when they become a dominant monopoly in their particular vertical, they move to the adjacent vertical in which they're nominated and then they drive growth from there and then they move on to next, so that growth rate doesn't really slow down because they're essentially going into adjacent vertical businesses.

Speaker 1:

So in this particular strategy I mentioned, we want asymmetric upside and downside, and this is how it works. We want asymmetric upside and downside and this is how it works. When the market is going up, we want to have the primary driver of total return to be price return, so we want to participate in the growth of the upside in terms of the price appreciation, the tech stocks. But when the market corrects, we want to generate income to cushion the correction and so that becomes the primary driver of the returns in the portfolio. And this is something that if I go back to the previous slide is, we often get this question is the tech sector too rich?

Speaker 1:

Right? We got this. This question came to us from you know, all of the advisors work within in July, right? Can Nvidia keep going up? Right? Is it too richly priced? Right, and should I allocate out of tech Right? Probably similar to the question. Now we have a pretty good rally in the last month.

Speaker 1:

People are asking that same question and, and, uh, you know so. So if an advisor were to manage the asset allocation in their portfolio, what, what, what is? What? Are their choices? Right, the first would be to sell out of it, right, uh, but there's some downsides to that, which is that you have a big capital gains tax bill and if you did that in July, there was some downsides to that, which is that you have a big capital gains tax bill and if you did that in July, there was some correction and then the market rallied again.

Speaker 1:

Going back in, timing is hard, right, that's, that's always a. If everybody had perfect timing, then you know. That's the one thing that I think. You know it's it's hard to do, right? So we took a different approach with the strategy, which is that we accept the fact that in the technology sectors, there are moments of exuberance and moments of correction, and the question is not how do you avoid, is, how do you navigate it, right?

Speaker 1:

So the last cycle we saw was sort of during COVID, right, what we call like the stay at home stocks. Right, all the online platforms saw a huge increase in price and as soon as there was news that, oh, we can see the sunlight, there's a vaccine, those corrected right. So it's like how do you navigate this exuberance and this correction? So we did the construction, portfolio construction process for the strategy is actually very easy. First we select the names that we want in our portfolio. So usually this is around 15 to 20, 25 names in the portfolio and we're exchange agnostic and I'll tell you a little bit why that's important. And then the first step is when the market is going up, we do momentum weighting. Step is when the market is going up, we do momentum weighting and if the particular name is going down, we do cover call writing. So that's how, on a very high level, how the strategy works.

Speaker 2:

And sorry, can we define? How do you define up and down? Is it a movement?

Speaker 1:

Yeah, so in a basket, in a portfolio of about 15 to 20 names, we look at each name individually and we want to look at uh, growth stocks often are considered also have momentum and that means that the price will continue to go up until there's some event that corrects it Right. And what we found is that in particular text named that the average momentum cycle is about nine months. So a tech name would go up in price for a consecutive nine months before there's like a correction and then maybe they go into another momentum cycle. So what we do is we see when their name starts to exhibit momentum. In the second month we overweighted a little bit by maybe two and a half percent. So that magnifies the upside right. And then when they're at middle of that cycle, at the fifth month mark, we overweighted by another two and a half. So we don't want to wait until the end of the cycle to overweight them. We want to be at the beginning and in the middle of the cycle to participate, participate, magnifying the upside. And so by momentum weighting we think we can magnify when the market is risk on. So that's the first component of the upside, the asymmetric upside.

Speaker 1:

The second part is the how do you manage the downside? Right, I mentioned earlier that cover calls is really good in three environments when a particular stock is going down, trading sideways or slowly going up so what we and, in particular, when stocks actually corrects, what happens is that the implied volatility in that name actually increases. So when you write cover calls, you actually increase the amount of premiums or income you can generate in that name and so that income will cushion down. You know the downside. So if, if a particular name is going down you know, you know 10% you generate 2% of income. You cushion the downside by 2%, so that stock really is only going down really like 8%. So you're minimizing the downside in a correction. So by doing these both asymmetric upside and downside, we're able to generate excess return, right, this is all also very interesting theoretically, but how has it done? So?

Speaker 1:

We launched a tech tightness in July and the performance has actually uh, this is up until last Friday has actually proven out, um, kind of our our theory in practice. Um, since inception, we've outperformed the NASDAQ 100 by about three, 3% and it and we specifically want to call out where those returns are coming from. So since July, we've seen another increase risk on environment. So a lot of the returns come from the momentum weighting and the security selection In particular I want to go back to. The security selection is where we're index or exchange agnostic. So, for instance, when you look at NASDAQ 100, all that means is the top 100 names. That's listed on a NASDAQ exchange. But there are also technology companies that are listed on other exchanges. So one of the drivers of performance is actually Oracle. Oracle is listed on a New York Stock Exchange that's generally not included in a NASDAQ 100 index or ETF, right. Oftentimes people associate NASDAQ as the technology index right. So that actually that security selection is very important, similar with Salesforce et cetera, and those are not on NASDAQ. So that security selection has actually contributed to outperformance.

Speaker 1:

More willing to waiting has actually contributed to outperformance. More willing to waiting has actually contributed to outperformance. The cover call has been negative. Why? Because the market has been risked on right. So we generate some income, but we don't remember we have this like price return versus income return. The primary driver of outperformance will come from price return and the cover call income will. The primary driver of outperformance will come from price return and the cover call income will be a primary driver, we believe, when the market corrects and so that we want to diversify, set of alpha generators within the portfolio.

Speaker 1:

I find this very interesting Other people's might but kind of the statistics so far right On the portfolio. So generally, if you use QQQ, which is a passive ETF to the NASDAQ 100, right, our beta or sensitivity to QQQ is about 0.94. So largely tracks the overall index. But what happens is if we actually break it up to upside sensitivity and downside sensitivity is that when the market is going up we have more than 1.2 sensitivity when the market is going up and when the market is going down we have less than 1 sensitivity when the market is going. And then our tracking relative to QQQ or NASDAQ 100 is about 2.8% and if you look compared to the outperformance, the information ratio is about 1.5, which is very attractive. Anything above 1.1 is probably very attractive. So this is like statistically proving out essentially the asymmetric upside and then downside mitigation.

Speaker 2:

But let's go through a couple of scenarios on this, because the know year have been, you know, very smooth, right, you can on the tech side, obviously. So in in sequences is impact behavior which is, you know, much more jagged on the upside or much more down trending. How would the upside, downside, capture sensitivities? You know right, because it's going to be regime specific to some extent.

Speaker 1:

Well. So it's interesting, we launched the ETF. We launched is the inception date was July 23rd. If you look at where the market was, it was actually at one of the peaks and it's a subsequent, I would say, three, four weeks. There was actually a correction and then it wasn't. It was until after the election where we had the next cycle of of risk on environment.

Speaker 1:

So this, this strategy, even though the period has been six months, we've actually gone through a mini cycle already. So these statistics is based upon that mini cycle in in the portfolio and and so so you know, going back, you know where would you use this? So we think one it's like a good substitute for a triple Q. So triple Q is a passive ETF. So now we have excess return, we've outperformed the triple Q, but an important thing was that triple Q, the distribute annual distribution rate is about 50 basis points versus um K. Triple Q has been distributing about annualized 7%. So you have outperformance and you have um higher distribution.

Speaker 1:

So this is what I mean is like we we want to make the trade-off between growth and income easier. You can have both actually in one fund and then the other side is it could be a compliment to US large cap. Us large cap already has a lot of technology exposure so I wouldn't substitute it for pure, but it could be a compliment, especially when you are more focused on distribution. So SPY is about 1.3% distribution, this is about seven. So you can mix and match SPY to get similar technology exposure in the overall market but get a higher distribution rate.

Speaker 2:

So is it again. I'm trying to think through sort of the mind of the advisor. You know an advisor that because I talk to a lot of advisors, right I see actually some here that are watching this webinar who know me actually quite well the um, if there's a a feeling that tech is overvalued, right, that the cues overvalued, that feeling that the advisor has has doesn't matter because their end clients still want the exposure because it's still working, still out. So you know, going up into the right, this seems like it's a very good way to solve the issue of advisors being worried about the cues while still also making their existing clients happy because now they're going to yield it's still the cues and there's better downside protection.

Speaker 1:

Yeah, I don't envy the advisors because they kind of are in a difficult situation, right? Um, if you were not exposed to technology in the last 20, 15 years, your overall portfolio probably have underperformed because a large part you're probably not even around anymore at this point, right?

Speaker 2:

it's like yes, right and.

Speaker 1:

But you also want to be a little bit tactical with the exposure, because there are moments of overvaluation right, we know this, that we accept it, right. But it's kind of costly because you know early in July that the talk was, oh, there's going to be mean reversion. You should move out of the large tech companies and go into small cap, right. First of all, the timing is difficult, right, and you have this tax associated with it when you sell out or something and buy something else. And then, if this was a cycle, then you have to sell out a small cap and go back into tech to get the growth, or else you're going to underperform. Right, and there's a couple of problems with that narrative in the market, which is the volatility of tech and volatility of small cap is not the same. Like in the portfolio. Usually small cap is a smaller slice of the portfolio because it's more volatile, it's less liquid. So you can't even, you know, reallocate a lot of tech large cap, liquid stuff into a smaller small cap, illiquid things, right, that's if they're not equal and volatility is not equal, and then you have a tax bill on top of that if you reallocate.

Speaker 1:

So we are trying with. This strategy is one we want to get you both growth and income. But from an asset allocation perspective it's like you know, we want you to reduce cap gains, tax bills in the portfolio by, say, just keep this tech exposure as a strategic exposure. And then we kind of you know one one of the folks in our team has this analogy is this sort of a cruise control in your portfolio right, when the market is risk on, you momentum weight and participate in upside, and then when the market sells off, then you use income to minimize your downside without reallocating. So that is sort of the problem that we're trying to solve for advisors here.

Speaker 2:

Yeah, certainly very, um, very unique. From that end of things, and especially if you're going to enter a more volatile period under trump administration, which I'm sure we can riff on, uh, all that should be even more beneficial and make the case for these types of funds um, and so yeah, and and this, this is just, uh, you know, for compliance that we have to show this is the historical return for all of the seven funds.

Speaker 1:

You probably cannot see it, so if you're curious, we're happy to send it to you. It's probably too many numbers in one slide, but you know we're happy to provide that.

Speaker 2:

They're all positive. That's what matters and I have to you know we're credit to provide that they're all positive.

Speaker 1:

That's what matters and I have to. You know we're credit. Credit is due right. Technology has done very well this year, so we're a beneficiary of the data right. But these are actively managed so there's some alpha that's associated with it that those will take credit for. But you know, we think our thesis is tech is slightly overvalued, but for the most part the price appreciation has been justified by the increase in earnings. So fundamentals are very strong, but there probably would be bouts of corrections when the announcements of earnings don't meet expectations right. Even in this last cycle, where Nvidia had really good earnings, they've outperformed the expectations but it's still corrected because it wasn't as good as what the expectations were. And so we we think from from.

Speaker 1:

I come from a tech background in some ways and if you think about any technology company, you have different stacks the hardware stack and the software stack. We still believe that the infrastructure around AI will do very well because many of the software company has already have capital expenditures to spend on hardware. So you see a lot of the chip companies, the businesses that have cloud computing, will do very well. The question is whether the software side can monetize it. I think that will come, but we're kind of early in the AI era, so we think this is a secular story that will play out, but you are going to have bouts of corrections and exuberance.

Speaker 2:

So let's get into that, because that actually relates directly to one of the questions that Chad is asking, which is really curious, for Howard's take on performance is like in a bear market. That's what's kept me from pulling the trigger. Let's say again this is more scenario analysis. We've kind of hit on it a little bit, but bear markets are associated with higher volatility. Higher volatility should mean better yield for these types of products, so that's the sort of automatic risk off. I think you can argue. That takes place in terms of that shift from capital appreciation to income.

Speaker 1:

Yes, and just to be very specific. So we again, as I mentioned, we think the infrastructure around. So our firm view is that we're still in the early innings of this AI revolution Right now. Currently, ai is primarily B2B. There's going to have to be development for B2C and that evolution hasn't quite occurred yet. But from all of the earnings report from Facebook, google, microsoft they've already told you they're going to have a lot of capital expenditure.

Speaker 1:

I'm building out the AI infrastructure, right, so the beneficiary of that is the infrastructure partner. So that would be the chip makers, that would be Nvidia, amd, qualcomm, right, compute power that needs to train the model. So that's would be AWS side of Amazon, right, uh, azure and Google cloud, those, those will benefit. Now, we don't know what the other side of the company will do, but those will benefit, right and so. So then then the question is like can the software side so, like Gemini or even OpenAI, even though that's not a public company? Can then they make these models to monetize? Right?

Speaker 1:

And our theory is that, you know, I think more than 50% of the S&P 500 companies have mentioned some sort of deployment of AI in their businesses. Not every one of these companies can train their own models. So they're going to have to rent these models from these large technology companies and I think that, potentially, is a way to monetize these models. And then ultimately you've already seen an inkling of this, which is like at the last earnings for Facebook they have already started monetizing these models to advertisement better advertise that they actually started monetizing it. So that's all B2B side. We haven't even seen the B2C side. So you started seeing that some of the chip makers, like AMD, starting to develop AI chips for personal computing. So that still has to filter out into the market. So we think there's still some legs to go, but people's expectations are high, so there are going to be corrections in the cycle.

Speaker 2:

Another question here, not investment advice, but it's an interesting way to think about it. So this person is asking if you feel that Tesla is at the beginning stages of a massive future growth run, would it be better to focus on investing more into TSLP versus KQQQ pure play on Tesla as opposed to diluting it on KQQQ with the other stocks there? Presently, TSLP return is much higher. We all know past performance is not indicative of the future results, Focusing on 10-year periods, which makes more sense. So look, a lot of people, a lot of the retail community obviously likes to go heavy into individual stocks, right? Some of these stocks, like Tesla and NVIDIA, obviously have huge, almost emotional, cult-like followings. You can argue Is there a case to be made for choosing the single play versus the more diverse play?

Speaker 1:

Yeah. So I think there are actually different use cases and in some ways I can resolve this question for you. So I forgot to mention. You know we mentioned tax efficiency a lot and I haven't actually even talked about that, so I should probably focus on that.

Speaker 1:

So one of the things with the first yield premium ETF is that the income we generate in the fund is not ordinary income. The positions that you generate from options is actually capital gains, so there is the ability or an option to get long-term capital gains treatment and in some cases some of the returns are categorized as return of capital, which is not immediately taxed, right. So that is a tax efficiency built into the yield premium strategy. With a triple Q, we have a special ability is that if there is a name that doesn't have momentum and we are it should have cover call on that particular name and we happen to have a yield premium ETF in that exposure. We can buy that ETF for operational efficiency. So, for instance, in July up until July, tesla has been falling in price, so we actually sold that exposure in the portfolio to harvest the loss and we bought the TSLP in our K triple Q. So the income is tax efficient and we harvest the loss. So that's the tax efficiency built into K triple Q.

Speaker 1:

To directly answer, the question for TSLP versus K triple Q is that they have different behaviors, and I think that's important for investors and advisors to know. On TSLP, you're not going to get the full upside of Tesla If a cover call works really well. If one of the things is, if you have a sudden increase in price within the period in which you write your options, you're not going to fully participate in the upside. So we typically write monthly options. We do that is because there's generally mean reversion within a month, so if a stock goes up really high, it kind of reverts. In many cases not all the time, but many cases you revert. So you get the full premium, but if there's a huge price increase over several months, you're not going to get fully the upside.

Speaker 1:

The yield premium strategy the focus is as consistent distribution as possible, so the income is more important than the price appreciation. Versus in KQQ, we try to balance both. We try to get price appreciation and the income is going to be a bit lower than the yield premium. We don't want to cap the upside to the extent. Whatever your objective is, though that's. That's why they're different. So k triple q has tslp in it right now. So you, you, you, if you want both is actually k triple q would be the better choice between the two is there?

Speaker 2:

is there an argument made in holding tesla and then tslp together, sort of blending them against each other?

Speaker 1:

Yeah, so so the, the and maybe I should also. So. The reason why we call technology Titans a dynamic income is the. The income level will change depending on the market. So the market is going up, so the income range will range between four to 12%. And the range is because when the market is going up, we're not writing cover calls on all of the names. So it would be closer to the 5%, 6%, 7% range, which is where we are now. When the market corrects, we're writing cover calls on all of the names and we think that will get us to like a 12% 14% range right. So if your focus is, I want growth, but some income, that's K, triple Q, but the income right now is at 7%. So if you want something more, you can pair up with Tesla to make up the difference in income level that you wanna generate, but just knowing that the TSLP will have some limited upside, not that it will fully participate what the underlying would do Needless to say.

Speaker 2:

These types of strategies basically have little sensitivity to interest rates, right, so it's a way of getting income without being nervous about what the Fed necessarily might do. Only to the extent that Fed movement creates volatility does it impact yield? Obviously Is there. Let's talk about sort of other ways of thinking, about implementation. How do you think about or what have you heard in terms of advisors, individuals putting certain percentages? Is it more satellite, 2%, 3% in these types of funds, larger allocations, what's the range that you typically see?

Speaker 1:

It depends on, actually, the advisor. We know, based upon the advisors that we work with, they have an average about an 8% distribution rate. They want to try to reach Short rate can get you to 5%. So that deficit of 3%, depending on how much risk. You know, apple is much more stable than Tesla, right? So then if you want to use and that's why we have six you can do it a la carte. So then if you want to use and that's why we have six you can do it all a cart. You can do a combination to make up for that deficit in the 3% distribution deficit. That's what we've encountered. People may have less distribution need or higher distribution needs, so that's why we have the six.

Speaker 2:

You can mix and match your portfolio it. Typically, when I think about income needs, I think much more in terms of retirees you know people that are closer to the age where they need to be worried about that, um, but it looks to me like a lot of these can also be used for just a younger audience, younger demographic anyway, because it's on the stocks which, let's face it, are the most interesting and hottest right now.

Speaker 1:

Yeah, so you know, with the, with the yield premium, you're kind of you have six options the, the and I, the K, triple Q. We reset the portfolio quarterly, so there might be different names coming in and out. The reason why I do it quarterly is also we have a, you know one of the things you can't control the markets, but as a manager you can manage the costs within your fund. So we want to have as little transaction costs in the portfolio as possible. So we, we rebalance our portfolio quarterly. So you, you, you might see names that will come in and out, but generally we try to make as little modification as possible to reduce that transaction cost. I think there is a question regarding the synthetic long.

Speaker 2:

So just as ELMs, right, yeah, okay, right from Tim Martin that just came in. Yeah, let's sit on that. So let me read that out In KQQQ, you have some synthetic long, long call short put at the same strike Trades on Microsoft, apple and NVIDIA. What's the inspiration to do this, rather than just going along with stocks?

Speaker 1:

Yeah. So one of the things that we also try to do is for those people who are not familiar with the synthetic long. You can replicate an exposure to a stock by long call and shorter put of the same strike. It behaves similarly and the benefit of that is when you have a synthetic long you use only a portion of your capital. So like 5%, $5 out of a hundred, the other um $95, we actually will invest in a short-term T bill or a money market fund.

Speaker 1:

There's two reasons for this. One is you can get a pretty good five rate, a 5% rate, without actually. You know T bills are generally pretty safe Uh, us government back to you know that's you don't incur, consider riskless assets in the market. But the other thing is that usually, as you are a portfolio manager to manage inflows and outflows, you have to keep a portion of it in cash to meet redemptions and creations. If there's a creation, you have excess cash in your portfolio. You have a redemption, you have to keep it liquid to meet the redemptions. But when we do synthetic longs, we have a portion that's already in T-bill or money market funds. We can have full exposure without cash dragged in our portfolio. So that's why we use a synthetic long in the portfolio.

Speaker 2:

First, I think this whole concept is fascinating on a number of levels. I myself have been familiar with them and obviously we're starting to work together, but the way I think you described it here is really intriguing and powerful. For those that want to learn more about the funds outside of the webinar, how accessible are you guys as a company? Let's talk about how you communicate this stuff beyond what people are seeing here.

Speaker 1:

Yeah, so we have a team of client solution folks who work with questions about our strategies and if you're interested you can just send an email to info at CurveInvestcom and somebody definitely will answer your email. But we also have a monthly subscription list in which we tell people what the distribution rate is. It's very important for the dividend focused investors to know what the next supplement for their paycheck is and other updates on the portfolio. So that list we try to send once a month so it doesn't jam your inbox. But that's a passive way to get updates on Curve. But we're always happy to talk to anyone any clients who are interested and describe what's going on in their portfolio, how we're managing it, and we get a lot of questions and we're always happy to answer those and then if we get enough questions of the same questions, we try to put something on an FAQ in the website. That helps us do our job better.

Speaker 2:

Everybody go check out the website. I'm sure that we'll be doing more of these types of webinars and videos in the future. Appreciate those that joined. Looks like a nice audience here and we'll see you next time. Thank you, I appreciate it Great. Thank you. I appreciate it Great. Thank you. Cheers everybody.

People on this episode

Head Shot

Michael A. Gayed, CFA

Host