[MUSIC] Last month Larry Fink, Chief Executive Officer of Black
Rock, said that leveraged ETFs could blow up the industry.
And that his firm would never, ever launch a leveraged
ETF. Well those comments raised a big debate in the
ETF business about these leveraged ETFs. Could they really be
used to blow up the industry? And how can they
really be used in investment portfolios and should advisors really
be paying attention to them? Today, we're joined by Mark
Yusko, head of Morgan Creek Capital Management. Mark uses leverage
ETFs in some of his portfolios and he's going to
talk to us about this issue of leverage. And how
they can be used and how advisers can use them
in their portfolios. Mark, thanks for joining us today. Thanks
for having me. So, this issue of leveraged ETFs came
about largely because Larry Fink, CEO of Blackrock. Right. Commented
that leveraged ETFs could blow up industry. And first of
all, I wanted to ask you what you thought of
his comments were they a little bit overboard or is
there some grain of truth in there? What do you
think? Yeah, look, you know, I think they're a little
out there. I don't think were any imminent danger of,
of the industry blowing up. I think, you know, the
derivative industry broadly speaking. Is, is pretty big. You know,
some of the banks have some pretty big derivative exposure,
probably worry more about that first. And the ETF space,
you know, leverage is a tool. And I think there's
a good use of leverage today, and I don't think
we're at extremes, but I think there's a kernel of
truth to what he's talking about. Okay. Yeah, and certainly
leverage is something that's used across the financial industry. Yeah.
From ETFs through, you know, even, you know, structured products
and things like that. Yeah. So it's not like it's
a new concept. And by all of us every day.
Right, we have a mortgage on our house. Exactly. We
put 20% down four times leveraged. People say, I would
never do that with equities. That's right. Do it with
the equity in your home. Yeah. So, leverage is just
a tool. Right. So can you tell us a little
bit then about what are some of the benefits of
leverage and then we'll talk about some of the risks.
Yeah, so leverage, again it's, it's a tool. It's used
to amplify the return of some asset. So if I
put 100% down on my house and the price goes
up 10%, I make 10%. If I borrow the money,
I make 20%. Same thing with an ETF. If I
buy an ETF with cash and it goes up 10%,
I make 10%. If I borrow half the money. I
make 20%. So it, it's a tool that amplifies the
return. Now, can amplify the up, and it can amplify
the down, so there's one of the risks. And, and
how does that work? Tell us a little bit about
[INAUDIBLE]. Yeah, so, you know, so, if, if I bought
a house with cash and went down 10%, I lose
10%. If I bought a house with half leverage, I
lose 20%. Right. If I put no money down, I
have infinite downside, right? Yeah. Because I have no equity.
Exactly. So it's a long way to call yourself back.
So, same thing in an ETF. If you're down 10%,
a levered ETF will be down 20. And because of
some structural issues, you might even be down a little
more because of some rebalancing thing. But, but not dramatically
more. Okay. And that was, that was one of the
questions I wanted to ask you. So in, in the
ETF structure. Right. Are there other risks and potential benefits
that advisers really ought to think about when they're looking
at these products? Yeah, I think the most important one
is, in a leveraged ETF, particularly the short ETFs, when
they're rebalancing daily. You have a basic tendency of that
instrument to grow larger against you when you're wrong. Right.
So you don't really wanna buy and hold these instruments.
They should really be thought of as hedging tools. At
least the short ones. The long ones. They still have
the rebalancing problem, but it's not quite as acute. So,
think of them as short term hedging tools, not as
buy and hold instruments. Okay, and use, you personally use
leverage ETFs, and, tell us a little bit about, kinda,
the due diligence that you do. And you talked about,
I mean, they're not necessarily a buy and hold type
of vehicle. So does it take a lot of hands-on
time for you as a user of leveraged, leveraged ETFs.
Yeah, so, so we run a fund, a, a mutual
fund, MIGTX, the Morgan Creek Tactical Allocation fund and in
that we can go both long and short. But there
are limits on how much we can be short, in
terms of actual dollars. So if we want to have
a lower net exposure in the portfolio, cuz we're concerned
about valuations or something. We may use some of the
levered long ETFs and go short them. So it gives
us more oomph on the, on the protection side, more
hedging. Right. In July we'll probably start managing something called
GTAA, Global Tactical Allocation. ETF, and it'll be a basket
of ETFs and within that we may use a levered
ETF to gain exposure. Either positively to a market that
we're really bullish on, or, again, in a hedging way.
We can't go short in that, we can just be
long, but we might use, for a short period of
time, one of the short ETFs Okay. So it does.
It sounds to me anyway, Mark, that using leverage ETFs
is, and it kinda speaks to your earlier comment as
well Okay. About not really being, a buy and hold
type, type of strategy. It sounds like it does take
a fair amount of hands on Yeah. And, and you
asked the question. I didn't answer about [LAUGH] due diligence.
So, you know, one of the things about diligence is.
You want to dive into what you actually own, and
with ETFs it's not so much that there is some
active manager out there. Right. That you have due diligence.
In our other life we manage fund to funds. Registered
investment company funds like our global equity long short fund.
That you can buy as a REIT. There were actually
diligencing managers. Right. You know, we want to go on
site. We want to see where their educated. Who their
mentors were. You know what their process is. What their
philosophy is. Right. In ETF, you gotta know what the
process of [UNKNOWN] are. It's set out as quantitive. So
really the diligence there, what are the assets of the
entity. Is it a good strong company that your working
with, you know do you have a run on the
bank risk. Really in any sorta leverage structure, that's the
trouble. If you have a run on the bank it
will amplify the move. And Warren Buffet has a great
quote about this, he says any business model that is
dependent on the kindness of strangers. The leverage provider is
doomed to fail. Now I think that's a little extreme
in this case. I think level ETFs can certainly play
a role. But I think you have to know how
much capital is in there. What type of holders are
they. Are they long term investors or short term traders.
And at least be cognizant of those risks. Okay. Right.
Very good. Well, that's some good insight into this issue
of leverage ETFs. Which, again, you know, hit the headlines
after Larry Finks said they could blow up big. Yeah.
So, I appreciate you coming by, Mark, and having this
discussion with us. No, thanks for having me and look
forward to doing it again. Okay. [MUSIC]