Today’s episode on The Derivative, Jeff Malec sits down with James Maund, a veteran of the financial industry with experience spanning Goldman Sachs, the NYSE floor, and his current role at KraneShares. Maund provides a unique insider’s perspective on the rapid growth and innovation within the ETF space while outlining KraneShares main investment pillars – China Tech, Carbon emissions/cap-and-trade, and options-based overlay strategies designed to generate income and downside protection. Maund shares his views on the challenges and opportunities facing both established ETF providers and new entrants, as well as the importance of education and alignment with investor expectations. The conversation delves into the role of market makers, the impact of regulatory changes, and the potential risks and benefits of increased options and derivatives usage in the ETF industry. Maund also offers a glimpse into KraneShares’ plans for the future, highlighting areas of focus such as alternative investments and the continued growth of the carbon markets. Whether you’re an ETF enthusiast or simply interested in the evolving landscape of investment products, this episode provides a comprehensive and insightful look at the dynamic world of exchange-traded funds.
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From the Episode:
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Check out the complete Transcript from this week’s podcast below:
China Tech, Carbon, and Option Overlays in ETFs? Yep, with James Maund of KraneShares
Jeff Malec 00:06
Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments. Go analyze the strategies of unique hedge fund managers and chat with interesting guests from across the investment world. Hello there. Welcome back. Hope you’re enjoying your summer, getting outside and unplugging from boring old stuff like this. But it’s not all that boring. If you’re on a plane, on a walk, or whatever you’re on, I think you’ll enjoy this one. We’ve got James Maund from KraneShares, a leader in the ETF space, bringing his experience at Goldman, the New York Stock Exchange, and now crane shares to the table as we explore their main investment pillars, China focused tech, carbon emissions and of course, alts James shares his insider’s perspective on the rapidly evolving ETF landscape, weather options, overlay strategies are eating the world and the challenges and opportunities facing both established players and new entrants in the ETF space, send it. This episode is brought to you by RCMs, outsourced trading desk, where ETFs, like grand shares, come to trade unique global futures markets like carbon futures. How do those work? Right there on RCMs, 24 six outsource desk. Check it out at RCM alts.com/ 24 RCM alts.com/ 24 now back to show. All right, we’re here with James from crane shares. James, how are you doing? Great.
James Maund 01:41
Thanks for having me. Jeff,
Jeff Malec 01:42
no worries. What’s new in New York City these days?
James Maund 01:47
Well, it’s, it’s pretty quiet here mid August. You know,
Jeff Malec 01:51
you’re the only one there.
James Maund 01:53
We’ve a handful of people, but it’s definitely noticeable that it’s August, given, given the lack of crowds out there. But it’s, it’s, we were
Jeff Malec 02:01
talk, talking a bit offline. You go to your escapes Vermont, that’s,
James Maund 02:05
right, yeah, yeah. Spend a lot of time in Southern Vermont. Uh, most winter weekends. We could spending some time there summer weekends as well.
Jeff Malec 02:13
It’s been, what’s your, uh, what’s your ski out there? I went to school, Union College. We used to jump over Vermont to ski all the time.
James Maund 02:20
Yeah, yeah. So we’re on Stratton Mountain, and, yeah, it’s, it’s great.
Jeff Malec 02:25
I think that would maybe my favorite. Gillington upset me. Two years ago, we were there in the summer, and you buy the whole pass, and half the stuff was closed. I’m like, Oh, we’re just driving through here. I want my money back. Like, sorry, yeah, yeah,
James Maund 02:40
it’s, it’s a tough business, you know, it’s weather dependent, and it’s, it’s, it’s, it’s hard to keep things going year round. You know, they do what they can. I
Jeff Malec 02:48
hear you, so let’s talk a little bit about your background before we get into crane shares. So you’re born and raised east coast.
James Maund 02:58
East Coast grew up in in New Jersey, Montclair, New Jersey, you know, and been in this area my whole life, in the New York area. So I went to school at Wesleyan up in Middletown, Connecticut, and week after graduation, moved down to New York City and been here kind of ever since. So it’s, it’s been a good run early in my career, I started Goldman Sachs, and they started as middle office, yeah, yeah. Learned all about kind of the equity derivative products and the operational aspects, kind of nuts and bolts, all the way from, you know, trade through through settlement and beyond, and from there, took a job with the ETF specialist group on the floor of the New York Stock Exchange. So that was a legacy piece. Goldman bought a business from spear leads and Kellogg that had a big floor trading operation and an electronic trading operation. So it’s kind of legacy spear group making markets on ETFs. That point, there were about 300 ETFs listed. This was kind of early, 2000s
Jeff Malec 04:07
and before or after the flash crash was this weird, leads involved in that a little bit. This
James Maund 04:13
was, yeah, well, unfortunately, it was Flash Crash involved. All the the market makers at the time, spearhead had a big group, and a lot of others did. So yeah, the flash crash was, was May of 2010 so this was years before that talking 2000 456, so I spent a handful of years on the floor of the New York Stock Exchange, and then about a year and a half on the floor of the American Stock Exchange, which was still separate from the NYSE at the time, and just as an ETF specialist in a variety of products, international ETFs, it’s us listed funds with international underliers and then worked with some of the sector, select sector and S, p5, 100 funds. Toward the end of my time, there
Jeff Malec 04:57
was the feeling you. Even back then. So this is early 2000s was the feeling like, ETFs, this is going to be huge, or was it like, Oh, these are some new things. Let’s try it out.
James Maund 05:08
No, it was, I think there was definitely a feeling that it was going to be big. There was still, you know, the market was still dominated by mutual funds at that point, and ETFs were pretty much focused on equities. All the assets were in domestic equity, ETFs International. ETFs had a little bit more of, you know, they were just kind of coming onto the scene, and little bit more interest. And then fixed income. ETFs were just getting started, very early days for fixed income. So I think people were just starting to get a glimpse of how ETFs Could, could be a wrapper for a lot of different underlying asset classes, and just starting to get a glimpse of the growth potential. But certainly, you know, Spy, the key is the Select sectors were all very successful at that point, and people were just starting the wheels turning on, on, you know, how big this could be?
Jeff Malec 06:00
And then I ask all the Goldman alums we have on, did it feel right? I can’t remember who met Taibbi or something. Was that, uh, I can’t remember where he wrote from, but he called it the vampire squid around the GFC and everything. So having been on the inside and knowing people there, is it a vampire squid, or is it just a normal firm trying to make some money.
James Maund 06:22
I think it’s, it’s, you know, more the lot. There’s certainly a lot of very smart people there, but I think there’s, you know, from, from my seat, from my perspective, making markets and ETFs on the floor, and all the interactions I had when I was there, it was just a lot of smart, hardworking people trying to do the best they could, you know, moving the needle for the business
Jeff Malec 06:43
and for all our young listeners. How hard is it to get that seat?
James Maund 06:49
Well, at this point it’s impossible, because there’s, there’s no more floor based, yeah, I would say it’s the best job I’ll ever have. It was a really, really cool environment to go to the exchange every day. And, yeah, I was
Jeff Malec 07:02
at Board of Trade, so Ditto. That can’t do that anymore either.
James Maund 07:05
Yeah, yeah. But, um, no, it’s certainly gotten, say, a lot more competitive. I think there were a lot of folks back then, particularly on the floor, who worked their way up. You know, it was more like, you know, kind of an apprenticeship sort of situation, where, no matter what you did in school or kind of what other experience you had, it was very unique, working on the floor, being able to think on your feet and do a lot of those things, kind of human to human that are now technology trip.
Jeff Malec 07:36
It’s interesting here you say that because I’m always saying, oh, New York versus Chicago. The Chicago pits were truly that, like, you could just be an athlete who didn’t go to high school, and they’d be like, All right, you’re big and you can scream, we’ll teach you how to trade. Versus New York, I always argue, like, Well, you had to still go to a good school and and, know, some people to get in, in somewhere.
James Maund 07:57
Yeah, that’s fair to say. I think that the pit based trading. I had a good friend who worked in crude features on the nimex for a couple of years. And again, you know, physical presence. And that was a much more kind of physical environment the New York is a little more, you know, a little less kind of throwing elbows, and a little more thinking on your feet
Jeff Malec 08:20
Exactly. And then I’ve also thought that New York smartly kind of CO opted Chicago futures markets by wrapping them into mutual funds and ETFs and and all that, which we can get into later. But you know, sure, 20 years ago, you had opened an account at a futures brokerage to get the type access. Now you can just get with an ETF Yeah. So half of me is bitter at that being a futures guy, but half of me is, hey, that’s the way the world works. That’s progress. That’s right. So let’s get into crane shares. You guys do a lot, so help us, kind of give us a broad. You got some different buckets you guys are operating in. Give me the broad elevator pitch, and then we’ll go from
James Maund 09:04
there. Sure, absolutely. Crane shares, we’re just 11 years old now. Our flagship product is a K web, which is a China tech ETF, and that’s really where we got our start. Our founder, John crane, serial entrepreneur, spent many years in China, building businesses, sold several businesses there, came back to the US and was talking about all the growth he saw there, and all the opportunity. And, you know, realized, when he was talking to friends and family about this experience, that it was actually really hard to access investing in China. And he decided to start this asset manager crane shares to provide that access, and that was really the genesis of the firm. And we’re still heavily focused on China. China thematic funds are a big piece of what we do. They’re our first pillar and our largest pillar, and. We provide not just the access through those products, but a lot of resources around investing in China. We have a daily note China last night that our Chief Investment Officer, Brendan Hearn, writes, as it has a large following, and we really try to be more of a resource for our clients and help with providing information that, again, it’s a traditionally harder to access market, and information on the market kind of unvarnished, you know, kind of unbiased information, or maybe biased differently from what you get in the Western media, is a little bit hard to come by, so we really try to focus on putting that information in the hands of our clients and our investors. We also have two other pillars.
Jeff Malec 10:43
Let me I’ll dig into Jennifer. So, okay, sure, yep. What talk to me a little about the interest from back when that K web started, or China Tech was hot, versus today versus in the middle? Is it waxed and waned and gone cyclical? Or has that been a straight line up?
James Maund 11:01
Yeah, no, certainly far from a straight line. It’s it’s a pretty volatile space to be in. And you know, you have a country that’s growing rapidly, you have a technology environment, whether you’re trading China, tech, us, tech, any area that market is going to be growing quickly and changing a lot. So it’s very dynamic and and that funds grown quite a bit. I joined crane shares January of 2020, Raum was about 3 billion, and then just about two years later, it topped out around 17,000,000,000k web itself has grown substantially in that time. Obviously, if you look back at the price history of some of the China tech names, K web, peaked in February of 2021 about $110 a share. And in all of my time on Wall Street working with ETFs, it’s really the only ETF that I’ve seen as the price came down, we actually saw net creates. So shares outstanding more than quadrupled, almost quintupled from about 40 million out to about 200 million out in that time that the share price came down for a variety of reasons, from its peak in February of 2021 to the low in October, a little over about a year and a half ago now,
Jeff Malec 12:26
who was the big holding that wrote it up to those all time highs, or one of those?
James Maund 12:32
Yeah, exactly 10 cent, Alibaba, pinduoduo, all of the big, you know, big China tech names. Are the largest holdings in the fund. And, you know, I think for a variety of reasons, you know, this was into the covid, you know, bust, boom, yeah, where you want to think about that, and then the ensuing kind of back and forth between, you know, growth in the US and the political rhetoric there growth in China, you know, lot a lot of different opinions and a lot of different actions to try to, you know, kind of figure out the best path forward for those companies. And I think we’re at a point now where we’ve, we’ve been in a consolidation phase for quite a while. And, you know, it looks as though the share price is bottom. So hopefully we’ll see, you know, a nice recovery in the coming months and years. And
Jeff Malec 13:28
I’ve, I’ve heard been on my pod this last week, but someone is saying, oh, stocks don’t always go up. Look at China has been a growing economy where the stock market’s been flat for X years. I don’t have the data to support that. So if you agree with that, or not agree with that, and then contrast that with the tech piece of China, is that the same story or much different
James Maund 13:49
story? No, I think it’s, it’s certainly you have these, these strong demographic factors. You have, you know, a growing middle class. You have this, this rising tide in China that still exists, still growing. You’ve seen us markets and US tech expand very quickly and reach very high multiples versus China tech, which has been much more muted growth over the last few years. So if you look at the difference in valuation between China tech and US tech, there’s a big gap right now. And, you know, obviously there are a number of different opinions about, you know, why that is, and kind of where the valuations are between us, tech and China,
Jeff Malec 14:29
like PES and everything, or just pure valuations.
James Maund 14:32
Yeah, no pure valuations. Peas. You know, there’s obviously a number of different ways to look at it. But, you know, I think you’ve just seen this huge run in US tech that in the past couple of weeks here we’ve seen maybe some cracks, maybe maybe some downturns. Again, a variety of opinions about whether this was a short term pullback in the context of a of a continuing bull market, or something else. But, you know, there’s certainly a. A big, big kind of gap for China tech to make up in that regard. So it’s pretty compelling from that perspective. And
Jeff Malec 15:07
then I’m sure you get this from potential investors, or maybe not that’s of interest. But right? How do you answer that? Oh, it’s government manipulated. Whatever name five complaints about China, like what, I guess, what are some of those complaints, and what are your answers to those complaints? Well,
James Maund 15:24
again, I mean, the government plays a big role, no matter where you are, certainly, you know, China’s a centrally planned economy, and there’s a lot of influence. There a lot of direct influence, as well as indirect influence. You know, us, regulations are impactful on us, tech, European regulations are impactful on Europe. And now so many of these companies are, you know, have such a global footprint. If you look at a lot of what are thought of as, you know, the larger US companies, companies like Apple and Tesla, and you look at the amount of earnings that they derive from China, it’s really global, you know. So it’s really hard to say, oh, one government is, you know, maybe having an impact on companies in that country that don’t exist for, you know, other companies or other countries. So I think there’s certainly, you know, a different, different approach in terms of, you know, how regulators in different parts of the world think about, you know, the companies that do business there. But there’s certainly, you know, we’re not in a scenario where there’s, there’s one country or one region that has, you know, a lot less regulation. I think it’s just a matter of as one economy, one market continues to evolve and grow very rapidly, and you have some other economies and markets that are a little bit more established, you’re naturally going to see more volatility in the growing economy.
Jeff Malec 16:48
It surprises me, they don’t just basically pump up the stock market and right, have all these flows into all these ETFs, everything, tracking the index and be like, it’s a seems like an easier way to make money for them, but perhaps it’s gotten too big for them to control in that way.
James Maund 17:02
It’s a bit of that. I mean, there’s certainly this, this concept of home team buying that you see from different analysts, and that’s real. I mean, that, you know, the the local kind of, you know, top names in the indexes, and a lot of the local ETFs are being bought, you know, by the home team, that there is a significant government investment investment there. And, you know, that’s, that’s all part of it. Certainly it’s been supportive. And if you look again at the economic growth trajectory, and you know, valuations, it, it looks like, you know, a really strong, long, long term investment. And again, we’ve seen a lot of our clients, you know, if they liked it at 100 they’re they’re loving it at, you know, 50 or 25 and that’s just reflected in the growth of shares outstanding as the prices come in. So think a lot of investors believe in the long term fundamentals there. And, you know, again, you can’t, can’t argue with the government, kind of eating their own cooking, or, you know, anyone eating their own cooking and putting their money where their mouth is.
Jeff Malec 18:10
What’s it look like in terms of, right? It’s the basically tied with us for largest economy, yeah, but I gotta imagine it’s like as a percent of global portfolios, what, less than 10, less than five? What is
James Maund 18:25
it? Yeah, yeah. It’s, it’s, it’s well under five. And, you know, it’s, it’s, certainly, there’s a huge imbalance there, right? So you have number one versus number two, and you have a couple of things in play there. Certainly, you know, a lot of growth in the last 20 years, coming out of China, getting into that position and and rivaling the US in terms of, you know, largest economy. But you also have this, you know, this element of, like, Yankees and Red Sox, right? You need this. You have this, like, negative rhetoric going on between the two. You have, you know, obviously a lot going on in politics and a lot of rhetoric out of political candidates. And you know, on the one hand, you have a rival, you’re always going to have that in one versus two, but on the other hand, you can’t really have one without the other. And they both, you know, through that competition encourage tremendous growth and innovation. So I think it’s really natural and healthy that that rhetoric is part of it, but it’s also, you know, leads to healthy competition and tremendous growth.
Jeff Malec 19:31
I love that I can be right. I can love the Red Sox bullpen. They just signed all these new headers. If I’m a Yankees fan, I’m not buying the jersey. I don’t care how good the team is,
James Maund 19:42
yeah, and look, they’re going to be hard pressed to get a Yankees fan to pay a compliment to anything the Red Sox are doing, right? But at the end of the day, those are the games that everybody wants to go to and and those are the, you know, the games that bring out the best in each team and the players. So, you know, I think there’s a strong power. Parallel between one and two in any sport, one and two in terms of the largest economies in the world. And
Jeff Malec 20:07
just so we’re clear here, the Yankees are the US and the Red Sox are China. Just we can upset all of our Boston people less depending,
James Maund 20:13
depending on where you live. I have, I have friends and family in New England who certainly you know, would take exception to anyone saying that that the Red Sox are not the US in that analogy, but it seems
Jeff Malec 20:25
like John Henry’s kind of given up on them anyway. So we’ll let them be we’ll save that for another pot. I cut us off on the pillar. So pillar one, or what do you call them pillars? Or what?
James Maund 20:43
Yeah, we think of them as kind of, you know, pillars, pillars of our offering. So pillar one is China. Pillar two is, is climate, specifically carbon. So carbon cap and trade, we launched little over three years ago now, the first carbon cap and trade. ETF krbn holds the four largest carbon emissions markets in the world. There’s a European market, which is well established. It’s more than 20 years old, covers all of the majority of the emissions that are produced in Europe. There’s a California market, a CCA market that’s also that’s the largest in the US, UK after Brexit, has its own market, which is the second largest UK emissions and then there’s something called the Reggie, which represents the East Coast of the US, the Regional Greenhouse Gas Initiative. So those are the four largest markets in the world, and again, their long term goal is to reduce carbon emissions by putting a price on those emissions and and having a cap on the emissions licenses. So it’s really a market based mechanism for reducing carbon emissions over time, and it’s something that we’re also seeing in other regions of the world. China launched their similar program recently. There’s programs in New Zealand, Korea, other regions of the world. So it’s been a space that has grown rapidly over the last few years and has seen a lot of interests, both from people who are more environmentally focused and climate focused, but also people who understand the kind of economic value of a market that is structurally designed to have prices go up over time with decreasing supply and steady or increasing demand from required participants. So it’s been a really interesting space that’s that’s grown a lot, and again, similar to what we do with China and providing information. It is a market that it’s a little harder to access information. It’s not necessarily something where it’s front page news what’s going on in the California carbon emissions market. So we have Luke Oliver, our head of climate investing, writes a weekly piece climate markets now to kind of keep our clients up to date on recent developments of those markets. And
Jeff Malec 23:06
how do you explain to the everyday investor how that works? It’s sort of confusing, right? So you’re essentially just buying the carbon credit futures. Is it correct?
James Maund 23:15
Yeah, it’s a futures based exposure, and it it basically, you know, provides that that access and that exposure in a way that’s really liquid. So again, it’s a 40 act fund. It’s an ETF. So we have to have daily liquidity, daily transparency. We hold the December futures for all of our funds in the carbon space, and those are the largest, the largest open interest most liquid futures. And that’s really a space that that, I think, again, is is grown in popularity over the last few years, for for investors, and I
Jeff Malec 23:52
think it’s hard for the everyday investor. I understand that trades like any other market. Yep, right. So every year I’ll throw out random numbers, but every year the credit starts at $10,000 say, right? And I’m some company in California, I have to buy that in order to use my do emissions. And then a next year that’s going to be 15,000 or whatever that math is. And so every year that you have to spend more, it’s like rent, like environmental rent, basically, right? So
James Maund 24:20
that’s one way to think about it, and it’s priced per ton of emissions. And this is a really interesting thing about carbon markets, is depending on where you are in the world and which emissions program you’re part of, they price carbon at different levels based on the maturity of the program, kind of the levels of emissions. So you know, you do have different pricing in different markets. California is pricing carbon in the low 30s per ton at this point, topped out just around 40 European carbon. On the other hand, topped out around 100 euros a ton. Again, it’s a more mature program. So. Um, so depending on where you’re in the world and what level of maturity you’re at in terms of your cap and trade program, you may have different prices per ton, but it allows, you know, a tangible price for emissions. And it also allows not just an investment vehicle, but it helps companies think about and plan for the cost of emitting carbon, and as that cost goes up, maybe it makes sense for companies to invest more in technologies that will reduce carbon. Maybe, you know, a power plant switches from burning coal to burning natural gas at some point. There are these kind of tipping points that, at a certain price per ton of carbon emissions encourages, you know, industries or companies to invest in lower emissions kind of technologies.
Jeff Malec 25:49
And as an investor, do I get to if I’m buying carbon credits, do I get to feel good about I’m saving the economy? Is there any of that piece to it, or is it just a yeah, this is, this is another, different way for you to make money. Well, it’s
James Maund 26:03
both, right? And we certainly have investors who care more about the economic impact. They care about the investment case, right? It’s one of the few markets I’ve ever seen that’s structurally designed to go up in price over time, even though there are short term price fluctuations, the long term goal of capital trade is to have decreasing supply and increase that price. But we certainly have a lot of investors who care deeply about the environmental impact. And from that perspective, it’s a really compelling asset class and a really compelling investment. And obviously, you know, you’d expect to see a little bit of both, where that’s one individual is making an investment decision and cares deeply about both. But in other cases, we’ve been on on calls, particularly with institutional clients, where there’s, you know, Investment Committee, and there’s somebody who’s deeply passionate about reducing carbon and there’s somebody on the other side of the table who’s deeply passionate about, you know, maximizing returns, and it’s one of the few investments that allows for, you know, it resonates with both of
Jeff Malec 27:08
those people. Yeah, it seems like it could get caught up in, excuse me, in politics, and I’m not touching that woke thing and all this stuff, but we hooked it into the the stands alone as an investment product is, is the stands alone as
James Maund 27:24
an investment product. And from that perspective, it’s interesting because, because a lot of the interest we’ve had in the product is, is from that kind of, more fossil fuel type of crap, where they’re looking for like they’re doing exactly, exactly. So it’s a great investment vehicle from that perspective as well. And
Jeff Malec 27:44
then the risk there, as I’ve always thought of it, is, right? There’s some sort of covid or something, and they pause the increase, or they cut back the increase to generate more economy growing growth, right? So the it’s regulatory risk is the main thing you’re trading off there.
James Maund 28:00
Yeah, people, people watch the regulators closely. Obviously, there’s a strong correlation between economic activity and carbon emissions right during covid, when, when people weren’t, you know, out and about. I think it was well documented how the environment recovered. Yeah, you know it was, you know, air quality, water quality, far fewer emissions, but also, again, you have less demand for this stuff, so the price of emissions is going to drop in an environment like that. But then it also drives home how important it is to keep emissions low, the validity of this program. So it’s a double edged sword, but certainly, you know, you need the government to stay in a state, of course, terms of you know what they’ve laid out, what they’ve committed to do in these programs. And as long as that happens, and you know they’re they’re sticking to the to the plan that they’ve laid out, we’re going to see long term growth price of carbon emissions. And
Jeff Malec 28:58
in my world, we’ve seen it added to a lot more managed futures portfolios, trend following portfolios, right? And they’re just like, I don’t really care what it’s doing. It’s just another price, right that we can track and see trend and do different things and trade on. So that’s interesting, yeah, yeah, for sure. Which leads into pillar three.
James Maund 29:17
That’s right, that’s right. And that’s kind of what we think 33
Jeff Malec 29:20
How many are there? Total of three.
Jeff Malec 29:23
Okay, good. Sorry, listeners. I was worried there for a minute.
James Maund 29:27
This is the final pillar for for us here today, and that’s, you know, that’s really what we think of as more of an alts type of pillar. So it encompasses real assets, as you just mentioned, partnered with Mount Lucas management on kmlm, which is a real assets fund based on strategies that they’ve had in place for many years. So they they manage that fund. We also have, you know, eyeball, which is interest rate volatility hedging, and that’s run by quadratic capital and Nancy Davis, who I know you mentioned you’ve had on the podcast. Us here before, yeah,
Jeff Malec 30:01
we’ll throw a link to that pod in the show notes. That was a fun one.
James Maund 30:05
Fantastic. And then, and then, we also have a suite of products that are options overlay. So we launched a product called clip that writes covered calls on K Web. One thing you get with China Tech is a lot of volatility. Anyone who’s been in those markets or been in those investments has experienced that. So we figured out, why not monetize that volatility and produce some income? So writing at the money calls 30 days out, so the fund just holds K web and writes calls, and we pay whatever premiums we earn out to our investors, and that fund is averaged about 4% per month in terms of distributions to investors.
Jeff Malec 30:50
That’s allowed. You can write calls on your own, ETF, yep, yep, absolutely,
James Maund 30:55
yeah, yeah. So, so it’s been a great way to use the, you know, liquid options market that we see in K web and the the volatility profile to generate income for investors. So that product’s been in the market for about two and a half years and seen a lot of interest. We also have some strategies that provide downside protection along some some upside capture over time, kind of structured notes, sort of outcomes, K buff and KPRO that offer either full protection and some upside capture over two years. So that’s the full protection product. Is KPRO, and that has about 24% of upside capture. So if K web goes up 24% or more over the next two years, we’d see that from KPRO, and then K buff is a 90% protection. So you have 10% downside, you have about 42% upside over the next two years. So we’re trying to use the options profile on K web to offer different solutions to clients who have expressed an interest in a protected version of K Web. Again, they love the story. The volatility is hard to stomach. And they say, Look, if you can, if you can provide me some protection on the downside, I’d be happy to capture some of the upside. So that’s some of the stuff that we’ve done more recently.
Jeff Malec 32:21
I was going to ask is, was, did you see other traders kind of putting these option structures around K web and say, Oh, we should offer that ourselves, or was the client saying, I want this? So
James Maund 32:31
it’s a little bit of both. I mean, it’s, it’s the long, the long story of ETFs, which really hasn’t changed since inception, since, you know, the original ETF came out in the US in 1993 is providing access to these kind of asset classes that are traditionally harder to access, and these exposures that you can now get in one trade with an ETF that used to take several different likes of a trade, yeah. And we’ve seen, you know, cases and with some of these options wrappers and some of these other products that we’re now putting in an ETF where individuals were doing it on their own, even with ETF models, you know, people say, well, love the model, but don’t really want to be responsible for trading and rebalancing to the model. And we’ll launch an ETF that actually tracks the model and provides that investment in in one ticker, in one trade, so it really simplifies that access. And you
Jeff Malec 33:27
guys got some great names. Krbn clip, how does that whole process work out? I think we’ve asked MEB Faber has been on here before, and was John. That is kind of the fun part of it, right?
James Maund 33:38
It is. I mean, there are, there are a lot of, if you’re, if you’re in the ETF business, there are a lot of things and and tickers are, are always fun to figure out, you know, what’s going to represent the product with. You know, you get four letters, so you have to figure out the right way to kind of have that, that ticker, represent the product, also something that’s going to be, you know, commercially viable and memorable, and that’s always a fun part of the process. And we take a poll internally and, and there’s a lot of strong opinions about but tickers on different products, and who
Jeff Malec 34:11
SEC approves that I heard it’s, you can’t have a bad word, like, that’d be even be more fun.
James Maund 34:18
I think it depends on, yeah, it depends on your view and you know how you want to be represented, but yeah, they’re at the exchange level. So you know, when you list with an exchange, you tell them, You know what tickers you’d like to have. They tell you what’s available, and the exchanges can reserve the tickers for you when they’re available.
Jeff Malec 34:36
But it’s not like back in the old days of buying up all the URLs and sitting on them forever, like, if you don’t use it, I think it comes back available, right? That’s
James Maund 34:44
right, that’s right. Yeah, you can’t, you can’t reserve a ticker, you know, indefinitely. But, yeah, it’s, it’s definitely, you know, you’d be surprised. It’s, it’s pretty where rare that we bump up against the ticker that’s not available. Yeah. And if we do, we usually have a, you know, strong support for the second or third choice. We have good outcomes there,
Jeff Malec 35:12
circling back on the alts a little bit. What, what are you saying in terms of investor interest? Are they? Is that one of your growing areas? Are they right? I know managed futures had a great 2022
James Maund 35:23
That’s right, that’s right, yeah. And it’s in a little bumpy sense. So
Jeff Malec 35:27
a lot of managed futures people I talked about, oh well, it’s just like, oh 809, again, I’m taking a break. Yeah, talk about that space for a minute, if
James Maund 35:36
you can. Yeah, yeah. No, that, that space is, is grown quite a bit, like you say. The last few years have been been strong, and there’s certainly a long term investment case, you know, no matter where you are in the market cycle and how you think about timing markets, lot of interest in managed futures, a lot of interest in the covered call strategy producing income, yeah, and we’ve seen that space grow tremendously across all ETFs, the growth in options, overlay, ETFs has been amazing. There’s about 50 billion in AUM now, tracking those sorts
Jeff Malec 36:11
of strategies from zero, or from what
James Maund 36:15
call it, three years ago, it was, it was close to zero, certainly, you know, sub a billion, you know, and that’s that’s been a hugely popular space.
Jeff Malec 36:26
Do you feel like anyone’s just throwing anything that’s doing similar to that out there, or is it like you guys had a nice way to do it where it was different, and selling them on your own product versus everyone else, seems like a very competitive market? I
James Maund 36:40
mean, it always is, you have to come up with an idea, not just that is creative, but also, you know, viable from an investment perspective. So I think, you know, you always hear this, this adage about ETFs, that people just throw things out there and see what sticks. And I think, Well, that certainly, you know, has been the case. It’s also a situation where Hindsight is 2020, we talked to a lot of investors, a lot of managers, that have phenomenal ideas that maybe the timing isn’t right or for one reason or another another, it just doesn’t resonate at the time. Doesn’t mean it wasn’t a great idea. It doesn’t mean there wasn’t a great investment case for it, but it is hard to stand out in this space. So I think it’s, you know, the heavy lift is launching the fund, but then there’s a heavier lift in terms of getting the word out and getting investors, you know, to to make that investment,
Jeff Malec 37:30
right. We’ll probably see a couple of firms launch some short yen carry trade, ETFs, and over the next couple months, that
James Maund 37:37
would be, yeah, that would be timely, or at least, at least popular.
Jeff Malec 37:43
So expand on that a little, if you kind of like, what’s from your time in ETF space and what the firm itself is seeing, is there too much product chasing too few assets. Is there an unlimited new flow of assets that are looking for new product? What’s your views there? I
James Maund 37:59
think it’s a there’s a balance right between a lot of assets that are invested in ETFs that track more traditional indices, and again, you get that low cost and liquidity transparency. It’s really a phenomenal vehicle. But you also have a lot of innovation, and the ETF rule that came into effect a few years ago really helped to usher that along. But you also have, you know, a lot of new asset classes coming into the wrapper. We talked about carbon, which was really hard to access for investors before. You know, the ETF came to market a couple of years ago. And you talked about these options overlay strategies, these kind of, you know, defined outcome type of strategies. Unless you were a wealthy, sophisticated investor, even, you know, five years ago, wasn’t really possible to access those strategies. So now they’re coming to market. And then the market speaks. There are products that, again, will will see a lot of success and inflows and and the ones that don’t you know, those issuers will go back to the drawing board and figure out, you know, where there’s a viable appetite for investment, but it’s always an innovation. I think back historically, you have, again, I talk about early to mid, 2000s with fixed income ETFs. ETF started as equity products that held equities, and I remember even at Goldman, the equity trading floor that traded ETFs was in an entirely different building than the fixed income trading floor. And a lot of the meetings that we were having when I left that seat and joined an issuer. A few years later, we were introducing the equity traders the ETF desk, to the fixed income traders for the first time. There’s a lot of operational work that had to be done in terms of creating the piping and connectivity between those two desks to trade bonds within the equity ETF wrapper. And think about, how do we price this? How does the Create redeem process work? How do we settle these trades? And how does it all work, and that infrastructure and wiring took years for people to you. Build out efficiently and understand efficiently. And as we see new asset classes come into the ETF wrapper, we’re seeing that work being done over and over again, and there’s a lot of innovation that goes into that as well, that it’s kind of behind the scenes that people don’t see when they’re, you know, buying the ETF on on screen, or putting it in their their portfolio.
Jeff Malec 40:19
Yeah, I know from our seat, we helped a few, half a dozen firms get really up to speed very quickly on accessing the different futures markets and and doing things that weren’t exactly in their wheelhouse in the ETF structure. Want to circle back you mentioned kind of stuffing the bonds in there, right? The covid crash that was, oh, this is, Are we finally seeing cracks in the ETF model? I can’t remember which ETF right, but it’s nav was way below what the bonds were trading at, or vice versa. And it was kind of that duration mismatch of like, well, we can’t trade the bonds in real time, like the ETF is trading. So some were arguing, that’s means ETF model’s broken. Some are arguing like, no, that’s how it’s supposed to work. You could get if you wanted to. This was the real time pricing, even though it was disconnected from the portfolio value. If the portfolio could have sold there, it would have been this much lower. So I don’t know if there was a question there, but if you could comment on that, yeah,
James Maund 41:15
no, it’s, it’s an important topic, and certainly makes a lot of sense and and what you get with an ETF, because it does trade, you know, it trades all day, every day, when markets are open, you know, and you have full transparency, it really is that price discovery vehicle. So you may have underlying assets that don’t trade as much, doesn’t mean they can’t trade as much. Doesn’t mean you couldn’t access it if you needed to but you do get that kind of immediate feedback in terms of pricing, risk management and hedging, and the prices that you see for ETF shares are reliant on where the underlying basket should be trading, or what it’s worth, where you can hedge that exposure if you’re making that market, if you’re making that price to the market. So you have this constant feedback loop, loop of trades in the ETF shares, market makers and trading desks thinking about hedging that exposure, and where can they put that hedge on, and what’s it worth, and how can they put that risk on, work out of that risk efficiently, and then having that all go through the ETF grade redeem process to actually source the inventory necessary to fill those orders that that people are trading on when they’re buying and selling shares. So it’s a really efficient mechanism for price discovery, and I think it is useful. I think in the fixed income space, we’ve certainly seen a lot of innovation. You You might have Q sips that don’t trade, you know, at all on a given day, or maybe for weeks, you know, at a time, but they’re in a basket. They’re in an ETF that’s providing price discovery every day,
Jeff Malec 42:50
right? It’s almost like you get futures, for lack of a better word, on these individual bonds that are part of this ETF, and you can trade the ETF on,
James Maund 42:59
and that’s just for all underlying markets. I mean, you know, the seat that I sit in where we’re providing exposure to, you know, China tech, when those markets are closed, we’re open, we see, you know, a lot of kind of transfer of risk, a lot of exposure trading hands on China tech at a time when you know the local markets are closed, and there’s a an efficient mechanism that allows all that to happen. How
Jeff Malec 43:27
hard is it to get the market makers on board, right? They have to really understand what you’re doing, and, like you said, be able to create a hedge model that they can put their neck out there a little
James Maund 43:38
bit. So, so market makers, yeah, there’s a balance. I mean, it’s a business for them. There’s a cost of capital, there’s a cost of hedging. They provide a huge service to the market in terms of providing that liquidity and pricing, but they’re also taking a lot of risk, and there’s a huge cost. There’s a lot of technology. They hire a lot of smart, hardworking people to figure out those nuances. So I think it’s it’s really interesting to think about how they view the world. And in a lot of cases, they’re not necessarily looking at exactly what the fund is holding, and that’s just, that’s a great place to start and a key piece, but they’re also looking at the risk they’re taking on, how they’re going to hedge that risk, the correlations that they’re looking at. So they have a really interesting, multifaceted, multifaceted way of thinking about pricing, managing this risk and trading that that allows for a real robustness in ETF markets that goes beyond, you know, the ETF share represents an index, and there’s that one to one relationship. There are, you know, other elements that that they can bake into thinking about that that allows them to be really nimble and efficient in terms of providing
Jeff Malec 44:57
pricing, and then, if they don’t totally. Understand, or if it’s kind of a dirty hedge, you’ll just see the spread be wider. Is that how they correct? Yeah, you’ll
James Maund 45:04
see that reflected in in the risk they’re taking on, and the level of kind of pricing uncertainty they have. And you’ll see that for the domestic equity markets, you know exactly where every underlying share of stock is trading that goes into that index, that goes into that ETF, so it’s really clean, and if there’s trading activity, you’re going to see a really tight bid ask spread in those products, because there’s not a lot of uncertainty, there’s not a lot of risk, and it’s risk that you can hedge pretty quickly and directly when you get into other asset classes, whether it’s, you know, international markets or fixed income, or, you know, some other asset class, where you don’t have that ability to immediately have price discovery on the underlying and hedge the underlying, they have to, you know, they’re taking a little more risk and you know they’re pricing that in, and you’re going to see that reflected in bid ask spreads might be a little wider,
Jeff Malec 45:56
which leads me to so if it’s a new product, they might not just say no. They’ll say, okay, but here’s what we’re going to spread it at, yeah, and there’s,
James Maund 46:03
there’s a conversation that goes on there, you know, between the issuer and the market maker, and the issuer has a decision to make about, you know, whether that’s going to be a viable product at those pricing levels. And the market maker is going to be honest about, you know, what they can offer and where they’re going to price risk. And in some cases, you see a product that gains traction quickly and is popular, and you have a lot of market makers competing for that flow. And you see bid ask spreads tighten very quickly. And in a lot of other cases, you’re going to see, you know, a longer, more drawn out process for that product to take on some assets and gain some traction, and then you get that competition coming in at tightening spreads.
Jeff Malec 46:40
And what, along those lines, what’s it look like? I’m a new guy. I’ve got an idea. It’d be an awesome ETF. I’ve got 25 million bucks. Is that a is that a pipe dream? Is that doable? Like, what? What’s the cost to start up and run an ETF successfully?
James Maund 46:58
Yeah, it’s, I mean, depends on how you want to do it. Now, there are a lot of a lot of firms that will provide access. They’ll provide all the infrastructure, because it’s not just having an investment thesis and bringing that to market. There’s a lot of infrastructure around it. There’s, you know, a lot of compliance that’s required. You know, marketing and sales effort is of key importance to to help clients understand what your fund is and what the investment case is. So there’s a there’s a lot to it. So we see a lot of managers who come to us with ideas and they want to partner with us to launch a fund, and we’re always interested in having those conversations. In other cases, you know, clients will have an idea. They’d love to see an exposure, particularly if it’s an institutional client that does have, you know, an investment, they can make it in that strategy, we’re happy to work with them and figure out, you know, the right way to get that product to market. And then you have the benefit of a publicly traded fund. So you might have that client who comes in with that initial investment, but now that investments available to the broader, the broader investing public, and you can really get, you know, some assets strike a board with investors that that leads to, you know, a really successful ETF.
Jeff Malec 48:12
But help me understand, if I’m like, give me a bogey of like, unless you have x and assets, you really probably shouldn’t do it yourself. You’re going to go broke trying.
James Maund 48:21
Well, it depends on the strategy. But I’d say, you know, broadly, you’re going to hear that a break even point for an ETF is somewhere in the 50 to 100 million AUM level. Once you have an ETF, up to 100 million AUM, it’s, it’s going to be, you know, an economically viable fund, because there’s, there’s a lot of kind of fixed cost that goes into, you know, offering an ETF and managing the underlying, again, all that infrastructure I talked about. So that’s generally the case. And what you’ll see with a lot of the successful ETF issuers is they have a core group of kind of flagship funds that have sufficient AUM to, you know, support some newer funds that are coming to market.
Jeff Malec 49:06
So you mentioned the new ETF rule that essentially took off some of the restrictions on alternatives leverage, like, Could you summarize that rule? I don’t know if that’s possible or Yeah, or just kind of how you guys view it,
James Maund 49:19
yeah. And what it really did was it leveled the playing field among issuers, right? So over time,
Jeff Malec 49:25
people had no action letters and they were out to do some things. Others didn’t exactly,
James Maund 49:29
exactly. So, so it really standardized all of those, what had previously been exemptions or not, and standardized the rule set around ETs and bring ETFs to market, and it allowed, you know, a lot of clarity, basically, for issuers who may see something in the market that works a certain way based on exemptions that existed at the time they came to market, and those are no longer available, and now you have a much more kind of transparent level playing field.
Jeff Malec 49:59
Yeah. So team is everyone mostly happy with that? Or, I guess some of the incumbents who had those no action letters maybe are mad at the competition.
James Maund 50:07
I wouldn’t say that. I think, you know, it’s really a nice thing about the ETF industry that still exists, and I hope continues to exist for quite some time, is there’s this sense of a rising tide, lifting all ships. There’s, there’s plenty of, you know, of pie for everyone to get a slice. And newcomers are welcome. Innovation is welcomed. And I think that’s partly because a lot of the incumbents already have such a, such a well established, powerful position. So so they’re not necessarily gonna, gonna view the world in a way that that is, you know, so defensive and ring fence say, Oh, these, these new entrants are really going to threaten, you know, our business, I think there’s really still this sense of of openness and, you know, excitement about innovation and newcomers to the market, but
Jeff Malec 50:54
it definitely seems like a winner. Take all business, right? Where it’s 80% of the assets are with two firms. What is the number? Yeah, yeah. I
James Maund 51:02
think the top three have, have something like more than 80% of the assets. They’ve been in this game for a long time. And they have, you know, all the low hanging fruit, right? All the domestic equity funds, all the, you know, you know, big fixed income indices. So they have a huge head start and huge advantage, and it’s deserved, because they were first to market. They were the innovators. So to look back now 25 years and say, you know, oh, I should be at the same level as somebody who has 25 years of experience and incumbency in this market is, you know, that’s a tough argument to make, but there’s still plenty of opportunity for newcomers, if you have a good idea, if you have you know the right partners in terms of marketing and distribution, and you’re bringing something to market that adds value to investors, there’s there’s certainly a path to success there, and it’s not a path. You’re not seeing those big three incumbent issuers doing a lot of the things, or trying to compete in a lot of the areas where, you know the newcomers are in the market. So again, there’s, there’s plenty of room for everyone. But having said that, you’re right. If somebody wants to launch an S, p5, 100 ETF or sector ETF, like you’re going up against such, you know, huge, well established competition, and it’s, there’s no value to the market because there’s no innovation there. So you need to figure out, you know, what you can bring to the market that’s going to be innovative.
Jeff Malec 52:30
So we’ll, we’ll close on that. And what do you guys see as a firm? Are you personally, of like, basically, what’s next for crane shares? What’s next for the ETF space? Where to where does some of that innovation come from?
James Maund 52:41
Yeah, well, certainly in the, you know, options overlay space, the derivative space, there’s a lot more to do there, and a lot more that that I think will resonate with clients. You know, the carbon markets continue to grow, which I think will will be exciting for investors going forward, and then just more use of derivatives. You have this whole complex the the options market, which should, you know, I do a lot with the options market and communicating there’s, there’s so much that that can happen there that I think will be a game changer for for ETF investors going forward. So a lot of opportunity
Jeff Malec 53:19
you have any worries that that is getting a little like the tails wagging the dog, like the overlays and so much option activity that it’s causing events like the beginning of the week or whenever that was last week? Yeah,
James Maund 53:32
it’s, it’s, it’s still efficient, right? And it’s a way for investors to express a view, and just because they’re not necessarily expressing it by buying the actual stock. Maybe they’re buying an ETF, maybe they’re buying a structured product. Maybe they’re buying, you know, an option or getting some other derivative exposure. It’s all, you know, investors are going to express their opinion on the markets in the most efficient way they can. So I don’t believe that there’s something artificial impacting something real. I think it’s all real. And understanding all those dynamics can be challenging, but at the end of the day, those are investors expressing views through the most efficient vehicle. So you know it. There’s a place for it.
Jeff Malec 54:15
Yeah, my argument would be if, if all the investors want 2% a month, and the answer is, sell all these naked options like they’re getting their view, but it’s long term dangerous or net zero for them, which they might not understand up front. Yeah, they need
James Maund 54:31
to understand that the risk and reward, as all investors do, and I think that’s that’s super important and will always be an emphasis. It seems
Jeff Malec 54:41
like these overlay products have somewhat doing that. Yes, you’re short volatility, but it’s against the underlying. And there’s a worst case scenario, isn’t that bad?
James Maund 54:49
Yeah, and there’s a, there’s a lot of, a lot of education, you know, a lot of disclosure and education. And I think most ETF issuer. Want to ensure that their investors have a good experience, that they get the outcome that they’re expecting. It doesn’t do an issue or an ETF issuer any good to sell their clients or investors something that ends up having a drastically different outcome. So there’s certainly an alignment there that education is important, but also making sure that clients are getting high quality investment products that deliver the outcomes that they expect is important. Love it.
Jeff Malec 55:30
Any last thoughts,
James Maund 55:33
I’m just excited to see, you know, it’s, it’s, I think you know it’s going to be an exciting and volatile next kind of six months to a year, there’s strong forces in markets that are really going to be interesting to see how things shape up in the future. So I’m just really excited to see what happens. Sounds
Jeff Malec 55:53
like you’re on the this was not just a blip, that this may have been the start of something real. I
James Maund 55:59
think it’s the start of something real. And I don’t think it’s necessarily negative. I think it’s, it’s, you know, there’s, there’s always a path to success in markets. And that’s what makes it fun and exciting, is solving that puzzle and figuring that out.
Jeff Malec 56:14
Awesome. I love it. Well, thanks, James. It’s been fun. Tell everyone where they can you mention a few of these newsletters and whatnot. They just go to the website and find those. That’s
James Maund 56:22
right, that’s right. Yeah, our website is crane shares.com, you know, all the information is right there. And the China last night newsletter, it’s China last night.com. So, yeah, happy to have any of your listeners come to the website and explore and certainly reach out with any questions. Will
Jeff Malec 56:42
do thanks for coming on. We’ll look you up next time we’re in New York.
James Maund 56:46
Thanks very much. Jeff. Really appreciate
Jeff Malec 56:48
Okay, that’s the show. Thanks to Jeff Burger for producing, thanks to RCM for sponsoring. Thanks to James for coming on, and we’ll see you next week. Peace.
This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.
