Presented by Syntax Advisors.
Margareta Hricova: Welcome to ETF TV – your insight into the role of exchange traded funds, issuers and investments. I am Margareta Hricova, and joining me today is Scott Peng, founder and CEO of Advocate Capital Management, and Deborah Fuhr.
Welcome to the show.
Scott Peng: Thank you for having me.
Deborah Fuhr: Thank you.
Margareta Hricova: So, Scott, back in April 2008, you wrote the paper stating, LIBOR is broken, and claimed that LIBOR manipulation was happening. How did you discover this and what was the repercussions of the paper?
Scott Peng: Well, during the height of the global financial crisis, I was head of US Rates Strategy at Citigroup. And during the global financial crisis, we had heard rumors off and on that LIBOR was being manipulated, but without any proof it was more of an urban legend. And then the Fed started a program to provide banks with liquidity where banks have to tender collateral. So here was, very easily, a way for us to see where LIBOR was, relative to this secured lending rate.
So we started tracking this rate that’s called TAF, Term Auction Facility, and for a while it was consistently below LIBOR, so as a secured lending rate, it should be lower than LIBOR. And then one day it was above LIBOR and we could not explain that. We went through all the potential reasons for it. And the final conclusion we came to was that LIBOR was being kept artificially low so that banks can appear to be sounder than they really were.
So we wrote an article called, “Is LIBOR broken?”. It got picked up by the Wall Street Journal a week later, and the rest, as they say, is history. Many, many years of investigations later, billions of dollars of fines on banks, some people went to prison, and it was really the only major crime, if you will, during the global financial crisis that was actively investigated and pursued. I am proud to have done my part in unveiling or shedding some light on that wrongdoing.
Deborah Fuhr: Well, that’s a very interesting story and clearly has a lot of impact on what happened in the financial markets.
So you started Advocate Capital Management five years ago. Why have you decided now to launch an ETF?
Scott Peng: We started Advocate Capital to bring portfolio based risk mitigation tools to our clients. I’ve been working on that since the days of long-term capital management when I noticed certain types of strategies that do quite well during a crisis.
Richard (Shea) and I met at BlackRock many years ago. We work well together, so the two of us co-founded Advocate.
Why start our RisingRrate ETF (RRH) now? Two reasons, really. One is that as we see modernized ETF & mutual fund rules in 2020, and what they did was use market convention risk metrics to basically guide the creation of ETFs and mutual funds. This brought it more in line with global fund products such as European UCITS. The second reason is that from a macroeconomic perspective, it is the right time to be launching a product like this. Interest rates are rising, inflation is rising, and we believe that we’re about to head into a perfect storm for rising rates. So it was a good time to provide the market with this product.
Margareta Hricova: So you listed the Advocate Rising Rate Hedge ETF RRH on NYSE:C on Thursday. You say it uses a strategy that intends to benefit if long term yields increase faster than short term yields. What are you doing to achieve this?
Scott Peng: First, let’s take a step back. There are many other rising rate products in the market, but they predominantly do one of two things; they either short bonds or they buy options that effectively short bonds. Now, shorting bonds and buy options are quite expensive. You have negative carry and you have option decay. So over long periods of time, these products generally deliver pretty unsatisfactory outcomes. One product fx has posted negative 94% since 2008. This is what we felt we could overcome with our product.
Deborah Fuhr: Can you talk a bit about where you think interest rates are going?
Scott Peng: Yeah. As I said, we think that we’re headed into a period of the perfect storm for interest rates. Global central banks have injected an unprecedented amount of liquidity via fiscal stimulus, the monetary stimulus into the marketplace. On top of that, we have inflation picking up a huge amount of pent up consumer demand. People have held back on spending during the pandemic and now they feel like they can live a little bit more.
And on top of that, the Fed is about to start to pull back on its bond purchase program. So all these forces are really starting to come together. So we feel that interest rates could easily double from current levels. Fx 10 year Treasury yield could certainly get to above 3-4% by the end of 2023.
Margareta Hricova: And who do you expect to invest in the new ETF and how will they use it?
Scott Peng: We can see multiple uses of the Rising Rate Hedge ETF. Fx people who might be concerned about rising rates and rising inflation. If inflation continues to rise and acrues to the non-transitory, then rates are very likely to rise higher as well. So you kind of get two birds with one stone with RRH.
The second use for RRH could be people who have significant emerging market exposure or tech exposure or high yield exposure. These asset classes can be quite sensitive to rising rates, as we’ve seen already in 2020. The third potential use is for people to purchase a small bit of RRH within a diversified portfolio, to help reduce risk and to improve the overall efficient frontier. Depending on the portfolio, we think a small allocation can result in a meaningful risk reduction and improvement in efficient frontier for the overall portfolio.
Deborah Fuhr: And can we expect to see more ETFs coming out of your shop in the future?
Scott Peng: Certainly, we are working on a few ideas and concepts, even as we speak.
Deborah Fuhr: That’s great. Thank you for joining us.
Scott Peng: Thank you.
Scott Peng: So Debbie, can you tell us about some of the other names in the ETF industry?
Deborah Fuhr: Sure. So last week, we saw 32 new listings from 22 issuers and 15 cross-listings. If we look at the number of new listings this year, we’ve had 1418. At this point last year, we had 878, so we’ve seen significantly more new listings.
In terms of the closures, we’ve had 1008, whereas last year at this point, we had 434. So net, we’ve had 410 new listings come to market, when you take creations vs the listings.
Asia Pacific has seen the largest number of new listings, so 507. At this point, last year, there were 260.
US has 384, up from 237.
Europe has 305, up from 200.
Surprisingly, Canada has exactly the same number, so 121 and 121.
Middle East Africa is up at 68 versus 55.
Latin America has 33 vs 5.
The majority of closures have also happened in Asia-Pacific, so 345. The US at 280. Europe at 239. Canada at 98. And Latin America at 20. So I think there’s been a significant number of new and innovative products coming out this year. A lot of ESG, even last week, we’ve seen a lot of climate products come to market. Again, it’s interesting to watch that in Korea, you see a number of issuers launched on the same benchmark. Others have done ESG, climate aware, and thematics have really been the stories of 2021 so far. So next week we’ll be able to talk about some of the flows and where the assets were.
Margareta Hricova: Thanks for the update, Debbie, and thank you to our sponsors Syntax Advisors, to Scott and of course, to all of you for watching. To watch prior episodes and to see news from the ETF industry, visit us at ETFTV.NET.
Thank you.
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