May 18, 2025 • 48 mins
The financial landscape has dramatically shifted, leaving income-focused investors struggling to find reliable yield. Traditional bonds no longer serve as the dependable ballast they once were, forcing advisors and retirees to explore alternative paths to consistent income.
Howard Chan, formerly of PIMCO and Goldman Sachs, shares how his firm Kurv Investments is addressing this challenge through volatility harvesting strategies that transform growth-oriented technology stocks into income-generating powerhouses. This approach solves a fundamental dilemma: no longer must investors choose between growth potential and current income – they can potentially have both.
What makes these strategies particularly valuable today is the breakdown of traditional asset correlations. The negative relationship between stocks and bonds that underpinned the classic 60/40 portfolio has weakened significantly, with both assets sometimes declining simultaneously during market stress. Volatility itself has emerged as an effective portfolio diversifier with a -0.8 correlation to equity markets this year.
Through covered call writing on high-volatility tech names, these strategies can generate substantial yields (7-14% annually) while maintaining some upside participation. The approach follows a four-step framework for navigating market turbulence: mitigating downside during corrections, generating income while awaiting clarity, repositioning for rebounds, and then capturing upside during risk-on periods.
Particularly enlightening is Howard's warning about NAV erosion in high-yield ETFs – when funds promise distributions above what markets can sustainably deliver, they must return principal to maintain their stated yield, creating a slow death spiral for investor capital. This critical concept is often overlooked by yield-hungry retail investors.
For those approaching or in retirement who rely on portfolio income rather than total return, these alternative income streams may provide the consistency and tax efficiency that traditional fixed income currently lacks. As Howard notes, with US debt growing at 7% while GDP grows at just 2-3%, challenging fiscal choices lie ahead – making thoughtful income strategies more essential than ever.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
What happened?
Obviously, inflation was a bigcomponent of this, but why is it
that retail in particular hasbeen so hungry for a higher
yielding type of opportunities?
Speaker 2 (00:09):
I have a cynical answer and I have maybe a market
answer.
Right, I mean before two yearsago.
Right, it was very obvious thatwe were in a zero rate
environment.
Assets were not providingthey're providing capital
returns, but not enough yield.
Assets we're not providingthey're providing capital
returns but not enough yield.
Speaker 1 (00:25):
And you know, in some ways, you know, yield is pretty
important, especially we dohave so take me through a little
bit of a sort of more recentreal time example, which is how
those types of strategiesperformed in the midst of the
tariff let's call it the tarifftantrum right the initial
decline and then obviously thisrip back higher.
Speaker 2 (00:44):
Yeah, I'll use an example for all of our funds.
Actually, if you take a look athow it performed from, you know
.
Let's take a corner case.
Let's take an example of Tesla.
Right, tesla actually has beenselling off even before the
tariff war.
So it started selling offmiddle of December and then it
(01:08):
got worse during tariffs.
Speaker 1 (01:09):
This should be a conversation around finding
yield in unconventional ways,especially in an environment
where people have no idea what'sto happen with inflation and
they want income.
And they can't get it fromtheir job, so they get it from
their portfolio.
So, with all that said, my nameis Michael Guyad, publisher of
the Lead Lagerport.
Joining me here is Howard Chanof Curve Investments.
Curve Investments is one of myclients.
I'm a big fan of the kind ofwork that Howard does with his
(01:30):
team.
Howard, for those who aren'tfamiliar with you, I think it's
worth doing a little bit of a CVbackground on you.
Who are you?
What have you done throughoutyour career?
What do you do on Curve I?
Speaker 2 (01:39):
worked a while at PIMCO, first in the Newport
Beach office looking at theGlobal Bond portfolio, and then
Global Bond was sort ofeverything in the kitchen sink
type portfolio, and sort of thebreadth of that portfolio then
(02:02):
led me to move to the Londonoffice to build out their
European ETF business, and so,and prior to that, I was at
Goldman doing asset allocationsfor, you know, large
institutional clients.
What led us to launch Curve was,in many ways, there was a
(02:22):
convergence between the USmarket and the European market
In 2019, there was a diverserule that was passed by the SEC
which looked at risk on a VARframework which was actually
more similar to the Europeanmarket, and so we thought then
that opened an opportunity to dosomething more interesting that
(02:44):
more institutional strategiesthat we typically have been
dealing with can now be put intoa format that is easily
accessible by everyone.
The one big change that we madewas that those institutions that
were using those strategiestend to be non-taxable entities
so pension funds, endowments sowhat we had to do was marry
(03:06):
those institutional strategieswith certain tax efficiency
within it, because now ETFs areavailable for taxable entities.
So all of our strategies are inthe vein where there is tax
efficiency built into thestrategy, built into the
strategy, and we try to be inparts of the portfolio where
(03:27):
there's sort of a missing link,I guess is the way to say it.
So that's how Curve came to be,and we offer not only
tax-efficient strategies but wealso went into doing, now,
tax-deferred solutions, thingslike 351 exchanges.
So we're in sort of thisintersection between tax and
(03:50):
investment strategies.
Speaker 1 (03:51):
Talk to me about what happened.
Obviously, inflation was a bigcomponent of this, but why is it
that retail in particular hasbeen so hungry for a
higher-yielding type ofopportunities?
Yeah, I mean.
Speaker 2 (04:04):
I think I have a cynical answer and I have maybe
a market answer, right, I meanbefore two years ago, right, it
was very obvious that we were ina zero rate environment.
Assets were not providingthey're providing capital
returns but not enough yield.
And you know, in some ways,some ways, yield is pretty
(04:26):
important, especially we do havea large population of boomers
and people who are already inretirement and who are going
into retirement, whereas priceappreciation is not as important
as stability of incomegeneration to supplement their
income or to be their income.
So even at a higher rateenvironment now, at four and a
(04:48):
quarter, that stability ofincome is still very important
for a lot of investors andespecially since most of the
instruments that we see thatgenerates income either in the
form of dividends or interestpayments and bonds, those are
fixed and so when inflation ishigher, that actually aids into
(05:16):
your ability to keep the realparity on the cash flow that you
get.
So I think that, despite notbeing in a zero rate environment
, I think that is still very ontop of mind for both advisors
and their clients to be able tofind sources of very consistent
and periodical income.
Speaker 1 (05:31):
Yeah, I mean I also think, just in general, there's
such skepticism now around bondsperiod, right, that it's like I
mean that was your ballast,that was your income source,
that was your diversifier andguess what, the last several
years that's been hell.
Speaker 2 (05:49):
Yeah, I mean it's difficult, right when the curve
is inverted, you don't get paidfor duration.
So what a lot of bond funds haveto do is load up on credit risk
, right, so to get thatadditional yield.
I mean in bond funds, there'sreally one of two ways in which
you would get additional yieldfrom base rate is you either
extend duration to take moreinterest rate risk you should be
compensated for taking longerduration risk or you take credit
(06:11):
risk in the form of movingbeyond from treasuries to credit
or high yield or emergingmarket debt.
And what we've seen is in a lotof bond funds is that, since
the yield has been inverted forquite a while, you're not being
compensated for taking interestrate risk.
So most funds are getting theiradditional yield through filing
(06:32):
up on credit risk, and that'sgreat when you are in a zero
rate environment, where a lot ofcorporates can refinance their
debt at very low rates and theeconomy is growing, so they have
income to cover the interestpayments they have on their debt
.
But when you have anenvironment potentially us
having gone into recession orare already in a recession where
(06:56):
there's a lot of uncertainty inthe market, that I think you
have to really manage yourcredit risk in those portfolios
as well.
Speaker 1 (07:05):
Yeah, I hadn't actually thought of this until
you framed it like that, but Iget it actually now, from the
standpoint of today, somethingyou're trying to get high yield
to your point.
You have to take on a lot ofcredit risk If you can get high
yield by using strategiessophisticated strategies, cover
calls around tech names thatdon't have credit risk because
they're so cash flow sensitive.
(07:25):
Allls being equal, you canargue that's relatively safer.
Speaker 2 (07:30):
We actually.
I think that's true, but weactually take this.
I'm putting up my assetallocation hat that I've been in
for a long while, right?
So the common wisdom is why dowe have the 60-40 portfolio 60%
in S&P 500 and 40% in, say, usags or US bonds, treasuries or
(07:51):
otherwise?
Is that traditionally what youexpect that if one asset is not
doing well, the other assetswill do well because they're
negatively correlated?
Right, and it's been written in2023 and even more recently,
that correlation has beenbreaking down.
Bonds are not as negativelycorrelated as equities.
(08:17):
For the first time when there'sa risk-off environment.
Equity markets sold off, bondssold off and the US dollar sold
off also, so they were actuallypositively correlated.
So from our perspective, wewanted to find a way to generate
(08:38):
yield that is still negativelycorrelated in the portfolio, and
one of the places that we seeas a diversifier in the
portfolio is actually usingvolatility.
So this kind of makes intuitivesense, but you can also back it
up empirically.
Equity markets sell offnegative return, volatility goes
(08:59):
up, so those two are actuallyheavily negatively correlated.
Since the beginning of the year, I think, the correlation is
negative 0.8.
So it essentially in some waysis serving as a diversifier what
bonds did in a portfolio.
(09:19):
And on top of that, if you'reable to be able to capture that
volatility premium, whether youknow, store volatility while
volatility is high or longvolatility when it's low and you
can clip a good coupon and beable to distribute that as
pretty steady income.
Speaker 1 (09:37):
Let's talk about the mechanics of that, the types of
ways that you can harvest volusing options of ways that you
can harvest of all using options.
Speaker 2 (09:46):
Yeah, so we have the way that we think about
portfolio and I have thisgraphic I sent to Michael, but
we don't have it here.
Really, think about it in foursteps.
In a crisis, right, when youhave a correction, which we've
(10:09):
just gone um, april 2nd, etc.
When you're when the market iscorrecting, what you want to do
is you want to mitigate downside, right, then you might reach a
certain low or some localminimum.
Uh, you want to get paid whileyou wait until the fundamentals
sort out.
So we've seen this now where wehad a period where volatility
(10:31):
was really high and it was very,very uncertain what America's
trade policy is.
It still is, I guess.
Today we at least have one, Iguess, broad understanding of
how we would trade with the UK.
So that muddle through.
You want to wait, right, youdon't have perfect information,
(10:54):
so you can wait and you shouldget paid while you wait.
And then you want to repositionOnce you have clarity in that
market.
The third step is thenreposition for rebound.
Have clarity in that market,the third step is then
reposition for rebound.
So now it's a little bitclearer in terms of the
direction that we're waiting forall of these countries to have
bilateral trade agreements withus.
And then, once things are clearthat there is momentum when
(11:18):
risk is coming back into themarkets, then you want to
magnify your upside.
That's the fourth step and Ithink we can do that all with
volatility.
And I'll kind of go through howwe do it in each one of these
stages.
So, in the first step, which iswhen the market is correcting
and you're mitigating downside,we we like to shortfall because
(11:42):
when, when you write things likecover calls, you could do more
complicated strategies likereversals or whatnot you have
when you have a stock.
Let's just use an example likeTesla right, and you write a
cover call on Tesla, your betato the underlying with that
(12:07):
cover call is less than one.
So, for instance, in some ofour strategies we write 30 delta
calls, which means that oursensitivity to the Tesla stock
is 0.7.
To the tesla stock is 0.7.
So if the tesla falls by onepercent, that strategy with the
(12:28):
cover call which should, youshould expect it to only fall by
0.7.
So that's like mitigatingdownside, right.
And then, once you're kind ofin this stage two, where you're
waiting, how can you get paid?
Right and you can go betweenstage one and stage two back and
forth.
That's.
You know.
Something that is often verycommon is that in a moment of
(12:49):
correction or you're waiting forthings to sort out, volatility
is actually pretty high.
So at that time, you know andmaybe just for those who are not
familiar with options is whenvolatility goes up, the price of
your options go up.
That's the simplest way toexplain it.
So when you write volatility,write calls, at that point you
(13:12):
actually get more for the callsthat you write.
But you actually also have anextra benefit, which is when
things are falling you can writemultiple calls.
Because you write a call hereand the stock falls, it becomes
out of the money.
To get to the same amount ofexposure, you have to rewrite a
(13:35):
call.
Further down, you clip anothercoupon, so you clip the coupon
twice, and so you're clippingcoupons along the way while
things are falling.
So you're getting paid, you'remitigating downside and you're
getting paid while things kindof sort out, sort itself out,
right.
And the third stage isreposition for for rebound,
(13:56):
right, if you are able to writea call in a way that is a little
bit out of the money, you'renot capping up your upside, you
still have movement for theunderlying to rebound, and this
part is actually the hardestright.
Oftentimes you want to haveyour portfolio to be conditional
, because if there's a rebound,it generally happens very sudden
(14:18):
and unexpected and by the timeyou want to reposition it's
already too late.
Right, the market has goneahead of you.
So by clipping coupons, writinga little bit out of the money
call when it rebounds, you canactually capture some of that
upswing and then after that youcan reposition your portfolio to
magnify whatever momentum is inthe market in whatever sector.
(14:39):
So that's typically how wethink about using volatility and
options to navigate a prettyturbulent market environment.
Speaker 1 (14:48):
So take me through a little bit of a sort of more
recent real-time example, whichis how those types of strategies
performed in the midst of thetariff.
Let's call it the tarifftantrum right the initial
decline, and then obviously thisrip back higher.
Let's go to the tariff tantrumright the initial decline and
then obviously this rip backhigher.
Speaker 2 (15:01):
Yeah, I'll use an example for all of our funds.
Actually, if you take a look athow it performed from, you know
, let's take a corner case.
Let's take an example of Tesla.
Right, tesla actually has beenselling off even before the
tariff war.
So it started selling offmiddle of December and then it
(15:24):
got worse during tariffs, thetariff war, tariff announcement,
liberation day on April 2nd andit hit bottom shortly before
the reversal and you can see, Ithink, that the stock had fallen
(15:46):
more than 30% and our strategythat writes the covered calls
have actually, I think,outperformed 8% to 10% of that,
and largely because our beta tothe underlying is less than 1%.
So 1% move in the underlyingmeans less than 1% move in a
strategy and at the same time wehave been restriking the call
(16:07):
all the way down.
So the distribution for thatstrategy is largely around
annualized 55%.
So you're getting paid whileyou wait for the market to sort
out, right, and then, when therewas a reversal or at least you
know step back in the I guessthe tariff stance that the
(16:31):
administration had there was arebound and I think it's very
hard for people to reboundintraday right To reposition a
portfolio for intraday reboundand, because the call was out of
the money, we actually captureda lot of that upside when the
stock went up.
And this, you know, I only bringup Tesla because they have had
(16:53):
a very extreme move and it's astock that I would argue that
doesn't really trade onfundamentals.
It's trade on sentiment andit's particularly sentiment of
one individual.
But this, the same behavior,has happened on the other names
that we have, like Amazon orGoogle or Apple, and even in our
basket of texts that that thisrebound, we were able to manage
(17:15):
the correction pretty well.
So I think, I think the ideaand even if you're not know, um
into specific technology names,like to build in some additional
conditionality in yourportfolio, really would help you
navigate in a moment of, youknow, market turbulence how much
(17:36):
of that process is ummechanical one oriented?
Speaker 1 (17:41):
is it art versus science mean?
There's a lot of, you know,five to six week calls and
rolling, you know, on a monthlybasis.
Speaker 2 (18:04):
But when the Delta of the calls uh reaches below a
certain amount, we restrictright and then and then we keep
doing that until the you knowthe market kind of, you know
rebounds and and and stuff.
In our basket basket there is alittle bit more discretion,
largely because, um, we are alittle bit more active in terms
(18:28):
of the positions are smaller, sothere's a little bit more uh,
you, you can pick, you have to,you have to pick a little bit of
where you want to be positionedin a portfolio relative to
other positions.
But generally we try to bepretty mechanical in the
portfolios.
Speaker 1 (18:46):
Okay, so talk to me about the product lineup at
Curve.
You've got a number of thesedifferent funds that are doing
this.
Speaker 2 (18:51):
Yeah, so we have two suites that I would characterize
as two suites.
The first is the Y premiumstrategy ETFs, and these are
single name, mostly all ontechnology names, and the
original purpose of having thesefunds was that we were trying
to solve a problem in advisorsand individuals portfolio where
(19:16):
you basically have had to pickgrowth or income.
Most technology stocks do notdistribute dividends, so you
either have to go for growth oryou have to go for higher
dividend payments, paymentequities.
If you're in equity space, thatgenerally is our utilities or
financials or industrial namesand those don't have growth
(19:40):
right, it's very hard to see howutility can grow the same way
as a technology company.
So what we want to do is tomake that trade-off a little bit
easier and to generate incomeon technology names.
And I will say this suite isgenerally used by people who are
very dividend-focused,income-focused and people who
(20:03):
are close or are already inretirement, where they are
focused more on the consistencyof distribution versus
maximizing the upside potentialof these particular names.
You still get upside potentialup to the strike of the call,
but their focus is primarily onconsistency of distribution.
(20:26):
The second one that we have iswhat we call the Tech Titans ETF
, which is also in the realm ofthe technology space, the
technology space and there it'sa basket of names of 15 to 20
names that we focus on andinstead of having the cover call
(20:51):
always on and we're trying toaddress this thing where, over a
long period of time, if youwant to maximize capital
appreciation, a cover call ETFwill underperform the underlying
Just by the nature of writing acall you are trading some of
the upside for income that yougenerate in the portfolio and we
wanted to actually solve that.
We want to have a bit of best ofboth worlds.
(21:13):
When market is risk on, we wantto magnify and capture the
upside, and when the market iscorrecting or trading sideways,
that's actually the perfect timeto write cover call.
So then the cover call getsturned on and we generate income
from the technology banks.
So this is sort of best of bothworlds.
(21:34):
One of our team members youknow sort of the adaptive cruise
of having your kind oftechnology exposure in your
portfolio.
So when market is risk on, wewant to momentum weight it to
capture as much upside aspossible.
But when the name does notexhibit momentum, price momentum
(21:58):
which is what we justexperienced in April we write
more and more cover calls.
And this is sort of indicativebecause prior to, I would say,
february, our dividend yield onthat fund ranged around 7% and
in a market correction that hasactually increased to 14%
(22:21):
because the entire basket didn'texhibit price momentum.
So we were writing cover callson the entire basket so we were
able to generate more income ina downside market correction
environment.
So the strategy is built to bea little bit counter-cyclical
you get more income when themarket is correcting and then
(22:41):
you have less income but youcapture more of the upside when
the risk is back on in themarket.
Speaker 1 (22:47):
What types of declines tend to be better, more
prolonged corrections or bearmarkets, or crashes?
Speaker 2 (22:56):
in terms of the way that this operates, I would um
the prolonged would allow us toclip more assistant coupon over
a period of time.
Um, if it crashes immediately,there's actually a second
question is does it reboundimmediately or does it?
Where does it go after that?
(23:18):
If it crashes immediately andrebounds, that actually doesn't
affect the portfolio too muchbecause, again, we generally
write five to six weeks call.
So if there's a rebound withinthat period before we roll, it
doesn't really actually affectthe portfolio that much.
(23:39):
If it's a really hard landing,a big correction, volatility
tends to spike very quickly also, and then, as I mentioned, we
would just restrike the callmore often because it becomes
out of the money sooner.
So in that case we generatemore income in that scenario.
(23:59):
So it is as we know this month.
The market is verycontext-dependent.
A lot of things could happen,but the one thing we are taking
advantage of is, when acorrection happens, uncertainty
tends to increase, volatilityincreases and therefore that's
(24:21):
actually a benefit to ourportfolio.
Speaker 1 (24:24):
Is it fair to say that, in general, you want, as
an issuer, to target parts ofthe marketplace which tend to
have more volatility, maybe morehype, more of a narrative than
others Meaning?
You know, when I think aboutyield and dividends, I'm
thinking about utilities,consumer state holes, healthcare
, blue chip, you know, notreally highly volatile parts of
(24:45):
the marketplace.
Speaker 2 (24:47):
Yeah, we consider ourselves sort of an alternative
income provider.
So think about, like, where youtraditionally would get income
right.
It's either from fixedinstruments, so you go from, you
know, treasury bonds all theway to corporates, to high yield
in merchant market debts andincreasing amount of risk.
But I would say generallyinterest payments other than
(25:12):
munis are taxed at ordinaryincome.
So if you think about it froman after-tax basis, that's not
too great.
The other source is dividends,but dividends from stock is not
always predictable.
They can change depending onthe quarterly meetings or the
(25:33):
set schedule.
Or, as in the case with tech,they just don't distribute.
So you can't own a lot of thatif you're really income focused.
So we try to look for differentways in which we can generate
income and I think usingvolatility premia in options is
(25:53):
another way.
The other thing I would justmention is that the tax
treatment for option income iscapital gains.
So there is a possibility that,depending on how we manage the
options and how long you holdthe securities, you can get,
instead of the highest marginaltax rate of 37% to long-term
(26:14):
capital gains, which is 20%.
And if we were to able tomanage the short-term gains in
the funds properly.
There's actually a fourth kindof category, which is return of
capital, which is actually notimmediately taxable.
The distribution goes todecrease your basis.
(26:35):
I think in this moment in whichbonds does not have as strongly
the traditional relationshipwith other asset classes and the
fact that bonds distributeordinary income type interest
payments, I think investorsshould look at alternative ways
(26:59):
to generate income.
And you're not getting paid forduration risks, so you have to.
Right now, the curve is alittle bit better than last year
, but you're getting paid atfour and a quarter right now.
On front end, you have to rollthat every month, right?
Because you don't want to buy along-end, long-dated treasury.
(27:20):
You're not getting compensatedfor the duration risk you're
getting.
So that's why, I think, whyincome is still very much in the
focus of people's minds,because, even though base rate
is higher, there's not a lot ofgood places to get good income
in the marketplace.
Speaker 1 (27:40):
So calling alternative income, I think, is
accurate.
But then of course my mind,speaking of asset allocation,
goes to alternative weightings,right, and how do you think
about the fits of a totalportfolio?
So if we say alternative income, that sounds like it should be
in the alternative bucket, butwe should figure out how to
weight both the alternativecategory and then this within
the alternative category.
(28:01):
So how do you think about, orhow do you see other advisors,
institutional investors, thinkabout the positioning sizing?
Speaker 2 (28:07):
Yeah, I say alternative income because I
think most people when theythink income, they think about
interest payments and dividends.
Right, we actually, the way wethink about it in portfolio
construction context, is weactually are a good complement
to dividend equity strategies.
So there's plenty of both inetf format and mutual formats
(28:32):
that they're dividend equities.
So they are overweightfinancials, energies and
utilities and they're definitelyunderweight.
Most of them are definitelyunderweight technology.
And so then if you pair it upwith something that is
overweight technology thatproduce dividends, that
(28:53):
combination gives you actuallycloser to the sector weighting
of S&P 500.
So you actually get the broadexposure of sector weightings
for the broad market and you geta yield enhancement.
So this is in a traditionalequity bucket.
So if you have a 60-40 portfolioand you have, let's say that,
(29:15):
60%, you have 30% individend-focused equities, in
dividend-focused equities, theother 30% in the technology
income sleeve, that combinedportfolio actually gets you
pretty close to an S&P 500portfolio with dividends,
because right now S&P isyielding 1.4%, 1.5% and this can
(29:39):
enhance, I think, like 200 or300 basis points above that and
you get a um, a favorable tapstreaming on the income.
Now, if you think about this asum an alternative bucket because
you you liken that as like aoption strategy, uh, etc.
Uh, what we actually have seenis people actually do the
(30:02):
advisors do their math backwards.
So, for example, we wereworking with like he has an
eight percent distributiontarget for his client, right,
you can, you can get easily fourand a quarter from no risk
t-bills, right, so that you haveto make up that three percent,
three and a half percent deficit.
(30:22):
So you just back out what youcan get in a portfolio to that
3.5% and that's the allocationto some of these alternative
income strategies.
So that's the two ways I thinkwe've seen people do it.
Speaker 1 (30:35):
Yeah, no, that definitely makes a lot of sense.
Let's talk about doing it on anindividual stock basis versus
doing it on an index.
Some of the pros and cons ofeither.
Speaker 2 (30:48):
I mean, certainly the way we see it, diversification
is the free lunch, so you won'thave to diversify.
We have six names.
But we think you could do adiversification a little bit
differently.
On an index, you have thediversification first and then
(31:09):
you write calls on it.
So your expected yield shouldbe lower versus individual names
have more volatility.
So if you write a call on there, you get more yield and then if
you buy a basket of it, you geta diversification afterwards.
So the ordering is different.
So on an index you getdiversification first, then you
generate the yield.
(31:30):
On a single name, I think whatmakes sense is generate the
yield and then buy a basket toget the diversification and I
think, net-net, you get a higheryield doing the second way,
depending on the names that youhave in the basket.
So that's how I would thinkabout it.
But the amount of yield you getshould be proportional to the
(31:53):
volatility of the underlyingright, and a NASDAQ index is
much more volatile than S&P 500index, although they have many
crossover names.
So you should expect a slightlyhigher yield on a NASDAQ versus
on a single name.
Even single name on veryhousehold names like Amazon or
(32:17):
that has more volatility than anindex.
So you should expect more yieldon a single name than an index.
Speaker 1 (32:22):
And, let's face it, people love talking about
individual stocks.
I mean, there's always anarrative aspect to this which
is hard to beat.
Speaker 2 (32:31):
Especially in this moment.
Speaker 1 (32:33):
Yeah, yeah, exactly right.
You always need to have a goodstory Now to that end.
You know, there's a lot offirms that do strategies that
are trying to play in the samespace.
What would you say?
Differentiates Curve fromothers, and part of that, I
think, should be a discussionaround NAV erosion.
Speaker 2 (32:52):
Yeah, I mean.
So I think what we want tofocus on is consistency and
persistence of income, right.
We want to be able to.
Again going back to what Imentioned, which is, you know
who are the current users or endusers of these strategies are
people who are, you know, incomefocused and who are gearing
(33:16):
towards retirement or inretirement, so they really focus
on what the consistency ofincome is versus other factors,
and so how we differentiateourselves is to be as consistent
in distribution as possible.
We want to also leave enoughprinciples so we can generate
(33:38):
consistent income right, and sowe don't have the flashiest
yield.
Our yield level is where wefeel we can generate that
consistency, and so that'sreally.
We come from a veryinstitutional background, so we
run our strategies very muchlike for a pension fund or
(33:59):
endowment that we have a processin place and whatever we
generate from the premium fromthe call is around where we
distribute.
You do get a problem in higherdistribution ETFs, which is this
NAV erosion issue that youmentioned, and I think this is
(34:21):
true of any high-yielding ETFsand strategies.
So basically, the idea is thatyou market your ETF as a very
high yield and maybe the marketdidn't allow you to generate
that amount of yield.
You to generate that amount ofyield.
(34:48):
So in order to make to, todeliver that higher yield, you
actually have to distribute yourprincipal to make that yield so
.
So the easiest way I the analogyI I used to use and I I think
it's very apt is you're you're alandlord, you have a property
that you're renting out for$2,500 a month, right, and
(35:09):
you're collecting $2,500 a monthand everything's peachy, and
then one month one of yourtenants is late.
So to make up that $2,500,you're selling parts of the
kitchen to get that income fromyour income property, right,
you're eating into yourprincipal.
We all know that's harmful foryour asset that you've invested,
(35:35):
right.
And so the same behaviorhappens in high distribution ETF
is, let's say, the market, you,as the investor, gave the ETF
$100 to invest and the fund ispromising you 7% yield.
So it's distributing $7 everymonth, but the market only gave
you 5%.
So in order to make up that $2difference, you're going to have
(35:59):
to distribute part of theprincipal to make up that $7
distribution and over time, ifyou continuously do that, your
NAV will keep going down andthat's what leads into NAV
erosion.
Speaker 1 (36:11):
Yeah, I think that is one of the most
underappreciated aspects by aswitch to retail.
They don't understand thatconcept.
They think almost like it's aninfinite money glitch, infinity
money glitch, kind of thing.
I've seen that word on Redditand I just shake my just shake
my head like wow.
I mean, when there's a realbear market, there's a lot of
trouble coming yeah, marchingcalls and you have to post
(36:33):
collateral when the marketcorrects.
Speaker 2 (36:35):
That's the worst time , just the the last.
You don't want to sell when themarket is correcting, right,
that's the worst time to to dothat.
Speaker 1 (36:42):
So yeah, which becomes an interesting thing to
think about when it comes tocollecting their yields, because
there's collecting the yieldand then there's reinvesting the
yield.
So what do you do with theyield?
Right?
So a lot of people will takethe yield and use it for
expenses, but the reinvestmentside should be really considered
.
Speaker 2 (36:56):
No, yeah, and I think this is a I think a a thing in
our industry.
Um, we often post total returnsfor our funds, right, there's a
there's baked in assumption andtotal return I don't know if
everyone appreciates is that itassumes that any distribution of
(37:18):
funds you reinvest back intothe fund.
That's how you get total return.
So if you are that pensioner orthat person who are income
focused, the total returnactually overstays your return
because if you're dependent onthat income, you're not
reinvesting it back into thefund.
(37:39):
So your return must besomewhere lower than the stated
total return, right.
And so I think oftentimes andthis problem is especially worse
when there's NAV erosion, right.
So I'll give you an example yougive me $100, I made five
(38:02):
dollars, right, I distributethat five dollars, my total
return is five percent.
Because it assumes I reinvestthat five dollars back into the
fund.
Right.
For the person who's justclipping coupons and using that
distribution for income, yourreturn is zero because a hundred
, you made five, so it 105.
(38:22):
You distribute that five andyou have five, right, you have
100.
So your principal hasn't moved,but you generate that $5 for
income.
So that's no reinvestment,right.
But it's even worse when youhave NAV erosion.
So in the case where you have$100 to invest, I generated $5
(38:45):
and I distribute seven.
So now my principal is 98.
I don't reinvest, right,because I need the income.
My return is actually negativetwo percent.
So it that reinvestment?
This is actually you.
I'm glad you brought this uplike that.
Reinvestment is actually ahidden thing that it doesn't
(39:07):
show up because, to be honest,to be fair, everybody's showing
total return because it'sApple's comparison, right?
Because different funds havedifferent distribution rates.
So you just make an assumptionthat everybody reinvests back
into the fund.
So when you compare funds howgood they are, you're comparing
like total returns.
So when you compare funds, howgood they are, you're comparing
like total returns.
But if you are clipping coupons, that return is not necessarily
(39:30):
the return that you get in yourportfolio.
Speaker 1 (39:33):
Thank you for that, because I think it's important
for people to understand thesedynamics.
For those who want to learnmore about Curve and maybe just
self-educate, because I think alot of people are intrigued by
these types of strategies, theytry to do it on their own.
They see that as a lot of work.
That, by the way, is one of thebenefits of using ECF, like
what you guys have to offer.
(39:54):
Where would you point them toand then talk through sort of
the future of Curve?
I'm sure you have other thingsthat you're hoping to bring to
market.
Speaker 2 (40:04):
Yeah, so all of the fund information can be found on
CurveInvestcom, soK-U-R-V-I-N-V-E-S-Tcom.
We have had a lot of demand forour views on not just
technology names but like macrooutlooks and stuff.
(40:25):
So we separate from our funds.
We have a podcast called Curbyour Enthusiasm where people can
find out more about our outlook, and then we do have monthly
calls.
That goes over our portfolioand what has happened in the
strategies that we do a deepdive.
So those are maybe three waysthat people can find out.
(40:48):
Find more, find moreinformation about Curve.
Speaker 1 (40:51):
We haven't talked about that, but maybe on the
last few minutes here let's talkOutlook.
I mean, do you get a sense that?
I mean, look, it's cliche tosay it's going to be a volatile
period.
It's going to be a volatileyear.
Everyone was super bearish twoweeks ago and everyone's super
bullish now, two weeks later.
What are your thoughts on theway the year plays out?
Speaker 2 (41:11):
From the beginning of the year, we always think that
the markets were too optimistic.
So we think that our base caseis that we're heading into a
recession that is not already ina very, very tricky position.
Do I address the inflationproblem or do I address the full
(41:53):
employment problem?
Our base case is that they'renot going to reset rates until
towards the end of the year and,if so, it's going to be very
modest, because inflation tendsto be sticky and it's a harder
problem to solve.
And this is one of the big macroconcerns that we have and I
(42:17):
think maybe reflected in themarket, is that, for the first
time in US economy, our debt toGDP is about 100%, so meaning 1%
growth for 1% debt that we own,but they're growing at
different rate.
Gdp maximum is going to grow at2% to 3% In fact, less if we're
(42:38):
going into a recession and USdebt is growing at 7%.
So we're entering into an erain which we are actually issuing
more debt to pay for our debt,and that's really a debt spiral
cycle that we it's it'srestrictive on growth.
Basically, um and so so it itmeans two things Either we cut
(43:05):
our budget there's a $1.8trillion deficit for the US that
we're financing every year orwe raise taxes.
Both are contractionary.
So we think that there's goingto be some tough times ahead,
big decisions that have to bemade.
It's going to be some toughtimes ahead, big decisions that
(43:33):
have to be made it's, but it'sgoing to get worse if
potentially, this big tax cutlegislation goes through, then
you're even in a bigger hole.
But and I'm not just kind ofspeaking, you know about our
book, uh, but the you know, lastyear there was, you know, a lot
of questions about valuations,about tech.
A lot of it has corrected that.
We have seen some rebound, butwe've seen actually, even in the
(43:57):
current earning cycles, thatthe earnings are actually still
pretty extraordinarily strong.
So we always get the questionis tech always expensive?
So we think, if there's anyadjustments, certain tech
sectors would do better Things,like Netflix, et cetera, where
(44:20):
if the economy is going intorecession and people have to
decrease their discretionaryspending, those kind of things
potentially are the last thingto go.
So we think that could bepotentially defensive from the
tariffs.
And what tariff negotiationsthat you know the outcome would
be.
It still seems extremelyunclear and whether we benefit
(44:54):
or if there's incrementalbenefit or it's just a settling
down of uncertainty in those youknow arenas.
Speaker 1 (44:57):
We're going to have to do another discussion on this
kind of much deeper, whichwe'll save for the next time, as
well as hopefully do a webinarin the coming week.
Appreciate those that watchthis live.
Again, this is a sponsoredconversation by Curve.
Learn more about their fundsand hopefully I'll see you all
on the next episode.
Thank you, I appreciate itGreat.
Thank you, michael, cheerseverybody.
What happened?
Obviously, inflation was a bigcomponent of this, but why is it
that retail in particular hasbeen so hungry for a higher
yielding type of opportunities?
Speaker 2 (00:09):
I have a cynical answer and I have maybe a market
answer.
Right, I mean before two yearsago.
Right, it was very obvious thatwe were in a zero rate
environment.
Assets were not providingthey're providing capital
returns, but not enough yield.
Assets we're not providingthey're providing capital
returns but not enough yield.
Speaker 1 (00:25):
And you know, in some ways, you know, yield is pretty
important, especially we dohave so take me through a little
bit of a sort of more recentreal time example, which is how
those types of strategiesperformed in the midst of the
tariff let's call it the tarifftantrum right the initial
decline and then obviously thisrip back higher.
Speaker 2 (00:44):
Yeah, I'll use an example for all of our funds.
Actually, if you take a look athow it performed from, you know
.
Let's take a corner case.
Let's take an example of Tesla.
Right, tesla actually has beenselling off even before the
tariff war.
So it started selling offmiddle of December and then it
(01:08):
got worse during tariffs.
Speaker 1 (01:09):
This should be a conversation around finding
yield in unconventional ways,especially in an environment
where people have no idea what'sto happen with inflation and
they want income.
And they can't get it fromtheir job, so they get it from
their portfolio.
So, with all that said, my nameis Michael Guyad, publisher of
the Lead Lagerport.
Joining me here is Howard Chanof Curve Investments.
Curve Investments is one of myclients.
I'm a big fan of the kind ofwork that Howard does with his
(01:30):
team.
Howard, for those who aren'tfamiliar with you, I think it's
worth doing a little bit of a CVbackground on you.
Who are you?
What have you done throughoutyour career?
What do you do on Curve I?
Speaker 2 (01:39):
worked a while at PIMCO, first in the Newport
Beach office looking at theGlobal Bond portfolio, and then
Global Bond was sort ofeverything in the kitchen sink
type portfolio, and sort of thebreadth of that portfolio then
(02:02):
led me to move to the Londonoffice to build out their
European ETF business, and so,and prior to that, I was at
Goldman doing asset allocationsfor, you know, large
institutional clients.
What led us to launch Curve was,in many ways, there was a
(02:22):
convergence between the USmarket and the European market
In 2019, there was a diverserule that was passed by the SEC
which looked at risk on a VARframework which was actually
more similar to the Europeanmarket, and so we thought then
that opened an opportunity to dosomething more interesting that
(02:44):
more institutional strategiesthat we typically have been
dealing with can now be put intoa format that is easily
accessible by everyone.
The one big change that we madewas that those institutions that
were using those strategiestend to be non-taxable entities
so pension funds, endowments sowhat we had to do was marry
(03:06):
those institutional strategieswith certain tax efficiency
within it, because now ETFs areavailable for taxable entities.
So all of our strategies are inthe vein where there is tax
efficiency built into thestrategy, built into the
strategy, and we try to be inparts of the portfolio where
(03:27):
there's sort of a missing link,I guess is the way to say it.
So that's how Curve came to be,and we offer not only
tax-efficient strategies but wealso went into doing, now,
tax-deferred solutions, thingslike 351 exchanges.
So we're in sort of thisintersection between tax and
(03:50):
investment strategies.
Speaker 1 (03:51):
Talk to me about what happened.
Obviously, inflation was a bigcomponent of this, but why is it
that retail in particular hasbeen so hungry for a
higher-yielding type ofopportunities?
Yeah, I mean.
Speaker 2 (04:04):
I think I have a cynical answer and I have maybe
a market answer, right, I meanbefore two years ago, right, it
was very obvious that we were ina zero rate environment.
Assets were not providingthey're providing capital
returns but not enough yield.
And you know, in some ways,some ways, yield is pretty
(04:26):
important, especially we do havea large population of boomers
and people who are already inretirement and who are going
into retirement, whereas priceappreciation is not as important
as stability of incomegeneration to supplement their
income or to be their income.
So even at a higher rateenvironment now, at four and a
(04:48):
quarter, that stability ofincome is still very important
for a lot of investors andespecially since most of the
instruments that we see thatgenerates income either in the
form of dividends or interestpayments and bonds, those are
fixed and so when inflation ishigher, that actually aids into
(05:16):
your ability to keep the realparity on the cash flow that you
get.
So I think that, despite notbeing in a zero rate environment
, I think that is still very ontop of mind for both advisors
and their clients to be able tofind sources of very consistent
and periodical income.
Speaker 1 (05:31):
Yeah, I mean I also think, just in general, there's
such skepticism now around bondsperiod, right, that it's like I
mean that was your ballast,that was your income source,
that was your diversifier andguess what, the last several
years that's been hell.
Speaker 2 (05:49):
Yeah, I mean it's difficult, right when the curve
is inverted, you don't get paidfor duration.
So what a lot of bond funds haveto do is load up on credit risk
, right, so to get thatadditional yield.
I mean in bond funds, there'sreally one of two ways in which
you would get additional yieldfrom base rate is you either
extend duration to take moreinterest rate risk you should be
compensated for taking longerduration risk or you take credit
(06:11):
risk in the form of movingbeyond from treasuries to credit
or high yield or emergingmarket debt.
And what we've seen is in a lotof bond funds is that, since
the yield has been inverted forquite a while, you're not being
compensated for taking interestrate risk.
So most funds are getting theiradditional yield through filing
(06:32):
up on credit risk, and that'sgreat when you are in a zero
rate environment, where a lot ofcorporates can refinance their
debt at very low rates and theeconomy is growing, so they have
income to cover the interestpayments they have on their debt
.
But when you have anenvironment potentially us
having gone into recession orare already in a recession where
(06:56):
there's a lot of uncertainty inthe market, that I think you
have to really manage yourcredit risk in those portfolios
as well.
Speaker 1 (07:05):
Yeah, I hadn't actually thought of this until
you framed it like that, but Iget it actually now, from the
standpoint of today, somethingyou're trying to get high yield
to your point.
You have to take on a lot ofcredit risk If you can get high
yield by using strategiessophisticated strategies, cover
calls around tech names thatdon't have credit risk because
they're so cash flow sensitive.
(07:25):
Allls being equal, you canargue that's relatively safer.
Speaker 2 (07:30):
We actually.
I think that's true, but weactually take this.
I'm putting up my assetallocation hat that I've been in
for a long while, right?
So the common wisdom is why dowe have the 60-40 portfolio 60%
in S&P 500 and 40% in, say, usags or US bonds, treasuries or
(07:51):
otherwise?
Is that traditionally what youexpect that if one asset is not
doing well, the other assetswill do well because they're
negatively correlated?
Right, and it's been written in2023 and even more recently,
that correlation has beenbreaking down.
Bonds are not as negativelycorrelated as equities.
(08:17):
For the first time when there'sa risk-off environment.
Equity markets sold off, bondssold off and the US dollar sold
off also, so they were actuallypositively correlated.
So from our perspective, wewanted to find a way to generate
(08:38):
yield that is still negativelycorrelated in the portfolio, and
one of the places that we seeas a diversifier in the
portfolio is actually usingvolatility.
So this kind of makes intuitivesense, but you can also back it
up empirically.
Equity markets sell offnegative return, volatility goes
(08:59):
up, so those two are actuallyheavily negatively correlated.
Since the beginning of the year, I think, the correlation is
negative 0.8.
So it essentially in some waysis serving as a diversifier what
bonds did in a portfolio.
(09:19):
And on top of that, if you'reable to be able to capture that
volatility premium, whether youknow, store volatility while
volatility is high or longvolatility when it's low and you
can clip a good coupon and beable to distribute that as
pretty steady income.
Speaker 1 (09:37):
Let's talk about the mechanics of that, the types of
ways that you can harvest volusing options of ways that you
can harvest of all using options.
Speaker 2 (09:46):
Yeah, so we have the way that we think about
portfolio and I have thisgraphic I sent to Michael, but
we don't have it here.
Really, think about it in foursteps.
In a crisis, right, when youhave a correction, which we've
(10:09):
just gone um, april 2nd, etc.
When you're when the market iscorrecting, what you want to do
is you want to mitigate downside, right, then you might reach a
certain low or some localminimum.
Uh, you want to get paid whileyou wait until the fundamentals
sort out.
So we've seen this now where wehad a period where volatility
(10:31):
was really high and it was very,very uncertain what America's
trade policy is.
It still is, I guess.
Today we at least have one, Iguess, broad understanding of
how we would trade with the UK.
So that muddle through.
You want to wait, right, youdon't have perfect information,
(10:54):
so you can wait and you shouldget paid while you wait.
And then you want to repositionOnce you have clarity in that
market.
The third step is thenreposition for rebound.
Have clarity in that market,the third step is then
reposition for rebound.
So now it's a little bitclearer in terms of the
direction that we're waiting forall of these countries to have
bilateral trade agreements withus.
And then, once things are clearthat there is momentum when
(11:18):
risk is coming back into themarkets, then you want to
magnify your upside.
That's the fourth step and Ithink we can do that all with
volatility.
And I'll kind of go through howwe do it in each one of these
stages.
So, in the first step, which iswhen the market is correcting
and you're mitigating downside,we we like to shortfall because
(11:42):
when, when you write things likecover calls, you could do more
complicated strategies likereversals or whatnot you have
when you have a stock.
Let's just use an example likeTesla right, and you write a
cover call on Tesla, your betato the underlying with that
(12:07):
cover call is less than one.
So, for instance, in some ofour strategies we write 30 delta
calls, which means that oursensitivity to the Tesla stock
is 0.7.
To the tesla stock is 0.7.
So if the tesla falls by onepercent, that strategy with the
(12:28):
cover call which should, youshould expect it to only fall by
0.7.
So that's like mitigatingdownside, right.
And then, once you're kind ofin this stage two, where you're
waiting, how can you get paid?
Right and you can go betweenstage one and stage two back and
forth.
That's.
You know.
Something that is often verycommon is that in a moment of
(12:49):
correction or you're waiting forthings to sort out, volatility
is actually pretty high.
So at that time, you know andmaybe just for those who are not
familiar with options is whenvolatility goes up, the price of
your options go up.
That's the simplest way toexplain it.
So when you write volatility,write calls, at that point you
(13:12):
actually get more for the callsthat you write.
But you actually also have anextra benefit, which is when
things are falling you can writemultiple calls.
Because you write a call hereand the stock falls, it becomes
out of the money.
To get to the same amount ofexposure, you have to rewrite a
(13:35):
call.
Further down, you clip anothercoupon, so you clip the coupon
twice, and so you're clippingcoupons along the way while
things are falling.
So you're getting paid, you'remitigating downside and you're
getting paid while things kindof sort out, sort itself out,
right.
And the third stage isreposition for for rebound,
(13:56):
right, if you are able to writea call in a way that is a little
bit out of the money, you'renot capping up your upside, you
still have movement for theunderlying to rebound, and this
part is actually the hardestright.
Oftentimes you want to haveyour portfolio to be conditional
, because if there's a rebound,it generally happens very sudden
(14:18):
and unexpected and by the timeyou want to reposition it's
already too late.
Right, the market has goneahead of you.
So by clipping coupons, writinga little bit out of the money
call when it rebounds, you canactually capture some of that
upswing and then after that youcan reposition your portfolio to
magnify whatever momentum is inthe market in whatever sector.
(14:39):
So that's typically how wethink about using volatility and
options to navigate a prettyturbulent market environment.
Speaker 1 (14:48):
So take me through a little bit of a sort of more
recent real-time example, whichis how those types of strategies
performed in the midst of thetariff.
Let's call it the tarifftantrum right the initial
decline, and then obviously thisrip back higher.
Let's go to the tariff tantrumright the initial decline and
then obviously this rip backhigher.
Speaker 2 (15:01):
Yeah, I'll use an example for all of our funds.
Actually, if you take a look athow it performed from, you know
, let's take a corner case.
Let's take an example of Tesla.
Right, tesla actually has beenselling off even before the
tariff war.
So it started selling offmiddle of December and then it
(15:24):
got worse during tariffs, thetariff war, tariff announcement,
liberation day on April 2nd andit hit bottom shortly before
the reversal and you can see, Ithink, that the stock had fallen
(15:46):
more than 30% and our strategythat writes the covered calls
have actually, I think,outperformed 8% to 10% of that,
and largely because our beta tothe underlying is less than 1%.
So 1% move in the underlyingmeans less than 1% move in a
strategy and at the same time wehave been restriking the call
(16:07):
all the way down.
So the distribution for thatstrategy is largely around
annualized 55%.
So you're getting paid whileyou wait for the market to sort
out, right, and then, when therewas a reversal or at least you
know step back in the I guessthe tariff stance that the
(16:31):
administration had there was arebound and I think it's very
hard for people to reboundintraday right To reposition a
portfolio for intraday reboundand, because the call was out of
the money, we actually captureda lot of that upside when the
stock went up.
And this, you know, I only bringup Tesla because they have had
(16:53):
a very extreme move and it's astock that I would argue that
doesn't really trade onfundamentals.
It's trade on sentiment andit's particularly sentiment of
one individual.
But this, the same behavior,has happened on the other names
that we have, like Amazon orGoogle or Apple, and even in our
basket of texts that that thisrebound, we were able to manage
(17:15):
the correction pretty well.
So I think, I think the ideaand even if you're not know, um
into specific technology names,like to build in some additional
conditionality in yourportfolio, really would help you
navigate in a moment of, youknow, market turbulence how much
(17:36):
of that process is ummechanical one oriented?
Speaker 1 (17:41):
is it art versus science mean?
There's a lot of, you know,five to six week calls and
rolling, you know, on a monthlybasis.
Speaker 2 (18:04):
But when the Delta of the calls uh reaches below a
certain amount, we restrictright and then and then we keep
doing that until the you knowthe market kind of, you know
rebounds and and and stuff.
In our basket basket there is alittle bit more discretion,
largely because, um, we are alittle bit more active in terms
(18:28):
of the positions are smaller, sothere's a little bit more uh,
you, you can pick, you have to,you have to pick a little bit of
where you want to be positionedin a portfolio relative to
other positions.
But generally we try to bepretty mechanical in the
portfolios.
Speaker 1 (18:46):
Okay, so talk to me about the product lineup at
Curve.
You've got a number of thesedifferent funds that are doing
this.
Speaker 2 (18:51):
Yeah, so we have two suites that I would characterize
as two suites.
The first is the Y premiumstrategy ETFs, and these are
single name, mostly all ontechnology names, and the
original purpose of having thesefunds was that we were trying
to solve a problem in advisorsand individuals portfolio where
(19:16):
you basically have had to pickgrowth or income.
Most technology stocks do notdistribute dividends, so you
either have to go for growth oryou have to go for higher
dividend payments, paymentequities.
If you're in equity space, thatgenerally is our utilities or
financials or industrial namesand those don't have growth
(19:40):
right, it's very hard to see howutility can grow the same way
as a technology company.
So what we want to do is tomake that trade-off a little bit
easier and to generate incomeon technology names.
And I will say this suite isgenerally used by people who are
very dividend-focused,income-focused and people who
(20:03):
are close or are already inretirement, where they are
focused more on the consistencyof distribution versus
maximizing the upside potentialof these particular names.
You still get upside potentialup to the strike of the call,
but their focus is primarily onconsistency of distribution.
(20:26):
The second one that we have iswhat we call the Tech Titans ETF
, which is also in the realm ofthe technology space, the
technology space and there it'sa basket of names of 15 to 20
names that we focus on andinstead of having the cover call
(20:51):
always on and we're trying toaddress this thing where, over a
long period of time, if youwant to maximize capital
appreciation, a cover call ETFwill underperform the underlying
Just by the nature of writing acall you are trading some of
the upside for income that yougenerate in the portfolio and we
wanted to actually solve that.
We want to have a bit of best ofboth worlds.
(21:13):
When market is risk on, we wantto magnify and capture the
upside, and when the market iscorrecting or trading sideways,
that's actually the perfect timeto write cover call.
So then the cover call getsturned on and we generate income
from the technology banks.
So this is sort of best of bothworlds.
(21:34):
One of our team members youknow sort of the adaptive cruise
of having your kind oftechnology exposure in your
portfolio.
So when market is risk on, wewant to momentum weight it to
capture as much upside aspossible.
But when the name does notexhibit momentum, price momentum
(21:58):
which is what we justexperienced in April we write
more and more cover calls.
And this is sort of indicativebecause prior to, I would say,
february, our dividend yield onthat fund ranged around 7% and
in a market correction that hasactually increased to 14%
(22:21):
because the entire basket didn'texhibit price momentum.
So we were writing cover callson the entire basket so we were
able to generate more income ina downside market correction
environment.
So the strategy is built to bea little bit counter-cyclical
you get more income when themarket is correcting and then
(22:41):
you have less income but youcapture more of the upside when
the risk is back on in themarket.
Speaker 1 (22:47):
What types of declines tend to be better, more
prolonged corrections or bearmarkets, or crashes?
Speaker 2 (22:56):
in terms of the way that this operates, I would um
the prolonged would allow us toclip more assistant coupon over
a period of time.
Um, if it crashes immediately,there's actually a second
question is does it reboundimmediately or does it?
Where does it go after that?
(23:18):
If it crashes immediately andrebounds, that actually doesn't
affect the portfolio too muchbecause, again, we generally
write five to six weeks call.
So if there's a rebound withinthat period before we roll, it
doesn't really actually affectthe portfolio that much.
(23:39):
If it's a really hard landing,a big correction, volatility
tends to spike very quickly also, and then, as I mentioned, we
would just restrike the callmore often because it becomes
out of the money sooner.
So in that case we generatemore income in that scenario.
(23:59):
So it is as we know this month.
The market is verycontext-dependent.
A lot of things could happen,but the one thing we are taking
advantage of is, when acorrection happens, uncertainty
tends to increase, volatilityincreases and therefore that's
(24:21):
actually a benefit to ourportfolio.
Speaker 1 (24:24):
Is it fair to say that, in general, you want, as
an issuer, to target parts ofthe marketplace which tend to
have more volatility, maybe morehype, more of a narrative than
others Meaning?
You know, when I think aboutyield and dividends, I'm
thinking about utilities,consumer state holes, healthcare
, blue chip, you know, notreally highly volatile parts of
(24:45):
the marketplace.
Speaker 2 (24:47):
Yeah, we consider ourselves sort of an alternative
income provider.
So think about, like, where youtraditionally would get income
right.
It's either from fixedinstruments, so you go from, you
know, treasury bonds all theway to corporates, to high yield
in merchant market debts andincreasing amount of risk.
But I would say generallyinterest payments other than
(25:12):
munis are taxed at ordinaryincome.
So if you think about it froman after-tax basis, that's not
too great.
The other source is dividends,but dividends from stock is not
always predictable.
They can change depending onthe quarterly meetings or the
(25:33):
set schedule.
Or, as in the case with tech,they just don't distribute.
So you can't own a lot of thatif you're really income focused.
So we try to look for differentways in which we can generate
income and I think usingvolatility premia in options is
(25:53):
another way.
The other thing I would justmention is that the tax
treatment for option income iscapital gains.
So there is a possibility that,depending on how we manage the
options and how long you holdthe securities, you can get,
instead of the highest marginaltax rate of 37% to long-term
(26:14):
capital gains, which is 20%.
And if we were to able tomanage the short-term gains in
the funds properly.
There's actually a fourth kindof category, which is return of
capital, which is actually notimmediately taxable.
The distribution goes todecrease your basis.
(26:35):
I think in this moment in whichbonds does not have as strongly
the traditional relationshipwith other asset classes and the
fact that bonds distributeordinary income type interest
payments, I think investorsshould look at alternative ways
(26:59):
to generate income.
And you're not getting paid forduration risks, so you have to.
Right now, the curve is alittle bit better than last year
, but you're getting paid atfour and a quarter right now.
On front end, you have to rollthat every month, right?
Because you don't want to buy along-end, long-dated treasury.
(27:20):
You're not getting compensatedfor the duration risk you're
getting.
So that's why, I think, whyincome is still very much in the
focus of people's minds,because, even though base rate
is higher, there's not a lot ofgood places to get good income
in the marketplace.
Speaker 1 (27:40):
So calling alternative income, I think, is
accurate.
But then of course my mind,speaking of asset allocation,
goes to alternative weightings,right, and how do you think
about the fits of a totalportfolio?
So if we say alternative income, that sounds like it should be
in the alternative bucket, butwe should figure out how to
weight both the alternativecategory and then this within
the alternative category.
(28:01):
So how do you think about, orhow do you see other advisors,
institutional investors, thinkabout the positioning sizing?
Speaker 2 (28:07):
Yeah, I say alternative income because I
think most people when theythink income, they think about
interest payments and dividends.
Right, we actually, the way wethink about it in portfolio
construction context, is weactually are a good complement
to dividend equity strategies.
So there's plenty of both inetf format and mutual formats
(28:32):
that they're dividend equities.
So they are overweightfinancials, energies and
utilities and they're definitelyunderweight.
Most of them are definitelyunderweight technology.
And so then if you pair it upwith something that is
overweight technology thatproduce dividends, that
(28:53):
combination gives you actuallycloser to the sector weighting
of S&P 500.
So you actually get the broadexposure of sector weightings
for the broad market and you geta yield enhancement.
So this is in a traditionalequity bucket.
So if you have a 60-40 portfolioand you have, let's say that,
(29:15):
60%, you have 30% individend-focused equities, in
dividend-focused equities, theother 30% in the technology
income sleeve, that combinedportfolio actually gets you
pretty close to an S&P 500portfolio with dividends,
because right now S&P isyielding 1.4%, 1.5% and this can
(29:39):
enhance, I think, like 200 or300 basis points above that and
you get a um, a favorable tapstreaming on the income.
Now, if you think about this asum an alternative bucket because
you you liken that as like aoption strategy, uh, etc.
Uh, what we actually have seenis people actually do the
(30:02):
advisors do their math backwards.
So, for example, we wereworking with like he has an
eight percent distributiontarget for his client, right,
you can, you can get easily fourand a quarter from no risk
t-bills, right, so that you haveto make up that three percent,
three and a half percent deficit.
(30:22):
So you just back out what youcan get in a portfolio to that
3.5% and that's the allocationto some of these alternative
income strategies.
So that's the two ways I thinkwe've seen people do it.
Speaker 1 (30:35):
Yeah, no, that definitely makes a lot of sense.
Let's talk about doing it on anindividual stock basis versus
doing it on an index.
Some of the pros and cons ofeither.
Speaker 2 (30:48):
I mean, certainly the way we see it, diversification
is the free lunch, so you won'thave to diversify.
We have six names.
But we think you could do adiversification a little bit
differently.
On an index, you have thediversification first and then
(31:09):
you write calls on it.
So your expected yield shouldbe lower versus individual names
have more volatility.
So if you write a call on there, you get more yield and then if
you buy a basket of it, you geta diversification afterwards.
So the ordering is different.
So on an index you getdiversification first, then you
generate the yield.
(31:30):
On a single name, I think whatmakes sense is generate the
yield and then buy a basket toget the diversification and I
think, net-net, you get a higheryield doing the second way,
depending on the names that youhave in the basket.
So that's how I would thinkabout it.
But the amount of yield you getshould be proportional to the
(31:53):
volatility of the underlyingright, and a NASDAQ index is
much more volatile than S&P 500index, although they have many
crossover names.
So you should expect a slightlyhigher yield on a NASDAQ versus
on a single name.
Even single name on veryhousehold names like Amazon or
(32:17):
that has more volatility than anindex.
So you should expect more yieldon a single name than an index.
Speaker 1 (32:22):
And, let's face it, people love talking about
individual stocks.
I mean, there's always anarrative aspect to this which
is hard to beat.
Speaker 2 (32:31):
Especially in this moment.
Speaker 1 (32:33):
Yeah, yeah, exactly right.
You always need to have a goodstory Now to that end.
You know, there's a lot offirms that do strategies that
are trying to play in the samespace.
What would you say?
Differentiates Curve fromothers, and part of that, I
think, should be a discussionaround NAV erosion.
Speaker 2 (32:52):
Yeah, I mean.
So I think what we want tofocus on is consistency and
persistence of income, right.
We want to be able to.
Again going back to what Imentioned, which is, you know
who are the current users or endusers of these strategies are
people who are, you know, incomefocused and who are gearing
(33:16):
towards retirement or inretirement, so they really focus
on what the consistency ofincome is versus other factors,
and so how we differentiateourselves is to be as consistent
in distribution as possible.
We want to also leave enoughprinciples so we can generate
(33:38):
consistent income right, and sowe don't have the flashiest
yield.
Our yield level is where wefeel we can generate that
consistency, and so that'sreally.
We come from a veryinstitutional background, so we
run our strategies very muchlike for a pension fund or
(33:59):
endowment that we have a processin place and whatever we
generate from the premium fromthe call is around where we
distribute.
You do get a problem in higherdistribution ETFs, which is this
NAV erosion issue that youmentioned, and I think this is
(34:21):
true of any high-yielding ETFsand strategies.
So basically, the idea is thatyou market your ETF as a very
high yield and maybe the marketdidn't allow you to generate
that amount of yield.
You to generate that amount ofyield.
(34:48):
So in order to make to, todeliver that higher yield, you
actually have to distribute yourprincipal to make that yield so
.
So the easiest way I the analogyI I used to use and I I think
it's very apt is you're you're alandlord, you have a property
that you're renting out for$2,500 a month, right, and
(35:09):
you're collecting $2,500 a monthand everything's peachy, and
then one month one of yourtenants is late.
So to make up that $2,500,you're selling parts of the
kitchen to get that income fromyour income property, right,
you're eating into yourprincipal.
We all know that's harmful foryour asset that you've invested,
(35:35):
right.
And so the same behaviorhappens in high distribution ETF
is, let's say, the market, you,as the investor, gave the ETF
$100 to invest and the fund ispromising you 7% yield.
So it's distributing $7 everymonth, but the market only gave
you 5%.
So in order to make up that $2difference, you're going to have
(35:59):
to distribute part of theprincipal to make up that $7
distribution and over time, ifyou continuously do that, your
NAV will keep going down andthat's what leads into NAV
erosion.
Speaker 1 (36:11):
Yeah, I think that is one of the most
underappreciated aspects by aswitch to retail.
They don't understand thatconcept.
They think almost like it's aninfinite money glitch, infinity
money glitch, kind of thing.
I've seen that word on Redditand I just shake my just shake
my head like wow.
I mean, when there's a realbear market, there's a lot of
trouble coming yeah, marchingcalls and you have to post
(36:33):
collateral when the marketcorrects.
Speaker 2 (36:35):
That's the worst time , just the the last.
You don't want to sell when themarket is correcting, right,
that's the worst time to to dothat.
Speaker 1 (36:42):
So yeah, which becomes an interesting thing to
think about when it comes tocollecting their yields, because
there's collecting the yieldand then there's reinvesting the
yield.
So what do you do with theyield?
Right?
So a lot of people will takethe yield and use it for
expenses, but the reinvestmentside should be really considered
.
Speaker 2 (36:56):
No, yeah, and I think this is a I think a a thing in
our industry.
Um, we often post total returnsfor our funds, right, there's a
there's baked in assumption andtotal return I don't know if
everyone appreciates is that itassumes that any distribution of
(37:18):
funds you reinvest back intothe fund.
That's how you get total return.
So if you are that pensioner orthat person who are income
focused, the total returnactually overstays your return
because if you're dependent onthat income, you're not
reinvesting it back into thefund.
(37:39):
So your return must besomewhere lower than the stated
total return, right.
And so I think oftentimes andthis problem is especially worse
when there's NAV erosion, right.
So I'll give you an example yougive me $100, I made five
(38:02):
dollars, right, I distributethat five dollars, my total
return is five percent.
Because it assumes I reinvestthat five dollars back into the
fund.
Right.
For the person who's justclipping coupons and using that
distribution for income, yourreturn is zero because a hundred
, you made five, so it 105.
(38:22):
You distribute that five andyou have five, right, you have
100.
So your principal hasn't moved,but you generate that $5 for
income.
So that's no reinvestment,right.
But it's even worse when youhave NAV erosion.
So in the case where you have$100 to invest, I generated $5
(38:45):
and I distribute seven.
So now my principal is 98.
I don't reinvest, right,because I need the income.
My return is actually negativetwo percent.
So it that reinvestment?
This is actually you.
I'm glad you brought this uplike that.
Reinvestment is actually ahidden thing that it doesn't
(39:07):
show up because, to be honest,to be fair, everybody's showing
total return because it'sApple's comparison, right?
Because different funds havedifferent distribution rates.
So you just make an assumptionthat everybody reinvests back
into the fund.
So when you compare funds howgood they are, you're comparing
like total returns.
So when you compare funds, howgood they are, you're comparing
like total returns.
But if you are clipping coupons, that return is not necessarily
(39:30):
the return that you get in yourportfolio.
Speaker 1 (39:33):
Thank you for that, because I think it's important
for people to understand thesedynamics.
For those who want to learnmore about Curve and maybe just
self-educate, because I think alot of people are intrigued by
these types of strategies, theytry to do it on their own.
They see that as a lot of work.
That, by the way, is one of thebenefits of using ECF, like
what you guys have to offer.
(39:54):
Where would you point them toand then talk through sort of
the future of Curve?
I'm sure you have other thingsthat you're hoping to bring to
market.
Speaker 2 (40:04):
Yeah, so all of the fund information can be found on
CurveInvestcom, soK-U-R-V-I-N-V-E-S-Tcom.
We have had a lot of demand forour views on not just
technology names but like macrooutlooks and stuff.
(40:25):
So we separate from our funds.
We have a podcast called Curbyour Enthusiasm where people can
find out more about our outlook, and then we do have monthly
calls.
That goes over our portfolioand what has happened in the
strategies that we do a deepdive.
So those are maybe three waysthat people can find out.
(40:48):
Find more, find moreinformation about Curve.
Speaker 1 (40:51):
We haven't talked about that, but maybe on the
last few minutes here let's talkOutlook.
I mean, do you get a sense that?
I mean, look, it's cliche tosay it's going to be a volatile
period.
It's going to be a volatileyear.
Everyone was super bearish twoweeks ago and everyone's super
bullish now, two weeks later.
What are your thoughts on theway the year plays out?
Speaker 2 (41:11):
From the beginning of the year, we always think that
the markets were too optimistic.
So we think that our base caseis that we're heading into a
recession that is not already ina very, very tricky position.
Do I address the inflationproblem or do I address the full
(41:53):
employment problem?
Our base case is that they'renot going to reset rates until
towards the end of the year and,if so, it's going to be very
modest, because inflation tendsto be sticky and it's a harder
problem to solve.
And this is one of the big macroconcerns that we have and I
(42:17):
think maybe reflected in themarket, is that, for the first
time in US economy, our debt toGDP is about 100%, so meaning 1%
growth for 1% debt that we own,but they're growing at
different rate.
Gdp maximum is going to grow at2% to 3% In fact, less if we're
(42:38):
going into a recession and USdebt is growing at 7%.
So we're entering into an erain which we are actually issuing
more debt to pay for our debt,and that's really a debt spiral
cycle that we it's it'srestrictive on growth.
Basically, um and so so it itmeans two things Either we cut
(43:05):
our budget there's a $1.8trillion deficit for the US that
we're financing every year orwe raise taxes.
Both are contractionary.
So we think that there's goingto be some tough times ahead,
big decisions that have to bemade.
It's going to be some toughtimes ahead, big decisions that
(43:33):
have to be made it's, but it'sgoing to get worse if
potentially, this big tax cutlegislation goes through, then
you're even in a bigger hole.
But and I'm not just kind ofspeaking, you know about our
book, uh, but the you know, lastyear there was, you know, a lot
of questions about valuations,about tech.
A lot of it has corrected that.
We have seen some rebound, butwe've seen actually, even in the
(43:57):
current earning cycles, thatthe earnings are actually still
pretty extraordinarily strong.
So we always get the questionis tech always expensive?
So we think, if there's anyadjustments, certain tech
sectors would do better Things,like Netflix, et cetera, where
(44:20):
if the economy is going intorecession and people have to
decrease their discretionaryspending, those kind of things
potentially are the last thingto go.
So we think that could bepotentially defensive from the
tariffs.
And what tariff negotiationsthat you know the outcome would
be.
It still seems extremelyunclear and whether we benefit
(44:54):
or if there's incrementalbenefit or it's just a settling
down of uncertainty in those youknow arenas.
Speaker 1 (44:57):
We're going to have to do another discussion on this
kind of much deeper, whichwe'll save for the next time, as
well as hopefully do a webinarin the coming week.
Appreciate those that watchthis live.
Again, this is a sponsoredconversation by Curve.
Learn more about their fundsand hopefully I'll see you all
on the next episode.
Thank you, I appreciate itGreat.
Thank you, michael, cheerseverybody.
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