Animal Spirits Podcast - Talk Your Book: The Opposite of ESG

Episode Date: December 19, 2022

On today's show, we are joined by Mark Neuman, Founder and CIO of Constrained Capital to discuss companies orphaned by ESG, how capital is actually getting constrained, politics in investing, Coke & Pepsi vs alcohol & tobacco, and much more!   Find complete shownotes on our blogs...  Ben Carlson’s A Wealth of Common Sense  Michael Batnick’s The Irrelevant Investor  Like us on Facebook  And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.      (Wealthcast Media, an affiliate of Ritholtz Wealth Management, received compensation from the sponsor of this advertisement. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information.)  Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by constrained capital. Go to constrained capital etifes.com to learn about the constrained capital, ESG Orphans, ETF. That's ticker ORFN. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holt's wealth management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritthold's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Rithold's wealth management may maintain positions in the securities

discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. Michael, one of the books I've read recently that sticks out, how the world really works. Vaclav Smil, I think I'm saying his name right. It kind of resonated with me because of what happened in the pandemic. And his whole point was, most people just consume stuff and then don't really know what goes into the stuff they consume. And his point is, it's not easy to make all the food in the world and push stuff around the globe and make things happen behind the scenes. And I think we kind of learned that in the pandemic with all the supply shortage stuff in the way that we've just had backlogs of everything, that, oh, yeah, there's this whole thing moving around and happening behind the scenes that no one really understands. Stuff just ends up in front of us. We push a button, stuff gets here.

We don't know how it got there. There's a whole chapter about the importance of energy and basically saying without fossil fuels, we would not be where we are today in terms of progress and technology. He made the point that fossil fuels have been kicked to the curb in terms of their importance over time. Without fossil fuels, we would never have made it to where we are today and got some more efficient.

So one of the stats from the book, he said, the average inhabitant of the earth nowadays has at their disposal nearly 700 times more useful energy than their ancestors had at the beginning of the 19th century. And he does go through this timeline and progression of we went from people who were burning will oil or will fat back in the day, and then we have coal and oil and all these things. There's this progression,

and things do get better and more efficient over time, and I'm sure we'll get there. But it was an interesting case for people just view the bad things about fossil fuel and don't really look at the good things that they've helped us accomplish. I don't really have a follow on. Okay. Cool.

I think these last couple of years, that has been something people have reconsidered that, oh, yeah, this stuff actually is very important to us, whether that's a good or a bad thing. How often do you think about, hey, I plug in my iPhone and magically electricity does whatever the hell it does, and it charges my battery? Where does that electricity come from? I just figure there's a hamster underneath the house that's just constantly going on a wheel. But yeah, you're right. We take a lot of this for granted. All right. So what is this conversation about today? So over the years, there's been a lot of talk about ESG investing, but I think it really went into overdrive, actual money being allocated in 2020 and 2021, after years and years of talk. And a lot of that, as we found out, was due to model portfolios from the behemoths driving some of their own funds. And so there's been a bit of a backlash against ESG investing. There's been a bit of analysis on, what does it actually do? And this is not necessarily a moral or ethical argument for or against whatever you believe in, but does ESG investing actually do what you hope it does. And this conversation

that we have with Mark Newman, who went the complete other way and launched an ETF to own the stocks that have been orphaned by ESG investors, this is not something that I spent a ton of time thinking about. And it's a bit of an uncomfortable thing to think about owning, at least for me, Gun manufacturers, for example. But there's some interesting things that came out of this conversation. This topic has been hard for me. I don't have a really strong feeling either way

because on the one hand, you have people who say ESG has done more harm than good. Well, capital misallocation. Capital misallocation. And it's made things worse in terms of energy. And then you have other people who say, well, ESG doesn't matter. It's a nothing burger because it's secondary market purchases

that you're not making. And these companies are going to be fine either way. and I see parts of both of those arguments in I probably fall somewhere in the middle. But it is interesting. Shocker. Ben doesn't take its side. Again, people have really strong feelings on this, and I think they fail to see both of these explanations.

His biggest point to me was that it's very difficult to know where to draw the line in terms of what companies are good and which companies are bad. There's a lot of gray area, and there's very few companies that are completely black and white in terms of they do good or they do bad. This is not a black or white issue, that's for sure. That's my biggest takeaway here. Could Facebook be an ESG screened out company because they're potentially creating hate groups and starting wars or making teenage girls feel bad about themselves?

That's where it's hard to understand and know what is a good company and what is a bad company, which is probably... We spoke about Pepsi, for example. Yeah, all the sugar that they produce, that's why I drink Diet Pepsi. Anyway, enough stepping on the material. well, there might be some feelings on this episode one way or the other. And as always, we look forward to hearing them. So if you have any thoughts, questions, anger, indifference, animal spirits pot at gema.com.

Here is our conversation with Mark Newman from Constrained Capital. We are joined today by Mark Newman. Mark is the founder and CIO of Constrained Capital. Mark, welcome to the show. Hey, thanks for having me. Glad to be here. All right, you have the Constrained Capital, ESG, Orphans, ETF. ORFN. Pretty good ticker. I pulled this up. I looked at it and I said, oh, another ESG fund, but you're the opposite of an ESG fund. Explain to us what this is and what you're trying to do here.

The ESG orphans are the exclusions from the ESG bubble of the past decade. These are sectors that have come under capital constraints because of the ESG movement imposing its own will if you see it like that. on these companies and trying to force behaviors. And the result is misallocation of capital and malinvestment, which creates these opportunities. They starve certain industries, and they force capital into other spaces that are ESG approved arbitrarily. And this creates distortions in the market. And I created constrained capital to capitalize on situations where there are constraints

creating these dislocations and creating these opportunities. All right, I've got a million questions. I'm excited to get into this because this is the exact opposite of ESG. You're going after what's been orphaned by ESG investors, which is pretty clever twist on this. So I guess first question is in terms of capital allocation, so a company is publicly traded, ExxonMobil, for example, they're not necessarily reliant on secondary transactions.

if you are avoiding holding some of these energy stocks, how is that impacting their cost of capital directly? The mandates that come down from ESG affect where investments are made, both on the corporate side and on the actual money flow investing side. So at the corporate level, you see certain sectors getting favored deals and certain sectors getting less favored deals. There have been stories about the banks, charging more, higher rates, basically higher cost of capital for these firms. And you add on to that the sort of disincentives and the regulations that make it expensive for these companies to do

business. And then you add on top of that the villainization in the public eye and creating almost shame and woke related stuff that turns people away from these companies and it depresses these stock prices, and it makes their costs of doing business higher. So are the stock prices like their currency for attracting employees and doing deals and that sort of stuff? Well, that's one way to look at it. I leaned on a guy called Cliff Asniss, who wrote a piece. Entitled Virtue is its own reward. One man's ceiling is another man's floor. And he talked specifically about how these companies get starved of capital. And the only way to attract investors is because they have lower prices over time, because nobody's owning them,

someone's selling them, divesting of them. And it has to attract the, let's call them sinners, but I don't view it like that, but the non-virtuous, let's say, make the appeal for them to invest. There has to be an attraction to it. And therefore, their stock prices are lower. And that's how the attraction is for those investors to take advantage of these exclusions, the ones kick to the curb, the ones who have financial tailwinds against them. But what happens is they lean out their businesses. They focus directly on making money and not a lot of extracurricular or ESG related factors of hiring certain types and people and this and that. They focus on their business. And over time, they do better business-wise by having leaned out and created efficiencies

and the stock prices appreciate because nobody really owns them. So the margin, dollar flowing into those moves that sector, those stocks better, almost, if you will, in terms of price discovery, than areas that have been overcrowded for the wrong reasons. Does that make this more like a value type of strategy? Or is this just like a mismatch of expectations? From a valuation perspective, these stocks and these sectors, they range from cheap to very cheap relative to the broader market, whether it's the S&P 500 or the NASDAG or the Russell, or even a ton of these ESG indices that have been created. So the index itself from price to cash flow and price to earnings and EV EBITDA, it pays a nice dividend, those kinds of things.

It has deep value. But in terms of the stocks themselves, yeah, they basically end up, again, focusing on business, whereas recently Google in their earnings announcement, they said we have to cut costs and hire less because they miss numbers. And what happened is they really hired too many chief sustainability officers, too many chief people officers. And what happens is over time, those are on the P&L side of the equation, that's the L side. Those people don't add profits, they cost. And so those companies get more expensive. Whereas you look at like an ExxonMobil, the stock price gets depressed over time and their product is still flowing and they're still making money. So on a cash flow basis, EV to EBITDA, ExxonMobil is super cheap, relative to, say, a

big tech company that's seen massive inflows because they've been an ESG darling. This is an interesting angle that I never considered. We're actually going to be talking about this next week in Animal Spirits. Daniel Sodorov tweeted, he's looking at XLA. We're a combination of profitability and low multiples. And I wonder if there are greater dynamics at play, such as obviously an oil going negative didn't help and just the general trend of growth over value. Do you think that ESG investing, which has become quite a thing over the past couple of years, do you think that those have made these companies get more lean and therefore are more attractive investments because they are more profitable because they've had to be

because investors are selling their stock due to ESG mandates. Am I oversimplifying that or do you think there's something there? No, I think there's something there. On the one side, yes, these stocks have been underowned and therefore probably sold more than bought on a relative basis. For reasons that are outside of ESG investing. I think that's fair. Yes.

But then looking at fossil fuel, for example, ESG starved that industry. And the original capital constraints on both fossil fuel and nuclear, for that matter, you saw what happened in the EU, in Germany. They shut down their nuclear plants and became more reliant on fossil fuels in this case, which meant Russia really took advantage of capital constraints because they have the fossil fuel-related energies. And with Germany shutting down nuclear, we had a starved industry, and then we had energy insecurity, which led to food insecurity. But the point is the supply of oil and the supply of fossil fuel,

was constrained. And so there's a floor. Now, yeah, we've seen a little bit lower oil prices, maybe on some recession concerns, but net net, demands not really going anywhere in the medium to longer term in fossil fuel, and they're constricting supply because of pushing people away, shaming it, divestment, and regulations are causing the price of oil to go up. Look, my 14-year-old son, 15, he said, dad, if oil's going away, isn't it going to a thousand before goes to zero. And that's just simple. Even if ExxonMobil cannot do more exploration, down the road, their product is still going to have a bid to it. It's going to go higher. So their profitability improves. Maybe they just don't do as much research because they're not allowed to, let's say,

or expansion, but they're still pulling oil out of the ground. Maybe their dividends go up. Their cash flows are going to improve if the value of oil goes to 100, 150, etc. I did an interview with Dr. Anas al-Haji, very well-known energy expert on YouTube about a month, month and a half ago. And he basically said that developed countries use oil at a certain amount. The developing countries are going to need fossil fuel down the road. So there's always going to be that demand. It's not going anywhere. And the greater challenge probably is the supply issue, which means there's less of it.

So these kinds of companies are in a driver's seat going forward because we're not going to get to future energy without present energy. can't just abandon what we've done here and try to pursue some new energy strategy. The handoff there, even if it happened, is going to be messy. Yeah. So I always make this little, I wouldn't call it a joke, but it's my story. If we're all on this boat, that's the SS energy, collection of all energy that we have, and the ESG captain says, hey, everybody, we need a new boat. And we can all look at each other, say, yeah, I agree, I agree. Then rather than meet in the state room and say, hey, let's figure out the new boat, we have the.

captain saying, hey, everyone, abandon ship. And let's go swimming and we'll figure out the boat when we get to that point. Well, I think people are going to drown in the water before we figure out the boat. So we're going to need fossil fuel. It's got to fuel the factories to make these things. Fossil fuel really eliminated a lot of hunger, a lot of poverty, and it makes our houses warm and cold, we can't just abandon that and imagine some new energy just pops up like a quantum leap. So we're going to need these guys and they've been maligned. They've been avoided, which means over time, they're going to come back. I mean, in 2009, the energy sector was 13.5% of the S&P. At the end of 21, beginning of this year, it was less than 3%. Now, the energy sector's come

back a bit on this rally this year to about six, five and a half, six percent. But I think it's got more to go. I mean, people are still underinvested. It's still hated. It's still maligned. And here we are, I have a winter in front of us that's going to be a bit tricky, to say the least, I think. We're in for more energy appreciation over time. Mark, did you see there was a slide deck from Oswald the Motoring?

He wrote, and we'll link this in the show notes. The ESG movement, the goodness gravy train rolls on. Did you see this, Mark? I have seen it. Okay. Let me just quote what he says. Listeners of the show would be familiar with Oswath, the motor, and professor of valuation. I don't know if that's his exact title, but he does a ton of great work over at NYU. So he says, there's one slide. Is ESG good for companies?

And he says the ESG sales pitch is internally inconsistent and fundamentally incoherent. And there's a lot of interesting nuggets in here. But what was your reaction when you saw this paper? Damn and Aaron and I have become friendly. I've spoken to him a fair bit. We did a YouTube video as well called Emptiness in ESG a few months ago, a month and a half ago. Yeah, he's not a fan. For the audience, this is important.

Professor Demoderman is not a fan based on nothing other than research and data. This has nothing to do with a question of ethics or morals or anything like that. He's just looking at it in terms of data. And also, I guess, just ethically, in terms of like the sales pitch, he thinks there's a lot of how to air there. So with that, back over to you. No, 100% Michael. That's right. So I've spoken to Professor Damme, Darren, a handful of times. And we've become, I guess, email pen pal friends, whatever. He said in the end that ESG has higher costs and lower returns. And he also, in my speaking, he basically said, the minute BlackRock tells everybody that costs are higher and returns are lower and admits that openly, their ESG business is over. And the amazing thing is he's been on. that and it's funny, Michael, you mentioned that he is just straight up data and analysis because I laughed with him. He told me, this was his quote, okay, and I've talked to him so I know I can use

it. He said in ESG, there's either feckless knaves or useless idiots pushing it now. There's no third party. And so look, here's the thing. Once he said that, I said, so, Professor, how do you get invited back to these events? And he said, well, everyone wants to hear it from a business perspective. They want to hear it straight up how it's going to impact their business. So you asked earlier, maybe it was Ben. He asked about the expensiveness of these companies. Professor and I talked about Hershey's. And he said, here's the crux of the problem. They go and find sustainable chocolate, sustainable cocoa, sustainable sugar. And they go out and that costs more because you got to turn over more rocks, if you will, to find those sources. But you and I don't go into CVS and say,

oh, I want the chocolate that was sustainable when we buy a Hershey's bar. Hershey's is forced to do this behavior because the ESG makes them fill these due diligence questionnaires in theory. Again, more costs. And they haven't checked that out with, A, the consumers, because I don't think we, you and I go buy chocolate based on that, number one. Number two, they haven't checked it with the shareholders and say, hey, shareholders, this is going to cost us more.

It's going to impact our margins. And we're going to have a tougher time in terms of being. a cheap value company. And so that's the crux of the issue on the fiduciary side of corporate responsibility as far as he's concerned. And then he pushes it further and says, as BlackRock and vanguard, it's really disingenuous and not being straightforward. In the end, I created this product because my fiduciary moral compass as a CFA charter holder blew up when I discovered all these things. And I said, wow, investors are being misled. They're paying higher fees. They're getting worse returns. And they're failing objectives. Society isn't better because of this. We have

massive problems in the world now. A lot of it attributable to ESG. And that's where Damadarin and I had just a fantastic call. Like he's just an incredible straightforward truth teller, which is why we get along so well. The energy sector is an obvious orphan and one that people have talked about a lot, especially in recent years. What are some other sectors? industries that your fund focuses on? I classify them as two different groups. We have the old sin stocks, alcohol, tobacco, gambling, and the new woke shame stocks, fossil fuel, nuclear energy, and weapons.

I came to these because, again, my North Star is that capital constraints, and I investigated all the funds that were pushing ESG, Parnassas, Calvert, Calamos, Vanguard, BlackRock, just I read tons. And then I did a screening on all the stocks in the ESG, universe, Morningstar, MSEIES universe, and I screened them to find which ones appeared where and when. To me, what came out was a lack of representation, sort of in the zero to 10 percent appearance level, if you will, or existence or exposure level in these funds. And it came down to which industries were under capital constraints. Again, fossil fuel, nuclear energy, weapons, alcohol,

tobacco, gambling. So the former three are the woke shame, fossil fuel nuclear and weapons. And then the latter are the sin stocks. Now, the index has some rules to it. It's 25% maximum any sectors. So that's fossil fuel and nuclear right now. It's got 21% weapons, 12 and a half each alcohol, tobacco, and a small 4% gambling. It's a market cap weighted index. So it's distributed according to weights of those sectors. But those are the six that have come under ESG capital constraints and are the orphans as a diverse anti-ESG basket. This whole topic is interesting and unusual in the sense that we tell people not to mix politics with investing. And I think when we say that, we're generally talking about

the person in the White House should not dictate how you invest your money. In fact, Ben and I were just talking the other day, how energy stocks did horribly under the last Republican president and are doing phenomenally well under this Democratic president. So it doesn't always work the way that you think. I don't know how you avoid politics with this sort of discussion. It seems like this is one of those weird things where there will only be one sort of political persuasion that would consider investing in an investment like this. That's a great point. The way I look at it is when bureaucrats enter the room and the engineers get kicked out of the room, we have a problem because they don't know the true

EROI on energy, let's say. The bureaucrats don't know. The engineers do. So when we form policy around what the bureaucrats think and they have their hands on the money printer, all the sort of actual math and data gets thrown out the window based on we have money. We can just sort of make this work. Now, I look at these things as if you're not focused on pure returns, pecuniary interest only, and you're focused on something else, A, you don't care about returns as much, and B, you're not really going to do either very well. So I look at this basket and say, it's for investors focused on high expected return securities without any politics, without any of that stuff. Is it though? Let me give you an example. The weapons sector,

and a lot of people have issue with weapons and this and that, and I get that perspective. to. I do. But look, if Bernie Sanders and Ted Cruz agree on weapons with regards to, say, Taiwan, then it's not political. It's really vital. And then if we also say that as an ESG proponent, I want to protect the Ukraine. I want you to help the Ukraine. Well, what happens? We send aid to the Ukraine. Ukraine turns around and goes to Raytheon and buys weapons systems. By the way, you can't even, as an ESG investor, buy the weapons because they're excluded. So how does that work? There's a lot of this political story that has infected and distorted the markets.

I'll give you another example, and I live in Atlanta, so I have to be a little careful, but Coke and Pepsi. You just saw recently Nestle. Nestle's changing their appeal to kids now because of this backlash. Mark, you better go to the Coke Museum quick before they hear this. I know, right? Have you been there before? I have. It's pretty cool. It's pretty neat. Coke and Pepsi, the biggest contributors to type 2 diabetes and obesity in our country.

A trillion dollars a year. I did the work. A trillion dollars a year costs our country. Now, alcohol and tobacco, and I don't smoke, and I barely drink other than like a glass of wine with a steak or whatever. But alcohol and tobacco costs our country somewhere between 6 and 700 billion a year. Not a small number, but it's 40% less than what Coke and Pepsi and their type 2 diabetes. and obesity plus their plastic bottles cost on our society. Yet, Coke and Pepsi are like the top couple holdings in New Veen's ESG Fund. And alcohol and tobacco are banned. Now, I have kids. My kids are in high school and middle school. The vending machines in their school sell all that Coke and Pepsi crap. And it's almost unregulated somewhere, somehow people determined that Coke and Pepsi are fine,

but alcohol and tobacco are terrible. Look, I love the dividends that tobacco pays. I love the inelastic nature of those goods, good times, bad times. People are going to smoke and drink. I'm not passing judgment on them. Ben Bernanke, one of his only biggest holdings for a long time was Philharis. He just wanted the dividends. I don't think he said, yay, smoking.

But that's the point here. ESG isolates these sectors, these securities. I'll take some. This is interesting and fair, because, you're right. What you just said, it's not black and white, and there does seem to be some hypocrisy and maybe some, I don't know if double standards is the right word, but who gets to choose what's right and what's wrong. Nevertheless, not to make this political, however, I am a gun owner, but I don't know that I necessarily want to invest in gun manufacturers.

I've seen this two different ways. You're talking about the engineer way of like, strip the emotions out. And the strip the emotions out would be invest in whatever works the best and gives you the highest returns. And then if you care about these issues, you give that money charitably or to organizations or to people in a different way that maybe has bigger impact. Is that a fair assessment? Nailed it, Ben. So the idea of Damadarins, one of his blog posts was saying good versus doing good. And you mix in there the being good. So my wife's a lawyer. And she told me of an old story of a firm that back in the day defended some of the tobacco companies. And they didn't really necessarily the lawyers approve of tobacco companies, let's say, but they were doing their job

in terms of they hired us. Once they collected fees on that service, they ended up doing pro bono work with the money they gained. That's how I view this product. I'm not going to push my political beliefs or my thoughts or my social values on anyone, I'm going to hopefully provide great returns. You can take those returns and you can go support the whales or not the whales or Greenpeace or the NRA or pro-life, pro-choice, whatever it is you choose. But the problem is ESG, especially over the last decade and stuff, has decided we know what good is. And we're going to invest your money to push our views of that. And this is what Damadarron said too about the S part of ESG, there's no universal measure of goodness.

You and I, you Ben, Michael and I, we probably agree on some things. We might not agree on others. So the tricky part with investors here is in the ESG world, they buy these funds, ESG funds, and they sit at a cocktail party and say, oh, I'm so ESG, I own this fund, but they own Amazon and they own Coke and Pepsi. And it's like, no, you really don't. So the hard part, the really hard part for investors these days and the RIAs too, is it's a lazy way out to say, hey, buy this ESG fund.

That I totally agree with it. That's what BlackRock and Vanguard capitalize on. Hey, you can be ESG, buy this. You could slap ESG on the label, and it could still be an S&P 500 fund. It could still track it exactly. I said, I don't want an necessarily own gun manufacturers. Well, I guess you could say, well, but Michael, what about you own Raytheon and all of these names and the S&P 500? What the hell are you talking about?

So here's another one, Michael, Dick's sporting goods. They sell guns. Walmart, doesn't Walmart sell guns? It's very tricky and very nuanced. It is. It is. And I think, look, that's the way forward, by the way, for ESG. They're going to sort of change the name.

They're going to change this. Oh, weapons to the Ukraine are okay, but weapons to these guys are not okay. It's going to get very nuanced. And I think that's how it evolves. I think one of the ways forward is there's personalized investing, direct indexing, for example, where you could specifically choose, listen, here's what I want to own. You don't want to tell me what I can own. I want to own more Wells Fargo and more Facebook because I like whatever you choose.

But so I guess for people that are considering the constrained capital orphan, which is an ETF, which is a conscious choice to invest directly in those companies, I know you're sort of making the pitch all along, but like what would the pitch exactly be? Is it just that, listen, these are companies that have been forsaken by investors and therefore there are higher expected returns. Is it that simple? So if you boil it down to some simple terms, yes. their higher expected return securities that are underowned and it's contrarian and it's definitely

against the grain. If the market comes under sell pressure, people sell what they overowned. That's all this tech and all this healthcare and stuff like that. It's not this basket. That's one. The other one is for those looking for diversification in their portfolio, this has an aspect of value. It has an aspect of mid-cap type stuff. But it also has a contrarian perspective to it, it has dividends, it has non-correlation, it has low beta. So it's a diversification instrument. I look at it as, if you have excessive ESG risk in a month at the end of the year, people are going to look at their portfolios and realize that they do. What do you mean by that just underinvested in energy, basically? Well, energy. Part of my research was looking at the weightings of energy,

materials, industrials, and health care and tech. Those are sort of the big five, the health care and tech being the ESG darlings and energy materials, excuse me, utilities as well and industrials too on the weapon side, being those have been sold. And the latter group, the basket of mine, has shrunk massively since 2009. So nobody really owns those. You can see in the past couple months, when people come to sell, correlations go to one and they sell what they own a lot of. Tech, Amazon down 40, Microsoft, Google, all those getting smoked because they're way overowned, Every ESG fund that launched in the last few years bought all those stocks. I mean, the top five in the S&P and the NASDAG are Amazon, Apple, Microsoft, Google, Tesla.

You know what they are in the ESG funds that BlackRock and Vanguard run? Exactly same. So every time they launch these funds, they pile into those. 7% of the S&P is Apple, Apple, Foxconn, Helping China, all that stuff. So net zero, laugh, laugh. at 7% of the S&P. So every ESG fund that gets launched, seven cents of every dollar, Apple.

And that's why Apple's like it 24, 25 times forward. They're crowded. And so this ESG orphans is the opposite of that. If you want to speculate in tech in that area, fine. But I would have a little piece of this product in your portfolio as a diversification tool. It's going to offset excess risk. I look at it. I say to people, it's an ESG immunization.

If your portfolio is infected with too much ESG, which so many funds are based on the fund flows, then this is the offset to that. And look, you're to date, the index that I create is up like 20%. The ETF launched in mid-May, and it's up a little more than 6% since mid-May, which is, again, doing what it should. I think it's allowing investors to protect themselves against the ESG unwind, which I don't think has ended. I think this is the first year in the cycle. Hey, Mark, how do you think about, or what would you say to investors who are looking at something

like this and say, listen, I can't invest in this? There's hardly any assets in here. Is that an argument that is full of hot air? What would you say to something like that? I'm sure you get it. I spent my career, almost 30 years, in the derivatives markets. I worked at Merrill Lynch and I worked at Susquehanna. I worked at Jones training. Yeah, exactly. But I always spent my helping guys solve equation problems in the market, find opportunities, and finding liquidity. So when I created this index, this ESG Orphans index, it's a $3 trillion index, 50 names, $60 billion. Now, in the derivatives world, but we always understand that the liquidity of an ETF in this case is fully dependent on the index itself. So a $3 trillion index means that a $10 million investment in an ETF on a $3 trillion index is an odd lot.

It's nothing. Now, that said, I'm a sort of one-man band, and it's me against Larry Fink on some level. The ETF at this point, it doesn't have as much AUM, and that is a challenge. But I've spoken to RIAs, and the reality is you want to put a large amount of money into this ETF, it trades market on close, the index trades market on close between $300 and $600 billion because mutual funds have marked their books to the close and that's where a lot of stuff trades. The index trades about 10 to 20 percent of its notional value on the close. So at that time, someone could buy or sell a basket, this basket, of those stocks with almost

limited or not much impact at all. So in terms of liquidity, getting in and out, now, for the smaller investor who wants to be involved, which look, I'm involved, I'm eating my cooking, I love this trade, I've been in this trade since the launch, you can nibble bits and pieces to get in there if you're trying to put 10, 20,000 to work. For those looking to put bigger pieces to work, it can happen. I've spent my career getting people into these, and I'm happy to chat with anyone more specifically. There's liquidity. Think about it this way. If Kathy Woods' ETF got a big order to sell or buy, half of her stocks don't even really trade. So in theory, my index at $3 trillion is more liquid than Kathy Woods' underlying index. It just is. GaxonMobil is $400 billion company. So there's plenty of liquidity there for those who are inclined. You're saying there's more liquidity in the underlying holdings than in the fund, and that's all it matters.

Yes, because, look, I have the specialist, if you will. I don't know if you call them specialists anymore. Maybe they're just market makers now. But that's how they work in terms of creating and redeeming these products. They work against the underlying basket because you can't own the index itself, but you can buy the ETF, the stock that represents that. And this is the product I created. And liquidity is there for those willing to be involved.

And it works on the way in and it works on the way out. Because every day at the close, that index, the underlying index, trades 10 to 20% of its notional value, and it allows a liquidity event to be involved in the ETF. For those who are interested in learning more about your ESG Orphans ETF, where do we send them? Constrained Capitaletoffs.com is the ETF website. ESG Orphans.com is the index website. The index website is a little more dynamic. It has my Twitter feeds, has my research, has a lot of the content that I've created,

plenty of media opportunities that I've had and posted there. Constrained capital ETFs is the more static one, has fact sheet, prospectus, SAI, and it's less updated because it's just more for the library aspect of the product. All right, Mark, well, this was definitely an interesting conversation, gave me a lot to think about, so I appreciate you taking the time. Well, thanks for having me, guys. I really enjoyed it. Thank you, Mark. Thanks, Constrained Capital. Remember, it's constrained capital.ethefs.com. Send us an email Animal Spiritspot at gmail.com.