Animal Spirits Podcast - Talk Your Book: Upside and Downside Customization For Your Portfolio

Episode Date: May 29, 2023

On today's show, we are joined by Jason Barsema, Co-Founder and President of Halo Investing to discuss how structured notes are made, counterparty risk during banking crises, customizing structured notes, and much more!   Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com   Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. 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. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. 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. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by Halo Investing. Go to haloinvesting.com to learn more about their platform for structured notes for financial advisors. 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. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ridholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decision. clients of Bridholz wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. Ben, we were at Inside ETFs earlier this week. And we were talking about, there was like, remember when, I don't know, five years ago, all, it was just index funds, index funds, index funds. And index funds have not gone out of vogue at all.

all, but you can only talk about them so much, right? They are what they are. There's no innovation with an index fund. It tracks the market cap weighted. They're just sort of accepted at this point. It's a core holding for most people. So while index funds have continued to do what they do, there's another part of the world where customization is really valued and specialization and niche opportunities. And so on today's show with Jason Barsima from Halo, who we've had on multiple times. One of the things that I love about the platform is it can be totally bespoke. The way that they've created, it is so easy for advisors to use. You could put in the underlines. You could say, no, you know what? I don't like this protection. Do this. Not soft. Give me hard.

Show me what this looks like. I want this amount of protection. I want this amount of income. I want this upside. To be able to like turn the knob so easily is a huge value add that could not have happened. I don't know when the technology was. created. But 20 years ago, this was just a non-starter. Right. I think that's the biggest leap forward we've made in the last decade, decade and a half call is the ability to pull different levers and maybe define some of your outcomes to give yourself or your clients better look through to see like these are the risks. And that was much harder to do in the past. So I think that, and that's only going to get better from here. I think the customization for the

next one or two decades is going to be a huge theme, especially for the huge amount of retirees we have now, who have most of the money, big portfolios, and now they're looking at, okay, I'm done making money, I have no more income coming in, I'm spending down my portfolio, I'm nervous about the uncertainty, just give me a little more certainty, even if I'm paying some sort of insurance or whatever on that, and I think that's why it's going to be such a big thing going forward. That's the thing, because to be able to define an outcome, even if it's like mathematically suboptimal, I'm not saying that it is, but just there's a huge premium for certainty,

for being able to sleep at night knowing that, okay, this is my investment vehicle and whether scenario X, Y, Z, you know how some people say Z? I don't know if that's a red flag, but that's a little bit weird. But no matter what happens, you at least know beforehand what you're getting into and if something doesn't sound good to you, you don't do it until you get to something that works for you. So all right, enough stepping on material. Here's our conversation with Jason Barsima from Halo. We are rejoined today by Jason Barsima, who is the co-founder and president of Halo Investing. Jason, welcome back.

Thank you guys so much for having me. All right. We've done this a bunch, but I think this is timely. I'm going to start with a question about the actual nature of a structured product. Tell us what happens, and this is a leading question. So this is a two-parter, kind of a quarter question, if you will. What happens immediately after a bank creates the structured note? And so what immediately happens is a bank creates a structured note, which define create, first

of all, right? And so how is ultimately the proverbial sausage made, although I don't eat meat, but we'll still use it as a metaphor. There's three different parts to a structured note desk, right? And so it's not just some Oz behind the curtain. You have the structuring team, which think about that as the packaging. So they package it all together. You have the hedging desk, and then you have the treasury desk. Remember, a structured note is the combination of a zero coupon bond, which is the treasure and a derivative, which is the hedging desk. And then the structuring desk packages it all together with a nice bow.

And so when an advisor buys a structured note, what happens is through HALOS technology, all of that is automated. So the funding rates are paired with the derivatives desk and ultimately all packaged up, documents are generated. The note is actually registered with the SEC. So in most instances, people are buying registered structured notes. So that gets registered through the SEC. And then what is created ultimately is what's called a DTCC eligible product.

That may mean nothing to you, but it is very important because when it's DTCC eligible, that means it's treated and cleared and processed, for lack of a better word, just like any other security out there. And so if you, Michael, buy a structured note issued by J.P. Morgan. J.P. Morgan goes through everything that I just told you. J.P. Morgan will deliver that structured note through the DTCC to Halo's broker dealer, right? It's got a QSIP, just like any other security. And then we deliver that and book that directly into wherever you, you know, custody, Schwab, Fidelity, Pershing, TD, you name it. That was a really good answer. When, what I was looking

for is there are several components to a structure note. There is downside protection. There's hard and there's soft. I'm sure there are more variables, but one of the most important variables is the maturity. And at maturity, who is paying you your money back? So the bank who issued it, right? So very, very good question. And, you know, ultimately, when you buy a structure note, there's a few things that you want to consider.

Obviously, you want to consider what the structure note is linked to, you know, the asset it's linked to. Think about when you're buying a structured note, you should be willing to buy. that individual asset outright. With a structure note, you're just wrapping a level of insurance or protection around it, right? That's the only thing that you're doing. So you have a thesis on the asset and you're wrapping a level of protection around that. So that's the first thing to consider. The second thing to consider is the counterparty risk. And so when a structure note is issued, it's ultimately an obligation of the issuer who issues it. Okay. And so forget about what happens, all the sausage that was just made that I told you, forget about that. Actually,

when you look at the annuities market and there's annuity products out there, which Halo also deals with annuities, if the listeners prefer annuities, you can access those on the Halo platform as well. A lot of those annuity providers that offer investment products that look like structured notes, they're actually not hedging out into the marketplace. They're not doing all that sausage manufacturing. It's just a contract to say, I'm going to pay you X on Y date. So to come full circle, Michael, who pays you those proceeds? Ultimately, it's the bank. Doesn't matter how they pay you.

So that's where I was leading this ship. For the first time, certainly not ever, but for the first time in a while, counterparty risk is something that people are thinking about. So you tell me, if Deutsche Bank was my counterparty and they issued me a structure note and then they're not there to, you know, they got absorbed by. UBS is now UBS on the hook, but talk us through when advisors are considering these products, who should, how do they view B&P Paribaz versus JPMorgan versus Credit Suisse? Yeah, I'd like to hear, I'd also like to hear like a good example of actual counterparty risk

and what that looks like because people always say that's the big risk, but then I don't think they really define it. Yeah. And so absolutely. And so you're giving the example of Credit Suisse and UBS. Was it credit suites I got bought? It was. Oh, okay. My bad. I don't know what I said, Doge, Mike. My bad. And I know that example. very well because that was my former home bank. And so if there's anyone who knows how Credit Suisse issued structured products, it was me. And to that point, right, and that's the important part. You have to understand with some of these banks how they actually issue the structure note and from what vehicle. When you look at Credit Suisse, right, it was a separate operating

co. That was completely different from the Holdco. It had its own capital that was reserved for their structured notes. So there was a lot of noise out there of saying, oh, my gosh, you know, $17 billion of cocoa bonds just went up in flames. Those cocos have nothing to do with structured notes. Those cocos are part of the hold co. They're not part of an operating company that is specifically designed and only designed and capitalized and separately rated just for that structured note. So think of a lot of these European issuers have that design after MIFID too, not to get too far in the weeds. But that's a really important thing to understand is that, yes, it's an obligation in many instances to the parent company. But for many European issuers, as you're naming, it's actually its own separate entity that has its own separate capitalization.

Now, how do you know that? You don't, except for if you want to read through an 80-page term sheet and be completely bored to death. That's what Halo does, right? So, yeah, we're a fintech company. Yeah, we were just named to the world's top 10 most innovative fintechs for the second year of a row, which I was very good. to hear you about. Congrats. Humble brag,

but I'm very proud of the team in regards to that. Definitely a team effort. But to that point, we also have humans that can walk you through all of this stuff, including yours truly, right? We're structured note junkies. We know everything about how these structure notes are manufactured. Getting back to Ben's question in regards to,

what does it mean to counterparty risk besides just, hey, can this bank pay me or not? Well, counterparty risk impacts the pricing of the structured note. Right? So think about what we were talking. talking about earlier. A structured note is a package of a zero coupon bond and a derivative. That zero coupon bond is an obligation of the bank who issues it. Clearly, zero coupon bonds have interest rates that accrete to par, right? And so the higher risk, the credit, the better

the terms that you're going to get because that zero coupon bond is sold at a larger discount when you look at the structure note side. So again, a lot of technical jargon to say the counterparty risk and the bank who issues it will directly impact the pricing of your structure note when you buy it, you will get better terms for a counterparty that has a worst investment grade than the too big to fails, or I like to say now, too big to saves, like a J.P. Morgan. Jason, that was great. Thank you for that. We'll move off this in a second. My last question is I would have been boring. Was that boring? Well, no, no, but maybe kind of. Yeah, in fact,

yeah, it was boring. But guess what? It's important. So I would imagine. Yeah. I would imagine that that in the in the days and weeks in the aftermath of the Credit Suisse mess that you guys were fielding a lot of questions about kind of risk. Yeah, very proactive. You know, and again, that goes back to being the humans. We set up calls with our issuers to talk to all of our clients. We set up webinars. One of our senior advisors at Halo was the global former global chief economist of Credit Suisse and vice chairman. And so we had a lot of good perspectives and a lot of differentiating perspectives to make sure that our clients felt comfortable. Now, on our platform, yes, we do not personally advise on counterparty risk.

You are fiduciaries. You have to feel comfortable about the counterparty that you want to take. But of course, we're here to help you, right? So we're here to walk you through the pros and the cons of each counterparty. The benefit, Michael and Ben, as you know about Halo, is that I don't get paid by the issuers. And I'm not owned by any of the issuers. So I have no incentive for to tell you J.P. Morgan versus B&P Parabot, you do what you do. And we will help you advise on the pros and the cons of each issuer in regards to pricing, in regards to counterparty risk experience, et cetera, et cetera, et cetera. But actually, it was really good for us because, you know, we only work with the world's largest banks. And so, you know, if you think about it, it was an interesting market because you had the noise out there with First Republic. like an SVB and obviously Credit Suisse, la, la, la, la, la.

But the biggest counterparties are assures on our platform, like a JP Morgan, like a city group, like a Bank of America. And so there was, and like the Canadians, and so there was a flood of demand into the Structure Note market speaking for our platform because people were scared so they wanted protection. Volatility was high, so they wanted to take advantage of the good yields and the good participation rates and the deeper amounts of protection they can get, you know, when times are volatile, those are the best times to buy structured notes. Now, you just saw the flood to kind of the two big to saves, as I call them. Jason, when you're thinking about structure notes,

there's all different sort of products and you can get creative with how you want to use them. Let's start the conversation on the actual structure notes. It started with the income one. The level of interest rates have a big impact. on the amount of income, obviously, or maybe not obviously, on the amount of income that an end client can receive. The equation, though, mentally for clients, must be different when they can get risk-free rate of, say, 5%. And now granted, there is role risk there.

That's, you know, I'm talking about like the one year that's not lit out on the curve. But that has to change how people are thinking about income. If it's just right there in front of you, why not just pick it up instead of locking up your money and having counterparty risk? What type of conversations that you're having with advisors On the income side, we'll talk about the equity side after this.

But just in terms of the income notes, what do those conversations look like? Great question. And let's hope you're right that it's risk-free. I guess we'll find out on X date, as I guess now we're calling it at the Treasury. And so, you know, all jokes aside, it's about, and I'll answer this in two parts. When you look at a structured note, yes, interest rates impact the pricing of the structure note, absolutely. Volatility impacts the pricing of the structure note.

But whenever you're making an investment, right, you're pulling from something and allocating to something else. You know, in this particular question, Michael, and we get this a lot from a lot of our clients is saying, hey, well, if I can buy a, you know, one year treasury at four or so percent, why would I buy an income note? I say, well, geez, you know, perhaps you should think about it differently. Because in my personal opinion, and look, you know, every advisor thinks about things differently, I don't take from my fixed income allocation.

And I've never advised taking from my fixed income. allocation and putting it to income notes. Income notes are within your equity allocation, in my very respectful opinion, because you're taking downside equity risk. Now, why you buy an income note is not just say, okay, I'm going to get a yield pickup over treasuries. That's a double bonus. And it's a double bonus. Why is because I don't care if you're a family officer or a firefighter. We all need to do three things with our portfolios. And I'm talking to financial advisors out there on behalf of your clients. And only three things. You need to grow your wealth. you need to preserve your wealth that you work so hard for, and you need to generate income.

Again, no matter if you're a firefighter or a family office, you need to do those three things for your clients. And so ultimately, when I look at these structured notes of income structure notes, they tick my boxes to say, great, on the equity sleeve of my portfolio, because income notes are typically linked to major stock indices with a level of downside protection. I'm generating income, which I like, and I might not be getting from my equity portfolio. portfolio. I'm locking in a return, an equity-like return that is appropriate and suitable for me. I'm looking at products personally right now, link to the S&P, the Russell and Eurostocks 50,

three-year maturity, 30% soft protection. It's got a call feature in contingent coupon of 30%. I'm getting 12% per annum. The way that I look at that, Michael, is saying, well, geez, where are my equity portfolio over the next three years do I feel reasonably confident that I'm going to get 12% per ann. Right? And so that's the exercise that I do. My bonds are my sleep at night money. And I'm just talking about for my family. That's my sleep at night money. My bonds are my bonds. I'm buying those income notes because I'm protecting against the sideways market. I want to generate income and I want to hit my customers or my clients, you know, return hurdle. But, but you're not locking that in because you said it is, it's callable. Can you talk about what that call feature looks like and

how it's how it works in practice? Yeah. So in this particular example, it was a one-year non-call on this particular case, but you're absolutely right. It's callable. Now, this goes into the approach that we've been really advocating for at Halo and really, you know, educating our client based on, which is called a hedge equity strategy. And it's gotten a lot of attention and very, very popular within, you know, the thousands of advisors that we serve, you know, in the United States. And it's a strategy that I implemented at Credit Suisse, and I've been implementing it for 15 years and a strategy that I implement within my own family, which is about layering structured notes throughout the portfolio, right? So on these calls, you've asked me

of saying, hey, what's the right allocation of structured notes within the portfolio? And I say, hey, you know, Michael and Ben, it's Cedrus Paribus, it's around 20% because I like to have about 20% of my portfolio protected. And more specifically, I like to have about 30% of my equity allocation protected. Okay. And so when I look at these income notes, Michael, I typically target yields of 8 to 9%. And in a normalized market, meaning VAL and the VIX around 16, 17, and interest rates in a somewhat normalized way of what we've had over the last 10 years. I mean, the historical 10-year treasury rate is 6.5%, as we all forget. But over the last 10 years, a normalized rate of, you know, call that more of 2 to 3%. I'm clipping an 8 to 9% yield on on my income notes,

sometimes a little bit less, sometimes a lot more that we're seeing in this. And just like car insurance, Michael, I never drive my car without insurance because I don't know what's going to happen. So when I get called, I roll. When I get called, I roll. And so I don't try to tactically time the market. These structured notes are core parts of my portfolio that I always have. Now, when volatility spikes or interest rates shoot up like they've done over the last 18 months, heck yeah, just like I do with my equity portfolio or my bond portfolio, I'll say, great, let's take some of that dry powder, let's take some of those long equity exposure that I've got, and let's allocate it to structured notes because, man, the terms look juicy. Now, that's just the tactical side. It doesn't

take away from the vast majority of my structured notes, vast majority of meaning 90% of my structured notes are just core equity positions within my portfolio. So you like to overrebalance when rates get higher for the number of reasons. Yeah, exactly, because I'm just going to get some pickup, especially in regards to my income notes, right? And we've got consultants here that can advise you on all of this. And ultimately, the thesis is, and just to finish that point, the thesis of the hedged equity strategy is very simple. It's just about taking a structure note and layering it on top of your long equity. And this is how I built my business at credit suites, and I built my

businesses into one of the largest practices at Credit Suisse using this specific strategy. And what that was was saying, hey, you know, Michael and Ben, I got a great large cap value manager. Man, we're Credit Suisse. We've got the best and brightest large cap value managers around the world, and that's why you bank with me, right? Now, the reality is over the last 12 years, active management has absolutely stunk, but I still believe in active management. So what I would do is I'd say, I'll take a growth note, three year growth note linked to the Russell 1,000 value, right, the benchmark of a large cap value manager. I'm going to have some protection on the downside, say 30% protection, and I'm going to get enhanced upside. And in this market,

you'll probably get 120 to 125% uncapped upside. Why do I do that? Well, active management has stunk, as I just said. So the enhanced upside of that growth note will make up for the performance drag that your active manager may have had over the last decade, right? Does that make sense? Yeah. How do you think about from an advisor, most advisor's clients are fully invested already, or maybe they're spending down their portfolio. How do you think about the advisors that are looking to get clients in for the first time? How do they leg into a strategy like this? Great question. So a matter if you're fully invested or not, it's really the same answer, Ben. I think utilizing structured notes in a market like this, and I know I'm talking my own

but I guess that is the point of the segment. But again, all jokes decide using instruction notes at a time like this are really, really good and really, really powerful. Why is because the market lost 20% of its value last year, right? And hopefully we all all performed the market on a fully diversified portfolio. But if you look at a fully diversified portfolio in 2022, 6040 portfolio, you're down around 20%. Looking at a client and saying, hey, Michael, you just lost 20% of your net worth.

right? You know, a fifth of your value that you work so hard for in 12 months is a very hairy conversation to have with your clients. But oh, by the way, Ben, I'm going to take that dry power that I have and I think it's a great time to invest and I'm going to put in the markets now. You'll be like, are you out of your mind, man? I just lost a fifth of my value. Those are very difficult, even if it's the right thing to do. It's very difficult. I dealt with this during the GFC. And so I use structured notes to say, hey, Ben, now is a good time to buy because we're at a lower base and you want to buy when there's blood in the streets. I recognize that you're anxious about losing more money because you've worked hard for that money. And here's a

structure note that will give us downside investment protection in case I'm early, in case the market continues to go down. But if we are at a bottom or near a bottom, it's going to give you that enhanced upside. So not only do we participate in the rally, oh, by the way, you have enhanced upside so you'll actually be better off than buying SPI or any other long equity manager that you might be allocating to. So I love doing that in this type of market because it's a more conservative and prudent way to invest. And it's a heck of a lot easier to talk to your client. Do you find that this message goes over way easier with older retiree boomer clients that don't have as much time to have income or savings make up for any shortfall in a bear market?

Well, there's actually been a lot of studies that I recently done that the millennial generation is the most risk-averse. And probably because, you know, you start to learn about stocks, right, during the tech rec. Really? Have you heard of, have you heard of shit coins? Well, I like to think that that's just the Jim Kramer mad money part of someone's portfolio. That's hopefully a small part of someone's portfolio as tactical bets, right? I chalked that up to your Draft King's, you know, account, right? But, you know.

Yeah, I think that's fair. I think that's fair. Yeah. And so, you know, to that point ultimately is, I think, I think it resonates with everybody because, again, you wouldn't own a home without insurance, you wouldn't live in an apartment without insurance, and you wouldn't drive a car with the insurance. It's not only dangerous, it's irresponsible. And so a lot of people say, and I get, there's differing views.

Well, I have a differing view. I'm about to share it. Oh, I know. And that's what I love about this show, but just to finish my point, right, is that if you can buy a three-year note on the S&P that gives you 25% downside protection, and again, in this market, 125% uncapped upside. So in three years for round numbers, the market's up 100 and you're up 125. If the market's up 50, you're up 62 and a half.

But price only, no dividends. Right. But still, to that last point, if the SMP is up 50, right, unless it's price only, and you gave up, you know, 6% of dividends. So you have 56% on a total return, technically less because the SMP yield is at 1.86. But we'll say 2%. So 56%, that note would have gotten you 62 and a half. You still would have been better off.

For sure. I just do that in just for clarification, because I know people are going to poke at that. Yeah, yeah, no, absolutely. And to that point, right, you're never giving up the dividend. You know, an option's pricing model at the end of the day has dividends baked in to Black Shoals, right? And so you are getting that enhanced upside and that downside protection. So I always like to say you're trading off that dividend for the enhanced upside and for

the downside protection, which, and I don't give tax advice, so please consult your own tax advisor, but can be interesting from a tax perspective because then you don't have to pay dividend taxes in growth notes, and please consult your own tax advisor, but from my own experience, their long-term capital gains. So, Jason, I will preface this comment with, I am generally a fan of what structure notes can do inside of a portfolio. And I love the platform and the customization. I think it's really phenomenal.

The one quibble I have with what you said is you wouldn't drive a house. Wow. Well, it depends on where you live in the country. A lot of people do have that they drive. That's true. Okay, you wouldn't drive a car without insurance. You wouldn't own a home without insurance. Very, very, very, very true. However, one of the reasons that stocks pay you to own them is because they are, in fact, very, very risky. and trying to eliminate some of the downside will almost always by definition eliminate some of the upside, which is totally fine. So I think that you can, in fact, own stocks without insurance. That doesn't mean that you can't own stocks with insurance. I just, I don't view the framing of that. I view the framing of that a little bit differently, I think than you do. I don't think we're

that far apart, but quite the contrary. You're exactly pitching my whole point of my hedged equity strategy, right? And so I totally agree with you. Long equities are long equities. Absolutely. That's the risk that we want. Not even because of the risk, my friends, it's also because a structured note, when you own a structure note, the terms only matter at maturity. Yes, we give you daily liquidity with structure notes at Halo, and that's really novel and super cool and transparent, but you only get all the benefit of the upside and the downside protection at maturity. So you want to use those long equities as your cash toggle to tactically tilt up or down, or if Michael wants to drive his mobile home, right? And he needs insurance on it. He is going to be able to do

that through his long equity. What I'm proposing, what I'm suggesting is exactly the same thing you just said, Michael, which is I'm just taking 30% of whatever you're allocating to that sub-asset class. So let's just take U.S. large cap core, right? And let's just say for round numbers, you have 10% to U.S. large cap core within your portfolios. My thesis is saying, take 7% and put that to a tax loss harvesting strategy or buy SPI, whatever you want to do with that in the long, and take that other three and protect yourself. No one's saying to take, and I am definitely not saying to take 100% of your equity exposure and put a structure note. I'm just saying do it because you can get the enhanced upside. You can get the downside protection, which from a sharp

and standard deviation and no one cares about that as your own client is good for you. But for your client's sake, and this would be the last point that I'd say, for your client's sake, protection is good because what does protection do? A lot of advisors listening, we remember what happened in February of 2019 with XIV. XIV blew up overnight. What happened to some of the robot portfolios out there, which had no exposure to XIV, by the way, is that they crashed because so many people went under that system to try to liquidate. Jason, so from that point of behaviorally, I am a big fan of protection because we all need, we all are our own worst enemy, myself included when it comes to emotionally emotional investing.

So you need to do something to protect yourself from doing something that you can't reverse. So I totally agree with that. Yeah, exactly. Something but not all. And I just think it's super important that people understand that there's no free lunch, that if you want to protect the downside, by definition, you have to give up some of the upside. But I guess I would allow you to counter that because you're saying that you could protect the downside and have an enhanced upside. That sounds like a free lunch, which should not theoretically exist in the world of investing. So how exactly does that work?

Walk us through that. Yeah. And so it all depends. And I'll walk you through it. But it all depends on what the market does, right? There is no free lunch. And so let's use a different example. My three-year note, 25% downside downside, 125% uncapped upside. Very staple vanilla note in my portfolio. Again, I layer that right on top of my S&P tax loss harvesting strategy that I use. Okay. Let's fast forward three years in the market. And the S&P is not up 50. 50% on the price appreciation. It's up 10. We just traded water for lack of a better sentence for the next three years. Well, my structure notes up 12 and a half. Not so bad, but what would my total return have been? Well, my total return would have been 16. So it would have been better off owning SPY, which gets back to my original point by saying no one's saying to don't do long equities. I'm saying quite the contrary. 70% of your equity exposure should be long for variety of reasons that we could talk about for hours.

But Jason, just to finish that thought, what happens if in your example, after three years the S&P, you have 25% downside protection? What if the S&P is down 20%? You get your money back. So you get your par back, right? If the S&P is down 25, you get your par back. In this particular example, I'm using soft protection. So if the S&P is down 26, I'm down 26.

Most people might have an allergic reaction that say, whoa, hey, gosh, I bought it for the protection. And that's totally cool. You can buy hard protection, which would buffer you for that first amount of losses. You would probably get around a 10% buffer, hard protection, for that same upside. And so the reason why I like soft protection, the way that I think about it, is saying, well, what did I just tell you to do? I just told you to take 30% of your long equity exposure and put it to the structured note. Right. Now, if the S&P's down 26, how's my tax loss harvesting strategy? you're doing. It's linked to the S&P. I'm down 26. How about in the in the down 26 scenario,

a lot of advisors have asked us, what do you think of doing like, you know, two to five percent of my portfolio in a tail risk strategy? It's going to be inversely correlated. And when things blow up, so maybe you can compare and contrast, structured notes with that sort of tail risk strategy. So, and that's the benefit of structured notes, Ben, is that you can, they can be whatever you want them to be. I get asked the question, well, how did structure notes do last year? I always ask, how did ETFs do last year? And they're like, well, what kind of ETF? I'm like, well, what kind of structure note?

It's just a wrapper, just like a mutual fund and an ETF and a structure. It's just a wrapper. And so at the end of the day is that you can pair different types of structure notes with each other. So great question, Ben, because I like those growth notes that I just explained. Sometimes with soft, sometimes with heart, depending on the market. Call Halo and we'll walk you through the pros and cons and why to think about hard versus soft in this type of market. But what's really been interesting in this type of market is of what advisor has been coming to us to say, hey, how can I, how can I solve for that tail

risk? How can I basically short the market without having to short SPY? Because I don't get a dividend when I short SPY and I can get my face ripped off in the wrong direction when you're short SPY. And so there's a really novel concept that I haven't seen before that actually our trade desk came up with one of our issuers at Halo, the human element. And so this was a three-year note that's fully principal protected. Okay? It's a three-year note that's fully principal protected. What's a catch?

There is, well, there's always a catch. Well, let me walk you through the terms, and then you can ask me what you think the catch is. And so you get the absolute return on the downside of the S&P. So you get that absolute return on the downside up to 25%. So meaning at maturity. If the S&P is down zero to 25, you're up, whatever it is. So if the S&P is down 20, you're up 20. If the S&P is down 25, you're up 25, right?

You get the absolute return on the downside all the way to 25%. You might be thinking, what happens if it's down 20%? By the way, when Jason says absolute, you mean inverse. Inverse, yeah. In our world, it's absolute returns, but inverse, absolutely. So you get that inverse on the downside. Again, down 10, up 10, right? All the way, do that all the way down to 25%.

Now, what happens if it hits 26%? Here's the catch. They kill you. No, no, they reward you. These are structured notes. We protect you. And so to that point, if the S&P is down 26%, you get called and you get your principal back. Most people would say, well, golly, the S&P is down 26.

I got called. So that's your opportunity cost. Right? So you have a thesis of the, you're going to make money if the S&P's down zero to 25. If the S&P is down by more than 25, you get called and you get your principal back. But what are you going to do with that principle? A, number one, the market's down and you just got your principal back. So that's a pretty good conversation to have it with the client. But what are you going to do with that principle?

You're going to go invest it back in the S&P. And you're probably going to buy an S&P growth note on Halo because VAL is insane right now. and you're going to, you're going to want to capture that upside. Does that make sense? Yeah. So is the catch that if the S&P is up, you don't get any upside? Oh, but wait, there's more. That's why I like about this note.

This is very novel. You have my curiosity. Now you have my attention. Yeah. And so if the S&P is up, and I made a mistake. I said this was a three-year note. This is even better. It's a two-year note.

Okay. And so this is a two-year note. If the S&P is up, you participate one for one on the upside, subject to a cap of 9%. Okay? So you're going to be capped out in those two years at nine. Now, what's your conversation with your client? Hey, first of all, why did you buy the note? You bought it as a hedge on the downside to the S&P 500.

Okay. Now, your next conversation with the client is saying, look, good news, bad news. Market was up. The rest of your report, the other 95%. of your portfolio is doing great. This portfolio got capped out at a four and a half percent annualized return. That's the same return as a two-year treasury. So I don't think any client under that thesis is going to say, geez, Michael, that was a lousy trade. I think that's a great trade. I like it. Does every bank issue this or every bank you work with? No, but the majors do.

And so we've been working with JP Morgan and specificity, you know, with this note. And so your point, though, about the wrapper is that these things are customizable. You can, if you want something like that, that's super downside protection or another one where you have a little bit downside protection and more upside, you can change the parameters. Yeah, it's just, you know, it's just the dials, right? So you might say, hey, man, I am super far out bearish on the S&P and I'm really, really worried. I would say, hey, man, then liquidate all of your equities, but that's a different question. but I would say if you want to short that, then say, well, then maybe the 9% cap isn't for you. Maybe you just want a 5% cap or no upside.

So the more downside protection you want, the less upside you have. So I'm making this up. But instead of 25, you want 40. Well, then good, you have zero upside. Bingo. Right. That makes sense. Okay.

See, this is what I like about structure notes, at least this is what I like about HALIS platform is that it is fully customizable while there is complexity and a lot of lot of moving parts. It's not rocket science. You should be able to get to the point with your client where they fully understand what happens in scenario X, scenario Y or scenario Z. So that particular one, that drives. I like it. Yeah. And as I always say, there's nothing more complex than this, right? There's literally nothing more complex than an iPhone. Jason's holding up his iPhone. Yeah, I just realized that. No, there's nothing more complex than your iPhone, right? But technology makes the complex simple.

And that's ultimately what Halo has done. And I'm not trying to sound cheesy. That's what we have done through our technology. That is what we have done through our research. And check out Haloinvestting.com in our journal. We write all this research. And that is what we've done with the humans because we do realize that it's one thing

if you understand the product, but your client has to understand it too. And we take care of both. So don't worry about that. Just think about what you want to do and what you want to achieve. And Halo will help you do that. Jason, that was great.

You're a pro. Thank you very much for coming on. As always, we appreciate it. Thank you, guys. I appreciate the opportunity. Thanks again to Jason for coming on. Remember that's haloinvesting.com. Learn more, especially if you're an advisor,

and email us Animal Spearspot at Gmail.com.