ETF Edge - Letting your hedges grow? 10/27/25

Episode Date: October 27, 2025

 As the markets grind higher, many have been questioning the proliferation of the new hedging products. Could that mean it is, in fact, time to consider them?      Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ. Let's rethink possibility. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange traded funds, you're in the right place. Every week we're bringing you compelling interviews, thoughtful market analysis,

and breaking down what it all means for investors and their money. I'm your host, Dominic Chu. This week we're talking bonds, buffers, and the stability of hedges in a market that seemingly just wants to keep grinding higher and higher. Here's my conversation with Mike Lucas, the CEO of True Shares ETFs, alongside Tony Kelly, co-founder of bond block. Mike, we're going to kick things off with you and the markets. This is a market that over the last several weeks and months at this point seemingly just sets record high upon record high, upon record high. today is no exception to that rule here. So take us through just what you think this current market

and its behavior is like and just how much more upside do we think there is for equities in the S&P 500. Well, I'll give you the shorter answer first, which is I don't know how much more upside there is. And to your point, this keeps grinding higher and higher. And we've got so many factors in play. We've got obviously tariffs. We have rate cuts. potentially. You've got a massive earnings week and how much longer can the AI boom, you know, carry the market. So lots of factors in play, but I think by and large, investors are still cautiously risk on. And it's because of those reasons, because the catalysts are so diverse and varied that anyone at any given time can create some uncertainty and or momentum in the market.

But we'll see this week. We'll see what earnings look like. And, you know, know, if these valuations can continue to be justified, then you've got some potential tailwinds here. But again, investors, they might be risk on, but that risk on comes with a caveat. They definitely want risk on with some actual protection or at least some downside mitigation just in case. Mike, what do you think you laid out kind of a mini laundry list, if you will, of potential kind of catalysts or influences on the market? what do you think right now, in your opinion, in your expert opinion, is the kind of biggest one or two motivating factors for what's really driving the fundamentals behind the market? Well, I think it's AI.

And Tony and I are chatting about the fact that we're both here in the Bay Area right now and certainly we're in the heart of it. And I think that the AI, you know, the AI boom, if you will, is carrying the market to a certain extent. And I think things to look for this week when you have a lot of these large big tech companies reporting is what their cap X looks like and what they're spending on the AI, you know, pick and shovel. And that will give us a pretty good idea if that momentum continues. But, you know, I think that's the story, frankly. All right. Now, let's talk a little bit, Tony, about this idea that the bond market has seen maybe returns that aren't too shabby either, especially in the last few weeks or so, given this idea that, you know, with the economy,

economy, yes, maybe showing some signs of slowing down a bit, is still fundamentally sound, at least from a labor perspective for the most part, and inflation certainly seems to be under control. And then you add on this idea that the Fed might move to lower interest rates more so before the end of the year. That's providing a tailwind for the bond market. So where exactly has been the activity in the bond market these days? Yeah, thanks. That's interesting. I think the investors have been, you know, piling into fixing the last couple of years. I think even as equity markets grind higher, we hear from clients.

They are looking to diversify that risk and lock in some of those returns. Some of the areas that we've seen a lot of those short duration for the last couple of years, both in treasuries and in credit, have seen a fair amount of flows. but it's kind of across the board, even, you know, as credit indices are paying five, six percent and yield to maturity on an investment grade exposures, those are interesting to clients as well. Now, is it just about the rate story? Is it just about what's happening with treasuries? Or do you see a more fundamental shift, perhaps, in the way that investors are viewing

certain key parts of the bond market, given what we now see in the equity markets? being with key drivers here like AI technology and everything else. What's the key driver here, one or two drivers, for what's happening with bond price action? Yeah, I think it's a couple of things. I think historically investors look to the bond market for diversification to diversify that equity risk that's in their portfolio. They look for it as a source of stability. You can think of a sort of a ballast in the portfolio.

And then the final component is the income component, which is great most of the time. and then it's even better. It kind of cushions those drawdowns, and it's real nice to have that in the portfolio when things get a little choppy. And certainly that idea of having that ballast or the kind of hedge, if you will, in place, is something, Mike, that you have made a living doing

over the last several years here, specifically with regard to those buffer-type ETFs that have a more defined outcome that kind of limit the return profile to a certain band on the, the upside and the downside and somewhere in between. How much more demand have you seen for those types of products, those so-called buffer or defined outcome ETFs

over the course of the past few years? Certainly it was since the pandemic. Well, it's gone meteoric, right? And I think that it goes back to what we just mentioned about what investors are seeing in the marketplace right now. Look, we've got a massive demographic shift happening in this country. And lots of investors are moving, or a great deal of wealth is moving from the accumulation phase to the distribution phase.

Now, a lot of those investors still need growth, but they need growth with risk protection. And the defined outcome space, and let's be realistic about it, the buffered space is probably the first wave of structured product strategies, traditional structured product strategies, jumping the fence into the ETF wrapper. And so we'll see the second and third way. wave of that begin to happen. But what this is allowing investors to do is create individually customized portfolios with a defined risk level. And it sort of dovetails with the phenomenon that I call performance that's good enough. Right. So 30 plus years in this business, most of those years were spent chasing the S&P. Well, there's a type of investor now and that investor pool is

growing that has a target in mind for their growth as well as their risk and the ability to customize portfolios and deliver that risk reward ratio that each individual investor is comfortable with is really behind the boom in not only buffered ETFs but you know defined outcome space in general which involves all sorts of different hedging techniques these days. Mike that those hedging techniques have now evolved again to kind of the next evolution of these buffer or defined outcome ETFs. And those are the uncapped ones. And you're an ETF manager that has kind of been one of the folks out in front of the idea of an uncapped buffer ETF. So for the viewers and listeners out there, you have this kind of idea that you can have a defined downside right in this, but you don't have

to be limited for the upside gains. And that means a lot more in a market like we're seeing right now because like you said, we're grinding higher, sequentially making kind of fresh record highs, not in blowoff, you know, fashion, but just kind of like the slow meltup. What exactly is the demand profile like now for the so-called uncapped buffer ETFs that still give you downside but then let you participate much more so in the upside? And what exactly does that cost an investor? Well, I think that the understanding that, you know, equity returns are not linear, typically. They're fairly lumpy.

And as we see instances of those non-sequential returns, and we saw it in 2020, we saw it this year, right? If you look at sort of the flash crash around Liberation Day back in April and what the market's done since. So you see fairly significant gyrations in the market and understanding what has. happens during those periods. It's a bit of a behavioral finance approach, but what happens during those periods has started to open the eyes of many investors to the idea that, okay, look, mitigating risk is great. I would like to do that. But we also need a way to harness those big, chunky, upward moves. And historically, a lot of these snapbacks happen after significant drawdowns, a way to protect myself just in case there are additional gyrations or drawdowns,

and also participate to the extent possible in the upside. And so your question is, what does that cost? And so a lot of our peers in the space work with a capped upside, and you get one-to-one of the upside. And for certain investors, that's great. For other investors that are more conscious of what happens in a significant up move, then we offer them a participation rate or an upside capture rate rather than a one for one. What that allows us to do is historically deliver anywhere between 75 and 85% upside capture without a limit.

And in years where the market's up significantly or 12-month periods where the markets up significantly, the difference between capturing that upside or capturing a big chunk of that upside versus being capped out when it comes to long-term compound returns is hard to ignore. I think investors are wising up to that situation. The more they see significant snapbacks following, you know, meaningful drawdowns. You know, Tony, Mike brings up an interesting point with regard to the behavioral finance, behavioral economics side of just how things have evolved for traders and investors. The most traditional kind of equity hedge out there for for decades now has been the bond mark. This idea that you allocate differently between certain risk assets and bond type assets to make sure that you're always in a risk profile that's appropriate for that particular investor or trader.

I wonder if you could take us through a little bit about how you've seen that behavioral element evolve towards the bond space, given the idea that there are so many more complex products like what Mike manages over at true shares for defined outcome equity, uncapped buffer, and everything. else, what exactly has been the investor sentiment like for the bond market? And is there still a role for just a straight stock bond allocation in this portfolio? Or is everything just getting much more nuanced and complicated these days? Well, it's definitely getting more nuanced. And I think that's actually what I would describe as the trend over the last 10 or 15 years. You know, 15 years ago, I think most advisors would think about their asset allocation as some split between equity and fixed income. On the fixed income side, there was probably one solution,

call it the ag, and they would probably spend more time developing out the equity side. That's actually what we have seen shift in change over the last few years, because all asset classes even within fixed income are not the same, right? There's quite a dispersion between returns and opportunities and that's what we've seen sort of shift and kind of play out over the last few years is advisors are being a bit more thoughtful because there is more opportunity in fixed income now that rates are no longer you know close to zero um you know there's uh and then there's there's product opportunities right so there's emerging market debt for example it's one of the top returning asset classes in the fixed income market this year is up well over 10 percent

And that comes along with all those benefits of diversification, lower the overall risk in a client's portfolio. So that is kind of what we are seeing continually play out as this more granular view of the fixed income exposures in clients' portfolios. The nuance and the kind of, I guess, custom tailored approach is something that we've seen and discussed now with regard to the buffer side of things on the equity side. How far, Tony, are we away from seeing way more robust, structured-type products enter the fixed-income ETF market? I mean, for me, back in my Wall Street days, structured products were almost exclusively pretty much geared towards fixed-income, currency, and commodity-type situations, and then they kind of evolved out to be a little bit more sophisticated on the equity side of things.

But for bond investors, is there a next evolution, so to speak, for some of these types of products for bond ETF investors with regard to defined outcomes and just how big of a market would that be? Yeah, I mean, I think Mike could probably comment on this and that probably is in the future. There's still a lot of white space, just even in the more straightforward traditional fixed income asset classes. Like there's a lot of talk, for example, private credit. I don't know if that is something you would necessarily refer to as plain vanilla, but there is a lot of interest in that subset of the fixed income asset class to be in an ETF wrapper for clients. And Tony, one final point about that. If you do see the types of products that we have seen

come out for fixed income, what exactly as an ETF manager yourself would you expect to be the next evolution for bond ETFs? What would you like to see out there? or what kind of things are you contemplating at bond blocks with regard to what the next product could be, the next big thing in ETFs for bonds? Yeah, I mean, there's still, like I said, a lot of white space, a lot of segments of the market that have not been delivered, and we're spending a lot of time on that private credit, as I mentioned, is an area that we're spending a lot of time on. We do have a private credit ETF product in the market now. We've got one in registration.

but there's still plenty of room even in the traditional asset classes in fixed income to deliver access to. And Mike, a final point to you here. As we talk a little bit about the way that these buffer ETS work, there's been a lot of debate for several years now at this point, maybe two or three years at the very least, about the back and forth about whether or not these things are suitable or whether or not the costs associated with the higher fee structure for some of these is worth it in the end for investors. You know, from an ETF manager's perspective, we know that, you know, you make your money

managing buffered ETFs, but just what exactly do investors and traders need to understand about the performance and risk profile of buffered ETFs vis-a-vis the types of fees being charged versus just say a regular S&P 500 ETF? Yeah, in that debate, I think, has raged for a while, particularly as Bufford ETF started to garner a larger market share. But the reality is these are essentially math-based products. And while I'll say that as a math-based product, they typically will deliver on what they're supposed to deliver on. However, matching expectations with investment objectives is still paramount in this space. And as it is with any investment space, I think the ETF space in particular tends to suffer on occasion from a little bit of ticker soup, right?

When you find a segment that works or starts to get crowded, you'll see dozens of variations on that approach. So in the defined outcome or the buffered space, education is key matching time horizons, investment objectives and risk profiles with the actual product or the strategy. I think is as important as anything when it comes to investor satisfaction. But again, let's not forget that this is a bit of behavioral finance in the sense that investors that are approaching defined outcome, investing in defined outcome, they're looking for a smooth ride. They're looking to go to sleep at night, not have to worry about what the market's going to do first thing in the morning.

And there's a value to that. There's a value to assembling these products, making them turnkey in the ETF wrapper, which depending on your perspective is probably more investor-friendly than some other wrappers available. And having the ability to do all that in ETF for most investors justifies the fee. And I think that's an accurate portrayal of it. If it matches the risk-reward profile and allows an investor to target their particular risk spectrum effectively, then it's typically worth what you're paying for it. Now there are some outliers in that discussion, of course.

But by and large, I think that's the perspective that I stay with. Now it's time to round out the conversation with some thoughtful analysis and perspective to help you better understand ETFs. It's our Markets 102 portion of the podcast. Tony Kelly, the co-founder of Bond Blocks, continues with us now. Tony, it was a fascinating conversation, one that is only limited by time. It was so much to talk about here. But one of the things I wanted to address with you specifically was we have these buffered kind of defined outcome, structured product type ETS on equities.

Bonds are complicated in their own right because there are so many different types of them out there. So just how hard is it for an ETF manager specializing in fixed income to put out ETF products that are out there to meet the demand for investors? I mean, it's not, I mean, it's not that hard. That's what we do, right? And what we're looking to do is to work with clients and, you know, what can we offer that doesn't either exist in the marketplace or what needs are unmet and we focus on that. So in some ways, it's kind of straightforward. The trick, though, is delivering that in the transparent, low-cost, tax-efficient rights. or the ETF because not every asset class or not any investment works easily, but that's the, you know, what we focus on.

All right. So Tony, it's straightforward. You're a bond investor. You're an ETF manager. Where exactly are investors going towards with regard to fixed income? Where are the so-called hotspots in the market right now for bonds? Yeah, I think, you know, really what has evolved over the last few years is advisors and investors are just looking beyond, you know, thinking of fixed income as one homogeneous

block, right? Historically, that might have been the ag. It might be some T-vills. Investors, these days are looking to, you know, decompose, if you will, for lack of a better thing, whether it's by readings or text. tilting by duration or really getting that precise exposures. You know, one of the areas that we've seen a lot of evolution, if you will, is in the Muni bond space.

You know, Muni bond ETF's been around for a while. You know, we launched them at BlackRock probably 15 plus years ago, the first product. The next iteration of that are active muni bonds. Muni bond market is still an area where there's an opportunity probably to deliver some alpha and outperformance, given the inefficiency in the market and investors are interested in that. We've taken it the next step to package not just an active muni strategy, but compose it with taxable bonds as well and taking advantage of the richness and

and cheapness that at times investors pay too much for that tax benefit and that is one of the flaws in the muni market and our tax aware suite solves for that problem by allocating based on where incrementally muni bonds are trading relative to taxable bonds. Okay, what exactly then is the driving force behind it besides the dislocations and pricing, some of the kind of move that we're seeing that are creating opportunities within certain key parts of the fixed income market because of perhaps outside of normal price discrepancies or gaps or convergences or divergences, what exactly has been maybe more of the bigger theme or bigger macro force behind why there is so much more interest on that municipal bond side of things these days?

You know, I think it's as fixed income ETFs grow and advisors are using them more and more, they want them for every part of their portfolio. It's not just like I mentioned the ag type clients. It's sort of solving for some of these other components. And Muni market is huge in retail advisors accounts. And they're looking beyond just the MUB type exposure, which is that beta exposure. They're looking to get additional access. And as these products are brought to market, advisors are becoming more sophisticated in their strategies and their approaches for their model portfolios.

And Tony, there's also a reach for yield these days. We know that with the municipal side of things, in certain key situations and constructs, much of the income that you generate from there could be exempt from certain parts of the tax market, whether at the state local level or at the federal level, depending on the types of municipal bonds that are in play. But what exactly has that translated to in terms of where else people are reaching for yield on the taxable side of things, right? We know that many high yield type funds, high yield mutual funds and ETFs are now in that range where they could be offering north of 6%, maybe even as high as 7 to 8% in certain states.

in certain circumstances, what exactly in, is there still a driving force behind that side of things on the high yield and kind of junk, so to speak, side? And just how important is it for some investors in those bonds to understand the risks that are associated with reaching for yield? Yeah, that's a great point. And that is, we spend a lot of time on that high yield in particular, it's not just even one market, right? When you kind of look at it by rating, there's quite a different risk characteristic in, let's say, the safest part of the high yield market, which would be your double Bs versus your triple Cs. And different investors are looking for different things. There are investors that want the return of the high yield category,

but maybe they don't want the full spectrum of exposures. And we have products that give them the ability to invest in the double Bs and the single bees. Let's say those would be the higher quality segments of, and the opposite is also true. We've seen significant inflows into our triple C product, institutions in particular. And their interest is to kind of round out their portfolio because they often find that they're underweight. And the risk return component of the triple C is attractive right now because the yields are above 10%. And they view that balance sheets still look good.

The economy is robust. And they actually want the highest yielding section of high yield. And so the ETSs are a great format to be able to kind of deliver those precise exposures. And Tony, before we let you go, from a bond manager's perspective, what do you think the biggest opportunities are within fixed income right now? What's most attractive to you? We've talked about a handful of certain key areas of the market. But if you were to go place some money right now someplace,

how exactly would you allocate within fixed income these days? Sure. You know, one of the areas, one of our recent launches is PCMM, which is a private credit CLO ETF. That is an investment-grade portfolio that has a coupon yield in the high sevens, and it's got a very low duration that we think is one of the better areas right now. But really, all of our products, kind of in the context of the... like a diversified portfolio, you know, that's the sort of built as asset allocation

tools, not necessarily to pick one as a bet, but basically to be either compliments to those more traditional core ag portfolios or to deconstruct an ag type portfolio with the weights and the assets in the direction that an investor wants to make up. All right. So some opportunities there. You're not the first one to talk about private credit as being a bigger part of the market these days. Tony Kelly at Bondblocks, thank you very much for joining us here on the ETF podcast. That does it for us here. Thanks for listening.

Join us again next week or just head over to etfedge.cnbc.com. How does InvestcoQQQQ rethink possibility? By rethinking access to innovation and the NASDAQ 100. Let's rethink possibility. Investco Distributors, Inc.