Talk Your Book: Anti-Carry

Episode Summary

Executive Summary: The episode centers on Simplify CEO Paul Kim explaining two ETF strategies: SPBC, which packages S&P 500 exposure with a 10% Bitcoin allocation via GBTC, and SVOL, which seeks to monetize VIX contango by selling volatility at a reduced 25% exposure while hedging with VIX calls. The hosts frame both as examples of ETFs bringing hedge-fund-like tools into accessible, tax-efficient wrappers.

Main Topics: Simplify's rapid growth and ETF innovation (Priority: 5/5): The hosts discuss Simplify's fast asset growth and the broader rise of active/thematic ETFs as investors seek differentiated exposures beyond plain index funds. SPBC: S&P 500 plus Bitcoin exposure (Priority: 5/5): Paul Kim explains how SPBC combines full S&P 500 exposure with a 10% GBTC allocation funded through futures/cash mechanics, aiming to give investors a simple Bitcoin sleeve inside a diversified portfolio. Bitcoin access, discounts/premiums, and portfolio sizing (Priority: 4/5): The discussion covers GBTC's discount/premium dynamics, why advisors may use the fund as a small toe-dip into crypto, and why even skeptics might justify a non-zero allocation. SVOL: selling volatility with a smaller risk budget (Priority: 5/5): Kim lays out SVOL as a volatility-income strategy that takes a 25% exposure to VIX futures carry rather than the more aggressive 50% or 100% products that blew up in past volatility spikes. Anti-carry overlay and tail hedging (Priority: 5/5): A key innovation is pairing carry (short volatility) with 'anti-carry' via VIX calls, intended to reduce drawdowns and improve outcomes when volatility spikes. Why the VIX curve offers carry (Priority: 4/5): Kim explains contango, implied volatility, option demand, and human uncertainty as structural reasons the VIX futures curve tends to offer persistent carry most of the time.

Key Arguments: ETF wrappers now allow strategies that previously lived mainly in hedge funds or would have been impractical before regulatory changes. SPBC is designed as a practical way for advisors to allocate a small Bitcoin exposure without abandoning core S&P 500 allocation. Using GBTC at a discount can effectively increase Bitcoin exposure, while ETF mechanics may also offer tax efficiency through in-kind rebalancing. Selling volatility is not inherently wrong; the problem is excessive sizing, as shown by XIV's collapse in 2018. SVOL reduces blow-up risk by using only 25% exposure to the VIX curve instead of 50% or 100%. Buying VIX calls with a small portion of carry creates an 'anti-carry' hedge that can soften crashes and even help in extreme spikes. The VIX term structure often remains in contango because uncertainty increases with time, which creates a persistent source of carry for sellers of volatility. The strategy is best understood as an income or carry product rather than a pure directional bet. A non-zero crypto allocation can be justified even by skeptics given Bitcoin's size relative to global investable assets.

Data Points: Simplify assets under management: more than $500 million - The hosts congratulate Simplify on crossing this mark in about nine months. Time to reach AUM milestone: about 9 months - Simplify's rapid growth pace since launching. ETF asset share of total ETF market: about 3.5% - Active/thematic ETFs are still a small share of total ETF assets. SPBC Bitcoin sleeve: 10% GBTC - Kim describes the Bitcoin exposure target inside the S&P 500 wrapper. SPBC equity exposure: 100% S&P 500 - The fund preserves full equity exposure while layering on Bitcoin via futures/cash management. GBTC discount: about 10% to 15% - Kim says the fund currently benefits from buying GBTC below nav. GBTC discount extreme: as low as 20% - A larger discount was mentioned as having occurred recently. Bitcoin market decline mentioned: about 50% - Used to explain why rebalancing thresholds were not hit frequently. Rebalance threshold high: 15% - If GBTC rises to 15%, SPBC rebalances back to 10%. Rebalance threshold low: 5% - If GBTC falls to 5%, SPBC rebalances back up to 10%. Bitcoin volatility: north of 50% - Kim uses this to explain why rebalancing and tax efficiency matter. Crypto market size: $1.5 trillion - Used to argue even skeptics may justify a small allocation. Global investable asset class size: $400 trillion - Used to frame Bitcoin as a small but non-trivial allocation in a global portfolio. SVOL exposure to VIX curve: 25% - Kim says this is the strategy's chosen sweet spot. Competing ETF exposure level: 50% - He references 50% products as common but riskier than SVOL's structure. Maximum volatility exposure discussed: 100% - XIV-style full inverse exposure is described as having blown up. VIX front-month carry: north of 100% annualized - Kim says a full short of the front month can generate extremely high carry in today's curve. Carry at 25% exposure: about 25% starting yield potential - Illustrates the math behind SVOL's expected income profile. Historic average VIX curve carry: about 45% to 50% annualized over 15 years - Kim says the curve has typically been steep enough to reward sellers of volatility. 80% to 85%: time the curve is normal contango - His estimate of how often the VIX structure reverts to a positive carry shape. Expected monthly return profile: about 2% per month - Back-of-the-envelope estimate derived from annualized carry potential. Past 15 years case study return: mid-5% annualized - A 25% unhedged VIX exposure back-test example. VIX spike example: from the teens to 82 - Describes March 2020 as a scenario where VIX call hedges would have helped significantly.

Pivotal Quotes: "picking up pennies in front of a stimulus" — Michael Batnick: A joking spin on the classic 'steamroller' metaphor for short-vol strategies. "we found that a 25% position is actually a pretty good sweet spot" — Paul Kim: Explains why SVOL uses smaller exposure than older volatility products. "when you marry a carry with an anti-carry, that combination is more robust" — Paul Kim: Summarizes the core design logic behind SVOL.

Implications: The episode shows how ETFs are evolving into toolkit products for advisors: simpler Bitcoin access, smarter volatility income, and lower-cost hedge-fund-like structures. Investors get more customization, but need to understand sizing and tail risk.