Stocks Keep PRINTING ALL-TIME HIGHS And It's NOT Stopping Anytime Soon

0:00Hello everyone. The stock market is on fire, baby. Investors don't seem to care about Iran anymore. And we've got an expert here to explain what is going on with all these income ETFs that are exploding across the market. We're live today from the desk of Anthony Pompliano.

0:24Before we get into today's episode, I need your help. My goal is to get to 1 million subscribers on YouTube. We currently have just under 47 ,000 subscribers. Hit the button and help us get to our goal. And let's get into today's episode. All right, ladies and gentlemen, the US stock market is on fire. The S &P 500 gained 10.4 % in the month of April. That is a monster number, 10 % in the month of April. That's the 13th time in history that the index has gained at least 10 % during a single month. Now, of the 12 other times, only twice has the S &P 500 not gone higher in the 12 months that followed.

1:02Carson Groob's Ryan Dietrich, a fan of this show and somebody that I love, he shows the average return 12 months later has been nearly 14%. And that suggests that current stock market investors are poised for strong performance through the rest of this year. Now, yesterday's new all-time high in the S &P marked the seventh all-time high during the month of April. Blue Kirk Market Insights explains that this often indicates more new highs are yet to come. Since 1950, over 70 years, the S &P recorded seven or more April all-time highs only seven other times. In each case, the year ended positive and the median gain was 26%.

1:4026%. Strength begets more strength. All-time highs bring more all-time highs, as we've been discussing. But we are now seeing strong positive performance across the entire stock market, not just the S &P. J.C. Perrott's writes that the Dow Jones Industrial Average, the Dow Jones Transportation Average, the NASDAQ 100, the S &P 400 mid-caps, the Russell 2000 small caps, the Russell micro-cap index, and the S &P 500 large caps. All of those different indexes. They all just closed the month at the highest levels in American history. That's pretty cool, right? It's not bad for a stock market that people predicted would have entered the next Great Depression last year, or a market that was supposed to suffer and go down because of the Iran war and the short-term oil shock.

2:21So why is this happening? Why is the stock market so resilient in the face of global conflict? Well, Jim Bianco, another friend of the show, had a great take recently where he described the market psychology. Listen to what he had to say. I think Warsh is gonna come in and he's going to make the arguments that AI, and by the way, if you would ask me just as a quick tangent, why is the stock market ignoring 441 on the 10-year note? Why is the stock market ignoring$120 on crude oil? I would argue to you that the stock market believes the single biggest story today is AI. And it believes in the power that AI is going to be transformative for the U.S.

3:02economy. And that is driving it more than whatever's happening in the Strait of Hormuz. Whether that's right or wrong remains to be seen. But right now, that's really the story that we've got going with the stock market. But he's going to make the case that AI is deflationary. So there you have it. Investors, they just don't really care. I agree with Jim on this. It may sound crazy, but Americans are not going to be affected as much by what happens in the street. Artificial intelligence is already infiltrating their lives. It's empowering higher levels of productivity across the economy. and it is driving the cost of certain goods and services down.

3:41The conflict in Iran is driving oil prices higher and by extension, the CPI numbers are going higher. But Americans are less dependent today on oil than they've ever been. And the increase in inflation is still within the range of the last few years. So if you have a comparative change, it's just less noticeable because you've been used to higher inflation levels. On top of those facts, the market likely understands that AI is a structural tailwind to the economy and society. Whereas the conflict and the resulting oil prices, those are going to be temporary. So regardless of whether you agree or not, the market is screaming from the top of its lungs.

4:12It is telling us that investors don't care about the Iran-related issues. There is one game in town, and that game is AI. Until we see some material issues in the AI market, I would expect the U.S. stock market to continue going higher. You're going to see it in semiconductors, data centers, power generation, model companies, large-scale tech firms, commodities, chemicals, photonics, and many other verticals. I could go on for days. This is a widespread generational bull market that we're living through. The best investors find a trend and they ride it for as long as possible. AI is presenting that opportunity right now.

4:45The question is whether you've got the courage to jump on board and hold on tight for the ride. All right, guys, I've got a very special treat today. We've got Troy Cates. He's the co-founder and managing partner at Neos. Neos is one of the pioneers of these income ETFs. Basically, you buy the ETF, you get exposure to the underlying asset, but then you also get a little bit of income coming off of these covered call strategies. These things have exploded in popularity. And so I got him to come on and explain what are they? How do they work? What are the risks? How should you think about whether you should put them in your portfolio or not?

5:17Here's my conversation with Troy Cates. All right, Troy, I thought a great place to start this conversation is these income funds have exploded in popularity. You guys have something like 25 plus billion dollars in assets under management. Who is buying these things? Like what is the problem that these funds are solving for folks? It's a great question. We've seen buyers as young in their 20s looking to either supplement their income or we've heard of a lot of people taking their paycheck, putting it all in products like these and then using the income in the distributions they're receiving off of these types of funds to live their life.

5:52Or we've seen it all the way through retirement where people are living on a fixed income. They have a budget, they're retired, and they have a set amount of money that they need to make work for them for their years until they don't need it anymore. So we've seen it throughout the kind of, you know, call it in your investment life cycle. And what's interesting about that is when we started doing this 15 plus years ago, it was really geared more towards retirees. It was really, those were the people that had fixed income portfolios that were trying to source income from other places. And when we brought out a lot of these early option based ETFs and brought out a different way to, you know, get income off of the volatility of whether it's the S &P or the NASDAQ or other reference assets, really the retirees were the ones who looked at it first and said, I need income.

6:47I could supplement some of my income that I get off, maybe off my fixed income portfolio or other places by using some of this. And I think over the past probably five years, it's really grown to across everybody who's investing and thinking about these types of products. Now, when you guys started this 15 years ago, it seems like these products have really kind of evolved over time. And the way I look at what you guys are doing is there's kind of a different iterations of these income funds. What's the difference between when you first did it versus all of the improvements to today in terms of how they actually operate?

7:20Yeah, when we first brought out these early ones years ago, there wasn't much you could do with an option inside the ETF structure at the time. So you're thinking back in 2012, 2013, really we had to build a passively managed product that was tracking an index. And there was a lot of indexes out there that, some of the SIBO indexes that were out there that would have, say, a covered call strategy. You'd own a reference asset like the NASDAQ 100. and in full replication. And then you would follow this index. It would tell you exactly what call you were writing. And most of them were 100 % buy rights.

7:54You were just buying for every $100 you owned, you were selling$100 worth of calls and you were covering that at the money. So you really weren't getting that upside participation as much. You were capping your upside and they just weren't that efficient of a product. But as the ETF space grew, as some rules changed and allowed certain things to be done within the active side of option management, that's when we really started to see these products really start to grow. Think of like 2019, 2020, and so forth. And when we started Neos a little over four years ago to get back into this side of the business and bring out a lot of the strategies we were doing for single family offices and private pensions, endowments, and stuff like that, we really said now that the ETF structure allows this, we could bring these products out to where anybody could buy them.

8:44If anybody could buy one share, they have access to what we look at as an institutional type product where they could potentially earn some income, have distributions on a monthly basis, and still get access to whether it's the S &P, the NASDAQ, we have products across gold, Bitcoin, Ethereum, and so forth. So basically, you're getting exposure to the underlying asset, whether it's the S &P, gold, Bitcoin, whatever. And then you're getting this income through this like option overlay, if you will, to drive that from a distribution standpoint. Now, one of the critiques that I've seen all over the internet of these income funds is great.

9:18I get the monthly distribution, but the nav decay, I'm getting killed and I'm actually quote unquote, losing money on my capital, even though I'm getting the distribution. You guys seem to have a little bit of a different perspective in terms of what you're doing. Describe why that nav decay isn't as big of a problem? Yeah. So it's something we focus on a lot. When we're building these strategies, we're not just building it to have a good distribution yield. That's not the goal. The goal is how do we overall have a good total return compared to that underlying reference asset used, the S &P 500, for example.

9:50We want to make sure that the product can keep up with the movement of the S &P 500. It might not capture all of the upside, but when the S &P 500 moves higher, we want to make sure our product moves higher as well. So the way we build our rules-based strategy, Everything here we do follows these sets of rules. And it's looking at volatility. It's looking at the volatility of the S &P 500 in this example. And it's saying, you know, when we're selling calls, we're not selling calls at the money. We're selling them out of the money. But how far out of the money? That can change every month. And one of the other big keys is on how much of the notional of the portfolio are we covering.

10:24So if we have a big rally like we've seen this past month in April where the markets move higher, we want to be able to capture a lot of that upside. side and by doing that over time we have a better total return than you might have say in an at the money buy rate that covers 100 of the notional we want to sell calls out of the money we don't need to cover 100 of the notional and we could still have you know meet our target distribution ranges so it's really important for us to think about that total return not just whatever a distribution yield can be given out to people now when you start thinking about kind of the yield that people can actually get, it seems like there are some people in the market that are promising 50, 75.

11:06I've seen 100 % annualized yields. Those numbers are bonkers. I, as someone who may surprise people, am fairly conservative. I think Bitcoin's a conservative thing, although many people may think it's risky. And so when I see those kind of like video game number type returns, I get very nervous. When I looked on all of your products in kind of the suite, I saw like much more conservative numbers. They're like 10, 12, 14 type percent things. Why are they promising so much more than what you guys are promising? I think, yeah, some of those other products. And as people start, that's one thing. There's so many option income products out there.

11:43There's so much to sift through and understand, even if you're just looking at an S &P 500 product or a NASDAQ 100 product. There's so many out there and they're not all created equal. Some of them don't even use options. They use equity link notes or they use swap contracts or total return swaps. So it can be different across the range. We try to look at it and say, when we're building these products, what could the product being this underlying equity portfolio, maybe in a NASDAQ 100 with an option overlay using NASDAQ 100 index options, what could that product return over time? And what could the distribution, meaning the premium coming off of those short options that we're selling on a monthly basis to be distributed out, what could that produce for the portfolio?

12:27And that's where we tie in our target distribution ranges. So our NASDAQ 100 product, QQQI is in the 13 to 15 % range. There are products out there that, like you said, say, hey, we could give you 90%. But over time, the NASDAQ 100 most likely will not return 90 % a year over time. So that's where you get into your question earlier about funds that have NAV decay and it's just eating away at the underlying principle. We just like to distribute out what we're receiving in premium from the short calls and make sure that over time, hopefully that total return can support that distribution. And that's kind of how we look at the world.

13:03Now, let's talk about what investors can do or what you see your investors doing. So on the first side is the portfolio allocation. Are people taking like 100 % of their S &P exposure and then going and putting it into like the S &P income fund? Is it a percentage? How are people constructing that portfolio to get exposure to some of the income, but still keep the S &P exposure? Yeah, so it's different for everyone. I don't think we've seen people take 100 % of their exposure and put it into one of these types of products. I think people use it to supplement some of their products. Some people have their portfolios divided up by, you know, asset allocation.

13:38Here's my S &P 500. Here's my alternatives, maybe my fixed income. And then And they might take a sleeve of each one and take some of our products, whether it's some of our equity, high income, our fixed income, our alternatives, and put those sleeves in. Some people we've talked to look at it as, hey, I have a set percentage, say 20 percent of a portfolio that is all income focused. And that's where this might sit. So for us, you know, we never tell anybody this is not a full replacement for your S &P 500 exposure, your NASDAQ 100 exposure. It's more of a supplement. If you want to lower your volatility, you want to have potentially a tax efficient distribution coming to you on a monthly basis.

14:16This is where you might kind of sleeve that into your portfolio. And then how do people think about the suite of products that you offer? Is it just like, hey, I have S &P exposure. OK, I should get S &P income exposure. Or do you see people just going across the entire suite and saying, you know, let me add every single fund? How does that work? Yeah. So now we're, as you kind of walked through earlier, we're up to 19 ETFs now. And the way we look at everything is we really look at ourselves as a solutions provider. So when we started out, we launched three ETFs. We had SPYI as our equity high income.

14:47We had BNDI as our fixed income product and CSHI as our cash alternative. And that was kind of rounding out your overall asset allocation. And with each launch, we keep slicing up that asset allocation pie. So when we look at it, we see investors, they usually don't come in with one. They might start out with one ETF, but then they say, oh, I was looking for, I have gold exposure, but I don't earn income off of it. You have a gold product that I could have a distribution on a monthly basis from that. So they start to look at a number of products. They don't always go for all of them, but figure out each investor is different.

15:22And they figure out, oh, I could take this one or these two, and this makes sense for me. So it's nice to, as we think about ourselves as, again, as a solutions provider and if people think about earning income and having exposure to this part of the ETF sector, they think of Nios and come over and say, all right, they have an S &P, they have a gold, they have a Bitcoin and put together their own portfolio. I love the Nios name. I just think it's super slick. It's like hanging on the door and it attracts the right people. What's the biggest risk for these? There's a lot of people say, OK, cool.

15:54This sounds awesome. I'm going to get income. I'm going to get the underlying exposure. I'm going to hold constant that you guys are good at managing the options. There's not going to be the nav decay. What risk am I taking by going and putting my capital in one of these funds? Yeah, so I think the biggest risk that people understand if they're investing in the S &P 500, they have downside risk in those equities that they're holding, those 500 plus equities. If you take one of these products like our S &P 500 high income product, the risk is you understand the downside risk. You understand you're taking equity risk.

16:21I think the biggest risk is not capturing all of the upside. So we're selling calls out of the money. And like we said earlier on a certain percentage of the notional on a monthly basis. But what that does is gives us real premium in real time, but it's capping out. We're selling away our upside to get that premium. So it's not capturing all of the upside in these big bull runs like we've seen this month with this big rally we've seen in the equity market. It's not capturing all of it. We'll capture a good percentage of it, but you're not going to capture all of it as you kind of go through those short call strikes.

16:53On that point in particular, when I was looking at some of the performance over various time periods, you know, one, three, five years, whatever. One of the things that it seemed like is let's say that the S &P delivered 15 percent. Your fund may have delivered like 11 and a half in ballpark numbers. But still, it's not like, hey, the S &P did 15 and you guys did three. So to your point, it seemed like it was, you know, two thirds or more of the upside was still being captured in the underlying exposure. And then obviously you're getting the income on top of that, which is the thing people are seeking out.

17:26Yeah. And that's exactly what we built them to do. We built them to have a lower vol product because you're taking that income in on a monthly basis off the distribution. And you're willing to take that and give up a little bit of the upside. Yes, there's going to be plenty of times where the S &P or the NASDAQ are kind of going up and down 1%, 2 % a month and kind of going sideways. But then there's going to be those months where we do gap higher, like we've seen this past month. And during those months, we're going to capture a lot of that upside. But you're not going to capture it all, depending on how far out of the money the calls are and on how much of the notional we wrote.

17:59But the idea is, you know, building these products. We want to try to have that total return. We want to capture as much of that as we can. Makes sense to me. Where can we send people to find out more about Neos or look at the various funds that you guys offer? So you can go to our website. Neosfunds.com is a great place. We have a lot of videos there. kind of going through everything from our view on how we structure things and what cover calls are. And you can see all the different fund pages for all 19 ETFs. You can always follow us on X, Nios Investments, and we put stuff out there as well.

18:31You're like your media star now, getting into YouTube videos and stuff. Exactly. If you had asked me three, four years ago, if I'd be on YouTube this much, I probably would have said there's no way, but here I am. I love it. I love it. All right, Troy, thank you so much for doing this. We'll definitely do it again in the future. Thank you. All right, guys, that's it for today's show. Thank you guys so much for watching. I hope you enjoyed that interview. And the U.S. stock market, it's on fire, baby. I'll see all of you live from the desk of Anthony Pompliano on Monday.