On this week’s episode of the Stansberry Investor Hour, Dan invites an incredibly special guest onto the show.
He’s served as the Head of Investment Strategy and Due Dilligence for UBS…
And spent several years at Bloomberg, where he was Chief Investment Officer for Bloomberg’s technology-driven wealth management business, Bloomberg Black…
Today, he is the global investment strategist and head of investment strategy at ProShares, and he has insight into the markets that few can match…
Simeon Hyman joins Dan on the show to discuss everything that’s going on in the markets today, plus how ProShares is developing products to help retail investors take advantage of major new investment trends and new opportunities.
During their conversation, Dan and Simeon talk about the rise of passive investing… what’s going on with the new meme stocks trend… and what changing interest rates mean for you and your holdings going forward…
Simeon even shares some new ETFs that ProShares has developed to take advantage of new trends in the market, like a new momentum ETF (QQQA)… and an ETF designed to capitalize on the rise of online retail (ONLN).
The two have a captivating conversation filled with tons of valuable insight from one of the most in-the-know investors on the planet.
Listen to Dan’s conversation with Simeon, and much more, on this week’s episode.
Global Investment Strategist | Head of Investment Strategy Group at Proshares Advisors LLC
As ProShares' global investment strategist and head of investment strategy, Simeon Hyman leads a team in strategic analysis, product research and development, education, and the delivery of investment strategies using the firm's ETFs. Prior to joining ProShares, he served at Bloomberg as the chief investment officer for BloombergBlack. Simeon earned bachelor's and master's degrees in economics from the University of Connecticut and an MBA from Columbia Business School.
1:22 – Dan thinks the market could see some rough days ahead… “I’m almost 100% in bear mode…”
5:49 – “Sometimes, like right now, you might want to own a few puts on the bigger indexes, like the S&P 500 ETF, or the Dow Jones ETF, or the Nasdaq ETF… I do that myself…”
9:40 – This week’s quote is from Thomas Jefferson… “Laws that forbid the carrying of arms … disarm only those who are neither inclined nor determined to commit crimes. Such laws make things worse for the assaulted and better for the assailants; they serve rather to encourage than prevent homicides, for an unarmed man may be attacked with greater confidence than an armed one.”
13:17 – Our guest this week is Simeon Hyman. Simeon is ProShares global investment strategist and head of investment strategy. He leads a team in strategic analysis, product research and development, education, and the delivery of investment strategies using ProShares ETFs. Prior to joining ProShares, he served at Bloomberg as Chief Investment Officer of Bloomberg Black.
15:48 – Dan asks Simeon about the recent rise of meme stocks… “They’re trading opportunities, not investment opportunities… and we think, as an example in the retail space – that the longer opportunity – the longer game here is the continued growth of online retail…”
19:18 – Simeon explains why, “Interest rates are likely to rise enough to hurt bonds, but probably not stocks…”
27:30 – Simeon explains why there’s still a lot of room for growth in online retail… “Currently the penetration of online retail is 13%. That’s right, only 13% of U.S. retail sales are online today. So, anybody who thinks they missed it, you haven’t missed anything yet…”
33:07 – “We just launched the Nasdaq 100 Dorsey Wright Momentum ETF, ticker QQQA, and here what we’re doing is applying momentum using Dorsey Wright relative strength indicator which is one of the best practical applications of the theoretical momentum factor, and we’re applying it to the Nasdaq 100…”
36:02 – Simeon explains why some ETFs, like their online ETF (ONLN), are better modified to be market-cap-weighted… “We thought that was an appropriate way to acknowledge how important scale is but still allow for a lot of diversification…”
41:15 – Simeon leaves the listeners with one final thought… “Beware of shiny keys and stick to your plan… If you turn on CNBC and you turn on the news, you can get a little distracted by the news of the day. Make sure you’re focused on your long-term investment plans an invest accordingly…”
43:55 – On the mailbag this week, one listener calls in on the listener feedback line to ask Dan a question about stop losses and trailing stop losses… And another listener calls in to dispute some of Whitney’s comments on guns from last week’s episode. Was Whitney out of line? Dan gives his take on this controversial topic, and more, in this week’s episode…
Announcer: Broadcasting from the Investor Hour Studios and all around the world, you're listening to the Stansberry Investor Hour. [Music plays] Tune in each Thursday on iTunes, Google Play, and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here's your host, Dan Ferris.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I’m also the editor of Extreme Value published by Stansberry Research. Today, we'll talk with Simeon Hyman. Simeon is ProShares' global investment strategist and head of investment strategy. So we're going to be talking about some ETFs with him. This week in the mailbag, listener Sunny called in to comment on Whitney Tilson's statements about gun ownership.
And remember, in the mailbag, it's a conversation. So you can talk to me. Call up and leave a message on our listener feedback line. 800-381-2357 and hear your voice on the show. In my opening rant this week, I'm 100% – or as close as I can get to 100% – pure buckled-down bearish mode. I'll explain what I mean right now on the Stansberry Investor Hour. So I'm almost 100% in bear mode, because I never get 100%, right? Look. I’m always looking for businesses that are really attractive and that are priced to provide a decent return. Because what do they say? It's not your timing of your market. It's your time in the market.
And I would say it's your time in the market holding on to shares of great businesses over your lifetime of investing that's really going to make the biggest difference and really going to make you the most money. It's not going to be your ability to pick the top of a bull market and then buy a bunch of puts or short a bunch of stocks. That is not how you're going to get rich in the stock market. It's going to be a compounding effect over a long period of time.
So with having said that, though, of course I think there are two times when you really need to be aware of the overall stock market. Most of the time you can forget about it and look for those great businesses. But near the bottom when everybody hates stocks and the overall market is absolutely dirt-cheap relative to historical metrics, then you need to be really more bullish and aggressive. Then, there's all that in-between time when you're just looking for great businesses. That's most of the time. And then, there's the time like right now when the overall metrics are very expensive, right?
We're 3 times sales in the S&P 500 and 2 times GDP in total market cap of all the stocks traded in the U.S. And those numbers have never been seen before. We've never been really anywhere near them before. And there are other metrics I could use, but those are just fine, that are pretty decent historical measures of the overall attractiveness of U.S. stocks. But then, there are other signs, right? All these meme stocks, stuff like AMC, GME, and lately – once again – the speculative call option volume. It's bumping up against all-time records.
And at the same time that the speculative call option volume is bumping up against all-time records, the willingness to hedge your downside risk is just disappearing. It's falling into the basement. So what does that tell you? To me, that sounds like a decent indicator that people are hyperconfident about more upside to come and not the tiniest bit worried – well, maybe the tiniest but only the tiniest bit worried about the downside risk that they face.
So, at those times – look. Everything expensive, people super bullish, nobody's worried about the downside. How can you not feel like, "Hey. Let's just take it easy right now." At least. You know? At least just say, "Hmm. How much cash do I have?" Right? That's what I've been pushing for a couple years now... Two, three years. Right? Don't sell your stocks and bonds. Maintain that stake in humanity's ongoing progress and maintain that stake in cash-generative businesses that provide you with a good return over the long term. Don't get rid of it. But maybe hold plenty of cash.
Maybe if you're holding speculative businesses you sell out of them and you kind of hang on to the cash rather than redeploy it. So maybe you wind up with 20, 30% cash. But not like 50, 60%, right? Just a good, solid chunk of it. It'll cut down on the volatility in your overall portfolio, and it'll make it like – it'll make you feel 10 times better if the market's down 30, 40, 50% and you're holding a big slug of cash and you're going, "Hmm. I think this is what Dan was talking about." You know? Because cash is an option on those future opportunities. Right?
So you hold plenty of cash. Maybe you hold some gold and silver. But in a big market crash, big bear market, you should expect them to kind of not perform so great either. But you still want to have some because you don't know what's going to happen, right? Don't predict the – don't call the top. Just prepare for a wide range of outcomes. And sometimes, like right now, you might want to own a few puts on like the bigger indexes. Like the S&P 500 ETF or the Dow Jones ETF or the, you know... some Nasdaq ETF or something like that.
And I do that myself. I mean, I won't be specific about it because I don't want to get in trouble with the – you know, I'm contractually obligated not to be in the specific recommendations I make. But I can talk generally about that without getting in trouble. So, I do that. And right now, I'm kind of leaning into that just a little bit more. And the cool thing about that is, it's a tiny position, it can be less than 1%... but just for round numbers' sake, say it's 1%. And if the market really goes down hard and fast, you can make many times your money, right? You could make 10, 20, 30, 50, 100. I don't know. Depends on what kind of options you're buying.
And that will provide you with some more cash, and it'll affect the return of your overall portfolio, possibly substantially but you made a small commitment. And maybe you hold those options and they go to zero. That's the most likely outcome. You're aware of that, right? I’m always talking about these put options. You're aware that the most likely outcome of holding them is that they go to zero, right? OK. They're insurance policies, right? An investment strategy is not to buy insurance policies and hope there's an earthquake. [Laughs] Right? That's not an investment strategy.
So that's how I view this, and I think with the way people are speculating heavy in call options and the way they're not hedging with puts, I just feel like this is one of those moments again. I called one of them in September 2018, and that worked out pretty darn well. So I called another one at some point that didn't work out so great. So I'm one for one on those. But that's where I am right now. And I feel like I could talk about a lot of different things, but I want to really talk about the one that makes the biggest difference and the one that really just jumps off of all the financial pages and jumps out of all the data at me.
And that's the one this week. So buying a few puts, worried about the market correcting. And the way things have been going, you know... yeah. I think we could be in for an extended bear market, six to 12 to 24 months that takes us down 50, 60, 70%. Who knows? I don't know. But what's likely is something like a five, 10, maybe 12% correction. Something like that. So that's where I am. I'm going to leave it right there. I don't want to dilute the message with anything else. I do want to give you our quote of the week.
Now, our quote of the week has nothing to do with investing. It has to do with a question that I will be responding to in the feedback. Remember? I mentioned in my opening that one of our listeners called in the feedback line and was talking about Whitney Tilson's comment about gun ownership being the most dangerous thing you could do. So this quote kind of expresses my own viewpoint pretty well.
It's from Thomas Jefferson from a Commonplace book in which Jefferson was quoting the 18th-century criminologist Cesare Beccaria or "Becharia" – I'm not sure. My Italian pronunciation is not great. [Laughs] So Jefferson wrote sometime between 1774 and 1776, "The laws that forbid the carrying of arms are laws of such a nature." It refers to a previous thing that he wrote. He continues. "They disarm only those who are neither inclined nor determined to commit crimes. Such laws make things worse for the assaulted and better for the assailants. They serve, rather, to encourage than to prevent homicides, for an unarmed man may be attacked with greater confidence than an armed man." End quote. Right?
Gun control laws all have one primary feature. They make the world safer for people who want to commit crimes, and they make it more dangerous for people who want to protect themselves from people wanting to commit crimes. The simple fact is, you cannot design society from top-down with simple rules for everyone that cover every situation. The world is a dangerous place. Any aggregation, any sizeable aggregation of humanity, will involve – unfortunately – theft, rape, murder, assault, and other manner of violent crimes.
And you cannot turn your back on that truth about human beings. If I can have a wanted home invader knocking on my door in rural Southern Oregon, what are the possibilities in more dangerous places like Chicago? Come on. This is not a difficult thing to figure out. It's not difficult to figure out that you can't design society in terms of what you allow people to do. All you can do is what the founders did and put limits on what the government is allowed to do.
And the government should never, ever, ever, ever under any circumstances be allowed to prevent me from arming myself anywhere at any time. Period. That's how I feel about that. [Laughs] So, stay tuned. We'll talk about it again in the mailbag. But for now, let's get back to talking about investing and let's talk with today's guest Simeon Hyman. Let's do it right now. [Music plays and stops] The American retiree is now paddling upstream against soaring taxes, crippling adviser and portfolio fees, skyrocketing medical bills, historic inflation numbers, and food prices, an overvalued stock market, and a left-for-dead bond market.
The American retiree or future retiree is now facing a crisis like never before in history. And on June 23, America's No. 1 retirement expert – Dr. David Eifrig –is doing something about it. Dr. Eifrig is stepping forward with an urgent wake-up call for every American over the age of 50. He'll share the greatest upset in the history of American retirement and the one retirement lie that could wipe out everything you've built. So ask yourself. "Who's fighting for your retirement?" Get all the details at www.danmessage.com. Again, that's www.danmessage.com for the retirement wake-up call on Wednesday, June 23. Don't miss it. [Music plays and stops]
Today's guest is Simeon Hyman. Simeon Hyman is ProShares' global investment strategist and head of investment strategy. He leads a team in strategic analysis, product research and development, education, and the delivery of investment strategies using ProShares' ETFs. Prior to joining ProShares, he served at Bloomberg as chief investment officer of Bloomberg Black. [Laughs] We got to talk about that. Simeon earned bachelor's and master's degrees in economics from the University of Connecticut and an MBA from Columbia Business School. Simeon, welcome to the show. Glad to have you.
Simeon Hyman: Thanks for having me. Appreciate the opportunity.
Dan Ferris: So look. One of the reasons why I really wanted to talk with you is because there's some funny things starting to happen with ETFs due to these crazy meme stocks. And on a recent episode, I talked about how AMC Entertainment Holdings has been pushing around the Russell 2000 Index, and you work for ProShares, man. You're the ETF company. And the Russell is like, you know – that's one of the premier indexes. And there are thousands of indexes. I can't imagine what the effect of this sort of thing on a smaller index might be. What is your take on this? I mean, indexes aren't like broken, are they? How does this play out? Help me here. I'm just at a loss for how to think about how one stock can move the Russell 2000, be 70% of the movement over a single week.
Simeon Hyman: Yeah. I mean, it is interesting to look at. And one place that you've seen – you've seen several of these meme stocks – or I don't even know what we call them. But you've seen some sort of... I almost sometimes call them dead-cat bounces. But you see some focuses on companies that are having some challenging economic performance, particularly through the pandemic. One place that we see it, of course, is in the retail space where some of the comeback stories in this meme land have been some of the old brick-and-mortar folks.
And indeed, you do see – if you look at, as an example, the S&P Retail Select Index – you see some real short-term movement that's been driven by some of those stocks. I think if you were to ask sort of more of the reason point-of-view on this, they're trading. They're trading opportunities not investment opportunities. And we think as an example, in the retail space, that the longer opportunity, longer game here is the continued growth of online retails and opportunity. But indeed in the short run, there have been some interesting things, particularly when you take smaller slices of the equity markets like a sector or subsector, and if you find a couple of these stocks there that are getting bid up a day here, a day there.
Dan Ferris: Right. So there are folks out there who have been kind of critical of the – let's just go ahead and call it the rise of passive investing, even though you could argue that the term... we could quibble about the term "passive." But let's not do that. I think we all know what we mean by it. And part of the argument is, over time – and even John Bogle expressed concerns about – over time, as more and more of the market becomes passively invested, problems can develop. You know? The liquidity kind of starts to dry up, and that can create some volatility all by itself without any fundamental developments at play. What's your view on that?
Simeon Hyman: Well, there are a couple of pieces to this puzzle. So first, passive with sort of a capital "P" is still a relatively small percentage of overall trading. So there's lots of trading going on that you just walk through some of the trading activity out there that's outside of sort of the passive land. And the other pieces that – particularly in the ETF world, the structure itself, adds liquidity to the market through the process of creating redeeming shares.
So, you know, there's opportunity here both – or I should say the passive piece is still relatively small. But also, the market structure of ETFs, which is our focus as liquidity in marketplace. So, you just don't really see systemic dislocations that people are kind of waiting for. If a bunch of people think a stock's more than it was worth yesterday, that's... to me, that's a fundamental move. Whereas not fundamental with regards to the underlying P&L and balance of the company, but it's people buying stock.
Dan Ferris: Market fundamentals. Right I see. Well, you know, I couldn't help like picking your brain. Like, as soon as I find somebody from ProShares, I'm like, "Oh. He's an ETF guy. We got to ask him these big ETF questions." But let's talk about what you focus on and what you do from day to day. You have some ideas for us, I know, about the bigger picture of interest rates. Which is a really important topic with interest rates still scraping what James Grant has called like 5,000-year lows. Why is a growth and technology ETF guy this interested in interest rates?
Simeon Hyman: Well, first to be clear we've got a bunch of solutions at ProShares that run across various forces of the markets. But I do think that there are opportunities to stay invested in growth and technology in this market, which... and I'll mention a couple in a minute. But to back up to your orienting question about interest rates, the backdrop – a good way to think about that backdrop right now is perhaps to think about it in the following way... that interest rates are likely to rise enough to hurt bonds but probably not stocks. So let us just – let's go with the Bloomberg consensus as an example. I still use the terminal – I'm an old employee. I still like to go to the terminal. Lots of good stuff there.
And it takes you about two seconds to pull up that the 2022 Bloomberg consensus for the 10-year Treasury yield is two-spot-two percent. If you say "spot," it sounds more intelligent because it sounds more like I'm a British guy. So two-spot-two for 2022. OK. Now let's do one more thing. Let's do a scatter plot of P/E ratios against that 10-year yield. Because P/E ratios... the market's a discounting mechanism. Those multiples only mean something in the context of interest rates. And if you make that plot, you'll see that at 2% you get roughly a 20 P/E. And we're currently trading 22 times. 22 times – too many 22s these days.
But we are trading at 22 [laughs] times 2021 consensus earnings. Oh, and by the way. In this last earning season, companies beat their estimates by – on average – about 25%. So this is the – it's a long-standing story. But when rates rise from low levels and as long as they don't go sky-high and – it's generally a decent time to be involved in equities. Not true for bonds. You know? If we go from 1.5% to 2.2%, that's 70 bps. Corporate bonds on average have a duration that's eight to 10. You know, you're out 5 to 10% of clients' safe money, that's not a great answer. But stocks will probably be OK in that scenario because it's such an indicia of an improving economy that it's good for equities.
Dan Ferris: Right. But there's a threshold. We would have to agree that there's a threshold, right? On that. So if this forecast comes true, maybe we're golden. But if we start to get higher on the 10-year, certainly like so-called zombie companies will have a problem, and there's more of those than ever. It could become a problem, right? Higher interest rates at some point could and definitely would become a problem, right?
Simeon Hyman: The long-term average... and you saw this from Bill Dudley a couple of weeks ago. But the long-term average on 10 years is around 4% or so. And the simple map is two plus two equals four... 2% inflation and 2% real yield is 4%. That's going to be the long-term tendency. It just doesn’t seem like we're going to get there any time in the next 12 to 24 months. You have to have a complete unwinding of QE. Absolute complete unwinding of QE and solid inflation expectations, settling into the 2% range.
So even if you got to that long-term average level, you might still argue that equities will be fine. I'm not sure I'd go that far because – yeah. So even a three handle on the 10-year in the next several months. Very rapidly I think we'd see a reaction from the equity markets. But talk to me when you see a three or four in front of it, and then I'll say, "OK. Now let's start to take it into greater consideration with regard to the broad market." But I think we've got some time before that happens.
Dan Ferris: Right. Fair enough. Definitely. So overall, I know you have some ideas for us about growth and technology stocks and staying invested as you said. But overall, a lot – well, not lots. But enough folks these days are talking about stocks being – U.S. stocks particularly – being in a bubble. Do you care? Do you have a macro viewpoint that you wish to share?
Simeon Hyman: It's back to that scatter plot. I'm not sure how you get to a bubble when we're trading not much past a 20 P/E, and we're not even at a 2% 10-year. If you want to say that part of the valuation of equities is dependent on low rates, that would be fair. But that's different from saying it's a bubble, and that's why the key here is – yeah – as long as rates stay somewhere with a two handle, it's very supportive evaluations at these levels. It's kind of a weird, unusual hypothetical, "Well, if interest rates were 5%, then stocks would be overvalued." Yeah. But they're not.
Dan Ferris: Right. So I think you get to a bubble-like price-to-sales or S&P 500 around like 3, like all-time high of market cap to GDP – just shy of two all-time high CAPE ratio in the 30's, I think, at this point. You know, those are the big ones that are thrown around. But they don't bother you.
Simeon Hyman: Certainly not anything like market cap to GDP. I mean, that's a – there's so much noise around that. "What's public companies? What's private companies?" Yeah. It goes back to some of the old research that – there's never really been anywhere globally a consistent relationship between GDP and GDP growth and equity markets because there's so many things in between that that I would find that to be a very unreliable indicator. You still – and even if you wanted to get into the quality of earnings debate, which would mean, "OK. Maybe I don't trust P/E because I want to do price to cash flow, or I want to do economic profit," or something like that.
But on average, earnings quality – yeah. You can't really say it's deteriorated, especially given that many of these companies on the tech side – it's not sock puppets anymore. There's a lot of cash flow and a lot of high returns on equity and on assets and on net assets. So even if you wanted to – even if you wanted to poke at earnings quality... I think if anything, it's better than it was 20 years-
Dan Ferris: What is this sock puppet metaphor? What are you talking about?
Simeon Hyman: That was one of those early Internet companies. I can't even remember which one it was. Its logo was a talking sock puppet. I can't even remember which one it was. [Laughs] And people pointed at it when the tech bubble burst in 2020 – excuse me, in 2000, 2001.
Dan Ferris: Got you.
Simeon Hyman: I can't use that reference anymore. I've been told that people are not familiar with sock puppets anymore, so I’m going to stop talking about it.
Dan Ferris: All right. Well, yeah. You can update it, right? OK. So I guess you're going to have ETF tickers and ideas and names for me. But you like online retail, right? Tell me about that.
Simeon Hyman: Yeah. So I wanted to focus on two ideas. Again. We've got a fair number of things across the spectrum. But with respect to this concern around growths in technology, I think it's just – it would be risky to abandon them in one portfolio. These are the sources of innovation. And as I mentioned, they make money. And so, to be completely out of it is a big bet. And we've seen that as sort of the "yes, values have performed big, year to date, but still, the sort of rolling over of growth and technology is not quite happening." But I think you still want to be smart about it.
And one of the ways, as you just indicated, we think is online retail. You know, what's the importance here? Well, here you have a growth and somewhat technology-driven piece of the equity markets. But you have an opportunity here to participate both in the reopening of the economy and transformational change. So people spending more money on lots of different things. So you've got the consumer discretionary spending thing going for you. But of course, you have the ongoing increase in online retail penetration. I'll give you one crazy stat.
Currently, the penetration of online retail is 13%. [Laughs] That's right. Only 13% of U.S. retail sales are online today. So, anybody who thinks they missed it, you haven't missed anything yet. So that's the first real surprise here that I think a lot of folks, "I didn't know that. I get packages every day." The other piece that's very interesting is that even if you say, "OK. Well, I was surprised by that. But is the distinction between kind of a born-online player and a legacy player make a difference anymore? I mean, isn't Walmart a huge online player now?"
Yes. They're No. 2. But guess what? Walmart's reward for becoming the No. 2 online retailer has been steadily declining in margins while Amazon's goes straight up. So the born players still have tremendous cost and efficiency advantages. Will that dissipate ultimately in some great equilibrium where a brick-and-mortar store is only one-third selling space, two-thirds last-mile distribution, and there are drones flying in there and automatically doing automated pick-and-pack? Yeah.
But that is many years from now. 13% is your calling card here with a real price advantage. It's not just Amazon. It's Wayfair. It's Chewy. It's Etsy. Qurate still is a very clever business model. But just to put the period at the end of the sentence, oddly enough the ProShares online retail index – and we track it in our ETF ticker ONLN – it's actually at a 30% price-to-book discount to the tech sector and 40% discount to the consumer discretionary sector. So somehow, it's actually a little bit on sale based on a classic fundamental metric.
Dan Ferris: On sale are two words that I like a lot. [Laughs]
Simeon Hyman: You can tell from our dialogue that it’s not my favorite word because I pointed out I think the most important story is the long legs to the story. But it still just caught my eye because you wouldn't have expected that discount.
Dan Ferris: OK. That's pretty cool. Also, I hear you on the 13% because I expect to wake up every day and see this number updated – right, for the past 14, 15 months now. And I expect it to be updated. And somebody says, "Oh, no, no, no. It's 25% now," or something. But no. It’s not, is it? It's actually pretty cool.
Simeon Hyman: Yeah. The peak, that first quarter of lockdown when brick-and-mortar was substantially locked down, was 16%. That was a pop from 11. And now, we've had three straight quarters of 13, which is a substantial acceleration from pre-pandemic. So it did peak just slightly higher, but even that peak was relatively low. And if you look at guestimates of where we'll be, say, in three years, 20% is kind of a number people land on. And think about it. That would be a 50% increase in online retail sales.
Dan Ferris: Right. That includes stuff like grocery too. So you could go – you could probably go like "X grocery" and "X a couple of other things" maybe to get a more meaningful number? No?
Simeon Hyman: Grocery's an interesting one because – I think you're getting... I suspect where you're going is, you're assuming grocery has low penetration. And if you guessed that, you would be right. In fact, prior to the pandemic, it was the lowest at 2 or 3%. And it is now in the high single digits. So there indeed has been a dramatic increase in grocery penetration. But you still – but it's not that far off. So now, it's somewhere in the mid to high-single-digits versus the 13% for the overall category. So if you strip it – I don't know, off the top of my head, it's not going to change the numbers dramatically. There's no real smoking gun there. But you are correct. It was the lowest in penetration, and it did have a very nice pop in the pandemic that's probably not going to recede to any great extent in the near term.
Dan Ferris: All right. Good. Fair enough.
Simeon Hyman: Yeah. I'll give you – I got one more for you. So you mentioned some of the interesting things going on in the ETF space. I think one of the things that might have caught your attention over the last month or so – there was a wildly dramatic rebalancing of most of the momentum indices... several of them completely changed their stripes from being technology – heavily weighted in technology to heavily weighted in finance. It's an interesting data point because we think there's an opportunity to deploy momentum but perhaps in a way that would behave a little bit better with regards to how you deploy it in your portfolio.
And look. The academic research highlights momentum as one of the most durable and emphatic factors that there's a real risk premium associated with. Like, momentum's a real thing. You've got all that Fama French data and all that stuff that tells you it's good. But when it changes its stripes so frequently, sometimes it's a little tricky how to deploy. We just launched the Nasdaq 100 Dorsey Wright Momentum ETF, ticker QQQA. And here what we're doing is applying momentum using Dorsey Wright's relative strength indicator, which is one of the best practical applications of the theoretical momentum factor.
And we're applying it to the Nasdaq 100. When you apply it to the Nasdaq 100, it picks the 21 highest momentum stocks, highest ranked by relative strength out of the Nasdaq 100. So there's enough room for that factor to, if you will, speak. So you're getting the benefit momentum factor, but you know you're always going to have a large-cap growth portfolio at the end of the day. And I think that makes it a really well-behaved opportunity to use momentum and – as we're talking about – to stay invested in the innovative side of the equity markets.
And just to close out on this, the QQQA and the Nasdaq 100 Dorsey Wright Momentum Index – it's equally weighted. And that's pretty important these days. Because you got a lot of top-heaviness in some of these indices and sectors, whether it's looking at the tech sector and you got 40-odd-percent between Microsoft and Apple, etc. So the equal weight I think is an extra vote in favor of taking a peek at this in the current environment. Because again. Do you want to be out of this? No.
And by the way. It's the combination that's important. It's the deployment of momentum and the equally weighting. It's that combination that we think is really uniquely delivered here. And crazy enough, there wasn't one. You know, we at ProShares – we want to be... we like to do things a little bit differently. We're a nice-sized player, but we're small enough that we can do me-too stuff. And there was nothing like this out there. So really pleased to partner with Nasdaq and Dorsey Wright on this.
Dan Ferris: So equal weighting is rare enough that I have to ask, like, about the culture around your organization or maybe just your part of the organization. Does that have anything to do with it? And why aren't more people doing this?
Simeon Hyman: As I mentioned, we're focused on differentiated opportunities, but we're also very focused on doing the research when we see them. So let me – by example, I'll explain how we think about these construction elements. You have to really look at the underlying economics. I think I started to use a New York accent. I don’t know how that happened, but I'll try to keep that [laughs] ... it's when I get on a real roll. You have to focus on – you have to focus on the underlying economics of the opportunity to inform the construction decision. As an example, we just went through ONLN, our online retailer ETF. That's modified market cap-weighted. Why?
Because scale is so critically important. And Amazon is just under 25% of that index, by the way. It has contributed about 25% of the return of that ETF over the last several years. And we thought that was an appropriate way to acknowledge how important scale is but still allow for a lot of diversification. Because Wayfair, Etsy, Chewy, and a bunch of other players are meaningful there. But you still had to acknowledge the output scale. When we look at the momentum opportunity, the key here – there's a couple of pieces.
But one way to think about it is, imagine that you were an old-school active manager and you had equal conviction across all your picks for your fund. You would then equally weight. So the equal weight derives from the observation that the momentum factor has sort of equal explanatory power. In other words, once you find the 21 highest-ranked guys, there's no extra benefit from making the highest of the 20 – the highest of the highest of the 21 bigger.
And if you were to do something else like market-cap weight, you'd kind of be diluting the information that you're getting from the momentum index. You might want to do that if you were like CalPERS. You would want to take a tiny smidgeon of this benefit but look almost exactly like the index. But here, the audience to this we think wants the maximum opportunity for momentum. And the odds of that are equally spaced across the names. It happens to be that in this environment we think there's that extra benefit of equal weight because it appears that there's some sort of extra "top heaviness" in some of the alternative ways that you would approach the market.
Dan Ferris: Got you. That's an interesting point about not wanting to dilute the effect that you've researched and are trying to exploit. It makes me wonder, again, about the whole rest of the ETF market. You know? Why is everybody – is it just laziness? Is it just – we all know how business goes, right? You got to make a living. You got to get a product out there. Is it laziness, or why don't more people do that kind of work? I just – this market cap weighting thing drives me a little nuts.
Simeon Hyman: It really depends on what the investment objective is. You really can't argue with a set-it-and-forget-it 30 years – just "play the well-diversified beta "game. You know, the old research points to that to be a very plausible and defendable approach to managing one's portfolio – whether it's for an individual or an institution. But we certainly do think there are some opportunities. Look. There are not opportunities to cure world hunger, but there are opportunities to find a little bit more return and a little bit less risk by applying some of these opportunities, whether they're innovative takes on a sector. You know, there hadn't been a way to split online retail from legacy retail.
So that was our insight there. It seemed pretty obvious. But if you wanted to buy a retail ETF, it had both things in it. And as I said, it was just – it really surprised us that there was no momentum index on the Nasdaq 100, which seemed like a no-brainer to combine a source of perpetual outperformance and innovation with an academically proven factor. So I don't have the same beef with folks who are going pure passive with a capital "P." But at the same time, we think we're providing some solutions that add some value.
Dan Ferris: OK. So QQQA, online retail index. ONLN is the ticker. You got anything else for me? I'm loving both of these so far.
Simeon Hyman: I'm going to leave it there because there's only so much people could digest and we'll take a run at a couple other ideas on another show. That'd be awesome.
Dan Ferris: All right. Well, Simi, that's cool. I get it. But I promise you [laughs] the listener to this podcast has a voracious appetite for ideas. Just voracious. So [laughs] we've been talking a little while here, and I'm going to throw my final question at you. It's the same final question for every guest on every podcast. And it is very simply, if you could leave our listener with a single thought today, what would it be? And you can go as far and wide as you like. It doesn't even have to be about investing. But in your case, you know, I'm going to bet that it will be.
Simeon Hyman: How about, "Beware of shiny keys and stick to your plan?"
Dan Ferris: Beware of shiny keys?
Simeon Hyman: And stick to your plan.
Dan Ferris: Beware of shiny keys. Explain – I don't know what about that one. I haven't heard that one before.
Simeon Hyman: If you turn on CNBC and you turn on the news, you can get a little distracted from the news of the day. Make sure you're focused on your long-term investment plans and invest accordingly.
Dan Ferris: I see. Oh, shiny keys. Shiny objects. I got you.
Simeon Hyman: You know, like a cat, kind of.
Dan Ferris: Right. Right. Sure. [Laughs] Sure. No. No. I get it now. Yeah. Yep. Don't be mesmerized by shiny objects in the financial media and stick to your plan. Stick to a long-term plan. It's so simple, isn't it? I mean, it's so simple, but it's so emotionally difficult. Listen. Thanks for being here. I really enjoyed hearing about your two ideas and all of the other insights about interest rates and ETFs in general. And I really hope that we can check back in with you in another six, 12 months or so.
Simeon Hyman: Indeed. Be a pleasure. Thanks again for the opportunity.
Dan Ferris: Hey. That was really cool. I hope you enjoyed that as much as I did, because you have to respect the guy who says, "You got two ideas, I'm keeping the rest in my pocket. You can have me back in six or 12 months." [Laughs] You know? I like that. I expect to hear it a lot more often than I do, in fact. So that was pretty cool. I hope you enjoyed it. All right. Let's check out the mailbag. [Music plays and stops] There's a story you're missing out on that I'd like to bring up today.
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In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Just send your questions, comments, and politely worded criticisms to [email protected]. I read as many of these e-mails as time allows, and I respond to as many of them as possible. You can also call us at our new listener feedback line 800-381-2357. Tell us what's on your mind and hear your voice on the show. And two – count them, two – listeners availed themselves of the opportunity to call us at the listener feedback line and get their question on the show. One of them is a fellow named Shannon.
Listener: Hey, Dan. This is Shannon. I’m an Alliance member. The question is, what determines a stop loss and a trailing stop loss in all of the recommendations that all the subscriptions give?
Dan Ferris: I didn't completely get what you were going after. You could've been asking me, really, what a trailing stop is. But it sounded pretty much like you knew that, so I'm going to skip that and I'm going to guess that you mean something like, "How does one establish a trailing stop price level?" And it's pretty subjective. Although, we have found historically it's generally going to fall in the area of 20 to like 35%. I know some people in a really volatile stock will use 50%. I'm guessing that those are pretty small positions if you can tolerate a 50% and then you're out.
But mostly, I'm in the 20-to-25-percentish camp when we use them at all in the Extreme Value newsletter. We don't always. Like with a stock like Costco, we just don't bother. But it's a good question. And it is subjective. Now, the folks at TradeStops, they do a little bit of work on the volatility of a given stock, and then they'll suggest where to set your stop based on that. So they have a whole system for doing that. And it seems pretty cool. But at Extreme Value, we don't even use that.
We probably should, but we don't because we believe we know which are the really awesome businesses... we believe that we [laughs] know that Costco is a fantastic business and will continue to be one for the next five or 10 years. And we believe we know Starbucks is a fantastic business and will continue to be one. So we proceed with our own system. But it's a good question. And ultimately, the answer is, it's kind of subjective. The next bit of audio, from our listener feedback line, comes from Sunny.
Listener: Hey, Dan. First name's Sunny. Longtime listener, longtime subscriber. In fact, I'm an Alliance paid-up member. But what brought me to Stansberry was the Extreme Value. Hey. I just finished listening to your [laughs] interview with Whitney Tilson. I love Whitney. I'm a subscriber to Whitney. And I will get the book and read the book. But I had a real problem with his evaluation of suicide related to gun ownership. I mean, my question is, does he have any data on how many homes actually have posters in them where people were suicidal or killed themselves?
My rant. You can't kill yourself with a toaster, but correlation is not causation. I hold this guy in high esteem for years. I have to admit that it's kind of – he's made me question how high esteem I hold him in. Granted, the gun thing is a whole different issue. It can separate a lot of people who agree on everything else. But I just don't think his assessment of that is accurate. Anyway. My two cents, Dan. Thanks.
Dan Ferris: Sunny, I hear you. I knew someone would either write in or call in about this. And obviously – look, Whitney is an awesome guy. We're not going to agree on everything. He's a super bright, really nice... like, he's a really successful guy who's just available. You know? Like, he's not difficult to communicate with, and he's always been really great to me and I've always had a lot of respect for his work. So I'm not going to snap back at him about this issue [laughs] which I'm really passionate about.
I'm passionate about guns in general and gun laws and the way we think about guns in our society. I own guns. I know this issue from the bottom up. I have experience with them. And so, you know, when he said – in his interview he said, "You know, it's the most dangerous thing you can do, is to bring a gun into the house" – you know, I didn't bother pushing back on it even though I think that is literally just not true. I don't see... I haven't read that part of his book yet, but I need to do it to find out why he would make that statement because obviously estimates are as high as 400 million – we have like 400 million guns in this country.
And there are... I think the latest statistic actually comes from 2019, roughly 24,000 suicides by gun. And gun is the most frequent. He's spot-on about that. Most suicides – about two-thirds of them – are with a gun. So, obviously if someone is feeling really down and they know there's a gun in the house, it's a bad situation. Like, I didn't push – that's part of the reason I didn't push back. It's obvious that that is the case, right? But to say that it's the worst thing you could ever do or the most dangerous thing you could ever do... I think that's just his passion for this issue coming through.
Because that can't be literally true. There's way too many guns in way too many households for that to be true. In fact, if you look at all the places where all the gun violence – non-suicidal gun violence – takes place, you could lift four or five cities off the map and, within those cities, areas of maybe tens or hundreds of football fields in size – just lift those off the U.S. map and all of a sudden, there's very little gun violence in the United States versus the rest of the world. So it's a more complicated, more nuanced issue than maybe Whitney represented.
But I understand his passion about it because I'm passionate about the opposite view. I don't think you're truly safe unless you have a gun in the house. And let me tell you a quick story. It would have to have been between 2010 and 2013. I don't remember exactly what year. But I was working in my study in the front of the house. The doorbell rang. I went to the door, and there was a young man – there were actually two young men. There was one at my door, and then there was one standing out by the curb looking back and forth, who I figured was the lookout.
And the one standing in front of me had a red sport coat on, and he had this sloppy-looking clipboard with some really crappy-looking papers. It was a mess. I was like, "Who is this guy?" And it was very awkward, and he was trying to convince me that he was collecting money for some charity. And I knew that was baloney, but I couldn't figure out what was really happening. So I said, "No, thank you," and they went on their merry way. Well, later on that evening on the news they described these two people perfectly and said that they had committed home invasions in the area.
Now, this was a town of less than 20,000. This is rural Southern Oregon. This is not New York City, not Chicago, not Baltimore, not Miami, not any of these – LA or wherever, these places where there's lots of violence. This is rural, Southern Oregon. Right? So I feel like I had a brush with a really, really potentially deadly situation, and I was really sorry I didn't have a gun in the house at that moment. And I was glad that I work at home because I think what they were doing is casing the neighborhood to figure out – they don't want a six-foot, 200-pound guy answering the door.
They want some little housewife answering the door, and they'll come back later and overwhelm her and do God knows what to her and take those valuables. And it'll be horrible. So these are tail events in your life, right? A tail event overwhelms all the other events in the distribution. You know? Right? Say there's 1,000 people on an island of average amount of wealth, and one of them is Bill Gates, right? He's the tail. And he overwhelms the rest of the distribution. You see what I'm saying?
And in your life, an event like murder or suicide is a tail event that overwhelms every other event in your life. And home invasion could be murder, right? Or rape or robbery, or who knows what they can do to you. So for that reason, I cannot expose myself to the risk that somebody's going to come into my home. And there were people I met in – I met a guy in Baltimore who was a patient of a neurologist friend of mine. You know, they broke into his house and put a gun in his mouth and pulled the trigger.
And he lived. And of course, he was not the same afterward. He was a neurology patient – right – of my friend. So I've just been – I've had that particular close brush with a bad situation, and I just don't think... I'm pushing 60. My wife and I are not bodybuilders or martial artists or whatever you have to be to fight back. And a gun is really the only option. So I feel safer that I have a loaded gun next to me at key places in the home here. And the most dangerous thing I could do is to be exposed to one of those situations and not have it, right? But the suicide issue to me is something altogether.
And I think Whitney makes a good point. If you think somebody – and also, the point about safety. Right? If you do. If you have kids in the house, you don't want to have loaded guns laying around... where a 14-year-old, like a teenager, they're curious. They'll want to play with things, right? Or even a toddler wants to play with things. You know? And they accidentally pull that trigger and – boof – that's a tail event in your life. So I just let Whitney talk, and I didn't feel any need to push back at that moment. And I thought about it later on, and I actually posted something on Twitter, and I took it down. I was like, "Look, this situation... I don't need to respond and I don't need to say anything about this. It is what it is. You feel the way you feel."
You're probably not going to change your mind, Sunny. I know I'm not changing my mind on this. [Laughs] Whitney's not changing his mind. He made some good points, and that's the way it is. But I'm glad you said something because I obviously had a lot to say about this. And I'm glad you brought it up, and thank you for that. OK. One more question from Zack M. And Zack M. e-mailed us and said, "Good morning, Dan. Just wanting to say thank you for taking the time to create the content for the Investor Hour podcast. I try to listen to every episode, and I forward episodes on to my friends regularly."
Well, thank you for that, Zack. I hope everybody forwards the episodes to their friends regularly just like Zack. Zack continues. "Also," he says, "Thank you for introducing me to Michael Covel and the trend-following strategy he believes. The past 18 months has seen me trying to blend trend-following and value investing into my portfolio. Thank you again and take care." And I just want you all to know Zack is referring to Episode 127, November 7, 2019 if you want to listen to our interview with Michael Covel.
And yeah, Zack. There's more than one way to skin a cat out there in the market, isn't there? There's all kinds of strategies that work over all kinds of different periods of time. And you commented later in your e-mail. You said, "Both strategies in my opinion have their place through a market cycle." I bet you're right. I bet a really smart person – and we actually talked with Marc Chaikin recently on the program, right? And he combines fundamental – mostly fundamental – but with some technical analysis. And we talked with other investors who've done the same. So it's a good idea. And if you can pull it off, you can generate some great returns. Thank you, Zack. Good question. Glad you wrote in.
And that's the mailbag, and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. We provide a transcript for every episode. Just go to investorhour.com, click on the episode you want and scroll all the way down and click on the word "transcript" and enjoy. If you like this episode and you think somebody else might like it, send them a link to the podcast so we can continue to grow. Just tell them to check it out on their podcast app or at investorhour.com.
And do me a favor, please. Subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review. You can also follow us on Facebook and Instagram. Our handle is @InvestorHour. Follow us on Twitter where our handle is @Investor_Hour. If you have a guest you want me to interview, drop me a note at [email protected] or call the listener feedback line at 800-381-2357 and tell us what's on your mind. Until next week. I'm Dan Ferris. Thanks for listening.
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