Options Trading and ETFs with Jay Pestrichelli

Our guest this week is Jay Pestrichelli, co-founder and CEO of Zega Financial. In this episode, Jay tells us that ETFs have made delivering value easier to a broader audience:

• Advisors are in the business of transacting in trust, which requires ‘old world’ discipline and a focus on relationship building and client service.
• The ETF wrapper has allowed Zega to democratize access to its unique expertise in options trading, as well as scale and streamline its business, but differentiation is key.
• The era of single stock options-based ETFs is just starting with much more product development and advisor adoption to come.

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TRANSCRIPT WITH TIMESTAMPS

00:00:00:12 - 00:00:31:17

Cinthia Murphy

The ETF industry has been in the business of disrupting and improving investor outcomes for 30 years. ETF issuers and product providers sit on the front line of that innovation. Here we get to hear their stories and learn what it takes to be a disruptor. This is ETF Wavemaker. Welcome to ETF Wavemaker. I am Cinthia murphy, Head of research for the ETF think tank.

00:00:32:03 - 00:00:39:06

Cinthia Murphy

And today I am joined by Jay Pestrichelli, co-founder and CEO of Zega Financial. Welcome, Jay.

00:00:40:05 - 00:00:43:14

Jay Pestrichelli

Cinthia, great to be here. So nice to be on the show. Thanks.

00:00:44:10 - 00:01:04:24

Cinthia Murphy

Yeah, I'm excited to talk to you today. We were going to explore what it means to be in the ETF business. Why be in the ETF business and how you stand apart in this business based on your expertise. So I wanted to start by talking a little bit about Zynga Financial itself. You know, you talk a lot about the importance of risk management.

00:01:05:05 - 00:01:22:23

Cinthia Murphy

I mean, you guys use things you say things like buy and hedge and the importance of hedging. And you talk a lot about the value of all critical old world discipline. What does that mean? You know, old world discipline and hedging in today's market context.

00:01:24:02 - 00:01:59:19

Jay Pestrichelli

You know, as an advisor, we are in the business of trust and building and keeping that trust with our clients, whether it's an ETF client or a wealth management client is really important to us. And so your clients need to know that even though we're trading more complicated vehicles like like options, that we're still going to stick to kind of core principles of understanding the client's needs, communicating, being transparent, being there for them when things are inevitably not going so great, but also being there to celebrate the wins.

00:01:59:19 - 00:02:23:01

Jay Pestrichelli

It's really more about with our clients, the relationship building and how we can help them achieve their goals, which is a little different than what happens in some experiences today. You know, no touch service, do it yourself, do everything from, you know, from an app on your phone, you know, doesn't really appeal to everybody all the time, especially folks that are looking for a trusted advisor.

00:02:23:06 - 00:02:43:10

Jay Pestrichelli

And so when we talk about overall discipline, that's what we talk about. We talk about using a measured hands when we're investing, measuring risk, meeting client goals, but doing in a way where there's more of a a relationship. Yes. We'll use video these days like Zoom, like we're using right now. But still, conversations are much more impactful than emails and messaging.

00:02:44:05 - 00:03:02:10

Cinthia Murphy

Yeah, well, what's interesting about that is that, you know, we you know, we've been in this business a long time. I think I've been here longer than you have. Even just the idea of financial advice and the role of the advisor, you know, it's constantly being reinvented. But at the same time, the core principle is always the same.

00:03:02:10 - 00:03:34:15

Cinthia Murphy

And technology makes the job changes a little bit, what the job looks like, but the value doesn't change. It's always there. So what I'm curious is, you know, as an advisor from that role, ETFs are one of the products that Zynga financial offers, and you have two families of ETFs, zig ETFs and yield max ETFs. So tell me a little bit about how the ETF wrapper itself enable you to share your expertize, access to your true expertize in a way that other products haven't?

00:03:34:15 - 00:03:40:11

Cinthia Murphy

Or, you know what's special about this wrapper in the context of what Zig is trying to do as an advisor?

00:03:41:12 - 00:04:08:06

Jay Pestrichelli

Yeah, the ETF wrapper is such a matter of convenience, right? For the end client, it removes things like high minimums that might be associated with an option strategy. You know, we've been running individual option strategies for clients in there, in individual accounts since 2010. And there are some constraints when it comes to using options. You know, Zynga is primarily an options based advisor.

00:04:08:07 - 00:04:37:08

Jay Pestrichelli

Every one of our strategies that we manage has some component of options in them. And as such, you know, there's additional disclosures and approvals and separate accounts that have to be opened up. And that was the universe we lived in up until a few years ago. And now with really the advancement of ETFs, it makes it so much easier to deliver those strategies to the inclined you don't have to be, you know, high net worth client now to have access to professional option management.

00:04:37:13 - 00:05:04:03

Jay Pestrichelli

You can buy an ETF for $20 a share and get in and get the experience of, let's say, an investor that might come to us that, you know, has a large concentrated position and we're going to hedge it or we're going to sell options over it for income. It really does help bring the more sophisticated, active management strategies to really everyday investors, which is what Zig is really about.

00:05:04:09 - 00:05:24:12

Jay Pestrichelli

You know, we wrote a book in 2010 called Buy and has the five iron rules for investing over the long term. And it was a book that was meant to be a how to book for the do it yourself options trader. And, you know, ETFs are now such a better vehicle to give that. So if you don't want to do it yourself, then use an ETF that meets your goals.

00:05:24:15 - 00:05:31:12

Jay Pestrichelli

You get to assess, you get to pick, right? The variety of ETFs that are out there now that use options make it so much easier for the end investor.

00:05:32:12 - 00:06:13:14

Cinthia Murphy

So we like the value to the end investor is is clear and it's awesome. It's one reason why we love ETFs and from your perspective, you know it helps also broaden the act, the reach, the access more people can now use options based strategies in an easier way, thanks to the ETFs from the other side, from the business side, you know, the Zynga side did the ETF, you know, being part of the ETF ecosystem, has that brought any benefits to the actual business from the advisor, whether that's the ability to reach a broader audience or to scale or anything that comes to mind or not.

00:06:13:14 - 00:06:38:20

Jay Pestrichelli

Yeah, you know, from a yeah. From a business perspective, you know, absolutely right. It's better distribution, it's better adaptability. You don't have to actually go and, you know, sell every one of the accounts that you're bringing in. You know, it's still important to communicate with the community that is that are using your funds. I communicate with yield match clients almost every day.

00:06:39:11 - 00:06:56:09

Jay Pestrichelli

They reach out to me and we talk. We set up and we do phone calls. And so it's one of those things where you can still be that trusted advisor, but using the ETF as a means of adoption. Now, when it comes to Ziggy's business, yes, there's two things that I've found to help you be successful in this business.

00:06:56:16 - 00:07:14:24

Jay Pestrichelli

It's having a product that differentiate yourself and meet your client needs. So product first. And the second is, you know, awareness and distribution. I mean, the ETF kind of allows you the wrapper allows you to kind of check both of those boxes when you can create, you know, awareness around the product. Right. Putting out the greatest ETF in the world.

00:07:15:06 - 00:07:37:08

Jay Pestrichelli

But if nobody knows about, it won't matter. And then also doing a bunch of advertising on a so-so product isn't going to help you be successful easier. So, you know, we have found from his Vega side that having unique products that like your max or like the the buying hedge strategy that Ziggy runs that some of the funds but having either one of those out there in the marketplace and communicating about them.

00:07:37:14 - 00:07:44:23

Jay Pestrichelli

The ETF wrapper just helps adoption and really smooths out that that timeline of bringing a client on.

00:07:45:17 - 00:07:49:03

Cinthia Murphy

Yeah a product that solves an actual investor problem. Right.

00:07:49:08 - 00:07:51:00

Jay Pestrichelli

That's the magic number about that.

00:07:52:08 - 00:08:17:09

Cinthia Murphy

Yeah, exactly. So I'm curious actually, how did you first get into the world of ETFs? You know, you talk about the five iron rules of investing in general. I'm sure it applies to any other way, any other approach, just smart investing. Was it changes in regulation? Was it you heard from somewhere? I mean, what brought you to the world of ETFs?

00:08:18:18 - 00:08:49:02

Jay Pestrichelli

Yeah, I think it was there was there's some adoption and an advancement of regulations where it becomes easier to run option strategies, you know, running a the strategies you run today, I wouldn't really be possible ten years ago. Right? The advent of flex options and weekly options and things like that now make it possible to kind of bring, you know, the nuances that we could run in a separately managed account or even in a hedge fund.

00:08:49:02 - 00:09:20:19

Jay Pestrichelli

You can now bring those into the into in semi because not only the industry is advanced from a product side, but also from the regulation. So quite frankly, the let's take the old Max family, for example. Right. Having single stock ETFs now where whether it's over an individual take care like Tesla or are other ETFs having products where you can use options to create a very focused set of exposure and still meet all of the ETF guidelines is definitely new.

00:09:21:00 - 00:09:47:13

Jay Pestrichelli

I think we'll continue to see more and more advancement with regulated regulators when it comes to single stock ETFs. For us, it's not about leverage at this point. It's more about running an option strategy like a covered call strategy on the single single stocks and the way actually that we implement that in the your match strategies. I'm not aware of anybody using, say, synthetic options and writing calls over it as a way of delivering that.

00:09:47:13 - 00:10:10:19

Jay Pestrichelli

And so yeah, I think I think definitely the advancement of the both the industry, the options space, the options industry as well as regulators, I think both of those things are making it easier to get into the ETF business. As a money manager, you don't have to do the, you know, the I'll say the funky things or the the hard things in in a separately managed account any longer you can do it an ETF, which is great.

00:10:11:16 - 00:10:31:23

Cinthia Murphy

Yeah. What I think is so cool is that, you know, if you look at, you know, we've been in this business like it's been 30 years since ETFs first came to market in the U.S. and how far we've come from just the S&P 500 portfolio to things like single stock ETFs with an options overlay like the yield max family ETFs.

00:10:32:07 - 00:10:54:15

Cinthia Murphy

And it's it's really solidify in my opinion just this concept that the ETF isn't just an investment product or wrapper, it really is what we call ETF, you know, ETF as a service, you actually wrapping different strategies in this wrapper for access. And it's not about the idea of being a fund as much as it is a service to provide access.

00:10:54:15 - 00:11:00:18

Cinthia Murphy

I think it's just an interesting growth and innovation trajectory that the industry has seen in recent years.

00:11:01:12 - 00:11:21:02

Jay Pestrichelli

Yeah, look, I like the idea that you're calling it a service, because for me to run some of these strategies for an individual, they would have to write some different agreements with me. They'd have to sign option agreements with their broker, separate accounts. They'd get that fund options, disclosure document, right. And then they'd have to figure out, okay, who's, you know, I have additional steps, right?

00:11:21:02 - 00:11:39:17

Jay Pestrichelli

So when you could really deliver the strategy in a much easier way for the end client and then they get to choose when they want to enter exited. I think it actually is a better service. You know, you always want to make sure that people understand the funds they're getting into. I think that's a little bit of the downside.

00:11:39:17 - 00:12:10:08

Jay Pestrichelli

You could put out as much information as you can about a fund, but you never really know if the end investor understands, especially with some complicated strategies that include options, which is why, you know, we are so communicative when it comes to these strategies. We want the investors to understand it. So I think, you know, you could provide the service of access with the ETF wrapper, but I still don't think it eliminates the benefit of having, you know, someone to talk to or some to communicate with when you want to know more information about the ETFs.

00:12:11:16 - 00:12:23:17

Cinthia Murphy

So let's do a quick rapid fire. Two questions. The toughest part of being in the ETF Business Advisor Favorite part of being the ETF Business Advisor Go.

00:12:25:02 - 00:12:40:23

Jay Pestrichelli

The toughest part is when nobody knows your fund exists and it's hard for people to get people to buy it, right? Yeah. Like I said, you could put out the greatest strategy in the world that nobody knows about it. It's hard to have it distributed so I think that's probably the toughest part about the ETF is is it's so competitive right now.

00:12:41:09 - 00:13:03:09

Jay Pestrichelli

Right now, the best part is when an ETF really has some success, you start to create this awareness and it snowballs and you get to be on great videos like this one with you. Cynthia So I think all of those things, in all honesty, when, when you do have something that really it strikes a good nerve with the investment community and you could see the success and how you're helping people.

00:13:03:24 - 00:13:08:08

Jay Pestrichelli

That to me is really the best success of all of this. It's why we're in the business in the first place.

00:13:09:09 - 00:13:35:15

Cinthia Murphy

The last question, Jay, I love to to look to the future a little bit. You know, as somebody who is very active, busy managing product, talking to clients in the ETF world, you know what trends today, whether that's in product development, whether that's in investor adoption, what do you find exciting or that you're really keeping an eye on because you're you're curious to see where it goes?

00:13:35:15 - 00:14:06:14

Jay Pestrichelli

Yeah. So obviously the single stock and single stock boom is just starting. There's definitely a land grab going on where you start to see whether it's leveraged or inverse or option strategies like yield back strategies that are covered calls on individual tickers. I think we're going to see a lot more push towards that. I think it's it'll be very similar to maybe the thematic ETF adoption of, you know, five years ago where you had a theme and you wanted to invest in that theme.

00:14:06:14 - 00:14:29:19

Jay Pestrichelli

And boom, there's an ETF for that theme, right? I think as we go forward with single stocks, there's so many more individual stocks that you can run strategies for. I think we'll start to see that. I also see this trend with advisors adopting them. You know, in the past, you know, advisors would say, yeah, maybe I don't want to use ETFs because then my clients can just go buy that ETF without me.

00:14:29:19 - 00:14:51:00

Jay Pestrichelli

But really, clients still need help. And now that these are actively managed strategies within the ETFs, actually managing the positions the ETFs themselves in portfolios is where advisors can provide value. I can't tell you how many advisors that I've been talking to over the last few months where they just want to discuss how do I embed the yield out of sugar?

00:14:51:06 - 00:15:11:24

Jay Pestrichelli

Zag is buying hedge product into my suite of ETFs that I then build for my clients. Because even though a client can certainly go out and buy an ETF on their own, knowing how to allocate to it, knowing when it's time to add to it, when, knowing when it's time to take that out of the portfolio is where an advisor can really start to provide value and again help the client need it.

00:15:11:24 - 00:15:30:05

Jay Pestrichelli

State If you haven't figured that out for me, it's all about the end client and really it's who we're here for in the first place. So I do think that that might start to be a very interesting dynamic where advisors start to use these ETF that are strategy based versus say, index based or theme based, and there will work those into their portfolios.

00:15:30:11 - 00:15:36:24

Jay Pestrichelli

And you know, that is a trend I don't think has been adopted just yet, but I think we'll start to see more and more of that as well.

00:15:37:15 - 00:15:55:02

Cinthia Murphy

You know, it's it's an exciting time and it's a really busy innovation time for sure in the ETF ecosystem. Jay, we will stop here. Thank you so much for coming on the show and telling us your story and keep up the good work. We will be watching.

00:15:55:02 - 00:15:57:17

Jay Pestrichelli

Thanks. Thanks for having me. Great talking to you.

00:15:57:22 - 00:16:27:03

Cinthia Murphy

Thanks, everybody, for joining us this week. And we will see you next time.