J. Gallegos

And I was there for almost 10 years working on that. And then Bond Blocks called. It wasn't Bond Blocks then. It was a few of us that started the firm in October 2021 at the time. So a few of us got together. Our CEO, Leland Clemens, has been an architect of fixed income ETFs, both in terms of product design, but also in sort of how they lived and breathed in capital markets. It's really hard to appreciate right now. But when we launched HYG in 2007, there just wasn't the bond market infrastructure to match sort of the equity infrastructure that ETFs operated in.

And so there's a lot of work that had to be done to connect all of those points. Literally going to different desks at different big firms and explaining them how to price a bond portfolio of so many bonds and then how to get that working. So he was a really early pioneer in that. He and another co-founder, Tony Kelly. And he always had this idea about focusing on fixed income and launching more product. It would help, be easier to create portfolios with and be more precise. And COVID happened. And it was sort of, I would say, maybe the third major volatility event that affected all markets, but specifically fixed income markets.

And he called another co-founder of Bond Blocks. His name is Brian O'Donnell and said, we've got to do this business. We've been talking about it at conferences over drinks for so long. But the way that markets have been functioning and the role of ETFs, specifically in fixed income, it's time. Like, do you want to do this? And so they made a couple more calls. And so there were seven of us that came together in October of 2021 to form a fixed income only ETF provider. We saw a few things. One is we knew that rates were going to rise at some point. We knew the volatility would continue in the markets.

And we also, because we both, in our former days together at iShares, but also in our subsequent roles at JP Morgan and Goldman Sachs and Northern Trust, knew that there wasn't enough fixed income product for the markets in the next 10 years. Because we see that markets in the next 10 years were going to be very different from the markets in the last 10 years. And so we saw that there was a pretty, like, fixed income product was underdeveloped for quite a long time in ETFs and it needed to be focused on. And we wanted to bring more precision to fixed income investing through ETFs. And that's the premise of Bondblocks is that, clients need to have updated products for these markets because they're different than the markets that they were familiar with

From, post-GFC and even before. And that, there wasn't enough development focus on delivering that product to market. So there's about 80% of all ETFs or equities. And that's really surprising. So we saw a lot of future growth in fixed income and a lot of underserved clients. And that's me.

So, that's what my hobby is. There's no me right now and that's all right because I have a good voice.

And so, for an SAP 500 fund, you have 500 names in that basket. And if you deliver those securities to the provider, they will deliver you shares of the need. And so, if you want to alter that basket for a lot of really good reasons, you can create a second basket. And so, one is for creation and redemption. One may be for just pricing the basket in a different way. And so, that's what the first patent is, is how do you do that operationally? And nowadays, that process was actually codified in an SEC rule like 6011. Again, getting super nerdy here. But we do have the patent on it. We're named as inventors of the patent on it for having, developed that business

Process really, really early on in ETF. Oh, that's great. And the second one was, was the while I was at J.B. Morgan. I'm named inventor of a ETF portfolio management system and trading system. And so, when I got to J.B. Morgan, we had to build out, technology infrastructure to, connect to all the portfolio desks and create these baskets and help portfolio managers run their funds every day. And so, we built a piece of technology. And I and the technologists are named on that. Oh, that's cool. We have ETFs.

And maybe they hadn't been having that dialogue with clients. Now they have this new offering and way to talk to them. And importantly, like, that gives choice to investors in ETFs. And, there is some fatigue, as I mentioned, like, you can't, your innovation budget can't be as big if you're traditionally one of those older chassis ETF providers that are really big. Like, they have multi-asset products. They have hundreds of products. Every incremental product that they want to maybe, to try out has a big, big margin to clear in order to get through the product development process. So, there's a lot of competing priorities at those firms, those large ETF firms, where when you bring in smaller firms like newer firms like Bobblocks or established, you know,

Other asset managers that come into place, it just benefits investors because they have more choice. They have more product to interact with. They have more providers to interact with. And I think that has been really, really important. Then this really boring technical thing I just mentioned, but regulation level, the competitive playing field for all ETF providers. That's incredibly helpful to the landscape going forward. Like I said, the next 10 years are going to be very different from the last 10 years because just not on purpose, but the SEC just invariably were giving like different types of, rule sets to different providers along the way over 20 years.

And they normalized all that and made it so that everybody plays with their rule set. So competitively, that's fantastic. And I think you see that in the choice of product, maybe yours as well. It's like, there are a lot of registered investment advisors that are bringing their expertise to clients. There's, I think there's some interesting strategies that are out there that, haven't been there. So more choice, more ideas, tons of innovation and focus. So bond blocks is, it's important that each, some of these firms is like bond blocks, like they're focusing on a problem and they're investing in that problem every day. And they're solving things for clients.

They're listening closer to clients of what they're, what they need. And that's good for clients.

So it's really in the innovation, um, decision-making we want to be able to make and also just the execution timing we want. That's why we did it. Um, we know how to do it. We're really good at doing it and we're really great at executing. So we stood up by our business. We started, we all came together, assembled in October of 2021 in the same place. And we had our first fund launched in February of 2022. So we stood up the asset manager. We stood up all of the infrastructure to run the trust in four months. That's really hard to do if you don't put a white label. Um, but that's why. Yeah. there's no reason to go pay someone to do it.

To work. And that's who, that's what this group is. And so what it feels like when I'm at Bond Blocks is I'm working with the people I want to work with. I'm working on the problem I want to work on. And I'm doing it with a group of, of, of, it's not just the people we start off with. This is almost, we're almost 30 people, but I'm, I'm doing it with a team that is really, um, really motivated to, to get this right. And it just, it feels great every day. Um, so that's what I think people would assume you would, Bond Blocks would be like, um, going from the big firm to the little firm. Uh, the other thing that's just so, I'm so appreciative of that we have, is we have a

Ton of perspective and a ton of context from leaving a bigger firm and acquiring, you probably feel this way too, like acquiring every single client and being so, um, humbled and, and, and feeling so appreciative that like clients are choosing you so quickly, uh, that is, that's been great. Like learning, relearning sort of the path to engaging with a client, um, earning their trust, having them buy your product early. It has this, it has this just great virtual cycle of, of, it feels great. it feels great to do something super, super hard. It is hard. The perspective of being away from bigger firm is it's harder.

It's harder. And the people at Bond Blocks, um, signed, like signed up for that degree of difficulty. Our first hire was in March of 2022. Um, he came from Bloomberg and he called us and he said, I, I know what you guys are doing and I want to do it too. And that's not the only call we got. Um, two or three months later, we got a call from, uh, Joanne Bianco, who, uh, is our market strategist here at Bond Blocks. And she said, I saw you guys on TV and I wanted to be part of that. So like everyone's sort of self-selected into this degree of difficulty. And that's an incredible team to work with. It's harder in a lot of ways, but it has an energy that keeps you really focused.

And how did you guys go in viewing the strategy around marketing and getting that distribution so fast?

Um, and then from there we started to build the brand bit by bit and look, and also I think we benefited from the fact that in February of 2022 markets completely changed. we thought there'd be, interest rates would rise and we thought there'd be higher volatility over time, but we didn't think it would happen so fast and happen really quickly. So fixed income came into view. And right when we launched, we had a lot of opportunities in PR to tell our story and to get out there. And then, um, we have an amazing CMO at Bond Blocks that has, built our brand brick by brick. So I think that we've made a really great impression and we've been able to reach a lot of people

Quickly. That's a huge key to our success. People have heard of us. I'm so excited when I'm, someone I say, oh, I work at Bond Blocks where I have my, the best one is like back to the playground, where my Bond Blocks baseball hat on the playground, pushing a stroll as pushing a swing with my kid. And like, someone's like, oh, I know Bond Blocks. And they want to talk to me about Bond Blocks. Like that's, that's a big testament to getting your name out there. And, um, we punch above our weight. That's what we like to say at Bond Blocks in a lot of ways. And in brand, I think, I think we do that with clients. Listen, like we also know what to do there too.

We hire some of, um, best, most experienced ETF salespeople, um, in the industry and they knew who to call day one and they knew how to call those people back day two and day 90 and day 120 until, until they came into the funds. And so again, it's that know-how and, um, that initial plan. I think though, you have to be appreciative. It was like what works in the first year or two, isn't going to work in the second year and the third year and four years. So the degree of difficulty is always leveling up. We're in that space right now. Like 3 billion is great, but what are we doing to position and talk to clients about what's going on in rates and what's going on in credit right now?

How do we make sure we're getting our share of that, um, that big migratory, uh, uh, transition, that big migratory sort of moving from assets from, risk-free assets into credit. Like we have to be on top of that, um, as well. So we, I get it said know-how it's, it's really leaning into brand and digital ways to amplify what we're doing. And we're just out there, Brad.

And so trading through the credit spectrum in credit in general, but in high yield specifically from double B all the way to triple C is actually how institutional investors, um, think about their portfolios and where their risk is. And so we, we wanted to put all of these tools. There's 10 different high yield ETFs that we have. There's actually 11 because we have a sector rotation product as well. But there's 10 different ways that you could amplify your exposure in, your broad high yield exposure. And so X triple C, the reason I thought it'd be a good place to start is two reasons. One is it has had an incredible story in the last two years.

And two is that, right now, as we're thinking about rates declining and the resiliency of the economy, even within today's news of, seeing some softening, um, X triple C is sort of positioned really well to, provide extra yields, lower volatility versus equities. it's a great opportunity. It's our top pick in the fixing of opportunities right now. But what it is essentially is it's a diversified portfolio of over 220 bonds in the triple C category. And to orient to you and why that's different and new is that, when you think about a broad based high yield product, or you think about benchmarks and high yield, like, the big, the bigger, um, the bigger index, uh, broad high yield products,

There's about, 10 to 11% in a given time of a broad high yield benchmark in triple Cs. So if you're buying a high yield ETF today and you're getting, you're getting the beta index exposure to that, you're already exposed to about 10% of triple Cs. And so what is interesting is, for someone that's using that in their allocation today, this is a really great compliment to say, well, maybe, you should be adding another slice of triple Cs, adding more exposure into your broad based high yield exposure. Um, the yield has been bouncing around 12% all year. Um, and it's had some amazing price appreciation in 2023.

It should have good price appreciation going forward, given that rates are coming down and, you can be enjoying, a really big yield pickup by, adding some triple C to your portfolio. So that's one way to think about the product. The advantage is that, you're getting the benefits of diversification. So a lot of active managers in fixed income or in high yield, they're, they're, they're picking QCIP by QCIP, right? They're, they're picking a set of QCIPs they think are the right QCIPs to invest in. And often a lot of high yield managers just exclude triple C altogether. And so, um, whether you're, picking a few QCIPs, you might be unintentionally under allocated to the category versus your benchmark.

So you could add this to, to sort of, gets you at least benchmark neutral, but still express reviews through those individual QCIPs. So that's another way I think it complements an investment process. Or, if you're out of triple C and you want to be out of triple C, it's a way to use this really efficient product. Um, to, or the other products actually. So you would use double B and, and, and single B to build your portfolio. So if you, if you want to lean into the higher quality side of high yield, you do that. So these credit reading products and these sector products are all designed so that you can express a view and a more precise view, lean into things as they're happening.

So you have a benefit of the liquidity of the ETF to get in and out of these positions. You have the benefit of them being diversified portfolios. You're not buying one or two bonds and triple C, which is risky. Um, you're buying hundreds of bonds and it hasn't been done before. And it's really impressive how, um, effective the pricing is when you're trading it on exchange. And that's, that's triple C. Um, I, I think it's a broader story about, about the whole products that it mom blocks and how you use them. But I like triple C because it's our topic, uh, in terms of an opportunity fixed income. And it's, it's really has a ton of utility for these markets.

And, that means that like the category itself has a much lower default rate rate. Um, and it's been that way for a while. And so, yes, if you go all the way down into the credit spectrum of triple C's, there's a higher default risk, but you're, but you're in a portfolio of hundreds of triple C's. So that is dampened and offset of it in the diversification. And we're not at historic, we're not past historical norms for defaults. And so I guess what people are getting wrong today is we don't foresee an economic event that's going to impact this track, this category in triple C any differently than, it would normally.

And that means you get the benefits of all of this exposure and you get the benefits of the sealed, um, in one trade. And so that's where I think, we've been taught, we've been taught about triple C's for two years and people have been asking us about like something, something's going to happen. People won't be able to cover their interest, um, because rates are so high. Well, this, this, this category also, which is different, um, start, sorry, this, um, market cycle is different because it started off with the pandemic. And a lot of these issuers refinanced their debt at ultra low rates. And so they're in a really good position, uh, to, to pay their debt and they've weathered these higher rates pretty well.

There's also a sense that like, as rates might be coming down in the next couple quarters, the maturity of some of this debt, again, most of it being higher quality, um, in, in the broader category, the maturity of this broader debt is going to happen in 2025 and 2026. That's a lot of time, to absorb, refinancing rates and, um, to weather this storm. And I think it's been working really well. So what people have unfortunately missed out on is they've missed out. If they haven't invested in the category, they've missed out on the yield in 2023. It was the top performing category in fixed income. It, um, it returned over 20%. Um, and it's hard for people to, uh, create a relative sense of what's different about junk bonds.

And I try not to use that word today versus what they knew and what they're associating. They're associating with like the floor dropping out and everything going away. That can happen. If you build up really specific idiosyncratic risk in your portfolio with certain Q-sips and certain fundamental, but in certain, in certain, smaller size exposure to triple C. That's not this product. Right. This is, this is category exposure.

People have put trades on and been very wrong in many different points of, of this journey. So you need to see more, but we don't foresee a recession coming. And the second thing is, is that again, going back to bond math and just giving some, um, historical perspective on this, like the coupon income has been the primary driver of long-term returns. In fixed income and specifically in high yield, we have some data that shows that it really has driven and absorbed volatility in the high yield segment. So in particular, when you have a 12% yield within the portfolio, it can, it can weather price volatility very, very well. And so that did happen in 2023. The yield was high.

There was, there was some, there was some volatility in, in, in the underlying, but the total return because of the coupon yield was, was, was, was, was, was cushioning that along the way. So that's, what's really important. And so we believe the second thing we believe is that rates are going to be higher for longer. There's a lot of estimation that rates are going to really start to turn around after September. And I think there's one, there's one firm that's calling for eight rate cuts successively, like very quickly. We don't see that happening because again, there's economic targets that haven't been met. So you need to see that all come together. And I think that, that, that supports our view that rates are going to be higher for longer.

There isn't an impending recession. And that backdrop I gave you, which is like, this is not the credit market. Everybody wants to say, wants it to be, they want it to be like much more of a downturn than it has. It has never produced itself to be. So to your question about like volatility, like, yes, it is more volatile than the broader high yield and it's volatile than other, it's more, it has higher volatility than other classes, but it's been supported by this gigantic coupon. And that has been, I think people just forget that's how bonds work and that, and that's how, and that's the benefit of higher rates.

And it's just, you, you, you, your viewpoint on here would be that like you don't see recession coming. You see rates dropping. There's a total, there's a, there's a price appreciation opportunity here with, with, with triple C. And there's, there's a volatility absorption with such a high coupon. So lean into it more because your, your typical exposure, like I said, is 10%. Lean into it more. It could be a source of extra performance and extra yield. And you couldn't do that before. You couldn't trade 200, triple C high yield bonds in, on exchange before. And you should be able to. You could also feel a little differently.

And, you could go a little higher in product quality and, add more single B. Single B has a really great sweet spot in, in credit. In terms of, in terms of the risk report there. And that's what those credit rating products are meant to do. Like express your view and be able to move in and out of your view as, as things develop.