At The Money: Deregulation Will Free Your Portfolio

The new administration promised deregulation and ending red tape to unleash business and animal spirits. An ETF allows you to deploy capital to take advantage of that theme. Michael Gayed is Portfolio Manager for Tactical Rotation Management, one of the sub-advisers to the Free Markets ETF, FMKT. He is also the founder of Lead-Lag Media, which houses The Lead-Lag Report and related media properties. Each week, “At the Money” discusses an important topic in money management. From portfolio construction to taxes and cutting down on fees, join Barry Ritholtz to learn the best ways to put your money to work. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

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• 1:40Barry Ritholtz?

  Exactly one year ago, the Free Markets ETF launched, ticker symbol FMKT, designed to invest in companies expected to benefit from deregulation and free market dynamics in the second term of the Trump presidency. I was intrigued by the concept and wondered what it might look like in the second half of this term. To help us unpack all of this, let's bring in Michael Gayed. He is the portfolio manager for Tactical Rotation Management, one of the sub-advisors to the free market ETF. So, Michael, I was intrigued by this concept. What was the original insight behind FMKT?

• 2:25Barry Ritholtz?

  How was deregulation becoming an investable theme that perhaps markets were underpricing?

• 2:30Speaker 03

  Yeah, and it's interesting, right? So, when Trump got elected, I have this large network of advisors that I talk to, 350 advisors that I regularly talk to, which is why my calendar is always so jammed. And one of the advisors said to me, you know what would be a good investment idea? You know, something that focuses on deregulation. And he was kind of saying it kind of off the cuff. So, yeah, I give the guy credit for coming up with the idea. And it's like, you know, that's actually an interesting idea. I mean, deregulation arguably makes the time to market faster. It increases margins. It should benefit earnings from a fundamental perspective. It should increase competition. So, all that sounds like an interesting thesis. So, I called up three other firms, you know, one which is the advisor Title Financial Group,

• 3:12Speaker 03

  and then two other RIAs as sub-advisors, people that I've known. I wanted to approach this more from the AVC standpoint. My other funds I launched on my own, this I wanted to actually have partners on, because it's a very different way of my style of investing, which is more risk on, risk off historically. And came up with the idea and said, okay, well, let's go after it. Now, when I had the idea, when I kind of really was thinking through the idea, it's like, all right, Trump is making it very clear that he's going to go from this, you know, for every new regulation you want, I want to cut. He goes from that to for every new regulation, I want 10 cut. And he's actually gone more aggressive on that since he was elected. So, come up with a fun idea, figure out what sectors, what industries benefit the most from deregulation. And it has to be active, because these executive orders come out, and you don't know what's going to be deregulated next.

• 3:56Speaker 03

  So, you've got to kind of focus on that as quickly as possible. Now, deregulation is a very interesting buzzword. You hear a lot of people on the media talking about deregulation as a big tailwind for the broader markets. And I do believe that if you look at, you know, why has the US outperformed Europe so much? It's not just because of tech, it's because we don't have as much regulation as Europe does. Regulation is a stopping point, is a friction that hurts earnings and tie it to market. So came up with the idea for free markets. It's an active fund, stock picking. A lot of the focus is around sectors like industrials, financials, cannabis, nuclear, anything in the aerospace part of the marketplace. Not so much tech. Maybe we can touch on that. We believe that tech is probably going to be regulated.

• 4:41Speaker 03

  And maybe AI in particular be regulated, especially from regulatory perspective in our business, the investment advisory business. But yeah, out of the gate, we had some pretty strong performance. About a year ago, we launched, we had four in a thousand traded shares on day one. A lot of interest in that. We had really strong performance. We were a thousand basis points over the S and P at some point. That ended up being a blessing and a curse because obviously nothing closes a sale like a chart. People started chasing the performance of FMKT. And then we had a drawdown as we got back to AI is the only plan in town. And right now we're kind of meandering, but I do believe that the deregulation theme is here to stay. Even if you get a Democrat as president next go around. The reality is industries that have less regulation should at least theoretically outperform.

• 5:22Barry Ritholtz?

  So, so let's stay with that concept of deregulation. How do you define what sectors benefit from deregulation? And then how do you hone in on what companies within those sectors are going to be the biggest beneficiaries?

• 5:37Speaker 03

  So arguably, it would be very hard to do either of those outside of using AI, which we actually built out a whole workflow and AI screening process to figure out exactly that. Which sectors, which industries benefit? Which individual companies are mentioning deregulation the most in earnings transcripts? So we've got multiple kind of filters that are looking at valuation, that are looking at where SG and A is impacted by regulatory costs. And it's in some ways that you can argue it's obvious, right? It's like, think about industry wise, sector wise, what has the most regulation? Banks, sure.

• 6:09Barry Ritholtz?

  Financials, no doubt.

• 6:10Speaker 03

  No doubt, right? Especially with Dodd-Frank and then you've got to roll back a Basel and all that, which is the deregulation side. You know, cannabis, right? So we saw Trump obviously trying to get ahead of the Democrats. You can argue with some of this reclassification on the cannabis side, right? So like we've got Tilray in the portfolio. Nuclear, right? Obviously with all this AI build out, you're going to need energy. So you've got to make the time to market for getting nuclear plants up shorter to meet the growing demand of speed of implementation of AI data centers. So it's all the stuff that. Our bottlenecks, right, is kind of the area to the way to think about it. So we do a lot of screening. We do a lot of AI. We look at executive orders when they come out. We determine from the AI output. Does this make sense? And then we're just going grander, which companies in theory benefit the most, right?

• 6:53Speaker 03

  So a good example of that is Robinhood. Robinhood is kind of the forefront of financial deregulation. Very forward thinking company, but then on top of that, on the crypto side, they're big players, right? So you hit on all areas of the crypto, of the of the sort of deregulatory focus from the Trump administration, which again is not going to go away. It's hard to, once you deregulate something, to re-regulate it at least that quickly.

• 7:16Barry Ritholtz?

  Unless there's a crisis, it's almost impossible. FMKT's mandate says at least 80% of assets go into companies expected to benefit from regulatory shifts. What's the remaining 20%?

• 7:32Speaker 03

  Yeah, so so arguably, it's it's supposed to sort of like, how do you define it, right? In terms of what benefits from deregulation, but 5% of the portfolio can go into Bitcoin and Ethereum. That's listed in the prospectus. Now that was done-

• 7:44Barry Ritholtz?

  Any crypto or just those two?

• 7:46Speaker 03

  Just those two. And also, we can go into gold as well. And the argument there is that those, if you don't know what a free market is, which is unencumbered by regulation, those are those are almost by definition free marketplace, right? When it comes to the crypto space and gold in particular. So we can do a little bit, and we've gone into that in the past. It's obviously momentum has been weak, so we've gotten out of it. Part of the active nature of it, trying to avoid these big clients in those positions. But that's for almost any prospectus, in order to be considered a theme, you have to have that 80% threshold, right? So part of it's kind of a regulatory requirement to say that if you're going to be focused on a particular theme, you've got to have at least 80% of your portfolio in that. The reality is the every single holding to some extent has some kind of deregulation tie into it.

• 8:30Speaker 03

  Some of it's direct, some of it's more indirect, but there's always a justification for why we're positioning in particular holding.

• 8:36Barry Ritholtz?

  So the fund kind of sits at the intersection of markets and politics and I've long cautioned against allowing partisan politics to influence investing. You're really trying to walk a line where it's not a political expression ETF, but rather a policy-driven theme. How do you balance that? How do you keep this from becoming a darling of one side or the other?

• 9:05Speaker 03

  Yeah, it's like, it's like, politics goes into policy, policy goes into profits. Right? So it's really more about the profit side, the fundamental aspect of it. So we've got that question before. It's like, all right, so you have to have a Democrat come in place. And it seems like it's a Republican fund. I'd argue it's not because even under a Democratic regime, there will be some sectors that will be deregulated, the Democrats, like, like alternative energy, in which case then the holdings change because now that's where the focus on deregulation might be.

• 9:33Barry Ritholtz?

  Right. Solar, wind, we, it's more a Democrat issue than Republican issue.

• 9:38Speaker 03

  Exactly. And I go back to, oh, that's, yeah, you're gonna have deregulation there and then the holding shift. You know, energy is a big part of the theme behind FMGT, which obviously makes sense because Trump is so focused on releasing as much domestic oil as possible and removing frictions there. So it benefits from that, but then it's just a shift, right? You want to follow the policy because following the policy follows, is where profits end up coming from. And policy has winners and losers, and often the winners are things which are favored, which tend to be things which will get to market faster, which is exactly what deregulation is. So I don't view it as a political play. I think it's just sort of the nature of the beast is you will have certain parties that will favor certain sectors, certain industries. How do they do it? By either providing funding

• 10:20Speaker 03

  directly or by making, resulting in less friction for those companies.

• 10:24Barry Ritholtz?

  That makes a lot of sense. It also means that trying to come up with some rational benchmark, almost impossible. How do you figure out what your frame of reference is? The S and P 500 doesn't seem right. What do you use for a benchmark?

• 10:40Speaker 03

  Yeah. And it's interesting. So, I mean, by, we have to have a benchmark from a regulatory perspective because everyone, you know, that's how regulators think about these things. For us, it's more about, you know, the entire landscape of the equity universe.

• 10:56Speaker 03

  Is the fund outperforming or not? Now, again, we outperformed the S and P strongly. The S and P, to your point, is not really a proper benchmark for a free markets type of fund, because the S and P now, I'd argue, is an AI index. I mean, I'm sorry, but it's like, the S and P 500 is no longer as diversified as people think it is. It is a thematic fund, right, under-

• 11:14Barry Ritholtz?

  Large cap growth.

• 11:15Speaker 03

  Large, well, large cap growth is what? It's basically AI. I mean, that's, that's-

• 11:19Barry Ritholtz?

  It's AI, it's semiconductors, it's software, it's go, go down the whole list.

• 11:23Speaker 03

  All, all thing, right, exactly right. So, um, so I think anybody that's looking at FMKT is looking at it from a standpoint that they believe in the thesis, and a lot of small business owners believe that deregulation is more important than taxes, because that impacts their day-to-day activity and working, right? And, um, and I go back to, uh, finding a benchmark is more a function of sort of your own personal, you know, uh, financial requirements. It's not about, are you beating the S and P? Is it, is it, is this, does this fit your, your objectives from a risk-return perspective? Does it make the journey from a investment perspective better?

• 11:57Speaker 03

  And a lot of the free market positions are parts of the marketplace that the market have not rewarded. There's, there is a value tilt, interestingly enough, when you look at the holdings of FMKT. Sure, there are some of these more speculative positions that we have that you almost have to have a position in, like Archer and Joby. I know, I know, uh, you know, your, your colleague, Josh Brown, talks about, I think, Joby quite a bit and Archer as well. Those are classic deregulation plays because of the, the focus around, uh, flying, uh, taxis, basically, and deregulation as far as the FAA side goes. But, um, there's a value tilt. So, if there's an environment that favors a value, it's going to favor free markets anyway.

• 12:33Barry Ritholtz?

  So, let's, let's talk a little bit about some of the most recent holdings I was able to look up. Some are pretty obvious. Uh, you mentioned Robinhood, Key Corp, Citizens Financial, um, even Blackstone. Some of them are a little, I had to scratch my head, Palo Alto Networks, ADM, um, Oracle. Uh, the financials are obvious because of deregulation. Oracle seems more like a political, hey, you know, Larry Ellison is a big, uh, buddy of Trump. His son is in the midst of the whole, um, uh, mayhem with Viacom and, and all of that.

• 13:15Barry Ritholtz?

  How do you distinguish what's the beneficiary of a deregulation and what's politically favored? How do you separate those?

• 13:24Speaker 03

  Well, to some extent, if you're politically favored, you're gonna you're gonna try to put deregulation in place. And the way that looks is in the speed with which government contracts take place.

• 13:32Barry Ritholtz?

  So I was thinking more along the lines of M and A and antitrust rules.

• 13:37Speaker 03

  As well, for sure, right? In the case of an Oracle, there's there's a something called FedRAMP, Federal Risk and Authorization Management Program, which basically is without getting too deep into it. It's a way of getting approvals, right? To get a government contract to sort of be in a pipeline for like an RFP.

• 13:55Speaker 03

  Last year, the Trump administration did something that that basically removed a lot of that friction. So it wouldn't take as long to try to apply for a government contract, which directly impacts Oracle, right? That's the kind of deregulation which is important because it's all about speed to market.

• 14:09Barry Ritholtz?

  So so let's talk about Palantir and Archer Daniels. Similar situation?

• 14:14Speaker 03

  There's an element of that as well on that. Again, AI companies tend to not be true. The strongest deregulation plays, but Palantir does have an aspect of that because again, speed to market for them is around government contracts for defense. Right? So I think there's, you know, it was never sort of a major, major holding of fund, but it made sense to us to have some kind of exposure to it. And then on the energy front and Palo Alto, it's like anything that's tied to AI has to be deregulated from a bottleneck perspective, which is energy, electricity, utilities. So there is a reasoning behind data center permitting and utility usage, right? And the deregulation comes from that. The I keep going back to this idea that what you own matters a lot less than how much you own of it.

• 14:59Speaker 03

  So a large part of the active nature of FMKT is, yes, we're being thematic on deregulation, but we're also actively trying to see, is there momentum in this or that deregulation play to weight that heavier? So a lot of the holdings in the top 10 are not based on how strong the deregulation fit may be. It could be just this deregulation fit and the strong momentum. We want to be there.

• 15:19Barry Ritholtz?

  Gotcha. It makes a lot of sense. So so we talked about financials, technology. Healthcare is another deregulation issue. But I want to ask you about the defense sector and energy. When the war in Iran began, how does that affect how you look at the portfolio? And what is a potential beneficiary of this quicker, more frictionless deregulatory environment?

• 15:46Speaker 03

  Yeah, and when the war took place, and we meet once a week, me and the other portfolio managers, when the war took place, they said, all right, we got to get some defense companies in here and then figure out which defense companies benefit the most from deregulation. They're kind of in bed with each other, government defense, obviously, so it's all about speed. If you're going to go to war, you better have faster speed of bringing things to market. So it hasn't been a major, major thematic play, but arguably, it goes back to if it's about government contracts and it's about speed, then deregulation is about removing the friction to get something to the government's agencies' relative hands to get approved. It's interesting, I don't, I don't view free markets as a geopolitical

• 16:27Speaker 03

  play. I view it more as if you believe that deregulation is how you have more profits, then you're simply trying to figure out which companies benefit from that the most. And arguably, there's, there's more art than science to that, right? But it's, it's not as catalyst driven as much as it's more about executive orders that are taking place.

• 16:47Barry Ritholtz?

  All right, final question. How do you separate genuine deregulation tailwinds from talking points and narrative? More specifically, how do you distinguish a company that's talking about receiving regulatory relief from one whose margins or growth rates are actually improving?

• 17:09Speaker 03

  Yeah, yeah. And that goes back to it's art versus science. I mean, to some extent, there are some very clear, you know, cause effects on the deregulation side impacting certain companies, right? But to your point, a lot of it is going to be analyzing SG&A, fundamental line items, looking at and seeing what CEOs and executives are saying on earnings transcripts. You know, one of the filters is how many times is deregulation mentioned, you know, by various people at companies as a driving factor? Because they're not going to say it unless it's somewhat true, you would think, right? So it is, it is not as clear cut, which in white, again, it needs to be active. It's not something you can quantitatively say, this is the highest deregulation score. So a lot of this comes with judgment.

• 17:52Speaker 03

  A lot of this comes with, which is why it's good that I have a team, not just me, that's coming up with these, these allocations. And just trying to be fast in terms of figuring out where to position. This has been a very, it's been an odd environment, right? Because... Trump's been talking about deregulation. A lot of people were excited about deregulation. Deregulation has a lag, right? So any executive orders from last year, you'll start to maybe see this year showing up in the actual earnings. The market, I think, is still largely undervaluing the impact of deregulation. And if that's the case, then towards the end of the year, you have a rerating and then you start seeing it filter through in the bull market just as a rotation away from this AI-focused passive bid.

• 18:32Barry Ritholtz?

  Really, really interesting. So to wrap up, if you're intrigued by the concept of deregulation, of reduction of frictions, of more opportunity for companies to throw off the yoke of big government, I say as a New York left coaster, you can actually get exposure to that through active ETFs like Free Markets. I'm Barry Ritholtz. You're listening to Bloomberg's At the Money.

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