AI Summary
5 min readAnimal Spirits Live: Tax Alpha, Bond Market Mechanics, and the ETF Factory
When Alex Morris and his team at F/m Investments launched their T-bill ETF in August 2022, they assumed the 10-year Treasury fund would be the star. "We all chose the 10 year because it's the 10 year," Morris recalls. Instead, the 90-day T-bill fund became their runaway success, now approaching $7 billion in assets. The timing was impeccable: launched just as the Fed began its aggressive hiking cycle, the fund gave investors exactly what they were promised — a simple, predictable yield that reinforced itself month after month. "You got exactly what you were promised. You came back for more."
Why Bond Benchmarks Don't Work Like Stock Benchmarks
Morris argues that most investors are disappointed with bonds not because bonds failed them, but because the person managing the bonds was doing something different than what investors thought they were doing. The problem starts with the benchmarks themselves. The Bloomberg Aggregate Bond Index (the "AGG") holds roughly 40,000 securities, making it effectively uninvestable. Bloomberg even created a separate "Investable AG" version — which still holds about 20,000 securities. "It's hard to pick one item like the S&P 500 and say that's the bond market target," Morris says.
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What you'll learn
- 1 (00:00) **Intro & Setup** - Hosts Michael and Ben introduce the live show from Washington, DC, sponsored by F/m Investments, and set up the conversation with guest Alex Morris.
- 2 (03:03) **Bond Market as “Smart Money” & Inflation** - Alex defends the bond market’s recent rate-hike pricing, arguing it correctly feared inflation, and discusses the limits of the “smart money” label.
- 3 (04:30) **Who is F/m Investments?** - Alex introduces the firm as a $20 billion boutique fixed-income manager, and the hosts explore the surprising success of their T-bill ETF (TBIL).
- 4 (07:00) **The Need for Bond Diversification** - The conversation shifts to why the 2022 bond bear market woke investors up to the need for more thoughtful fixed-income allocation.
- 5 (10:00) **Bond Benchmarks & Hyperscalers** - Alex critiques the construction of bond benchmarks and explains how the rise of “hyperscaler” debt is distorting the investment-grade index.
- 6 (12:11) **Government Intervention in Mortgages** - The hosts ask why the government doesn’t directly intervene to lower mortgage rates, and Alex explains the practical and second-order risks.
- 7 (14:57) **The Rise of Tax Alpha in Fixed Income** - The core diagnostic section begins: defining tax alpha, explaining why it’s back in focus, and showing how the mechanics have changed.
+ Full timestamped outline available in the app
Guests on this episode
Show Notes
On this episode of Animal Spirits: Talk Your Book, Michael Batnick and Ben Carlson are joined by Alex Morris from F/m Investments for a live show recorded in Washington D.C. that covers inflation, the Fed, AI, tax alpha and much more.
Definitions of terms from the episode -
AG Index: Evaluates the performance of agricultural sectors across different regions.
Basis point: Is used to indicate changes in the interest rates of a financial instrument.
SALT Deduction: SALT stands for State and Local Taxes. The SALT deduction allows taxpayers to deduct these taxes from their deferral taxable income.
Alpha: Measures an investment’s performance relative to a benchmark index.
Tax Alpha: The difference between a portfolio’s after-tax return and the after-tax return of benchmark.
Coupon: A periodic interest payment made to bondholders
Russell 2000: Is a stock market index that measures the performance of 2,000 small cap companies in the U.S.
Options: Financial derivatives that give the holder the right, but not the obligation, to buy or sell an asset
BDCs: Stands for Business Development Company, a type of investment firm. BDCs primarily invest in small and mid-sized businesses
REITs: Stands for Real Estate Investment Trust, a company that owns, operates, or finances income-producing real estate
Par: Stated or face value of a financial instrument, primarily bonds and stocks
GFC: Stands for Global Financial Crisis, which refers to the severe worldwide economic crisis that occurred in 2007-2008
AGG: iShares Core U.S. Aggregate Bond ETF, which tracks the performance of the U.S. investment-grade bond market
Find complete show notes on our blogs...
Ben Carlson’s A Wealth of Common Sense
Michael Batnick’s The Irrelevant Investor
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