Recorded live at the Exchange ETF conference in Las Vegas, host Ryan Nauman welcomes David Nicholas, founder and CEO of XFUNDS, to discuss what a strong multi-year equity run means for investors and how to prepare for potential selloffs. Nicholas explains why focusing only on capital appreciation can be risky, argues that true diversification means some parts of a portfolio will lag, and emphasizes drawdown as a practical risk measure compared with volatility alone. He describes how investors often underestimate their drawdown exposure and how income generation can help investors avoid selling during downturns. Nicholas outlines XFUNDS’ approach using option overlays such as put spread selling and iron condors to harvest volatility and generate income without fully capping upside, and discusses implementation, including equity and fixed-income sleeves, potential allocations, and where to learn more at nicholasx.com.

Zephyr can help financial advisors create modern diversified portfolios. Learn more here.

Learn more about XFUNDS here.

00:00 Show Welcome

00:36 Live From Vegas

01:33 Meet David Nicholas

02:28 Why Launch ETFs

03:55 Beyond Growth Focus

06:21 Drawdown Risk Matters

07:59 Measuring Risk Tolerance

09:32 Income As Hedge

10:04 Options Strategy Basics

11:54 Explaining To Advisors

13:15 Portfolio Fit And Allocation

16:41 Where To Learn More

Connect with Ryan Nauman:

LinkedIn

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Welcome to the Adjusted for Risk Podcast.

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Join myself, Brian Nauman as I

talk market investment economic.

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Let's get started in life,

as I hope prepare you for

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the upcoming week in markets.

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I work for Zephyr in all of express

by myself in my podcast, guests are

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solely of their own opinions and do not

reflect the opinion of Zephyr or Informa.

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Its contains company.

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This podcast is for information

purposes only and should not be

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relied on for investment decisions.

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Welcome everyone to zephyr's

Adjusted for Risk podcast.

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We are recording on location at the

Exchange ETF conference in Las Vegas,

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which is a little bit different than being

in, uh, in Lake Tahoe, but it'll take it.

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The weather is nice.

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Weather is nice, so.

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You know, equities have

had a great three year run.

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In fact, it's been a while since we've

had three years of double digit growth.

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But at some point, you know,

we've gotta be prepared for

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risk and a potential sell off.

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Well, I have on the perfect guess to talk

all things about what this, um, great

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runup in equities means for investors

and the potential risks moving forward.

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But first, this episode is sponsored

by the award-winning Zephyr, which

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helps investment professionals

make more informed investment

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decisions on behalf of their clients.

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I'd like to give a very warm

welcome to David Nicholas.

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David is the founder and CEO of X funds.

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David.

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Thank you so much for coming on the show.

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It's an honor.

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Really excited about this conversation.

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Can you please tell us a little bit

more about yourself and ex funds?

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Yeah, well, grateful to be here

and then it's a great show, so

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we're just, uh, happy to be on.

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Yeah, so I've been in the investment

management industry now for over two

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decades and come from a private wealth

background and you know, for the last 20

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years we've helped really investors, uh,

not only just build their wealth, but also

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protect it, uh, generate income off of it.

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And so.

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It's really been an amazing, uh, stretch

so far, but also I think that career

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has really led into the ETF world.

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We've been able to bring those strategies.

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Into an ETF wrapper.

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So just really excited about it and

it's been a really, uh, fun market.

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We've had a lot of different market events

over the last 20 years, but uh, it's

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been good to get through all those and

also be able to put great products out.

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Yeah.

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Why did you decide to just go

in the ETF world, you know.

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Successful wealth management practice.

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What was it?

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Just over dinner on a, you

were like, let, let's do ETFs.

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Yeah.

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You know, I know.

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'cause this is a, it's a tough business.

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I mean, yeah.

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Very competitive.

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It's very competitive.

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And look, we, we don't have economies

of scale like a BlackRock or an

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Invesco, so it's a lot of risk.

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We put out a product, it doesn't work,

but just really it was, it was when

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the interest rates were very low.

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And then if you remember right after COVID

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up pretty, pretty, uh, significantly.

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We had clients ask us about treasury.

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And so all of a sudden, treasuries were

now this really exciting asset class.

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'cause you could get 5%

on a treasury, right?

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When you couldn't for years.

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For the first time in years.

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Yeah.

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For years.

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Yeah.

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And so, uh, clients were asking for us,

we were, as a private manager, we would

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add a management fee of 1% on top of it.

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Well, that four now became three.

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It really just, I, we felt bad.

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And so we actually, our first

ETF product was a fixed income

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product, a treasury product.

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That added an option to overlay,

and really it was just to be able

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to cover our fee with generated a

little bit of extra premium so that

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our clients would still be better off

even after paying our advisory fee.

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Yeah.

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Interesting.

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I love it.

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I love these stories of just you, you

kind of evolve, I wouldn't say pivot.

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Sure.

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But you, uh, expand and evolve over it.

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That's right.

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And then ETFs with technology now it's,

you know, it's not like mutual funds

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and, you know, some other products.

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It's easier to to launch.

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That's right.

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That's right.

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Fantastic.

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Do you think, you know, some investors

focus too much on capital appreciation.

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I mean, it's easy to, right?

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We've had this fantastic run up.

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20% returns.

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20% returns.

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Yeah.

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So do you think it's sometimes

easy, you know, or they focus

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too much on capital appreciation?

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Yeah.

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When you think about it as an

investor, the primary thing that

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we focus on is, yeah, how much

does my portfolio grow grow?

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Its capital appreciation, but,

but I would say that's not.

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That's not the only

thing to be looking at.

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And, uh, you know, we, we've had an

amazing run here over the last decade, and

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I, and I tell investors this all the time,

if everything in your portfolio is doing

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well, you should actually be concerned.

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Because really that means you're

not, you're not diversified.

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There should be some asset class

that is not performing well, that's

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giving you a balance or a hedge

to your long only investment.

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So to me, true diversification

means, yeah, parts of my portfolio

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are doing well, but I also have

this bucket that's really there.

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Yeah, it may be underperforming this year.

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But when things turn or we have a

sell off, you want that part of your

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portfolio to be able to give you a

nice offset due to long only equities.

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David, I love that.

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I have a lot of conversation.

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Finally, diversification's

worked, you know, after years

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of just US supremacy, right?

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And now it's working, and I've had

more and more people talk about

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exactly what you just said, David,

like if everything's working.

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Something's not working.

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Diversification's not working, right?

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That's right, that's right.

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Um, I think that's a great,

great way of putting it.

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Um, so fantastic.

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What, uh, so if they're putting

too much emphasis, maybe on

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capital appreciation, but why not?

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Because like you said,

markets have had a great run.

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We were up 20%.

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Why not?

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Put a big emphasis on capital

appreciation when it's worked.

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Yeah, that's right.

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David, you're asking a lot from investors.

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2025 I think was a really good

reset year for diversification

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to say, wait, you know what?

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Yeah, you're right.

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Uh, mag large Cap Tech has done very well

over the last decade, but if we wanna win

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long term, I think it really is important

to broaden out the portfolio and I, and I

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think you don't give up on what's worked.

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But I think if you're a prudent

investor, you're, you're gonna add

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metals as an asset class, you're gonna

look at crypto as an asset class.

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You know, I, we like nuclear

defense as an asset class.

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So I think the timing is right to broaden

out a portfolio because growth matters,

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but also risk and draw down are important

if you wanna be able to win long term.

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You know, and David, I'm really glad

you're brought up risk and drawdowns.

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I, when I started in the industry 20

years ago, aging myself, it was all about

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standard deviation, volatility that was.

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The risk.

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That's what everyone measured.

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Now I hear more and more, and

you just said it, draw down risk.

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To me that is like the primary risk

to me investing, losing my money.

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Give me all the upside investment.

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Your risk you want.

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That's right.

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Bring it.

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Yeah.

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But is that draw down risk?

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So do you think investors, after

having this great run, just

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forget about at risk sometimes

and be like, equities just go up.

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Yeah.

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Yeah.

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So when you think of, and I think

this is a great discussion about

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diversification, but when you think

about draw down, I always say if all

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of the assets in your portfolio, you

may have a hundred different positions,

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but if they all are going down at

the same time, then that means your

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correlation is off in the portfolio.

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And so I think you're spot on.

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Yeah.

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Give, what's a, David?

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What's a simple way to measure risk?

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Am I just because you're 25 years old.

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You may not wanna lose 50%

of your portfolio, and it's

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just a matter of, right.

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So if I have different asset

classes, I want a, a segment of my

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portfolio that's gonna give me lower

draw down that has less beta or

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correlation to the other parts of my

portfolio because volatility matters.

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But it's just not that

specific volatility.

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I like draw down as a really good measure

to measure how risky is my portfolio.

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Yeah, that's fantastic.

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As for.

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Okay.

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We focus a lot.

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We've created, uh, Zephyr Pain Index

Pain Ratio, which is a take on the sharp

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ratio to measure the drawdown risk.

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Yep.

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Because, like I said, upside volatility,

um, most people can handle that.

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That's right.

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That's right.

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It's that drawdown risk.

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So, and we'll, in our private wealth

practice, we'll ask, when individuals

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come in our office, we'll say, Hey,

how much are you willing to lose?

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Well, David, I don't wanna lose

anything, but I understand that.

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But how much are you

actually willing to lose?

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And they may say, well, David,

I wanna be down 10% or 15%.

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And then we'll run a risk analysis

on their actual positions.

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Well, in, in a year like oh eight,

they would've been down 40 or 50%.

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And so I think investors are not

aware and some of it's just 'cause

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the markets have done so well.

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They actually hold a lot more

draw down risk than they perceive.

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And that's a really issue.

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That's a big issue, which

is why investors sell.

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Uh, when markets are going

down at the wrong times.

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'cause they don't know really

what that draw down risk is.

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Yeah.

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And then, then you lock

in your gains and Correct.

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Or locking your losses and it's

the worst thing you can do.

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Yes.

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It is the worst thing,

but it's very emotional.

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It's hard not to.

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Yeah.

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But I think when you, at the early

stages, like you said, when you do that

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analysis, you set the expectations.

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There's transparency there.

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I think they can ride those

waves out, um, long term.

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And it helps them.

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So do you feel drawdown, is there

a specific drawdown risk, uh,

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metric or something that you use

that you like more than others

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that you really use at X funds?

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Yeah, so again, we, we have

software that we use for that.

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Morningstar, we have nitrogen software

that tells us the drawdown, uh, fin.

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We do some analysis for

drawdown for asset classes.

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But again, it's the math that matters

because it's really exponential.

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Or again, I know this is simple,

but just if you lose 50%, it's not

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50% that you need to make it back.

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It's a hundred percent to

make back what you've lost.

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So the math works against

you on the draw down side.

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Uh, which is why I also think some of

the ETFs that we have at X funds, you

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know, we don't, we are risk investors,

but if you're also generating income,

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while this, these asset classes may

possibly be going down in value,

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it actually provides some comfort.

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Whether while you're generating

harvesting volatility.

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And so I think that is another

way to hedge your downside risk

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is like, I don't wanna be down,

but if I'm gonna be down, wait.

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If I can still generate income

and not have to sell any of my

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positions, it's making, uh, I

guess sunshine out of a cloudy day.

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Uh, if you could still generate that

while you're holding the positions.

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Alright, so then it brings

that million dollar question.

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How do you do it?

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I'm an investor, David.

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Yeah.

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I want the upside.

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Markets are resilient.

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Yeah.

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I don't want to forego that potential

20% that markets have given us the past

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three years, but how do you do that?

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You know?

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Protect the downside.

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Yeah.

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Limit the draw down risk, but

also not limit that upside.

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Gains.

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Like how do you, how do you do it?

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To me, it's, there's

no free lunches, David.

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You gotta give up something.

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Yeah.

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You know, uh, I was literally

took the words outta my mouth.

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Mouth.

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There's no free lunch to this, so

you have to decide, right, what

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is the level of safety that I want

without capping too much of my upside?

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And so I just believe equity

markets move higher over time.

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So if you believe equity markets

head high over time, you don't

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want to cap your upside much.

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And so one of the unique things at ex

funds that we do that a lot of these

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other ETF issues aren't doing, we

generally specialize in put spread selling

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versus calls or call spread selling.

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Now again, Dave, you're talking about risk

and now you're talking about selling put

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spreads, put spreads does add some little

bit down additional downside exposure.

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But if you believe equity

markets head up over time.

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But your time is your friend,

because our opinion is those

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put spreads will outperform.

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So you get all of the upside

of the underlying equities and

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you generate income without

capping any upside exposure.

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So that's the way we, we also

like an iron condor approach.

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Okay.

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Uh, not to get too technical, put

our listeners to sleep, but in our,

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in our iron condor, you can actually

sell calls on part of the portfolio.

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Sell puts on the other

part of the portfolio.

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So you kind of have this, this up and down

kind of caller between your two positions

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to where if the markets rip higher.

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You still are not capping all the

upsides, so I generally like a put

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spread approach or a call on put

spreader coach that gives you kinda

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the best of both up and down markets.

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Mm-hmm.

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That's fantastic David.

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But though then my great strategy.

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You didn't put me to sleep, but you

were like, I was like, oh my gosh,

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I'm gonna have to Google this and

find out what's David talking about.

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How do you explain that to

financial advisors and so they

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can explain it to their clients.

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And like we said at the beginning,

it's a very competitive space.

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Yeah.

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Right.

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You gotta be able to tell your story.

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Yeah.

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In a way that financial advisor

can understand it so they can.

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Pass it on.

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Yeah.

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How do you do that?

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Yeah.

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It options are a, are a way, in

my opinion, it's one of the best

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ways that you can hedge or generate

income is using derivatives.

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But that Right, you start

to get the glossy eye.

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David, please don't

start talking about this.

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I, I think the great thing about for using

an ETF that does it for you is you don't

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have to be the expert at selling options,

but you have to be able to explain it

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in a way that that makes sense and, and

I think that it's really talking about.

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We wanna harvest volatility.

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So every of our underlying

positions, they have a set amount

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of volatility, meaning a standard

deviation that that stock will move.

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And so with when we're selling

options, we're just harvesting,

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what is that implied volatility?

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Uh, so again, it's just letting the client

understand that we're gonna generate

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income, we're gonna own the underlying,

uh, but there's so many different

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ways we could spend hours talking

about the different option strategies.

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That's another episode, David.

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That's exactly right.

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I'd love to be on and and

bring your coffee for that one.

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Yeah.

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Yeah.

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Awesome.

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Well, I love it.

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So then in a strategy like this,

a financial advisor, they're

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interested, David, you know, what

is the primary consideration they

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need to make when they're looking

to add, implement a strategy like

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this in their client portfolios?

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Or one thing, like in terms of, you

know, transparency or alignment?

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I'm big in alignment with.

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The product and the client's?

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Yeah.

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Investment objectives.

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Something that they really need

to worry about or consider.

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Yeah, I think this is all, you

know for, so if you just take our

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X funds, ETS for example, these are

geared for people that want income.

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So these are for individuals

that want income.

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But where we've seen it in our private

wealth and other advisory practices really

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work is if a client traditional draw

down, or uh, traditional distribution

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from a portfolio is usually four to 5%.

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We call a safe withdrawal

rate of around four to 5%.

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Well, I'll give you an example.

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GIX is one of our interna and our global

equity ETFs that has max seven, has

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small caps, mid caps, internationals.

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It has a 24% distribution

rate on the fund.

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So if you say, well,

David, what in the world?

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Well, we tell our clients, if you allocate

a 20% allocation to a fund that has a

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24% distribution, what did that just do?

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That added an additional 5%,

uh, withdrawal to a portfolio.

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And so I think where financial

advisors can best look at

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these high income funds as.

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To allocate a portion of it

in your equity gross leave.

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But if a client wants income, they can

actually double what the amount is.

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They're pulling off a portfolio.

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It's a win for the financial advisor

'cause you're providing income.

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But it's a real win for the client because

they can generally get, I think, more,

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uh, peace of mind out of knowing they

get high income without having to sell

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off a lot of their equity positions.

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David, you just stole the next question.

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I was gonna like, where do

you, how do you implement it?

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Like, is it, you know, fixed income?

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Is it part of the

alternative sleeve equity?

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But you explained it there.

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Perfect.

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Yeah.

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And, and there's different types, right?

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So I would say if, if.

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The underlying is all equities.

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I put that in the equity sleeve.

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Okay.

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Uh, we, there's also fixed income, uh,

options overlays, uh, like FIXI would

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put that in the fixed income sleeve.

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But really what's the underlying,

and that's the appropriate

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sleeve that it should be in.

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Yeah.

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And I know I, I always get the same.

374

Same response or like, Ryan, it all

depends on the client's risk of, uh,

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objective and, you know, risk tolerance.

376

But is there like a certain

percentage of the portfolio portfolio?

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Is it like a percent of equity?

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If it's an equity product, is it a.

379

Let's say 5% of your equity holdings?

380

Yeah.

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Or is there like a earmark

there or is it completely

382

dependent on the risk tolerance?

383

Yeah, so if you're just using

X funds ETFs, I would say a

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hundred percent of your portfolio

is, uh, perfectly Just kidding.

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Yeah.

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Um, no, it's, it's really, yeah,

it's what's the appropriate risk.

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But I, I, I don't wanna give up on growth.

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So again, the downsides is, yeah, we don't

want to cap too much of our upside with,

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'cause there's, there's no free lunch.

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So we're either gonna cap some of

our income or our growth exposure.

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So I, I love this 20 to 25%, uh,

portion of your portfolio for

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income funds, but there's also

themes that you may want to add.

393

And so if it's commodities,

if it's crypto.

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Uh, if it's themes like defense or

nuclear, well then, okay, David,

395

what, what sleeve does that have?

396

And I, and I still think you wanna

have this little non-correlated sleeve

397

of about 10 to 20% of your portfolio.

398

Uh, that can have metals, that

can have nuclear, that can have

399

defense, that's really non-correlated

to your other equity pieces.

400

So I would say anywhere between

20 to 30% of your portfolio.

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Awesome.

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David, great Fanta, uh, conversation.

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Great insight.

404

Thank you for taking time

outta the conference.

405

You guys are super busy.

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Where can our clients or our listeners

get more information about X Funds?

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Uh, thanks for the time.

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It is such an honor to be on your show.

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Uh, thank you.

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Can go to our website,

which is nicholas x.com.

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That's nicholas x.com.

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They can see all about our, our

funds and, and the firm as well.

413

Fantastic.

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David, thank you so much and thank

you to all the listeners out there.

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You're listening to this episode of

Zephyr's Adjusted for Risk Podcast.

416

You can watch all of our other

episodes on the Zephyr YouTube channel.

417

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418

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419

Thank you very much and have

a great rest of your week.

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Let's get started.