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Speaker 1: Well, can you trillions? I'm Joel Webber and I'm Eric.

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Speaker 1: I'll cheat us. Eric. We got another guest. You brought

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Speaker 1: him in, Martin Small black Rock, black Rock, we hit

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Speaker 1: the big time. We've made it, Joe. It's actually about us.

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Speaker 1: We hit the big time. I like that way to

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Speaker 1: pivot back. Black Rocks huge. They're huge, and so black

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Speaker 1: Rock is the maker of I Shares. I Shares as

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Speaker 1: the brand. People know. I Shares has one point four trillion.

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Speaker 1: That's almost of all e t F assets with the

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Speaker 1: T and Martin he's in charge. Well, he's in charge

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Speaker 1: of the U S I Shares and that's what all

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Speaker 1: the numbers I just said multiple bosses still actually right, yeah, yeah,

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Speaker 1: he's in the middle. Actually, wait, why why are we

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Speaker 1: interviewing again? Exactly let's talk about him. But but he's

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Speaker 1: fascinating because he is sort of a wizard of the

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Speaker 1: et F industry as a whole and is sort of

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Speaker 1: in charge of strategy and he is just he's where

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Speaker 1: the future is going. Uh. He is sitting in a

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Speaker 1: sweet spot. They have a lot of highly liquid, high

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Speaker 1: asset products that others would kill for. At this point

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Speaker 1: this time on tryants, we're gonna look into the crystal

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Speaker 1: ball of my shares. Martin, How did you find the

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Speaker 1: e t F my opening favorite question. So I actually

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Speaker 1: found the et F when I was in my old

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Speaker 1: job at black Rock. So I used to work in

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Speaker 1: our advisory business where we worked with central banks and

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Speaker 1: financial institutions. I don't know if you remember a lot

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Speaker 1: of the press that black Rock had during the financial

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Speaker 1: crisis that was about black Rock helps government's value heart

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Speaker 1: to value assets. One of the things that I came

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Speaker 1: upon during that period of my career was many institutions

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Speaker 1: were trying to figure out how to add liquidity to

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Speaker 1: their portfolio and reduce transaction costs. And it's when we

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Speaker 1: first started doing institutional consulting about e t F s.

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Speaker 1: I had also done a lot of work at clearing

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Speaker 1: houses where they were starting to see more activity happen

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Speaker 1: in ETFs, and they asked us questions like, how do

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Speaker 1: we think about margining these? Are these equities? Are they bonds?

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Speaker 1: How should we think about managing risk related to a

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Speaker 1: big ETF marketplace? And all of that started in probably

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Speaker 1: two thousand eight or two thousand nine. That sounds really boring, no,

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Speaker 1: it was. It was incredibly electrifying, and in two thousand,

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Speaker 1: twelve thirteen, we started working on term Maturity t S

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Speaker 1: and I had worked with the I Shares team when

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Speaker 1: I was working in black Rock Solutions, and about three

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Speaker 1: years later Mark and Larry asked me to take over

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Speaker 1: the U S and Canadian businesses Mark Widman and Larie

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Speaker 1: Fink not insignificant places. Mark and Larry, Yeah, Mark, we

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Speaker 1: hang out with them all the time. Yeah, they're great.

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Speaker 1: Uh So, so tell me about that. Because black Rock

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Speaker 1: actually rewind the clock a little bit acquired I Shares basically,

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Speaker 1: in hindsight, may have been the greatest acquisition of all time. Yeah.

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Speaker 1: I mean, my metaphor is it is the Louisiana purchase

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Speaker 1: of the asset management business. What you bought it for

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Speaker 1: versus what the potential is was amazing. What was behind

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Speaker 1: the decision to do it, because at the time it

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Speaker 1: definitely was, you know, a pretty penny to buy it.

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Speaker 1: At the time, everyone said universally that Blackrock was over paying,

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Speaker 1: that this was an impossible acquisition to try to manage

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Speaker 1: that bringing together religious zealots from one camp with religious

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Speaker 1: zealots from another, with fundamental research driven strategies and index

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Speaker 1: based strategies. Was impossible. Sounds like a TV show. People

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Speaker 1: said it was impossible, Um, but the fact was, I

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Speaker 1: think two things were really happening, the first of which

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Speaker 1: really pertained to what our clients were talking about. So

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Speaker 1: our clients were already talking about bringing together market cap

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Speaker 1: weighted indexing at the core of their portfolios, together with

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Speaker 1: things that we can't index, things that we can't turn

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Speaker 1: into transparent, investible rules based bundles. And so Larry and

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Speaker 1: the management team obviously heard all these things and said,

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Speaker 1: this is what the portfolio the future is going to

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Speaker 1: look like. And they made a big bet on transformation

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Speaker 1: of the industry. And here we are nine years later,

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Speaker 1: and everybody says, god, you know that that was obviously

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Speaker 1: the Louisiana purchases. But at the time, uh, most people

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Speaker 1: said it wouldn't work. Tell me about what you do, Martin.

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Speaker 1: So I'm responsible for our I shares businesses in the

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Speaker 1: US and Canada. As Eric said, in the US, we

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Speaker 1: run about one point four trillion dollars of e t

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Speaker 1: F s at roughly three seventy products, and so I'm

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Speaker 1: responsible for our business strategy. I'm responsible for our product

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Speaker 1: teams are sales teams in institutional and in wealth marketing,

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Speaker 1: PR communications. Black Rock has turned into a big matrix place.

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Speaker 1: So part of that is through resources that are dedicated

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Speaker 1: through I shares, and part of it is through resources

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Speaker 1: that I've actually cover things horizontally at black Rock across

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Speaker 1: multiple product lines um. But our organization has always been

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Speaker 1: let's really manage a product suite, which is the I

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Speaker 1: shares business, along client segments, institutional, wealth, self directed, whatever

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Speaker 1: it might be. So I try to bring all those

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Speaker 1: things together. Let me de jargon that a little bit,

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Speaker 1: because this is fascinating, and you know who are we

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Speaker 1: talking to out there. We're mostly talking to retail advisors.

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Speaker 1: You've got one point three trillion. Can you break that

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Speaker 1: into a pie chart kind of of how much is

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Speaker 1: institutional like pensions, endowments and such, how much is advisors

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Speaker 1: people who manage other people's money in the wealth side,

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Speaker 1: and then how much is just do it yourself retail investors.

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Speaker 1: So broad strokes at so it's six wealth managers. So

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Speaker 1: think about your major wirehouse platforms, your financial advisors, about

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Speaker 1: global institutions, so that securities and derivatives buyers. It might

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Speaker 1: be a professional asset manager, it might be an E

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Speaker 1: t F strategist, it might be a pension plan and endowment,

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Speaker 1: a foundation, whatever. And then about ten percent self directed

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Speaker 1: who would come through customer facing retail brokerages like Fidelity.

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Speaker 1: And isn't this interesting time where all all of those

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Speaker 1: people are in the same fund. In mutual funds, they

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Speaker 1: separate those investors. If you've got a lot of money,

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Speaker 1: you're gonna be in the eye class for less fees

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Speaker 1: a t F. It's like Sam's wholesale club. Everybody gets

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Speaker 1: the same price. People come at it for different reasons.

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Speaker 1: Is that unique that all these investors are playing in

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Speaker 1: the same sandbox. We think of our business and segments.

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Speaker 1: We have clients segments and we have product use segments,

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Speaker 1: so we have client segments. That's what we're talking about, right.

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Speaker 1: We're talking about institutional investors wealth managers like FA's, and

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Speaker 1: we're talking about self direct investors. How they use the

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Speaker 1: products is actually different. So you can have an institutional

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Speaker 1: investor that would use the same product as a financial advisor,

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Speaker 1: a self direct investor like I v v R S

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Speaker 1: and P five index fund at four basis points. People

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Speaker 1: use it as a trading vehicle, people use it as

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Speaker 1: a long term buy and hold um. It applies to

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Speaker 1: UH lots of different segments that come together, and honestly,

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Speaker 1: it's the coming together that makes the products have more viability. Right,

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Speaker 1: So when institutions and wealth managers and retail investors come together,

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Speaker 1: they actually make for network effects that the products become

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Speaker 1: they have more utility for people. This is fascinating. Is fascinating.

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Speaker 1: That was the best answer I've heard on that topic.

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Speaker 1: Network effect. That got a lot of people going. And

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Speaker 1: that's that's true. It's uh, it's if it is unbelievable.

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Speaker 1: I look at a product like e M R I

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Speaker 1: MG is a good example. That's their emerging markets that's

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Speaker 1: on the cheaper side, sporting basis ones. You know, a

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Speaker 1: lot of retail investors own that, a lot of advisors

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Speaker 1: own it, and then Bridgewater, that's the world's largest hedge fund,

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Speaker 1: owns it. It is just unusual to see all those

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Speaker 1: people using the same product. It's just still the largest

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Speaker 1: holder of it. I think. So, Yeah, Bridgewater owns e

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Speaker 1: M and I MG. I think they're slowly they owned

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Speaker 1: both ones more liquid ones cheaper. I think if you

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Speaker 1: add it together, probably the largest owner of the I

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Speaker 1: shares Emerging Market Suite. Am I wrong? They own a lot.

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Speaker 1: It's like four billion, right pert filings. Yes, so think

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Speaker 1: about it. The world's largest hedge fund, access to everything.

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Speaker 1: And they called this guy, and they called but guys,

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Speaker 1: think about why, right, Like if I ask you in

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Speaker 1: the ms c I Emerging Markets Index, how many countries

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Speaker 1: are there and how many currencies? There's twenty three countries

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Speaker 1: and ten currencies. So if your bridgewater, you say, do

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Speaker 1: I really want to go be active in twenty three countries,

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Speaker 1: get twenty three securities, licenses, set up twenty three sub

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Speaker 1: custodial accounts, like pay transaction costs for every one of

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Speaker 1: those securities. Like there's a reason that when but when

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Speaker 1: you bundle this stuff in the easy button, that it

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Speaker 1: becomes just it becomes easier to transact. Like Greenwich Associates

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Speaker 1: just released its study on institutional investors and the number

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Speaker 1: one thing they cite about et F usage is that

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Speaker 1: it's simple and easy to access. And so as they

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Speaker 1: reduce their footprint and dealing with all this stuff that

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Speaker 1: is just plumbing that they don't want to deal with,

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Speaker 1: they can buy the whole index. They can buy the

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Speaker 1: whole world. Basically in you know, the same thing that

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Speaker 1: you'd buy in your fidelity. Okay, I'm many give away

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Speaker 1: my big idea. You ready, we've we've been sitting on

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Speaker 1: it for a while. Hit me, why isn't there an

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Speaker 1: e t F with the easy ticker easy button? Well,

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Speaker 1: what would it hold? Well? Like everything? Yeah, like perfectly

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Speaker 1: diversified portfolio. Maybe we should change the aquaticker to easy.

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Speaker 1: You can, you can? You can just say now I

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Speaker 1: think you have a okay, right, that's the asset allocation

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Speaker 1: that holds other e t s that eventually hold everything. Okay,

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Speaker 1: is pretty good. Yeah, it's pretty good. Right, that's a

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Speaker 1: good rival. It's interesting e t F that hold other

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Speaker 1: e t F to try to do all that for you.

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Speaker 1: They didn't. They're not really big hits. I think people

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Speaker 1: like to sort assort the puzzle pieces in their own

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Speaker 1: way doing acid allocation. But has asked that an event

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Speaker 1: yesterday about whether an e t F vts could be

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Speaker 1: a hit, And they're there already. They exist exist, but

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Speaker 1: asset allocation ETFs haven't really taken off. We have we

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Speaker 1: have a whole we have a whole range of them.

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Speaker 1: So we have for example, I Y L D would

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Speaker 1: be the closest thing too easy. I y l D

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Speaker 1: is a multi asset I know, I'm going easy y

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Speaker 1: l D like I yield. It's pretty good, right. I

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Speaker 1: y l D is a multi asset income portfolio. We

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Speaker 1: have the core allocation series funds that would say you're conservative, moderate, aggressive,

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Speaker 1: and it puts together portfolio. Here here's the rub though,

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Speaker 1: and I think Eric you're right on this, which is

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Speaker 1: if you're a financial advisor and you want to show

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Speaker 1: your client that you're building a multi asset diversified portfolio.

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Speaker 1: If you show up for the client meeting and you

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Speaker 1: say here, I'm here with a okay, all done, they go,

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Speaker 1: I'm paying you one percent of my assets. This doesn't

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Speaker 1: feel like you're doing what you want to do. In addition,

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Speaker 1: I'd say clients all have I know I'm being a

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Speaker 1: little facetious, but clients all have something they're looking for

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Speaker 1: that's different than a stockport a standard PORTFOLI. So usually

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Speaker 1: you're going to want some more customization in terms of

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Speaker 1: target risk return, levels of income and so one size

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Speaker 1: fits all asset allocation ETFs UM. There's a market, it's

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Speaker 1: just not a very big market. I want to ask

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Speaker 1: another question because we talked about Larry, who's technically the

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Speaker 1: boss of the boss, and we talked about Mark. Can

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Speaker 1: you talk to me about and you came up on

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Speaker 1: the black Rock side, right, and then jumped to the

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Speaker 1: Ice shares. So can you talk to me about the

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Speaker 1: evolution I do. I work at black Rock, I sell

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Speaker 1: I shares, all right, So talk to me about that

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Speaker 1: acquisition that we talked about, the Louisiana purchase. How is

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Speaker 1: the company's culture evolved? Because you've evolved the marketplace, but

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Speaker 1: like internally, what sort of changed about black Rock and

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Speaker 1: I shares in the process. Uh, Larry is for as

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Speaker 1: long as I've been at black Rock. When I when

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Speaker 1: I came to black Rock, it was a US centric

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Speaker 1: bond manager sort of the end of two thousand five

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Speaker 1: two thousand six, it had something like three hundred billion

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Speaker 1: dollars of assets and eleven people. I thought it was huge.

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Speaker 1: I thought it was enormous. Uh. And we did several

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Speaker 1: transformative ACQUI asians along the way. In two thousand six,

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Speaker 1: we merged with Mary Lynch Investment Managers, and that I

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Speaker 1: would say was our our first step in really transforming UM.

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Speaker 1: Not so much the culture of the firm, but the

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Speaker 1: identity and capabilities of the firm. So we went from

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Speaker 1: being a US centric bond manager to truly being a

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Speaker 1: global investment firm. That was in twenty six countries sixty

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Speaker 1: two cities. But the biggest change was, all of a sudden,

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Speaker 1: a third of our assets were in equities. Uh. And

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Speaker 1: for a bond house people who grew up in bonds,

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Speaker 1: beginning to think of the world of equities is just

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Speaker 1: totally different. Talk to me about that. How do bond

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Speaker 1: people view the world and how is that different than

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Speaker 1: this new that just showed up. Is it like going

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Speaker 1: from chess to checkers? Because bonds have a maturity. They

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Speaker 1: they're much more complicated, at least for someone like me

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Speaker 1: approaching me from the outside. They are harder to get

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Speaker 1: your head around then stocks. I think that's absolute rubbish

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Speaker 1: and fiction. Bonds are pretty Bonds are pretty simple, like

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Speaker 1: but you know, it's it's uh, it's some amount of

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Speaker 1: interest over some period of time and some ending date

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Speaker 1: like that's it. Bonds are pretty simple, and what drives

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Speaker 1: prices and bonds is interest rates, credit spreads curve and

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Speaker 1: ultimately some degree of liquidity. Equities are like poker, bonds

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Speaker 1: are like chess right. Like equities, you know, you could

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Speaker 1: say something about there's a seventy probability that this will

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Speaker 1: be the result. In equities, you might have made a

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Speaker 1: good decision, like any duke would say, but of the

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Speaker 1: time you were wrong. In bonds, it's it's really more

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Speaker 1: chess right. The things are of the outcomes are pretty binary.

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Speaker 1: So how did that change you? Um? I really think

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Speaker 1: what it did was it changed the conversations that we

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Speaker 1: were having with all of our clients. So it used

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Speaker 1: to be we were hardcore bond people. We talked about

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Speaker 1: mortgage pre payment speeds, we talked about relative value and

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Speaker 1: credit spreads, but now we really started to talk about

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Speaker 1: holistic portfolio outcomes. What are you really trying to do

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Speaker 1: with your whole balance sheet? What are you really trying

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Speaker 1: to do to generate a seven percent return for your

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Speaker 1: pension plan participants. That's a really different set of conversations

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Speaker 1: and it requires, i'd argue, like a different kind of

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Speaker 1: person at the firm. So what you would have seen

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Speaker 1: over periods of time is more people who are holistic

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Speaker 1: portfolio construction and asset allocation people rather than people who

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Speaker 1: have focused on uh, do I pick Verizon versus a

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Speaker 1: T and T at the five year key rate duration. UM.

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Speaker 1: What Larry has been relentless about over the entirety of

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Speaker 1: my time there and since inception of the firm has

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Speaker 1: been culture. Uh. Larry is ruthless about culture. His view

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Speaker 1: as we are client focus, client centric business. Black Rock,

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Speaker 1: I'm quite certain has had literally hundreds of opportunities to

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Speaker 1: go into balance sheet proprietary businesses and we've never done that.

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Speaker 1: We've stayed in the fiduciary business, working solely for our clients,

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Speaker 1: and that is the north star. Um. You know, I

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Speaker 1: find started a hard press to go wrong. And let's

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Speaker 1: talk about fixed and come a little bit because you

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Speaker 1: guys have one of the most controversial e t F

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Speaker 1: s h y G. We've discussed it many times. It

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Speaker 1: packages junk bonds coming from the junk bond space. Just

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Speaker 1: this a couple days ago at the Milk and conference,

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Speaker 1: this came up again as a worry. Now, leaving aside

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Speaker 1: the motivations of the people who are worried, I know

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Speaker 1: some of them are active managers and it might be uh,

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Speaker 1: not the right messenger, but it's a persistent fear that

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Speaker 1: how can you take something that's not that liquid, say

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Speaker 1: junk bonds or any bonds really they don't trade like stocks,

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Speaker 1: and put it in this stock like trading vehicle. Will

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Speaker 1: there be a problem or some kind of an issue

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Speaker 1: if everyone heads for the exit at once? Yeah, so

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Speaker 1: I I think the first thing I'd say is uh. Uh.

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Speaker 1: The claims of the illiquidity of the high yield market

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Speaker 1: are greatly exaggerated. This is a market in the US

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Speaker 1: that has one point four trillion dollars dollars of outstanding

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Speaker 1: balances UH. Year to date, I think we've had over

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Speaker 1: the counter trading and high yield of a trillion dollars.

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Speaker 1: That's about twelve to fourteen billion dollars a day of

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Speaker 1: average daily volume and high yield bonds cash trading. UH.

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Speaker 1: If I take all the high l dtfs, I take

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Speaker 1: every last single one of them, UH, and I look

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Speaker 1: at h y G, I look at the other competitor products.

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Speaker 1: There's fifty billion dollars of high YIELDTF assets year to date.

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Speaker 1: The entirety of redemptions for the most funds is about

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Speaker 1: six billion dollars. That's like the entirety of the bonds

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Speaker 1: that have come out of the high l DTF space

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Speaker 1: and so I can hair numerator six billion over a

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Speaker 1: trillion dollars of trading year to date and cash bonds

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Speaker 1: that's not even one percent. So just the math to

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Speaker 1: me doesn't work as to how high yield ETFs are

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Speaker 1: causing any degree of price distortion and high yield. Now

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Speaker 1: here's the thing that is true. The high yield market

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Speaker 1: is more cumbersome to transact in. So if you want

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Speaker 1: to move two to four hundred million dollars of high yield,

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Speaker 1: you have to not call one broker dealer anymore. You

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Speaker 1: might have to call three, four or five to go

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Speaker 1: find the bonds you want. This should not be a mystery.

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Speaker 1: Then that it's easier and cheaper and lower transaction costs

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Speaker 1: to trade h y G, which packages up the whole bundle.

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Speaker 1: So if you try to buy all the bonds that

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Speaker 1: are in the basket of h y G in the portfolio,

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Speaker 1: it would cost you fifty basis points in transaction costs.

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Speaker 1: But h YG is a penny. That makes sense because

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Speaker 1: I don't have to go do all this nuisance value

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Speaker 1: of doing all those things up of the orders in

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Speaker 1: h y G. Uh It's like Eric, you sell me

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Speaker 1: your shares and I buy them from you on exchange

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Speaker 1: and nothing happens in the fund. That's why I think

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Speaker 1: in the hindsight, the Louisiana purcha, if you will, was

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Speaker 1: so genius. It's because bond guys looked out and said,

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Speaker 1: wait a second, there's a better way, and it looks

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Speaker 1: more like an equity right, like we can go get

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Speaker 1: It stems from the fantasy though, of the complexity of

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Speaker 1: the bond market. It's it's a fantasy like it really is.

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Speaker 1: And I think it's more people talking their book than

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Speaker 1: it is truth. Like we've known forever in the equity world,

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Speaker 1: when we twake twenty three countries and ten currencies in

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Speaker 1: em and we put it into one composite security like

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Speaker 1: in et F, it trades with lower transaction costs. Shouldn't

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Speaker 1: the same be true for bonds? I think so one

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Speaker 1: question I have, right, you guys have something that I

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Speaker 1: call the foreheaded monster, and I really we talked about

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Speaker 1: the portfolio of the future. You have i VV, which

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Speaker 1: is SPI, i MG which is emerging markets, i f

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Speaker 1: A which is developed international, a g G, which is

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Speaker 1: like your total bond. That's really a pretty good portfolio

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Speaker 1: for most people. What do you call it, I just

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Speaker 1: call it the core of the core. Yeah. I I

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Speaker 1: try to decorate my we start twist some stuff because

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Speaker 1: I gotta get readership anyway, stuff and not mine erica.

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Speaker 1: So this fourheaded monster just takes in cash like crazy.

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Speaker 1: I think the all end fee for this portfolio will

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Speaker 1: be about seven or eight basis points. Somewhere in there.

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Speaker 1: Other issuers have these core that are very similar, we

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Speaker 1: call the core wars. If this is the portfolio of

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Speaker 1: the future, some people on Twitter come back to me

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Speaker 1: and say, if everyone's in the same portfolios that are

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Speaker 1: just like this, that could be a problem in terms

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Speaker 1: of crowding for investors. So what do you say about

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Speaker 1: this concept of everyone using this is the portfolio of

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Speaker 1: the future. So, for one, I think there's there's lots

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Speaker 1: of great ideas about the portfolio of the future. So

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Speaker 1: and even simpler portfolio would be like I t ot

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Speaker 1: the total stock market index at three basis points I

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Speaker 1: x U S, which is IFA plus e M, and

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Speaker 1: then agag those four tickers at a blended rate of five,

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Speaker 1: four or five basis points. Would get you basically the

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Speaker 1: efficient market hypothesis in one shot. And I'd argue that

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Speaker 1: that's kind of the way institutions haven't been investing since

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Speaker 1: the early nine seven these and so that market doesn't

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Speaker 1: actually look very different than the institutional market looks today.

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Speaker 1: It's just implemented in ETFs um in terms of it

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Speaker 1: being much much bigger. There is so much room to grow,

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Speaker 1: Like if I really take all of the global equities,

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Speaker 1: like the entirety of stock and bond market cap in

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Speaker 1: the world, Like, let's just talk about the US. In

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Speaker 1: the US, there's twenty four trillion dollars of market cap

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Speaker 1: in the Russell three thousand, right, if I take all

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Speaker 1: the equity E t f s, like we're you know,

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Speaker 1: one twelfth of that, right, where this teeny tiny sliver,

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Speaker 1: So there's just ample room to grow. The second is

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Speaker 1: all that stuff is already in those exposures, right, it's

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Speaker 1: just in different rappers. So the migration of assets from

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Speaker 1: one rapper to another rapper in the mutual fund industry

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Speaker 1: doesn't actually change any of the nets supply demand dynamics

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Speaker 1: for stocks. So I think it's wholly irrelevant where assets

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Speaker 1: are located. What matters is what's the velocity of trading,

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Speaker 1: and is turnover relatively high um of daily volumes and

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Speaker 1: US equities is not done by E t F or

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Speaker 1: index funds. Right, It's people doing stock picking. It's my

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Speaker 1: mom and her pajamas and her Fidelity accounts to trade pajamas.

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Speaker 1: It really loosens the spirit up. People are more uninhibited then.

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Speaker 1: You know, Um, I want to talk a little bit

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Speaker 1: about this idea of that do it yourself retail investor.

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Speaker 1: How many of those people are the new day traders?

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Speaker 1: You remember the nineties, the day traders were their retail

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Speaker 1: investors doing Oracle and Microsoft. Some data is showing that

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Speaker 1: now they're using E t f s to do that

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Speaker 1: day trading. Do you find that to be something? And

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Speaker 1: I guess part of that that that feeds into Jack

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Speaker 1: Bogel's criticism movie TS, which is they tempt people to

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Speaker 1: trade too much and thus you lose money. Yeah. So

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Speaker 1: the there is no doubt that day traders, active asset allocators,

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Speaker 1: and even like active mutual fund managers are using beta

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Speaker 1: building blocks to run asset allocation portfolios or to make

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Speaker 1: tactical calls on markets. Uh. And if you were to

405
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Speaker 1: look at Fidelity, E Trade, Interactive Brokers, t d Amritrade, SWAB,

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Speaker 1: all of them have places where people are are using

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Speaker 1: e t f s alongside so goal stocks in order

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Speaker 1: to take views on markets. Uh. In fact, if you

409
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Speaker 1: looked at something like t d A S Think or

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Speaker 1: swim platform, you're seeing listed options volumes on e t

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Speaker 1: f s go up as well. Um. All of which

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Speaker 1: is to say, Um, these are more instruments for people

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Speaker 1: to take market views on, and that just makes for

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Speaker 1: a more efficient market. It makes for more price discovery tools.

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Speaker 1: As far as the frequency of trading, With all due

416
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Speaker 1: respect to UM, you know, one of the godfathers of

417
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Speaker 1: our industry, it's just not right and the data doesn't

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Speaker 1: bear it out. And I know people love to quote it,

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Speaker 1: but it's just absolute fiction. Okay, So what does the

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Speaker 1: future look like for I shares? Because you talked about

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Speaker 1: what was an eight of the equity overall equity market.

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Speaker 1: How how will I shares grow? I think we're gonna grow, uh,

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Speaker 1: predominantly for for three reasons. And I'd argue that these

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00:20:43,680 --> 00:20:48,119
Speaker 1: are all structural forces. They're like inexorable, they're indelible impressions,

425
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Speaker 1: like they are changing, like people are changing the way

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Speaker 1: they're doing business. UM. So if you're a financial advisor,

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Speaker 1: you are moving your practice, to fee based advisory and

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00:20:55,520 --> 00:20:57,760
Speaker 1: to asset allocation portfolios. The e t F is the

429
00:20:57,840 --> 00:21:00,320
Speaker 1: ultimate building block at low cost for that. If you're

430
00:21:00,320 --> 00:21:03,520
Speaker 1: an institutional investor, you are finding ways to simplify your

431
00:21:03,560 --> 00:21:05,520
Speaker 1: operations and you want to be able to trade in

432
00:21:05,520 --> 00:21:10,000
Speaker 1: a friction lists, transparent on exchange electronic market. The e

433
00:21:10,080 --> 00:21:12,320
Speaker 1: t F is ultimately a great engine for those things.

434
00:21:12,640 --> 00:21:15,360
Speaker 1: And then finally Um and Eric talks about this sometimes

435
00:21:15,640 --> 00:21:17,800
Speaker 1: we're going through. What I'd argue to do is like

436
00:21:17,840 --> 00:21:20,280
Speaker 1: that the beginning of the golden age of indexing. So

437
00:21:20,400 --> 00:21:22,960
Speaker 1: when I talk to people about indexing, people immediately think

438
00:21:23,040 --> 00:21:26,320
Speaker 1: market cap weighted indexing, and market cap weighted indexing is great, right,

439
00:21:26,359 --> 00:21:29,080
Speaker 1: it actually does tell us something about the depth breadth

440
00:21:29,080 --> 00:21:31,840
Speaker 1: investable opportunity set in the market. But like God did

441
00:21:31,840 --> 00:21:34,360
Speaker 1: not hand down market cap weighted indexing on the tablets

442
00:21:34,359 --> 00:21:36,720
Speaker 1: of SINAI is the only way of doing an index.

443
00:21:37,000 --> 00:21:38,960
Speaker 1: And so we're going to see this pulling apart, this

444
00:21:39,160 --> 00:21:42,040
Speaker 1: unbundling of things that can't be indexed. I'd call that

445
00:21:42,119 --> 00:21:44,960
Speaker 1: alpha from things that can things that can be subjected

446
00:21:45,000 --> 00:21:46,800
Speaker 1: to a set of rules. And that's where I think

447
00:21:46,840 --> 00:21:49,000
Speaker 1: factory t f s and smart beta comes comes in,

448
00:21:49,040 --> 00:21:51,320
Speaker 1: which is I know how to index the value premium.

449
00:21:51,359 --> 00:21:53,240
Speaker 1: It's just a set of rules about price to earnings,

450
00:21:53,240 --> 00:21:55,760
Speaker 1: price to book, and enterprise value to ebada. I know

451
00:21:55,800 --> 00:21:57,760
Speaker 1: how to do a quality screen. And so as we

452
00:21:57,800 --> 00:21:59,679
Speaker 1: give people more of those building blocks, I think what

453
00:21:59,720 --> 00:22:01,760
Speaker 1: you'll he is a portfolio of the future that has

454
00:22:02,040 --> 00:22:06,440
Speaker 1: fifty six market cap weighted indexing, it has fifty uh

455
00:22:06,480 --> 00:22:09,480
Speaker 1: sort of persistent risk premium like factors, and then we'll

456
00:22:09,480 --> 00:22:11,760
Speaker 1: have a bunch of stuff that can't be index market timing,

457
00:22:11,920 --> 00:22:15,199
Speaker 1: stock selection liquids. Uh. That to me looks like what

458
00:22:15,440 --> 00:22:18,679
Speaker 1: the most sophisticated institutional portfolios are doing today. Speaking of

459
00:22:18,720 --> 00:22:22,000
Speaker 1: institutions and their portfolios, one of the frontiers that has

460
00:22:22,080 --> 00:22:24,399
Speaker 1: not been sort of captured by e t s. They

461
00:22:24,400 --> 00:22:26,320
Speaker 1: haven't figured out how to do it is real assets

462
00:22:26,880 --> 00:22:30,160
Speaker 1: or private equity or venture capital. His is less companies

463
00:22:30,240 --> 00:22:33,160
Speaker 1: stop going public. A lot of people are saying this

464
00:22:33,240 --> 00:22:35,439
Speaker 1: is where investors are going to have to stay private

465
00:22:35,480 --> 00:22:39,040
Speaker 1: longer or stay private longer. Um. Is there any way

466
00:22:39,040 --> 00:22:40,879
Speaker 1: for e t s to capture it, either by you

467
00:22:41,160 --> 00:22:43,000
Speaker 1: or if you could speak out of the ice shares brand.

468
00:22:43,480 --> 00:22:45,560
Speaker 1: Is it possible for anyone to do it even in

469
00:22:45,680 --> 00:22:48,600
Speaker 1: E T N could this be done? There is so

470
00:22:48,720 --> 00:22:51,960
Speaker 1: much white space and indexing it's actually incredible. There's just

471
00:22:52,119 --> 00:22:54,800
Speaker 1: huge swaths of the marketplace that we haven't touched yet.

472
00:22:55,040 --> 00:22:58,240
Speaker 1: Real assets is definitely one. Uh. There are some products

473
00:22:58,240 --> 00:23:00,520
Speaker 1: in Europe that have tried to sort of mimic, through

474
00:23:00,560 --> 00:23:04,280
Speaker 1: public equities and inflation portfolios, the behavior of real estate

475
00:23:04,359 --> 00:23:06,640
Speaker 1: over long periods of time. I think we're early days

476
00:23:06,640 --> 00:23:09,359
Speaker 1: on that, but we are deep in the innovation and

477
00:23:09,400 --> 00:23:11,639
Speaker 1: research lab that I share is right now working on

478
00:23:11,800 --> 00:23:15,719
Speaker 1: public markets proxies for traditionally private exposures. So if I

479
00:23:15,760 --> 00:23:17,520
Speaker 1: told you I could give you eighty five percent of

480
00:23:17,560 --> 00:23:20,120
Speaker 1: the return of venture capital at one of the price,

481
00:23:20,160 --> 00:23:22,520
Speaker 1: would you be interested? Like I think the answers category

482
00:23:22,560 --> 00:23:27,959
Speaker 1: I want to go. It's like Bell labs, do you

483
00:23:28,240 --> 00:23:32,840
Speaker 1: absolutely right? Yeah? Which trends don't get talked about enough?

484
00:23:33,680 --> 00:23:36,040
Speaker 1: I think it's two things, uh. The first of which

485
00:23:36,240 --> 00:23:39,760
Speaker 1: is the replacement of derivatives by E T F s.

486
00:23:40,080 --> 00:23:43,000
Speaker 1: I never see people write about this stuff, but futures

487
00:23:43,040 --> 00:23:45,800
Speaker 1: cost ten to fifteen times more than ETFs, like in

488
00:23:45,840 --> 00:23:48,760
Speaker 1: the SMP five hundred, and we're starting to see that migrate.

489
00:23:48,840 --> 00:23:51,680
Speaker 1: The second thing is taxes. People just don't think enough

490
00:23:51,680 --> 00:23:54,679
Speaker 1: about net after tax returns, and we write a lot

491
00:23:54,720 --> 00:23:57,560
Speaker 1: about expense ratios. We were at a lot about transaction costs,

492
00:23:57,600 --> 00:24:00,000
Speaker 1: but I think people really don't think about the implication

493
00:24:00,000 --> 00:24:02,359
Speaker 1: aation of taxes, and it is really one of the

494
00:24:02,720 --> 00:24:05,520
Speaker 1: I think most attractive and compelling features for a taxable

495
00:24:05,560 --> 00:24:09,480
Speaker 1: investor of exchange traded funds. And I share our funds

496
00:24:09,520 --> 00:24:13,000
Speaker 1: plus haven't distributed a capital gain like ever. And one

497
00:24:13,080 --> 00:24:14,800
Speaker 1: question I could ask a lot is when's the first

498
00:24:14,880 --> 00:24:17,200
Speaker 1: free et F gonna come out? Now? My answer usually

499
00:24:17,280 --> 00:24:19,280
Speaker 1: is look at tracking. There are some that use SEC

500
00:24:19,400 --> 00:24:22,200
Speaker 1: lending to actually give you back a little basis points

501
00:24:22,240 --> 00:24:24,640
Speaker 1: and therefore it is free already. But moving that little

502
00:24:24,680 --> 00:24:29,040
Speaker 1: technicality aside, it will we see a zero point zero

503
00:24:29,200 --> 00:24:32,200
Speaker 1: percent expense ratio in the next couple of years. I

504
00:24:32,280 --> 00:24:34,119
Speaker 1: have no doubt that people will launch them because they

505
00:24:34,200 --> 00:24:37,080
Speaker 1: have other revenue models. So if, for example, you have

506
00:24:37,160 --> 00:24:41,040
Speaker 1: a customer facing retail brokerage platform, you might launch zero

507
00:24:41,160 --> 00:24:42,879
Speaker 1: fe E t fs in order to bring people in

508
00:24:42,960 --> 00:24:45,560
Speaker 1: your system and monetize them another way, like you might

509
00:24:45,600 --> 00:24:47,560
Speaker 1: take the cash that sits in your brokerage account and

510
00:24:47,600 --> 00:24:49,480
Speaker 1: invested at a spread in your bank. I have no

511
00:24:49,640 --> 00:24:51,639
Speaker 1: doubt we'll see zero f ETFs. You're not going to

512
00:24:51,720 --> 00:24:54,159
Speaker 1: see them from my shares at one. I think we

513
00:24:54,240 --> 00:24:57,480
Speaker 1: will continue to reduce the cost of investing, but everybody

514
00:24:57,560 --> 00:24:59,800
Speaker 1: has fixed costs at the end of the day are fixed.

515
00:25:00,040 --> 00:25:02,320
Speaker 1: Us are much lower than many other people's because of

516
00:25:02,359 --> 00:25:04,719
Speaker 1: our scale and the breadth of our platform, our use

517
00:25:04,760 --> 00:25:07,119
Speaker 1: of technology. So we added two hundred and seven billion

518
00:25:07,160 --> 00:25:09,359
Speaker 1: dollars of new assets and U s I shares last year.

519
00:25:09,480 --> 00:25:11,680
Speaker 1: I didn't grow the expense line by uh you know

520
00:25:11,800 --> 00:25:14,119
Speaker 1: that that level either. So we have lots of scale

521
00:25:14,200 --> 00:25:17,240
Speaker 1: to continue to grow our business pass along savings to

522
00:25:17,600 --> 00:25:19,560
Speaker 1: to our clients and shareholders. But at the end of

523
00:25:19,600 --> 00:25:22,520
Speaker 1: the day, I got no plans to offer a zero FtF.

524
00:25:22,800 --> 00:25:25,360
Speaker 1: And what I'd say is, you know, of the industry

525
00:25:25,560 --> 00:25:28,320
Speaker 1: is starting to consolidate in like two to three players um,

526
00:25:28,440 --> 00:25:30,080
Speaker 1: which has been true for the last three or four

527
00:25:30,119 --> 00:25:31,840
Speaker 1: or five years. But at the end of the day,

528
00:25:31,840 --> 00:25:34,120
Speaker 1: our business is going to look more like cloud computing

529
00:25:34,240 --> 00:25:36,359
Speaker 1: or cell phones in industry structure, which is if I

530
00:25:36,400 --> 00:25:38,360
Speaker 1: ask you guys, like what phones do you have, Everyone's

531
00:25:38,359 --> 00:25:40,359
Speaker 1: gonna tell me Verizon, A T and T there'll be

532
00:25:40,359 --> 00:25:42,080
Speaker 1: a couple of people who have sprint in T mobile,

533
00:25:42,320 --> 00:25:45,360
Speaker 1: but like that's going to serve the market. Unlike other

534
00:25:45,480 --> 00:25:48,920
Speaker 1: industries where you have a relative industry consolidation, the two

535
00:25:48,960 --> 00:25:51,920
Speaker 1: biggest players are driving pricing down not up, which is

536
00:25:52,119 --> 00:25:54,080
Speaker 1: I think a good thing. But we both have fixed

537
00:25:54,119 --> 00:25:56,159
Speaker 1: costs at the end of the day. Uh, and we

538
00:25:56,280 --> 00:25:58,400
Speaker 1: go a floor. There's a floor. Like there's an equal

539
00:25:58,720 --> 00:26:00,560
Speaker 1: I would call it an equal liberty them at which

540
00:26:00,640 --> 00:26:04,879
Speaker 1: we need to maintain uh discipline about quality of service.

541
00:26:05,240 --> 00:26:08,480
Speaker 1: As Eric said, like, our paramount objective is tracking our

542
00:26:08,520 --> 00:26:12,119
Speaker 1: portfolios and tracking our indexes, deploying material amounts of capital

543
00:26:12,200 --> 00:26:14,520
Speaker 1: against the index and realizing the published return. If we

544
00:26:14,520 --> 00:26:17,240
Speaker 1: don't do that, we're out of business. What's your last question?

545
00:26:18,000 --> 00:26:20,919
Speaker 1: I want to talk about your music career. I failed

546
00:26:21,080 --> 00:26:23,200
Speaker 1: music career, that's what you mean. One of my friends

547
00:26:23,280 --> 00:26:26,119
Speaker 1: that I shares, Kate Bernhard, sent me a picture. If

548
00:26:26,160 --> 00:26:28,200
Speaker 1: you want to look forward to working for Kate Burnhard

549
00:26:28,240 --> 00:26:30,679
Speaker 1: one day, I'll tell you that you gotta meet Kate.

550
00:26:30,760 --> 00:26:34,080
Speaker 1: She's great. Um so she's a singer. That's her sort

551
00:26:34,080 --> 00:26:36,760
Speaker 1: of slash career. She's performed a lot. She's really great.

552
00:26:36,880 --> 00:26:39,000
Speaker 1: She sent me a picture of you on stage. What

553
00:26:39,200 --> 00:26:41,359
Speaker 1: instrument do you play? What kind of music do you like?

554
00:26:41,480 --> 00:26:44,920
Speaker 1: We love talking music metaphors here, and do you play regularly?

555
00:26:45,400 --> 00:26:48,920
Speaker 1: So I have been I've been a guitar player since

556
00:26:49,000 --> 00:26:53,119
Speaker 1: I was nine ten years old, and my plan was

557
00:26:53,280 --> 00:26:56,040
Speaker 1: to stay in school and go to I went to

558
00:26:56,119 --> 00:26:58,960
Speaker 1: law school mostly to kill times so I could try

559
00:26:59,000 --> 00:27:03,480
Speaker 1: to build my music career. Uh And I don't tell

560
00:27:03,520 --> 00:27:05,719
Speaker 1: my parents. Uh And so I I did a lot

561
00:27:05,800 --> 00:27:08,879
Speaker 1: of work in trying to build bands and a recording career,

562
00:27:09,160 --> 00:27:11,440
Speaker 1: and uh we did, okay. I had a band. I

563
00:27:11,640 --> 00:27:13,960
Speaker 1: played in two bands at the time, sort of through

564
00:27:14,000 --> 00:27:16,720
Speaker 1: college through law school right afterwards for a number of years.

565
00:27:17,080 --> 00:27:19,240
Speaker 1: And then I just discovered that, uh, I just wasn't

566
00:27:19,320 --> 00:27:21,840
Speaker 1: good enough at it. But I love playing. I love

567
00:27:21,920 --> 00:27:24,600
Speaker 1: playing guitar. I played guitar almost every day. I'm an

568
00:27:24,640 --> 00:27:26,960
Speaker 1: avid guitar collector. I won't tell you how many I have,

569
00:27:27,119 --> 00:27:30,879
Speaker 1: but it's a lot. Uh and how many it's a lot? Uh,

570
00:27:31,800 --> 00:27:35,639
Speaker 1: it's a lot. And uhlet acoustic, both electric and I

571
00:27:35,720 --> 00:27:38,240
Speaker 1: have a particular band. So I collect a lot of

572
00:27:38,280 --> 00:27:40,960
Speaker 1: the things that I lusted after when I was like thirteen.

573
00:27:41,320 --> 00:27:43,920
Speaker 1: So I collect a lot of arena rock guitars from

574
00:27:44,000 --> 00:27:48,840
Speaker 1: like Winger and Slaughter Metal. I like to call it

575
00:27:48,880 --> 00:27:51,760
Speaker 1: arena rock hair metals. That's a little cooler. But for example,

576
00:27:51,840 --> 00:27:55,080
Speaker 1: I owned four guitars for guitars from Can you name

577
00:27:55,119 --> 00:27:58,320
Speaker 1: the guitarist of Winger? Uh, Kip Winger? No, he was

578
00:27:58,400 --> 00:28:00,880
Speaker 1: the singer and it was named after him, Red Beach,

579
00:28:01,040 --> 00:28:03,359
Speaker 1: Red Beach. He went on later to plan Docking. I

580
00:28:03,359 --> 00:28:06,760
Speaker 1: don't know Dock and he had played with Chuka Khan

581
00:28:06,880 --> 00:28:09,240
Speaker 1: early in his career, but I owned four of his guitars,

582
00:28:09,320 --> 00:28:12,520
Speaker 1: so I think they're super of his. Yeah, let's do

583
00:28:12,600 --> 00:28:15,560
Speaker 1: the math. You probably own twenty. I'm I was gonna go,

584
00:28:17,200 --> 00:28:21,320
Speaker 1: is it more than fifty? It might be Wow, we're

585
00:28:21,320 --> 00:28:23,280
Speaker 1: gonna have a concert. Is a high probability that it's

586
00:28:23,280 --> 00:28:26,200
Speaker 1: more than fifty? Okay? My last question if that was his,

587
00:28:26,880 --> 00:28:31,479
Speaker 1: what is your master plan? What is my master plan? Uh?

588
00:28:31,840 --> 00:28:34,600
Speaker 1: You know? For me, I know this will seem boring,

589
00:28:34,760 --> 00:28:38,120
Speaker 1: but I have never really planned out my career. I

590
00:28:38,240 --> 00:28:40,360
Speaker 1: never have. I started my career as a lawyer. I

591
00:28:40,440 --> 00:28:44,440
Speaker 1: wound up being rather interested and obsessed about the intersection

592
00:28:44,480 --> 00:28:47,479
Speaker 1: of capital markets, balance sheets, and regulation and everything I've

593
00:28:47,520 --> 00:28:49,560
Speaker 1: done in my career has been about that and so

594
00:28:49,680 --> 00:28:52,760
Speaker 1: long as I get to keep progressing, keep learning, like

595
00:28:52,920 --> 00:28:55,240
Speaker 1: in that area, I get super motivated to go to

596
00:28:55,280 --> 00:28:57,160
Speaker 1: work every day. And the other thing is, um, I

597
00:28:57,280 --> 00:29:00,360
Speaker 1: just I really do enjoy being around people like I

598
00:29:00,440 --> 00:29:01,920
Speaker 1: like getting to know new people, and the E T

599
00:29:02,040 --> 00:29:03,760
Speaker 1: F business is just such a great place to go

600
00:29:03,840 --> 00:29:06,360
Speaker 1: out and meet financial I was in Atlanta yesterday. I

601
00:29:06,480 --> 00:29:09,760
Speaker 1: met with advisors at Morgan Stanley, at ub Said Balantine,

602
00:29:09,800 --> 00:29:11,200
Speaker 1: the r I A. I went to a whole bunch

603
00:29:11,240 --> 00:29:13,520
Speaker 1: of places just to talk to people and learn about

604
00:29:13,520 --> 00:29:16,400
Speaker 1: their clients, their business, their problems, their challenges. Um to me,

605
00:29:16,480 --> 00:29:19,560
Speaker 1: it's like one big puzzle and nothing makes me happier

606
00:29:19,640 --> 00:29:22,160
Speaker 1: in this business. Like flows are great, you know, but

607
00:29:22,320 --> 00:29:24,640
Speaker 1: changing somebody's mind like that, that's my mission. If I

608
00:29:24,680 --> 00:29:27,040
Speaker 1: can just change your mind about one thing, I get

609
00:29:27,080 --> 00:29:29,239
Speaker 1: super motivated about that. So at the end of the day,

610
00:29:29,240 --> 00:29:31,800
Speaker 1: I really like to convince everybody that, like everybody should

611
00:29:31,800 --> 00:29:33,800
Speaker 1: be an index investor, Like if you're not indexing some

612
00:29:33,920 --> 00:29:37,080
Speaker 1: part of your portfolio, like you just haven't arrived yet.

613
00:29:37,840 --> 00:29:40,040
Speaker 1: Martin Small, thanks for joining us, and Trillion, thanks for

614
00:29:40,080 --> 00:29:44,880
Speaker 1: having me. It's great to be here. Thanks for listening

615
00:29:44,880 --> 00:29:47,200
Speaker 1: to Trillions until next time. You can find us in

616
00:29:47,200 --> 00:29:51,280
Speaker 1: the Boomberg Terminal, Bloomberg dot com, Apple Podcasts, and wherever

617
00:29:51,400 --> 00:29:53,960
Speaker 1: else you listen to podcasting. We'd love to hear from you.

618
00:29:54,480 --> 00:29:58,280
Speaker 1: We're on Twitter. I'm at Joel Webber Show, He's at

619
00:29:58,560 --> 00:30:04,040
Speaker 1: Eric Baltunas. Trillions is produced by Magnus Hendrickson. Francesca Levie

620
00:30:04,120 --> 00:30:06,160
Speaker 1: is the head of Bloomer podcast by