WEBVTT - Looking Into BlackRock's Crystal Ball 0:00:06.559 --> 0:00:09.320 Well, can you trillions? I'm Joel Webber and I'm Eric. 0:00:09.320 --> 0:00:13.280 I'll cheat us. Eric. We got another guest. You brought 0:00:13.360 --> 0:00:18.120 him in, Martin Small black Rock, black Rock, we hit 0:00:18.160 --> 0:00:21.400 the big time. We've made it, Joe. It's actually about us. 0:00:21.480 --> 0:00:23.599 We hit the big time. I like that way to 0:00:23.600 --> 0:00:26.960 pivot back. Black Rocks huge. They're huge, and so black 0:00:27.040 --> 0:00:29.720 Rock is the maker of I Shares. I Shares as 0:00:29.720 --> 0:00:34.640 the brand. People know. I Shares has one point four trillion. 0:00:34.760 --> 0:00:40.080 That's almost of all e t F assets with the 0:00:40.159 --> 0:00:44.160 T and Martin he's in charge. Well, he's in charge 0:00:44.200 --> 0:00:46.680 of the U S I Shares and that's what all 0:00:46.720 --> 0:00:50.680 the numbers I just said multiple bosses still actually right, yeah, yeah, 0:00:50.720 --> 0:00:52.640 he's in the middle. Actually, wait, why why are we 0:00:52.640 --> 0:00:57.040 interviewing again? Exactly let's talk about him. But but he's 0:00:57.040 --> 0:01:00.560 fascinating because he is sort of a wizard of the 0:01:00.600 --> 0:01:03.000 et F industry as a whole and is sort of 0:01:03.040 --> 0:01:06.920 in charge of strategy and he is just he's where 0:01:06.959 --> 0:01:09.160 the future is going. Uh. He is sitting in a 0:01:09.200 --> 0:01:12.440 sweet spot. They have a lot of highly liquid, high 0:01:12.480 --> 0:01:15.360 asset products that others would kill for. At this point 0:01:18.120 --> 0:01:20.640 this time on tryants, we're gonna look into the crystal 0:01:20.680 --> 0:01:26.440 ball of my shares. Martin, How did you find the 0:01:26.480 --> 0:01:30.679 e t F my opening favorite question. So I actually 0:01:30.680 --> 0:01:32.360 found the et F when I was in my old 0:01:32.440 --> 0:01:33.880 job at black Rock. So I used to work in 0:01:33.920 --> 0:01:36.720 our advisory business where we worked with central banks and 0:01:36.760 --> 0:01:39.679 financial institutions. I don't know if you remember a lot 0:01:39.720 --> 0:01:42.080 of the press that black Rock had during the financial 0:01:42.080 --> 0:01:44.560 crisis that was about black Rock helps government's value heart 0:01:44.560 --> 0:01:46.720 to value assets. One of the things that I came 0:01:46.800 --> 0:01:50.080 upon during that period of my career was many institutions 0:01:50.080 --> 0:01:52.040 were trying to figure out how to add liquidity to 0:01:52.080 --> 0:01:54.880 their portfolio and reduce transaction costs. And it's when we 0:01:54.920 --> 0:01:57.520 first started doing institutional consulting about e t F s. 0:01:57.720 --> 0:01:59.600 I had also done a lot of work at clearing 0:01:59.600 --> 0:02:02.520 houses where they were starting to see more activity happen 0:02:02.600 --> 0:02:04.840 in ETFs, and they asked us questions like, how do 0:02:04.880 --> 0:02:08.160 we think about margining these? Are these equities? Are they bonds? 0:02:08.320 --> 0:02:10.600 How should we think about managing risk related to a 0:02:10.600 --> 0:02:13.560 big ETF marketplace? And all of that started in probably 0:02:13.600 --> 0:02:16.440 two thousand eight or two thousand nine. That sounds really boring, no, 0:02:16.639 --> 0:02:19.600 it was. It was incredibly electrifying, and in two thousand, 0:02:19.600 --> 0:02:22.320 twelve thirteen, we started working on term Maturity t S 0:02:22.320 --> 0:02:24.240 and I had worked with the I Shares team when 0:02:24.280 --> 0:02:27.240 I was working in black Rock Solutions, and about three 0:02:27.320 --> 0:02:30.400 years later Mark and Larry asked me to take over 0:02:30.440 --> 0:02:33.799 the U S and Canadian businesses Mark Widman and Larie 0:02:33.800 --> 0:02:38.359 Fink not insignificant places. Mark and Larry, Yeah, Mark, we 0:02:38.400 --> 0:02:40.120 hang out with them all the time. Yeah, they're great. 0:02:40.440 --> 0:02:43.800 Uh So, so tell me about that. Because black Rock 0:02:43.960 --> 0:02:48.079 actually rewind the clock a little bit acquired I Shares basically, 0:02:48.080 --> 0:02:52.600 in hindsight, may have been the greatest acquisition of all time. Yeah. 0:02:52.600 --> 0:02:55.520 I mean, my metaphor is it is the Louisiana purchase 0:02:55.639 --> 0:02:58.240 of the asset management business. What you bought it for 0:02:58.520 --> 0:03:01.680 versus what the potential is was amazing. What was behind 0:03:01.720 --> 0:03:03.600 the decision to do it, because at the time it 0:03:03.639 --> 0:03:06.200 definitely was, you know, a pretty penny to buy it. 0:03:06.520 --> 0:03:11.040 At the time, everyone said universally that Blackrock was over paying, 0:03:11.480 --> 0:03:14.560 that this was an impossible acquisition to try to manage 0:03:14.840 --> 0:03:19.200 that bringing together religious zealots from one camp with religious 0:03:19.280 --> 0:03:23.280 zealots from another, with fundamental research driven strategies and index 0:03:23.320 --> 0:03:25.760 based strategies. Was impossible. Sounds like a TV show. People 0:03:25.760 --> 0:03:28.000 said it was impossible, Um, but the fact was, I 0:03:28.040 --> 0:03:30.680 think two things were really happening, the first of which 0:03:30.720 --> 0:03:33.120 really pertained to what our clients were talking about. So 0:03:33.200 --> 0:03:36.680 our clients were already talking about bringing together market cap 0:03:36.720 --> 0:03:40.240 weighted indexing at the core of their portfolios, together with 0:03:40.640 --> 0:03:43.160 things that we can't index, things that we can't turn 0:03:43.200 --> 0:03:46.960 into transparent, investible rules based bundles. And so Larry and 0:03:47.120 --> 0:03:49.400 the management team obviously heard all these things and said, 0:03:49.600 --> 0:03:51.240 this is what the portfolio the future is going to 0:03:51.320 --> 0:03:55.120 look like. And they made a big bet on transformation 0:03:55.160 --> 0:03:57.120 of the industry. And here we are nine years later, 0:03:57.440 --> 0:03:59.960 and everybody says, god, you know that that was obviously 0:04:00.000 --> 0:04:02.720 the Louisiana purchases. But at the time, uh, most people 0:04:02.720 --> 0:04:05.040 said it wouldn't work. Tell me about what you do, Martin. 0:04:05.320 --> 0:04:08.400 So I'm responsible for our I shares businesses in the 0:04:08.480 --> 0:04:11.240 US and Canada. As Eric said, in the US, we 0:04:11.360 --> 0:04:13.520 run about one point four trillion dollars of e t 0:04:13.720 --> 0:04:16.840 F s at roughly three seventy products, and so I'm 0:04:16.880 --> 0:04:20.200 responsible for our business strategy. I'm responsible for our product 0:04:20.279 --> 0:04:24.159 teams are sales teams in institutional and in wealth marketing, 0:04:24.200 --> 0:04:28.119 PR communications. Black Rock has turned into a big matrix place. 0:04:28.279 --> 0:04:30.479 So part of that is through resources that are dedicated 0:04:30.520 --> 0:04:32.760 through I shares, and part of it is through resources 0:04:32.760 --> 0:04:35.440 that I've actually cover things horizontally at black Rock across 0:04:35.520 --> 0:04:39.000 multiple product lines um. But our organization has always been 0:04:39.400 --> 0:04:42.000 let's really manage a product suite, which is the I 0:04:42.120 --> 0:04:47.599 shares business, along client segments, institutional, wealth, self directed, whatever 0:04:47.600 --> 0:04:48.880 it might be. So I try to bring all those 0:04:48.880 --> 0:04:50.839 things together. Let me de jargon that a little bit, 0:04:50.880 --> 0:04:52.920 because this is fascinating, and you know who are we 0:04:52.920 --> 0:04:55.719 talking to out there. We're mostly talking to retail advisors. 0:04:56.240 --> 0:04:58.279 You've got one point three trillion. Can you break that 0:04:58.320 --> 0:05:00.599 into a pie chart kind of of how much is 0:05:00.640 --> 0:05:04.640 institutional like pensions, endowments and such, how much is advisors 0:05:04.640 --> 0:05:07.000 people who manage other people's money in the wealth side, 0:05:07.400 --> 0:05:10.520 and then how much is just do it yourself retail investors. 0:05:10.520 --> 0:05:15.240 So broad strokes at so it's six wealth managers. So 0:05:15.320 --> 0:05:19.440 think about your major wirehouse platforms, your financial advisors, about 0:05:20.320 --> 0:05:23.720 global institutions, so that securities and derivatives buyers. It might 0:05:23.760 --> 0:05:26.279 be a professional asset manager, it might be an E 0:05:26.360 --> 0:05:28.960 t F strategist, it might be a pension plan and endowment, 0:05:29.000 --> 0:05:32.160 a foundation, whatever. And then about ten percent self directed 0:05:32.520 --> 0:05:35.480 who would come through customer facing retail brokerages like Fidelity. 0:05:35.640 --> 0:05:38.480 And isn't this interesting time where all all of those 0:05:38.520 --> 0:05:41.880 people are in the same fund. In mutual funds, they 0:05:41.920 --> 0:05:43.840 separate those investors. If you've got a lot of money, 0:05:43.839 --> 0:05:45.520 you're gonna be in the eye class for less fees 0:05:45.760 --> 0:05:48.240 a t F. It's like Sam's wholesale club. Everybody gets 0:05:48.279 --> 0:05:50.520 the same price. People come at it for different reasons. 0:05:51.160 --> 0:05:53.320 Is that unique that all these investors are playing in 0:05:53.320 --> 0:05:56.600 the same sandbox. We think of our business and segments. 0:05:56.600 --> 0:05:59.200 We have clients segments and we have product use segments, 0:05:59.400 --> 0:06:01.640 so we have client segments. That's what we're talking about, right. 0:06:01.640 --> 0:06:05.440 We're talking about institutional investors wealth managers like FA's, and 0:06:05.480 --> 0:06:08.400 we're talking about self direct investors. How they use the 0:06:08.440 --> 0:06:11.560 products is actually different. So you can have an institutional 0:06:11.600 --> 0:06:15.520 investor that would use the same product as a financial advisor, 0:06:15.560 --> 0:06:17.560 a self direct investor like I v v R S 0:06:17.640 --> 0:06:21.000 and P five index fund at four basis points. People 0:06:21.120 --> 0:06:23.160 use it as a trading vehicle, people use it as 0:06:23.200 --> 0:06:25.960 a long term buy and hold um. It applies to 0:06:26.160 --> 0:06:29.080 UH lots of different segments that come together, and honestly, 0:06:29.080 --> 0:06:32.560 it's the coming together that makes the products have more viability. Right, 0:06:32.600 --> 0:06:36.520 So when institutions and wealth managers and retail investors come together, 0:06:36.800 --> 0:06:39.200 they actually make for network effects that the products become 0:06:39.279 --> 0:06:44.000 they have more utility for people. This is fascinating. Is fascinating. 0:06:44.240 --> 0:06:46.240 That was the best answer I've heard on that topic. 0:06:46.360 --> 0:06:48.279 Network effect. That got a lot of people going. And 0:06:48.279 --> 0:06:52.320 that's that's true. It's uh, it's if it is unbelievable. 0:06:52.360 --> 0:06:54.760 I look at a product like e M R I 0:06:54.880 --> 0:06:57.440 MG is a good example. That's their emerging markets that's 0:06:57.480 --> 0:07:01.000 on the cheaper side, sporting basis ones. You know, a 0:07:01.040 --> 0:07:04.040 lot of retail investors own that, a lot of advisors 0:07:04.080 --> 0:07:06.760 own it, and then Bridgewater, that's the world's largest hedge fund, 0:07:06.760 --> 0:07:09.720 owns it. It is just unusual to see all those 0:07:09.720 --> 0:07:12.600 people using the same product. It's just still the largest 0:07:12.640 --> 0:07:15.600 holder of it. I think. So, Yeah, Bridgewater owns e 0:07:15.760 --> 0:07:17.680 M and I MG. I think they're slowly they owned 0:07:17.760 --> 0:07:20.600 both ones more liquid ones cheaper. I think if you 0:07:20.640 --> 0:07:22.560 add it together, probably the largest owner of the I 0:07:22.680 --> 0:07:25.400 shares Emerging Market Suite. Am I wrong? They own a lot. 0:07:25.440 --> 0:07:28.840 It's like four billion, right pert filings. Yes, so think 0:07:28.880 --> 0:07:31.480 about it. The world's largest hedge fund, access to everything. 0:07:31.840 --> 0:07:34.000 And they called this guy, and they called but guys, 0:07:34.040 --> 0:07:36.040 think about why, right, Like if I ask you in 0:07:36.080 --> 0:07:38.640 the ms c I Emerging Markets Index, how many countries 0:07:38.680 --> 0:07:41.160 are there and how many currencies? There's twenty three countries 0:07:41.160 --> 0:07:44.080 and ten currencies. So if your bridgewater, you say, do 0:07:44.160 --> 0:07:46.640 I really want to go be active in twenty three countries, 0:07:46.680 --> 0:07:49.920 get twenty three securities, licenses, set up twenty three sub 0:07:50.000 --> 0:07:53.600 custodial accounts, like pay transaction costs for every one of 0:07:53.600 --> 0:07:56.160 those securities. Like there's a reason that when but when 0:07:56.200 --> 0:07:58.480 you bundle this stuff in the easy button, that it 0:07:58.520 --> 0:08:02.160 becomes just it becomes easier to transact. Like Greenwich Associates 0:08:02.200 --> 0:08:05.840 just released its study on institutional investors and the number 0:08:05.880 --> 0:08:08.280 one thing they cite about et F usage is that 0:08:08.320 --> 0:08:10.480 it's simple and easy to access. And so as they 0:08:10.520 --> 0:08:12.840 reduce their footprint and dealing with all this stuff that 0:08:12.960 --> 0:08:14.800 is just plumbing that they don't want to deal with, 0:08:15.040 --> 0:08:16.760 they can buy the whole index. They can buy the 0:08:16.800 --> 0:08:19.360 whole world. Basically in you know, the same thing that 0:08:19.360 --> 0:08:21.040 you'd buy in your fidelity. Okay, I'm many give away 0:08:21.040 --> 0:08:23.880 my big idea. You ready, we've we've been sitting on 0:08:23.920 --> 0:08:27.240 it for a while. Hit me, why isn't there an 0:08:27.240 --> 0:08:30.920 e t F with the easy ticker easy button? Well, 0:08:30.960 --> 0:08:34.080 what would it hold? Well? Like everything? Yeah, like perfectly 0:08:34.080 --> 0:08:38.600 diversified portfolio. Maybe we should change the aquaticker to easy. 0:08:38.640 --> 0:08:40.760 You can, you can? You can just say now I 0:08:40.800 --> 0:08:43.840 think you have a okay, right, that's the asset allocation 0:08:43.880 --> 0:08:46.520 that holds other e t s that eventually hold everything. Okay, 0:08:46.600 --> 0:08:48.240 is pretty good. Yeah, it's pretty good. Right, that's a 0:08:48.240 --> 0:08:50.559 good rival. It's interesting e t F that hold other 0:08:50.559 --> 0:08:52.199 e t F to try to do all that for you. 0:08:52.480 --> 0:08:54.319 They didn't. They're not really big hits. I think people 0:08:54.360 --> 0:08:57.520 like to sort assort the puzzle pieces in their own 0:08:57.559 --> 0:09:00.920 way doing acid allocation. But has asked that an event 0:09:01.000 --> 0:09:03.520 yesterday about whether an e t F vts could be 0:09:03.559 --> 0:09:05.880 a hit, And they're there already. They exist exist, but 0:09:06.080 --> 0:09:08.520 asset allocation ETFs haven't really taken off. We have we 0:09:08.520 --> 0:09:10.280 have a whole we have a whole range of them. 0:09:10.320 --> 0:09:12.320 So we have for example, I Y L D would 0:09:12.360 --> 0:09:14.200 be the closest thing too easy. I y l D 0:09:14.320 --> 0:09:19.000 is a multi asset I know, I'm going easy y 0:09:19.120 --> 0:09:21.240 l D like I yield. It's pretty good, right. I 0:09:21.480 --> 0:09:24.240 y l D is a multi asset income portfolio. We 0:09:24.280 --> 0:09:28.400 have the core allocation series funds that would say you're conservative, moderate, aggressive, 0:09:28.440 --> 0:09:33.160 and it puts together portfolio. Here here's the rub though, 0:09:33.200 --> 0:09:35.640 and I think Eric you're right on this, which is 0:09:35.800 --> 0:09:38.400 if you're a financial advisor and you want to show 0:09:38.440 --> 0:09:41.600 your client that you're building a multi asset diversified portfolio. 0:09:41.920 --> 0:09:43.440 If you show up for the client meeting and you 0:09:43.480 --> 0:09:46.560 say here, I'm here with a okay, all done, they go, 0:09:47.520 --> 0:09:50.000 I'm paying you one percent of my assets. This doesn't 0:09:50.040 --> 0:09:52.160 feel like you're doing what you want to do. In addition, 0:09:52.200 --> 0:09:54.439 I'd say clients all have I know I'm being a 0:09:54.480 --> 0:09:57.360 little facetious, but clients all have something they're looking for 0:09:57.520 --> 0:10:01.160 that's different than a stockport a standard PORTFOLI. So usually 0:10:01.200 --> 0:10:03.560 you're going to want some more customization in terms of 0:10:03.600 --> 0:10:07.120 target risk return, levels of income and so one size 0:10:07.120 --> 0:10:10.160 fits all asset allocation ETFs UM. There's a market, it's 0:10:10.200 --> 0:10:12.120 just not a very big market. I want to ask 0:10:12.280 --> 0:10:16.240 another question because we talked about Larry, who's technically the 0:10:16.240 --> 0:10:19.040 boss of the boss, and we talked about Mark. Can 0:10:19.040 --> 0:10:21.199 you talk to me about and you came up on 0:10:21.240 --> 0:10:23.480 the black Rock side, right, and then jumped to the 0:10:23.520 --> 0:10:25.760 Ice shares. So can you talk to me about the 0:10:25.800 --> 0:10:27.920 evolution I do. I work at black Rock, I sell 0:10:27.960 --> 0:10:30.720 I shares, all right, So talk to me about that 0:10:30.760 --> 0:10:33.599 acquisition that we talked about, the Louisiana purchase. How is 0:10:33.640 --> 0:10:38.000 the company's culture evolved? Because you've evolved the marketplace, but 0:10:38.040 --> 0:10:42.280 like internally, what sort of changed about black Rock and 0:10:42.360 --> 0:10:45.160 I shares in the process. Uh, Larry is for as 0:10:45.200 --> 0:10:46.640 long as I've been at black Rock. When I when 0:10:46.679 --> 0:10:48.480 I came to black Rock, it was a US centric 0:10:48.520 --> 0:10:50.520 bond manager sort of the end of two thousand five 0:10:50.559 --> 0:10:52.760 two thousand six, it had something like three hundred billion 0:10:52.800 --> 0:10:55.679 dollars of assets and eleven people. I thought it was huge. 0:10:56.000 --> 0:10:58.959 I thought it was enormous. Uh. And we did several 0:10:59.000 --> 0:11:01.720 transformative ACQUI asians along the way. In two thousand six, 0:11:01.720 --> 0:11:04.199 we merged with Mary Lynch Investment Managers, and that I 0:11:04.200 --> 0:11:07.720 would say was our our first step in really transforming UM. 0:11:07.720 --> 0:11:09.480 Not so much the culture of the firm, but the 0:11:09.520 --> 0:11:11.920 identity and capabilities of the firm. So we went from 0:11:11.920 --> 0:11:14.280 being a US centric bond manager to truly being a 0:11:14.280 --> 0:11:17.120 global investment firm. That was in twenty six countries sixty 0:11:17.120 --> 0:11:19.960 two cities. But the biggest change was, all of a sudden, 0:11:19.960 --> 0:11:22.200 a third of our assets were in equities. Uh. And 0:11:22.280 --> 0:11:25.080 for a bond house people who grew up in bonds, 0:11:25.600 --> 0:11:27.760 beginning to think of the world of equities is just 0:11:27.840 --> 0:11:30.199 totally different. Talk to me about that. How do bond 0:11:30.240 --> 0:11:32.800 people view the world and how is that different than 0:11:33.200 --> 0:11:35.760 this new that just showed up. Is it like going 0:11:35.800 --> 0:11:39.400 from chess to checkers? Because bonds have a maturity. They 0:11:39.440 --> 0:11:41.920 they're much more complicated, at least for someone like me 0:11:41.960 --> 0:11:43.920 approaching me from the outside. They are harder to get 0:11:43.920 --> 0:11:47.040 your head around then stocks. I think that's absolute rubbish 0:11:47.080 --> 0:11:50.199 and fiction. Bonds are pretty Bonds are pretty simple, like 0:11:50.320 --> 0:11:52.599 but you know, it's it's uh, it's some amount of 0:11:52.679 --> 0:11:55.280 interest over some period of time and some ending date 0:11:55.440 --> 0:11:58.160 like that's it. Bonds are pretty simple, and what drives 0:11:58.240 --> 0:12:02.600 prices and bonds is interest rates, credit spreads curve and 0:12:02.679 --> 0:12:06.040 ultimately some degree of liquidity. Equities are like poker, bonds 0:12:06.040 --> 0:12:09.280 are like chess right. Like equities, you know, you could 0:12:09.280 --> 0:12:12.439 say something about there's a seventy probability that this will 0:12:12.480 --> 0:12:14.680 be the result. In equities, you might have made a 0:12:14.679 --> 0:12:17.760 good decision, like any duke would say, but of the 0:12:17.800 --> 0:12:20.760 time you were wrong. In bonds, it's it's really more 0:12:20.840 --> 0:12:23.559 chess right. The things are of the outcomes are pretty binary. 0:12:23.679 --> 0:12:25.760 So how did that change you? Um? I really think 0:12:25.800 --> 0:12:28.120 what it did was it changed the conversations that we 0:12:28.120 --> 0:12:29.880 were having with all of our clients. So it used 0:12:29.880 --> 0:12:32.080 to be we were hardcore bond people. We talked about 0:12:32.080 --> 0:12:34.920 mortgage pre payment speeds, we talked about relative value and 0:12:34.960 --> 0:12:37.520 credit spreads, but now we really started to talk about 0:12:37.679 --> 0:12:40.360 holistic portfolio outcomes. What are you really trying to do 0:12:40.400 --> 0:12:42.280 with your whole balance sheet? What are you really trying 0:12:42.320 --> 0:12:44.760 to do to generate a seven percent return for your 0:12:44.800 --> 0:12:48.800 pension plan participants. That's a really different set of conversations 0:12:48.840 --> 0:12:51.640 and it requires, i'd argue, like a different kind of 0:12:51.720 --> 0:12:53.840 person at the firm. So what you would have seen 0:12:53.840 --> 0:12:56.440 over periods of time is more people who are holistic 0:12:56.480 --> 0:12:59.480 portfolio construction and asset allocation people rather than people who 0:12:59.480 --> 0:13:02.400 have focused on uh, do I pick Verizon versus a 0:13:02.480 --> 0:13:05.160 T and T at the five year key rate duration. UM. 0:13:05.200 --> 0:13:08.680 What Larry has been relentless about over the entirety of 0:13:08.760 --> 0:13:11.959 my time there and since inception of the firm has 0:13:12.000 --> 0:13:16.120 been culture. Uh. Larry is ruthless about culture. His view 0:13:16.200 --> 0:13:20.360 as we are client focus, client centric business. Black Rock, 0:13:20.480 --> 0:13:23.880 I'm quite certain has had literally hundreds of opportunities to 0:13:23.920 --> 0:13:26.959 go into balance sheet proprietary businesses and we've never done that. 0:13:27.000 --> 0:13:29.720 We've stayed in the fiduciary business, working solely for our clients, 0:13:29.920 --> 0:13:32.319 and that is the north star. Um. You know, I 0:13:32.760 --> 0:13:35.400 find started a hard press to go wrong. And let's 0:13:35.400 --> 0:13:37.160 talk about fixed and come a little bit because you 0:13:37.200 --> 0:13:39.280 guys have one of the most controversial e t F 0:13:39.360 --> 0:13:41.679 s h y G. We've discussed it many times. It 0:13:41.760 --> 0:13:45.160 packages junk bonds coming from the junk bond space. Just 0:13:45.200 --> 0:13:47.920 this a couple days ago at the Milk and conference, 0:13:48.000 --> 0:13:51.200 this came up again as a worry. Now, leaving aside 0:13:51.200 --> 0:13:53.360 the motivations of the people who are worried, I know 0:13:53.400 --> 0:13:55.719 some of them are active managers and it might be uh, 0:13:55.920 --> 0:13:59.280 not the right messenger, but it's a persistent fear that 0:13:59.360 --> 0:14:01.600 how can you take something that's not that liquid, say 0:14:01.679 --> 0:14:04.439 junk bonds or any bonds really they don't trade like stocks, 0:14:04.760 --> 0:14:08.280 and put it in this stock like trading vehicle. Will 0:14:08.280 --> 0:14:10.440 there be a problem or some kind of an issue 0:14:10.559 --> 0:14:13.200 if everyone heads for the exit at once? Yeah, so 0:14:13.280 --> 0:14:16.960 I I think the first thing I'd say is uh. Uh. 0:14:17.160 --> 0:14:20.240 The claims of the illiquidity of the high yield market 0:14:20.320 --> 0:14:23.760 are greatly exaggerated. This is a market in the US 0:14:23.840 --> 0:14:26.800 that has one point four trillion dollars dollars of outstanding 0:14:26.800 --> 0:14:30.440 balances UH. Year to date, I think we've had over 0:14:30.480 --> 0:14:32.760 the counter trading and high yield of a trillion dollars. 0:14:32.800 --> 0:14:35.320 That's about twelve to fourteen billion dollars a day of 0:14:35.320 --> 0:14:38.960 average daily volume and high yield bonds cash trading. UH. 0:14:39.000 --> 0:14:41.560 If I take all the high l dtfs, I take 0:14:41.600 --> 0:14:43.960 every last single one of them, UH, and I look 0:14:44.000 --> 0:14:47.080 at h y G, I look at the other competitor products. 0:14:47.120 --> 0:14:50.400 There's fifty billion dollars of high YIELDTF assets year to date. 0:14:50.800 --> 0:14:53.480 The entirety of redemptions for the most funds is about 0:14:53.520 --> 0:14:57.000 six billion dollars. That's like the entirety of the bonds 0:14:57.040 --> 0:14:58.880 that have come out of the high l DTF space 0:14:59.200 --> 0:15:02.600 and so I can hair numerator six billion over a 0:15:02.640 --> 0:15:05.480 trillion dollars of trading year to date and cash bonds 0:15:05.600 --> 0:15:08.280 that's not even one percent. So just the math to 0:15:08.360 --> 0:15:11.480 me doesn't work as to how high yield ETFs are 0:15:11.520 --> 0:15:14.560 causing any degree of price distortion and high yield. Now 0:15:14.560 --> 0:15:17.040 here's the thing that is true. The high yield market 0:15:17.160 --> 0:15:19.920 is more cumbersome to transact in. So if you want 0:15:19.920 --> 0:15:22.520 to move two to four hundred million dollars of high yield, 0:15:22.800 --> 0:15:25.160 you have to not call one broker dealer anymore. You 0:15:25.240 --> 0:15:26.880 might have to call three, four or five to go 0:15:26.960 --> 0:15:29.640 find the bonds you want. This should not be a mystery. 0:15:29.680 --> 0:15:32.760 Then that it's easier and cheaper and lower transaction costs 0:15:32.800 --> 0:15:35.920 to trade h y G, which packages up the whole bundle. 0:15:36.040 --> 0:15:37.800 So if you try to buy all the bonds that 0:15:37.840 --> 0:15:39.960 are in the basket of h y G in the portfolio, 0:15:40.080 --> 0:15:42.880 it would cost you fifty basis points in transaction costs. 0:15:42.880 --> 0:15:45.160 But h YG is a penny. That makes sense because 0:15:45.200 --> 0:15:47.080 I don't have to go do all this nuisance value 0:15:47.080 --> 0:15:50.840 of doing all those things up of the orders in 0:15:51.000 --> 0:15:53.040 h y G. Uh It's like Eric, you sell me 0:15:53.120 --> 0:15:55.440 your shares and I buy them from you on exchange 0:15:55.440 --> 0:15:57.560 and nothing happens in the fund. That's why I think 0:15:57.600 --> 0:16:01.000 in the hindsight, the Louisiana purcha, if you will, was 0:16:01.040 --> 0:16:03.760 so genius. It's because bond guys looked out and said, 0:16:04.280 --> 0:16:07.360 wait a second, there's a better way, and it looks 0:16:07.440 --> 0:16:10.160 more like an equity right, like we can go get 0:16:10.680 --> 0:16:12.840 It stems from the fantasy though, of the complexity of 0:16:12.840 --> 0:16:15.160 the bond market. It's it's a fantasy like it really is. 0:16:15.280 --> 0:16:17.040 And I think it's more people talking their book than 0:16:17.080 --> 0:16:20.000 it is truth. Like we've known forever in the equity world, 0:16:20.160 --> 0:16:22.720 when we twake twenty three countries and ten currencies in 0:16:22.760 --> 0:16:25.520 em and we put it into one composite security like 0:16:25.560 --> 0:16:28.720 in et F, it trades with lower transaction costs. Shouldn't 0:16:28.720 --> 0:16:37.200 the same be true for bonds? I think so one 0:16:37.280 --> 0:16:39.360 question I have, right, you guys have something that I 0:16:39.400 --> 0:16:42.080 call the foreheaded monster, and I really we talked about 0:16:42.080 --> 0:16:44.640 the portfolio of the future. You have i VV, which 0:16:44.640 --> 0:16:47.480 is SPI, i MG which is emerging markets, i f 0:16:47.480 --> 0:16:49.600 A which is developed international, a g G, which is 0:16:49.600 --> 0:16:53.200 like your total bond. That's really a pretty good portfolio 0:16:53.240 --> 0:16:55.000 for most people. What do you call it, I just 0:16:55.080 --> 0:16:57.280 call it the core of the core. Yeah. I I 0:16:57.400 --> 0:17:00.640 try to decorate my we start twist some stuff because 0:17:00.640 --> 0:17:03.960 I gotta get readership anyway, stuff and not mine erica. 0:17:05.000 --> 0:17:08.560 So this fourheaded monster just takes in cash like crazy. 0:17:08.800 --> 0:17:10.760 I think the all end fee for this portfolio will 0:17:10.800 --> 0:17:13.360 be about seven or eight basis points. Somewhere in there. 0:17:14.240 --> 0:17:16.600 Other issuers have these core that are very similar, we 0:17:16.640 --> 0:17:19.119 call the core wars. If this is the portfolio of 0:17:19.160 --> 0:17:21.520 the future, some people on Twitter come back to me 0:17:21.560 --> 0:17:24.520 and say, if everyone's in the same portfolios that are 0:17:24.560 --> 0:17:26.840 just like this, that could be a problem in terms 0:17:26.840 --> 0:17:29.440 of crowding for investors. So what do you say about 0:17:29.480 --> 0:17:33.080 this concept of everyone using this is the portfolio of 0:17:33.119 --> 0:17:36.120 the future. So, for one, I think there's there's lots 0:17:36.119 --> 0:17:38.520 of great ideas about the portfolio of the future. So 0:17:38.840 --> 0:17:41.440 and even simpler portfolio would be like I t ot 0:17:41.640 --> 0:17:44.159 the total stock market index at three basis points I 0:17:44.400 --> 0:17:46.800 x U S, which is IFA plus e M, and 0:17:46.840 --> 0:17:50.359 then agag those four tickers at a blended rate of five, 0:17:50.440 --> 0:17:52.800 four or five basis points. Would get you basically the 0:17:52.800 --> 0:17:56.320 efficient market hypothesis in one shot. And I'd argue that 0:17:56.320 --> 0:17:58.960 that's kind of the way institutions haven't been investing since 0:17:59.000 --> 0:18:01.800 the early nine seven these and so that market doesn't 0:18:01.800 --> 0:18:05.040 actually look very different than the institutional market looks today. 0:18:05.080 --> 0:18:08.159 It's just implemented in ETFs um in terms of it 0:18:08.240 --> 0:18:12.000 being much much bigger. There is so much room to grow, 0:18:12.560 --> 0:18:16.040 Like if I really take all of the global equities, 0:18:16.080 --> 0:18:18.399 like the entirety of stock and bond market cap in 0:18:18.440 --> 0:18:20.320 the world, Like, let's just talk about the US. In 0:18:20.359 --> 0:18:23.160 the US, there's twenty four trillion dollars of market cap 0:18:23.160 --> 0:18:25.480 in the Russell three thousand, right, if I take all 0:18:25.560 --> 0:18:27.560 the equity E t f s, like we're you know, 0:18:27.600 --> 0:18:30.000 one twelfth of that, right, where this teeny tiny sliver, 0:18:30.080 --> 0:18:32.639 So there's just ample room to grow. The second is 0:18:32.960 --> 0:18:36.040 all that stuff is already in those exposures, right, it's 0:18:36.040 --> 0:18:39.520 just in different rappers. So the migration of assets from 0:18:39.600 --> 0:18:42.320 one rapper to another rapper in the mutual fund industry 0:18:42.560 --> 0:18:46.160 doesn't actually change any of the nets supply demand dynamics 0:18:46.160 --> 0:18:48.760 for stocks. So I think it's wholly irrelevant where assets 0:18:48.760 --> 0:18:52.000 are located. What matters is what's the velocity of trading, 0:18:52.040 --> 0:18:56.879 and is turnover relatively high um of daily volumes and 0:18:56.960 --> 0:18:59.280 US equities is not done by E t F or 0:18:59.280 --> 0:19:01.760 index funds. Right, It's people doing stock picking. It's my 0:19:01.800 --> 0:19:05.879 mom and her pajamas and her Fidelity accounts to trade pajamas. 0:19:07.560 --> 0:19:11.239 It really loosens the spirit up. People are more uninhibited then. 0:19:11.280 --> 0:19:13.359 You know, Um, I want to talk a little bit 0:19:13.359 --> 0:19:15.840 about this idea of that do it yourself retail investor. 0:19:16.200 --> 0:19:18.680 How many of those people are the new day traders? 0:19:18.680 --> 0:19:21.000 You remember the nineties, the day traders were their retail 0:19:21.040 --> 0:19:24.959 investors doing Oracle and Microsoft. Some data is showing that 0:19:25.000 --> 0:19:27.159 now they're using E t f s to do that 0:19:27.240 --> 0:19:29.720 day trading. Do you find that to be something? And 0:19:30.080 --> 0:19:32.760 I guess part of that that that feeds into Jack 0:19:32.800 --> 0:19:35.280 Bogel's criticism movie TS, which is they tempt people to 0:19:35.320 --> 0:19:37.960 trade too much and thus you lose money. Yeah. So 0:19:38.119 --> 0:19:43.000