Speaker 1: Well, can you trillions? I'm Joel Webber and I'm Eric.
Speaker 1: I'll cheat us. Eric. We got another guest. You brought
Speaker 1: him in, Martin Small black Rock, black Rock, we hit
Speaker 1: the big time. We've made it, Joe. It's actually about us.
Speaker 1: We hit the big time. I like that way to
Speaker 1: pivot back. Black Rocks huge. They're huge, and so black
Speaker 1: Rock is the maker of I Shares. I Shares as
Speaker 1: the brand. People know. I Shares has one point four trillion.
Speaker 1: That's almost of all e t F assets with the
Speaker 1: T and Martin he's in charge. Well, he's in charge
Speaker 1: of the U S I Shares and that's what all
Speaker 1: the numbers I just said multiple bosses still actually right, yeah, yeah,
Speaker 1: he's in the middle. Actually, wait, why why are we
Speaker 1: interviewing again? Exactly let's talk about him. But but he's
Speaker 1: fascinating because he is sort of a wizard of the
Speaker 1: et F industry as a whole and is sort of
Speaker 1: in charge of strategy and he is just he's where
Speaker 1: the future is going. Uh. He is sitting in a
Speaker 1: sweet spot. They have a lot of highly liquid, high
Speaker 1: asset products that others would kill for. At this point
Speaker 1: this time on tryants, we're gonna look into the crystal
Speaker 1: ball of my shares. Martin, How did you find the
Speaker 1: e t F my opening favorite question. So I actually
Speaker 1: found the et F when I was in my old
Speaker 1: job at black Rock. So I used to work in
Speaker 1: our advisory business where we worked with central banks and
Speaker 1: financial institutions. I don't know if you remember a lot
Speaker 1: of the press that black Rock had during the financial
Speaker 1: crisis that was about black Rock helps government's value heart
Speaker 1: to value assets. One of the things that I came
Speaker 1: upon during that period of my career was many institutions
Speaker 1: were trying to figure out how to add liquidity to
Speaker 1: their portfolio and reduce transaction costs. And it's when we
Speaker 1: first started doing institutional consulting about e t F s.
Speaker 1: I had also done a lot of work at clearing
Speaker 1: houses where they were starting to see more activity happen
Speaker 1: in ETFs, and they asked us questions like, how do
Speaker 1: we think about margining these? Are these equities? Are they bonds?
Speaker 1: How should we think about managing risk related to a
Speaker 1: big ETF marketplace? And all of that started in probably
Speaker 1: two thousand eight or two thousand nine. That sounds really boring, no,
Speaker 1: it was. It was incredibly electrifying, and in two thousand,
Speaker 1: twelve thirteen, we started working on term Maturity t S
Speaker 1: and I had worked with the I Shares team when
Speaker 1: I was working in black Rock Solutions, and about three
Speaker 1: years later Mark and Larry asked me to take over
Speaker 1: the U S and Canadian businesses Mark Widman and Larie
Speaker 1: Fink not insignificant places. Mark and Larry, Yeah, Mark, we
Speaker 1: hang out with them all the time. Yeah, they're great.
Speaker 1: Uh So, so tell me about that. Because black Rock
Speaker 1: actually rewind the clock a little bit acquired I Shares basically,
Speaker 1: in hindsight, may have been the greatest acquisition of all time. Yeah.
Speaker 1: I mean, my metaphor is it is the Louisiana purchase
Speaker 1: of the asset management business. What you bought it for
Speaker 1: versus what the potential is was amazing. What was behind
Speaker 1: the decision to do it, because at the time it
Speaker 1: definitely was, you know, a pretty penny to buy it.
Speaker 1: At the time, everyone said universally that Blackrock was over paying,
Speaker 1: that this was an impossible acquisition to try to manage
Speaker 1: that bringing together religious zealots from one camp with religious
Speaker 1: zealots from another, with fundamental research driven strategies and index
Speaker 1: based strategies. Was impossible. Sounds like a TV show. People
Speaker 1: said it was impossible, Um, but the fact was, I
Speaker 1: think two things were really happening, the first of which
Speaker 1: really pertained to what our clients were talking about. So
Speaker 1: our clients were already talking about bringing together market cap
Speaker 1: weighted indexing at the core of their portfolios, together with
Speaker 1: things that we can't index, things that we can't turn
Speaker 1: into transparent, investible rules based bundles. And so Larry and
Speaker 1: the management team obviously heard all these things and said,
Speaker 1: this is what the portfolio the future is going to
Speaker 1: look like. And they made a big bet on transformation
Speaker 1: of the industry. And here we are nine years later,
Speaker 1: and everybody says, god, you know that that was obviously
Speaker 1: the Louisiana purchases. But at the time, uh, most people
Speaker 1: said it wouldn't work. Tell me about what you do, Martin.
Speaker 1: So I'm responsible for our I shares businesses in the
Speaker 1: US and Canada. As Eric said, in the US, we
Speaker 1: run about one point four trillion dollars of e t
Speaker 1: F s at roughly three seventy products, and so I'm
Speaker 1: responsible for our business strategy. I'm responsible for our product
Speaker 1: teams are sales teams in institutional and in wealth marketing,
Speaker 1: PR communications. Black Rock has turned into a big matrix place.
Speaker 1: So part of that is through resources that are dedicated
Speaker 1: through I shares, and part of it is through resources
Speaker 1: that I've actually cover things horizontally at black Rock across
Speaker 1: multiple product lines um. But our organization has always been
Speaker 1: let's really manage a product suite, which is the I
Speaker 1: shares business, along client segments, institutional, wealth, self directed, whatever
Speaker 1: it might be. So I try to bring all those
Speaker 1: things together. Let me de jargon that a little bit,
Speaker 1: because this is fascinating, and you know who are we
Speaker 1: talking to out there. We're mostly talking to retail advisors.
Speaker 1: You've got one point three trillion. Can you break that
Speaker 1: into a pie chart kind of of how much is
Speaker 1: institutional like pensions, endowments and such, how much is advisors
Speaker 1: people who manage other people's money in the wealth side,
Speaker 1: and then how much is just do it yourself retail investors.
Speaker 1: So broad strokes at so it's six wealth managers. So
Speaker 1: think about your major wirehouse platforms, your financial advisors, about
Speaker 1: global institutions, so that securities and derivatives buyers. It might
Speaker 1: be a professional asset manager, it might be an E
Speaker 1: t F strategist, it might be a pension plan and endowment,
Speaker 1: a foundation, whatever. And then about ten percent self directed
Speaker 1: who would come through customer facing retail brokerages like Fidelity.
Speaker 1: And isn't this interesting time where all all of those
Speaker 1: people are in the same fund. In mutual funds, they
Speaker 1: separate those investors. If you've got a lot of money,
Speaker 1: you're gonna be in the eye class for less fees
Speaker 1: a t F. It's like Sam's wholesale club. Everybody gets
Speaker 1: the same price. People come at it for different reasons.
Speaker 1: Is that unique that all these investors are playing in
Speaker 1: the same sandbox. We think of our business and segments.
Speaker 1: We have clients segments and we have product use segments,
Speaker 1: so we have client segments. That's what we're talking about, right.
Speaker 1: We're talking about institutional investors wealth managers like FA's, and
Speaker 1: we're talking about self direct investors. How they use the
Speaker 1: products is actually different. So you can have an institutional
Speaker 1: investor that would use the same product as a financial advisor,
Speaker 1: a self direct investor like I v v R S
Speaker 1: and P five index fund at four basis points. People
Speaker 1: use it as a trading vehicle, people use it as
Speaker 1: a long term buy and hold um. It applies to
Speaker 1: UH lots of different segments that come together, and honestly,
Speaker 1: it's the coming together that makes the products have more viability. Right,
Speaker 1: So when institutions and wealth managers and retail investors come together,
Speaker 1: they actually make for network effects that the products become
Speaker 1: they have more utility for people. This is fascinating. Is fascinating.
Speaker 1: That was the best answer I've heard on that topic.
Speaker 1: Network effect. That got a lot of people going. And
Speaker 1: that's that's true. It's uh, it's if it is unbelievable.
Speaker 1: I look at a product like e M R I
Speaker 1: MG is a good example. That's their emerging markets that's
Speaker 1: on the cheaper side, sporting basis ones. You know, a
Speaker 1: lot of retail investors own that, a lot of advisors
Speaker 1: own it, and then Bridgewater, that's the world's largest hedge fund,
Speaker 1: owns it. It is just unusual to see all those
Speaker 1: people using the same product. It's just still the largest
Speaker 1: holder of it. I think. So, Yeah, Bridgewater owns e
Speaker 1: M and I MG. I think they're slowly they owned
Speaker 1: both ones more liquid ones cheaper. I think if you
Speaker 1: add it together, probably the largest owner of the I
Speaker 1: shares Emerging Market Suite. Am I wrong? They own a lot.
Speaker 1: It's like four billion, right pert filings. Yes, so think
Speaker 1: about it. The world's largest hedge fund, access to everything.
Speaker 1: And they called this guy, and they called but guys,
Speaker 1: think about why, right, Like if I ask you in
Speaker 1: the ms c I Emerging Markets Index, how many countries
Speaker 1: are there and how many currencies? There's twenty three countries
Speaker 1: and ten currencies. So if your bridgewater, you say, do
Speaker 1: I really want to go be active in twenty three countries,
Speaker 1: get twenty three securities, licenses, set up twenty three sub
Speaker 1: custodial accounts, like pay transaction costs for every one of
Speaker 1: those securities. Like there's a reason that when but when
Speaker 1: you bundle this stuff in the easy button, that it
Speaker 1: becomes just it becomes easier to transact. Like Greenwich Associates
Speaker 1: just released its study on institutional investors and the number
Speaker 1: one thing they cite about et F usage is that
Speaker 1: it's simple and easy to access. And so as they
Speaker 1: reduce their footprint and dealing with all this stuff that
Speaker 1: is just plumbing that they don't want to deal with,
Speaker 1: they can buy the whole index. They can buy the
Speaker 1: whole world. Basically in you know, the same thing that
Speaker 1: you'd buy in your fidelity. Okay, I'm many give away
Speaker 1: my big idea. You ready, we've we've been sitting on
Speaker 1: it for a while. Hit me, why isn't there an
Speaker 1: e t F with the easy ticker easy button? Well,
Speaker 1: what would it hold? Well? Like everything? Yeah, like perfectly
Speaker 1: diversified portfolio. Maybe we should change the aquaticker to easy.
Speaker 1: You can, you can? You can just say now I
Speaker 1: think you have a okay, right, that's the asset allocation
Speaker 1: that holds other e t s that eventually hold everything. Okay,
Speaker 1: is pretty good. Yeah, it's pretty good. Right, that's a
Speaker 1: good rival. It's interesting e t F that hold other
Speaker 1: e t F to try to do all that for you.
Speaker 1: They didn't. They're not really big hits. I think people
Speaker 1: like to sort assort the puzzle pieces in their own
Speaker 1: way doing acid allocation. But has asked that an event
Speaker 1: yesterday about whether an e t F vts could be
Speaker 1: a hit, And they're there already. They exist exist, but
Speaker 1: asset allocation ETFs haven't really taken off. We have we
Speaker 1: have a whole we have a whole range of them.
Speaker 1: So we have for example, I Y L D would
Speaker 1: be the closest thing too easy. I y l D
Speaker 1: is a multi asset I know, I'm going easy y
Speaker 1: l D like I yield. It's pretty good, right. I
Speaker 1: y l D is a multi asset income portfolio. We
Speaker 1: have the core allocation series funds that would say you're conservative, moderate, aggressive,
Speaker 1: and it puts together portfolio. Here here's the rub though,
Speaker 1: and I think Eric you're right on this, which is
Speaker 1: if you're a financial advisor and you want to show
Speaker 1: your client that you're building a multi asset diversified portfolio.
Speaker 1: If you show up for the client meeting and you
Speaker 1: say here, I'm here with a okay, all done, they go,
Speaker 1: I'm paying you one percent of my assets. This doesn't
Speaker 1: feel like you're doing what you want to do. In addition,
Speaker 1: I'd say clients all have I know I'm being a
Speaker 1: little facetious, but clients all have something they're looking for
Speaker 1: that's different than a stockport a standard PORTFOLI. So usually
Speaker 1: you're going to want some more customization in terms of
Speaker 1: target risk return, levels of income and so one size
Speaker 1: fits all asset allocation ETFs UM. There's a market, it's
Speaker 1: just not a very big market. I want to ask
Speaker 1: another question because we talked about Larry, who's technically the
Speaker 1: boss of the boss, and we talked about Mark. Can
Speaker 1: you talk to me about and you came up on
Speaker 1: the black Rock side, right, and then jumped to the
Speaker 1: Ice shares. So can you talk to me about the
Speaker 1: evolution I do. I work at black Rock, I sell
Speaker 1: I shares, all right, So talk to me about that
Speaker 1: acquisition that we talked about, the Louisiana purchase. How is
Speaker 1: the company's culture evolved? Because you've evolved the marketplace, but
Speaker 1: like internally, what sort of changed about black Rock and
Speaker 1: I shares in the process. Uh, Larry is for as
Speaker 1: long as I've been at black Rock. When I when
Speaker 1: I came to black Rock, it was a US centric
Speaker 1: bond manager sort of the end of two thousand five
Speaker 1: two thousand six, it had something like three hundred billion
Speaker 1: dollars of assets and eleven people. I thought it was huge.
Speaker 1: I thought it was enormous. Uh. And we did several
Speaker 1: transformative ACQUI asians along the way. In two thousand six,
Speaker 1: we merged with Mary Lynch Investment Managers, and that I
Speaker 1: would say was our our first step in really transforming UM.
Speaker 1: Not so much the culture of the firm, but the
Speaker 1: identity and capabilities of the firm. So we went from
Speaker 1: being a US centric bond manager to truly being a
Speaker 1: global investment firm. That was in twenty six countries sixty
Speaker 1: two cities. But the biggest change was, all of a sudden,
Speaker 1: a third of our assets were in equities. Uh. And
Speaker 1: for a bond house people who grew up in bonds,
Speaker 1: beginning to think of the world of equities is just
Speaker 1: totally different. Talk to me about that. How do bond
Speaker 1: people view the world and how is that different than
Speaker 1: this new that just showed up. Is it like going
Speaker 1: from chess to checkers? Because bonds have a maturity. They
Speaker 1: they're much more complicated, at least for someone like me
Speaker 1: approaching me from the outside. They are harder to get
Speaker 1: your head around then stocks. I think that's absolute rubbish
Speaker 1: and fiction. Bonds are pretty Bonds are pretty simple, like
Speaker 1: but you know, it's it's uh, it's some amount of
Speaker 1: interest over some period of time and some ending date
Speaker 1: like that's it. Bonds are pretty simple, and what drives
Speaker 1: prices and bonds is interest rates, credit spreads curve and
Speaker 1: ultimately some degree of liquidity. Equities are like poker, bonds
Speaker 1: are like chess right. Like equities, you know, you could
Speaker 1: say something about there's a seventy probability that this will
Speaker 1: be the result. In equities, you might have made a
Speaker 1: good decision, like any duke would say, but of the
Speaker 1: time you were wrong. In bonds, it's it's really more
Speaker 1: chess right. The things are of the outcomes are pretty binary.
Speaker 1: So how did that change you? Um? I really think
Speaker 1: what it did was it changed the conversations that we
Speaker 1: were having with all of our clients. So it used
Speaker 1: to be we were hardcore bond people. We talked about
Speaker 1: mortgage pre payment speeds, we talked about relative value and
Speaker 1: credit spreads, but now we really started to talk about
Speaker 1: holistic portfolio outcomes. What are you really trying to do
Speaker 1: with your whole balance sheet? What are you really trying
Speaker 1: to do to generate a seven percent return for your
Speaker 1: pension plan participants. That's a really different set of conversations
Speaker 1: and it requires, i'd argue, like a different kind of
Speaker 1: person at the firm. So what you would have seen
Speaker 1: over periods of time is more people who are holistic
Speaker 1: portfolio construction and asset allocation people rather than people who
Speaker 1: have focused on uh, do I pick Verizon versus a
Speaker 1: T and T at the five year key rate duration. UM.
Speaker 1: What Larry has been relentless about over the entirety of
Speaker 1: my time there and since inception of the firm has
Speaker 1: been culture. Uh. Larry is ruthless about culture. His view
Speaker 1: as we are client focus, client centric business. Black Rock,
Speaker 1: I'm quite certain has had literally hundreds of opportunities to
Speaker 1: go into balance sheet proprietary businesses and we've never done that.
Speaker 1: We've stayed in the fiduciary business, working solely for our clients,
Speaker 1: and that is the north star. Um. You know, I
Speaker 1: find started a hard press to go wrong. And let's
Speaker 1: talk about fixed and come a little bit because you
Speaker 1: guys have one of the most controversial e t F
Speaker 1: s h y G. We've discussed it many times. It
Speaker 1: packages junk bonds coming from the junk bond space. Just
Speaker 1: this a couple days ago at the Milk and conference,
Speaker 1: this came up again as a worry. Now, leaving aside
Speaker 1: the motivations of the people who are worried, I know
Speaker 1: some of them are active managers and it might be uh,
Speaker 1: not the right messenger, but it's a persistent fear that
Speaker 1: how can you take something that's not that liquid, say
Speaker 1: junk bonds or any bonds really they don't trade like stocks,
Speaker 1: and put it in this stock like trading vehicle. Will
Speaker 1: there be a problem or some kind of an issue
Speaker 1: if everyone heads for the exit at once? Yeah, so
Speaker 1: I I think the first thing I'd say is uh. Uh.
Speaker 1: The claims of the illiquidity of the high yield market
Speaker 1: are greatly exaggerated. This is a market in the US
Speaker 1: that has one point four trillion dollars dollars of outstanding
Speaker 1: balances UH. Year to date, I think we've had over
Speaker 1: the counter trading and high yield of a trillion dollars.
Speaker 1: That's about twelve to fourteen billion dollars a day of
Speaker 1: average daily volume and high yield bonds cash trading. UH.
Speaker 1: If I take all the high l dtfs, I take
Speaker 1: every last single one of them, UH, and I look
Speaker 1: at h y G, I look at the other competitor products.
Speaker 1: There's fifty billion dollars of high YIELDTF assets year to date.
Speaker 1: The entirety of redemptions for the most funds is about
Speaker 1: six billion dollars. That's like the entirety of the bonds
Speaker 1: that have come out of the high l DTF space
Speaker 1: and so I can hair numerator six billion over a
Speaker 1: trillion dollars of trading year to date and cash bonds
Speaker 1: that's not even one percent. So just the math to
Speaker 1: me doesn't work as to how high yield ETFs are
Speaker 1: causing any degree of price distortion and high yield. Now
Speaker 1: here's the thing that is true. The high yield market
Speaker 1: is more cumbersome to transact in. So if you want
Speaker 1: to move two to four hundred million dollars of high yield,
Speaker 1: you have to not call one broker dealer anymore. You
Speaker 1: might have to call three, four or five to go
Speaker 1: find the bonds you want. This should not be a mystery.
Speaker 1: Then that it's easier and cheaper and lower transaction costs
Speaker 1: to trade h y G, which packages up the whole bundle.
Speaker 1: So if you try to buy all the bonds that
Speaker 1: are in the basket of h y G in the portfolio,
Speaker 1: it would cost you fifty basis points in transaction costs.
Speaker 1: But h YG is a penny. That makes sense because
Speaker 1: I don't have to go do all this nuisance value
Speaker 1: of doing all those things up of the orders in
Speaker 1: h y G. Uh It's like Eric, you sell me
Speaker 1: your shares and I buy them from you on exchange
Speaker 1: and nothing happens in the fund. That's why I think
Speaker 1: in the hindsight, the Louisiana purcha, if you will, was
Speaker 1: so genius. It's because bond guys looked out and said,
Speaker 1: wait a second, there's a better way, and it looks
Speaker 1: more like an equity right, like we can go get
Speaker 1: It stems from the fantasy though, of the complexity of
Speaker 1: the bond market. It's it's a fantasy like it really is.
Speaker 1: And I think it's more people talking their book than
Speaker 1: it is truth. Like we've known forever in the equity world,
Speaker 1: when we twake twenty three countries and ten currencies in
Speaker 1: em and we put it into one composite security like
Speaker 1: in et F, it trades with lower transaction costs. Shouldn't
Speaker 1: the same be true for bonds? I think so one
Speaker 1: question I have, right, you guys have something that I
Speaker 1: call the foreheaded monster, and I really we talked about
Speaker 1: the portfolio of the future. You have i VV, which
Speaker 1: is SPI, i MG which is emerging markets, i f
Speaker 1: A which is developed international, a g G, which is
Speaker 1: like your total bond. That's really a pretty good portfolio
Speaker 1: for most people. What do you call it, I just
Speaker 1: call it the core of the core. Yeah. I I
Speaker 1: try to decorate my we start twist some stuff because
Speaker 1: I gotta get readership anyway, stuff and not mine erica.
Speaker 1: So this fourheaded monster just takes in cash like crazy.
Speaker 1: I think the all end fee for this portfolio will
Speaker 1: be about seven or eight basis points. Somewhere in there.
Speaker 1: Other issuers have these core that are very similar, we
Speaker 1: call the core wars. If this is the portfolio of
Speaker 1: the future, some people on Twitter come back to me
Speaker 1: and say, if everyone's in the same portfolios that are
Speaker 1: just like this, that could be a problem in terms
Speaker 1: of crowding for investors. So what do you say about
Speaker 1: this concept of everyone using this is the portfolio of
Speaker 1: the future. So, for one, I think there's there's lots
Speaker 1: of great ideas about the portfolio of the future. So
Speaker 1: and even simpler portfolio would be like I t ot
Speaker 1: the total stock market index at three basis points I
Speaker 1: x U S, which is IFA plus e M, and
Speaker 1: then agag those four tickers at a blended rate of five,
Speaker 1: four or five basis points. Would get you basically the
Speaker 1: efficient market hypothesis in one shot. And I'd argue that
Speaker 1: that's kind of the way institutions haven't been investing since
Speaker 1: the early nine seven these and so that market doesn't
Speaker 1: actually look very different than the institutional market looks today.
Speaker 1: It's just implemented in ETFs um in terms of it
Speaker 1: being much much bigger. There is so much room to grow,
Speaker 1: Like if I really take all of the global equities,
Speaker 1: like the entirety of stock and bond market cap in
Speaker 1: the world, Like, let's just talk about the US. In
Speaker 1: the US, there's twenty four trillion dollars of market cap
Speaker 1: in the Russell three thousand, right, if I take all
Speaker 1: the equity E t f s, like we're you know,
Speaker 1: one twelfth of that, right, where this teeny tiny sliver,
Speaker 1: So there's just ample room to grow. The second is
Speaker 1: all that stuff is already in those exposures, right, it's
Speaker 1: just in different rappers. So the migration of assets from
Speaker 1: one rapper to another rapper in the mutual fund industry
Speaker 1: doesn't actually change any of the nets supply demand dynamics
Speaker 1: for stocks. So I think it's wholly irrelevant where assets
Speaker 1: are located. What matters is what's the velocity of trading,
Speaker 1: and is turnover relatively high um of daily volumes and
Speaker 1: US equities is not done by E t F or
Speaker 1: index funds. Right, It's people doing stock picking. It's my
Speaker 1: mom and her pajamas and her Fidelity accounts to trade pajamas.
Speaker 1: It really loosens the spirit up. People are more uninhibited then.
Speaker 1: You know, Um, I want to talk a little bit
Speaker 1: about this idea of that do it yourself retail investor.
Speaker 1: How many of those people are the new day traders?
Speaker 1: You remember the nineties, the day traders were their retail
Speaker 1: investors doing Oracle and Microsoft. Some data is showing that
Speaker 1: now they're using E t f s to do that
Speaker 1: day trading. Do you find that to be something? And
Speaker 1: I guess part of that that that feeds into Jack
Speaker 1: Bogel's criticism movie TS, which is they tempt people to
Speaker 1: trade too much and thus you lose money. Yeah. So
Speaker 1: the there is no doubt that day traders, active asset allocators,
Speaker 1: and even like active mutual fund managers are using beta
Speaker 1: building blocks to run asset allocation portfolios or to make
Speaker 1: tactical calls on markets. Uh. And if you were to
Speaker 1: look at Fidelity, E Trade, Interactive Brokers, t d Amritrade, SWAB,
Speaker 1: all of them have places where people are are using
Speaker 1: e t f s alongside so goal stocks in order
Speaker 1: to take views on markets. Uh. In fact, if you
Speaker 1: looked at something like t d A S Think or
Speaker 1: swim platform, you're seeing listed options volumes on e t
Speaker 1: f s go up as well. Um. All of which
Speaker 1: is to say, Um, these are more instruments for people
Speaker 1: to take market views on, and that just makes for
Speaker 1: a more efficient market. It makes for more price discovery tools.
Speaker 1: As far as the frequency of trading, With all due
Speaker 1: respect to UM, you know, one of the godfathers of
Speaker 1: our industry, it's just not right and the data doesn't
Speaker 1: bear it out. And I know people love to quote it,
Speaker 1: but it's just absolute fiction. Okay, So what does the
Speaker 1: future look like for I shares? Because you talked about
Speaker 1: what was an eight of the equity overall equity market.
Speaker 1: How how will I shares grow? I think we're gonna grow, uh,
Speaker 1: predominantly for for three reasons. And I'd argue that these
Speaker 1: are all structural forces. They're like inexorable, they're indelible impressions,
Speaker 1: like they are changing, like people are changing the way
Speaker 1: they're doing business. UM. So if you're a financial advisor,
Speaker 1: you are moving your practice, to fee based advisory and
Speaker 1: to asset allocation portfolios. The e t F is the
Speaker 1: ultimate building block at low cost for that. If you're
Speaker 1: an institutional investor, you are finding ways to simplify your
Speaker 1: operations and you want to be able to trade in
Speaker 1: a friction lists, transparent on exchange electronic market. The e
Speaker 1: t F is ultimately a great engine for those things.
Speaker 1: And then finally Um and Eric talks about this sometimes
Speaker 1: we're going through. What I'd argue to do is like
Speaker 1: that the beginning of the golden age of indexing. So
Speaker 1: when I talk to people about indexing, people immediately think
Speaker 1: market cap weighted indexing, and market cap weighted indexing is great, right,
Speaker 1: it actually does tell us something about the depth breadth
Speaker 1: investable opportunity set in the market. But like God did
Speaker 1: not hand down market cap weighted indexing on the tablets
Speaker 1: of SINAI is the only way of doing an index.
Speaker 1: And so we're going to see this pulling apart, this
Speaker 1: unbundling of things that can't be indexed. I'd call that
Speaker 1: alpha from things that can things that can be subjected
Speaker 1: to a set of rules. And that's where I think
Speaker 1: factory t f s and smart beta comes comes in,
Speaker 1: which is I know how to index the value premium.
Speaker 1: It's just a set of rules about price to earnings,
Speaker 1: price to book, and enterprise value to ebada. I know
Speaker 1: how to do a quality screen. And so as we
Speaker 1: give people more of those building blocks, I think what
Speaker 1: you'll he is a portfolio of the future that has
Speaker 1: fifty six market cap weighted indexing, it has fifty uh
Speaker 1: sort of persistent risk premium like factors, and then we'll
Speaker 1: have a bunch of stuff that can't be index market timing,
Speaker 1: stock selection liquids. Uh. That to me looks like what
Speaker 1: the most sophisticated institutional portfolios are doing today. Speaking of
Speaker 1: institutions and their portfolios, one of the frontiers that has
Speaker 1: not been sort of captured by e t s. They
Speaker 1: haven't figured out how to do it is real assets
Speaker 1: or private equity or venture capital. His is less companies
Speaker 1: stop going public. A lot of people are saying this
Speaker 1: is where investors are going to have to stay private
Speaker 1: longer or stay private longer. Um. Is there any way
Speaker 1: for e t s to capture it, either by you
Speaker 1: or if you could speak out of the ice shares brand.
Speaker 1: Is it possible for anyone to do it even in
Speaker 1: E T N could this be done? There is so
Speaker 1: much white space and indexing it's actually incredible. There's just
Speaker 1: huge swaths of the marketplace that we haven't touched yet.
Speaker 1: Real assets is definitely one. Uh. There are some products
Speaker 1: in Europe that have tried to sort of mimic, through
Speaker 1: public equities and inflation portfolios, the behavior of real estate
Speaker 1: over long periods of time. I think we're early days
Speaker 1: on that, but we are deep in the innovation and
Speaker 1: research lab that I share is right now working on
Speaker 1: public markets proxies for traditionally private exposures. So if I
Speaker 1: told you I could give you eighty five percent of
Speaker 1: the return of venture capital at one of the price,
Speaker 1: would you be interested? Like I think the answers category
Speaker 1: I want to go. It's like Bell labs, do you
Speaker 1: absolutely right? Yeah? Which trends don't get talked about enough?
Speaker 1: I think it's two things, uh. The first of which
Speaker 1: is the replacement of derivatives by E T F s.
Speaker 1: I never see people write about this stuff, but futures
Speaker 1: cost ten to fifteen times more than ETFs, like in
Speaker 1: the SMP five hundred, and we're starting to see that migrate.
Speaker 1: The second thing is taxes. People just don't think enough
Speaker 1: about net after tax returns, and we write a lot
Speaker 1: about expense ratios. We were at a lot about transaction costs,
Speaker 1: but I think people really don't think about the implication
Speaker 1: aation of taxes, and it is really one of the
Speaker 1: I think most attractive and compelling features for a taxable
Speaker 1: investor of exchange traded funds. And I share our funds
Speaker 1: plus haven't distributed a capital gain like ever. And one
Speaker 1: question I could ask a lot is when's the first
Speaker 1: free et F gonna come out? Now? My answer usually
Speaker 1: is look at tracking. There are some that use SEC
Speaker 1: lending to actually give you back a little basis points
Speaker 1: and therefore it is free already. But moving that little
Speaker 1: technicality aside, it will we see a zero point zero
Speaker 1: percent expense ratio in the next couple of years. I
Speaker 1: have no doubt that people will launch them because they
Speaker 1: have other revenue models. So if, for example, you have
Speaker 1: a customer facing retail brokerage platform, you might launch zero
Speaker 1: fe E t fs in order to bring people in
Speaker 1: your system and monetize them another way, like you might
Speaker 1: take the cash that sits in your brokerage account and
Speaker 1: invested at a spread in your bank. I have no
Speaker 1: doubt we'll see zero f ETFs. You're not going to
Speaker 1: see them from my shares at one. I think we
Speaker 1: will continue to reduce the cost of investing, but everybody
Speaker 1: has fixed costs at the end of the day are fixed.
Speaker 1: Us are much lower than many other people's because of
Speaker 1: our scale and the breadth of our platform, our use
Speaker 1: of technology. So we added two hundred and seven billion
Speaker 1: dollars of new assets and U s I shares last year.
Speaker 1: I didn't grow the expense line by uh you know
Speaker 1: that that level either. So we have lots of scale
Speaker 1: to continue to grow our business pass along savings to
Speaker 1: to our clients and shareholders. But at the end of
Speaker 1: the day, I got no plans to offer a zero FtF.
Speaker 1: And what I'd say is, you know, of the industry
Speaker 1: is starting to consolidate in like two to three players um,
Speaker 1: which has been true for the last three or four
Speaker 1: or five years. But at the end of the day,
Speaker 1: our business is going to look more like cloud computing
Speaker 1: or cell phones in industry structure, which is if I
Speaker 1: ask you guys, like what phones do you have, Everyone's
Speaker 1: gonna tell me Verizon, A T and T there'll be
Speaker 1: a couple of people who have sprint in T mobile,
Speaker 1: but like that's going to serve the market. Unlike other
Speaker 1: industries where you have a relative industry consolidation, the two
Speaker 1: biggest players are driving pricing down not up, which is
Speaker 1: I think a good thing. But we both have fixed
Speaker 1: costs at the end of the day. Uh, and we
Speaker 1: go a floor. There's a floor. Like there's an equal
Speaker 1: I would call it an equal liberty them at which
Speaker 1: we need to maintain uh discipline about quality of service.
Speaker 1: As Eric said, like, our paramount objective is tracking our
Speaker 1: portfolios and tracking our indexes, deploying material amounts of capital
Speaker 1: against the index and realizing the published return. If we
Speaker 1: don't do that, we're out of business. What's your last question?
Speaker 1: I want to talk about your music career. I failed
Speaker 1: music career, that's what you mean. One of my friends
Speaker 1: that I shares, Kate Bernhard, sent me a picture. If
Speaker 1: you want to look forward to working for Kate Burnhard
Speaker 1: one day, I'll tell you that you gotta meet Kate.
Speaker 1: She's great. Um so she's a singer. That's her sort
Speaker 1: of slash career. She's performed a lot. She's really great.
Speaker 1: She sent me a picture of you on stage. What
Speaker 1: instrument do you play? What kind of music do you like?
Speaker 1: We love talking music metaphors here, and do you play regularly?
Speaker 1: So I have been I've been a guitar player since
Speaker 1: I was nine ten years old, and my plan was
Speaker 1: to stay in school and go to I went to
Speaker 1: law school mostly to kill times so I could try
Speaker 1: to build my music career. Uh And I don't tell
Speaker 1: my parents. Uh And so I I did a lot
Speaker 1: of work in trying to build bands and a recording career,
Speaker 1: and uh we did, okay. I had a band. I
Speaker 1: played in two bands at the time, sort of through
Speaker 1: college through law school right afterwards for a number of years.
Speaker 1: And then I just discovered that, uh, I just wasn't
Speaker 1: good enough at it. But I love playing. I love
Speaker 1: playing guitar. I played guitar almost every day. I'm an
Speaker 1: avid guitar collector. I won't tell you how many I have,
Speaker 1: but it's a lot. Uh and how many it's a lot? Uh,
Speaker 1: it's a lot. And uhlet acoustic, both electric and I
Speaker 1: have a particular band. So I collect a lot of
Speaker 1: the things that I lusted after when I was like thirteen.
Speaker 1: So I collect a lot of arena rock guitars from
Speaker 1: like Winger and Slaughter Metal. I like to call it
Speaker 1: arena rock hair metals. That's a little cooler. But for example,
Speaker 1: I owned four guitars for guitars from Can you name
Speaker 1: the guitarist of Winger? Uh, Kip Winger? No, he was
Speaker 1: the singer and it was named after him, Red Beach,
Speaker 1: Red Beach. He went on later to plan Docking. I
Speaker 1: don't know Dock and he had played with Chuka Khan
Speaker 1: early in his career, but I owned four of his guitars,
Speaker 1: so I think they're super of his. Yeah, let's do
Speaker 1: the math. You probably own twenty. I'm I was gonna go,
Speaker 1: is it more than fifty? It might be Wow, we're
Speaker 1: gonna have a concert. Is a high probability that it's
Speaker 1: more than fifty? Okay? My last question if that was his,
Speaker 1: what is your master plan? What is my master plan? Uh?
Speaker 1: You know? For me, I know this will seem boring,
Speaker 1: but I have never really planned out my career. I
Speaker 1: never have. I started my career as a lawyer. I
Speaker 1: wound up being rather interested and obsessed about the intersection
Speaker 1: of capital markets, balance sheets, and regulation and everything I've
Speaker 1: done in my career has been about that and so
Speaker 1: long as I get to keep progressing, keep learning, like
Speaker 1: in that area, I get super motivated to go to
Speaker 1: work every day. And the other thing is, um, I
Speaker 1: just I really do enjoy being around people like I
Speaker 1: like getting to know new people, and the E T
Speaker 1: F business is just such a great place to go
Speaker 1: out and meet financial I was in Atlanta yesterday. I
Speaker 1: met with advisors at Morgan Stanley, at ub Said Balantine,
Speaker 1: the r I A. I went to a whole bunch
Speaker 1: of places just to talk to people and learn about
Speaker 1: their clients, their business, their problems, their challenges. Um to me,
Speaker 1: it's like one big puzzle and nothing makes me happier
Speaker 1: in this business. Like flows are great, you know, but
Speaker 1: changing somebody's mind like that, that's my mission. If I
Speaker 1: can just change your mind about one thing, I get
Speaker 1: super motivated about that. So at the end of the day,
Speaker 1: I really like to convince everybody that, like everybody should
Speaker 1: be an index investor, Like if you're not indexing some
Speaker 1: part of your portfolio, like you just haven't arrived yet.
Speaker 1: Martin Small, thanks for joining us, and Trillion, thanks for
Speaker 1: having me. It's great to be here. Thanks for listening
Speaker 1: to Trillions until next time. You can find us in
Speaker 1: the Boomberg Terminal, Bloomberg dot com, Apple Podcasts, and wherever
Speaker 1: else you listen to podcasting. We'd love to hear from you.
Speaker 1: We're on Twitter. I'm at Joel Webber Show, He's at
Speaker 1: Eric Baltunas. Trillions is produced by Magnus Hendrickson. Francesca Levie
Speaker 1: is the head of Bloomer podcast by