Speaker 1: Welcome to chilliance. I'm Joel Weber and I'm Erica'll shoot us.
Speaker 1: Every once in a while we get to talk to
Speaker 1: someone who's like basically an E t F V I P.
Speaker 1: And I think we have another one of those people today. Absolutely,
Speaker 1: you know, we we we tend to follow the shiny
Speaker 1: objects a lot, and that's great, you know, but sometimes
Speaker 1: you gotta go to where the assets are. And so
Speaker 1: when you think about where the real money is because
Speaker 1: sometimes I I challenged myself, I'm like recovering the meta
Speaker 1: E t F like relentlessly, But when when you really
Speaker 1: sort of think about where assets are, the big chunk
Speaker 1: of money is with black Rock and Vanguard and State
Speaker 1: Street and a lot of those funds that you know
Speaker 1: might not get a lot of attention, but boy did
Speaker 1: they get the assets. And so um, you know, you
Speaker 1: gotta you have to talk to the industry leaders, um,
Speaker 1: you know, regularly, and we have one today. In fact,
Speaker 1: we have the biggest E t F company on planet Earth.
Speaker 1: So we have number one today, black Rock In case
Speaker 1: you haven't guessed it, I Shares has two point four
Speaker 1: trillion dollars in US E t F assets. That is unbelievable.
Speaker 1: I remember when you hit a trillion um. Now it's
Speaker 1: two point four, and now you know it's not just flows.
Speaker 1: The market appreciation is building the assets and so you
Speaker 1: know at some point you know this is black Rock
Speaker 1: and Vanguard particular are going to lead e t F
Speaker 1: sets beyond mutual funds. And we've had several guests from
Speaker 1: black Rock before, but they've all worked for this guy.
Speaker 1: So Salim Romg the global head of I shares and
Speaker 1: Index Investments for black Rock Or he's also a member
Speaker 1: of the firm's Global Executive Committee, this time on trillions,
Speaker 1: looking back and looking ahead with the global head of
Speaker 1: EYE Shares, Salem, Welcome to Trillions. I'm excited to be here,
Speaker 1: Joel and and and Eric and thank you guys for
Speaker 1: having me. You and black Rock very close to having
Speaker 1: ten trillion dollars assets under management. Do you guys have
Speaker 1: like a big shot clock and and like how much
Speaker 1: time until you hit ten trillion? Increasingly, the number I
Speaker 1: focus on the most, I kind of from where I
Speaker 1: sit is actually the number of clients that we serve.
Speaker 1: And I think the the amazing thing is and we
Speaker 1: don't talk about it because assets are are clear and transparent.
Speaker 1: But you know, in the fifty years since we got
Speaker 1: our first client, and and you all interviewed Mac McCown,
Speaker 1: who was our you know, the inventor of the whole category,
Speaker 1: which I enjoyed, and he secured the first client for
Speaker 1: Wells Fargo that became b g I, that became that
Speaker 1: we acquired, UH through black Rock. You know, we now
Speaker 1: have a hundred million people all around the world we
Speaker 1: use our index capabilities and and and I think if
Speaker 1: there's one number that's that's the most remarkable to me. Uh.
Speaker 1: I know, you'd have to rename your show hundreds of millions,
Speaker 1: and that's kind of less impressive than trillions. But but
Speaker 1: if there's a number that's that's the most impressive to me,
Speaker 1: it's that it's that there are a hundred million people
Speaker 1: all around the world using our e t f s
Speaker 1: and using our index capabilities for savings, for investing, for
Speaker 1: a whole assortment of things from that very first client
Speaker 1: that Mac had secured for us back in ninety one.
Speaker 1: I mean, you know, that actually brings up an interesting question.
Speaker 1: You forget how many people are investing an in particular
Speaker 1: year shop like when you are in your regular life,
Speaker 1: you know, throughout a year. Um, do people kind of
Speaker 1: I don't know, bring up the I shares ets they own,
Speaker 1: like a are you a little bit of a celebrity
Speaker 1: given that I Shares is so prevalent in many people's
Speaker 1: portfolios at this point. Uh, well, this is the first
Speaker 1: job that I've had that I've been able to explain
Speaker 1: to my kids. Uh, And so if that's one indicator,
Speaker 1: I wouldn't call myself a celebrity. With my fifteen year
Speaker 1: old and eleven year old, I'm happy to report that
Speaker 1: to them put their birthday money into I Shares. That's
Speaker 1: sort of a household requirement. But um, are you are you?
Speaker 1: Are you willing to disclose the tickers I have? And
Speaker 1: it's actually it's it's fascinating. So, uh, they had saved
Speaker 1: up about about a thousand dollars a piece that I'd
Speaker 1: open up, opened them up in account, commission free account,
Speaker 1: and I told them that they could invest in whatever
Speaker 1: they wanted as long as it was I Shares. It
Speaker 1: was about a year or two ago, and my eleven
Speaker 1: year old is uh, pretty frugal, and he had invested
Speaker 1: in two I Shares tickers he'd invested in I VV,
Speaker 1: which is three basis points, and he'd invested in I
Speaker 1: T O T, which is three basis points. And he
Speaker 1: really wanted to invest in the lowest cost ones that
Speaker 1: were out there, and so that that's what he has
Speaker 1: in his portfolio. My fifteen year old is into technology,
Speaker 1: uh and in what I think was a very well
Speaker 1: market time investment, he invested in the I robo and
Speaker 1: he also tested in our software dedicated et F which
Speaker 1: are a little bit more expensive in the thirties or
Speaker 1: forty kind of basis points, depending on the exact investment.
Speaker 1: But they've done really well. And and and you can't
Speaker 1: over extrapolgalate over kind of two people who happened to
Speaker 1: live with you, But I do think it brings out
Speaker 1: kind of just the diversity of many different types of
Speaker 1: investors out there. And and some are really looking for
Speaker 1: the theme and some are looking for the low costs,
Speaker 1: some are looking for both. And and it's just you know,
Speaker 1: you extrappol like that across tens of millions of people,
Speaker 1: and you get kind of the business that we've got.
Speaker 1: So cele one of the things we want to do
Speaker 1: is look back on this year, and then we're also
Speaker 1: going to look ahead. But as long as we're talking
Speaker 1: about your your kids and looking back at the year,
Speaker 1: what did you What did you tell them when they
Speaker 1: came to you and said, Dad, what's up with these
Speaker 1: mean stocks? They aren't that into investing that. They were
Speaker 1: into the memestocks and the like. You know, we obviously
Speaker 1: saw that, We looked at it, we researched at you know,
Speaker 1: for a brief period of time, there was some run
Speaker 1: up in in silver and including in our in our
Speaker 1: some focus on our silvery t f Oh yeah, that's right.
Speaker 1: But hold on, can I just give the audience a
Speaker 1: little background here? So the meme Reddit crowd went to
Speaker 1: game Stop, then a m C. But then they all
Speaker 1: had this idea that if you, if you somehow corner
Speaker 1: the silver market, the whole financial system would collapse. Like
Speaker 1: they it was almost like that little thing in the
Speaker 1: Death Star that if you can get the laser beam
Speaker 1: right in there, the whole thing will explode. And but
Speaker 1: they just didn't have enough. I'm not even close. But
Speaker 1: they used SLV to attempt this destruction of the financial system.
Speaker 1: It was all kind of like Keystone compish in my opinion.
Speaker 1: But they did buy SLV one day and create volume
Speaker 1: that I believe was record volume for the ticker, and
Speaker 1: then it it immediately sort of like faded away. But
Speaker 1: it was a story for a week. I think it
Speaker 1: was a story for like a couple of days in
Speaker 1: a week, and and and I think part of it, yeah,
Speaker 1: it was that. And so it was I do think
Speaker 1: the Meme stock piece while it was, while it was
Speaker 1: very noteworthy, and Eric, I'm not sure if it was
Speaker 1: you who has written about this that, like the media
Speaker 1: sometimes about five percent of the activity and it's and
Speaker 1: the more straightforward stuff doesn't get written about. But you know,
Speaker 1: as we looked at this phenomenon and we really started
Speaker 1: to see where was the movement around self directed commission
Speaker 1: free investing going, because a lot of this coincided with
Speaker 1: commission free platforms in the United States and massive growth
Speaker 1: and self directed investors. Actually, the truth is, if you
Speaker 1: will a little bit more mundane, about one percent or
Speaker 1: a very small fraction of total retail trading in the
Speaker 1: United States over the past kind of year two has
Speaker 1: been in meme stocks. Two thirds of it has been
Speaker 1: into e t F s UM and it's mostly just
Speaker 1: purchases of ETFs. And so that was really the trend
Speaker 1: that we took a lot of faith in, a lot
Speaker 1: of focus in and and and that doesn't show any
Speaker 1: real signs of abating, if you will, because I think
Speaker 1: there's a fundamental shift that's underway, one of which is
Speaker 1: a massive growth and self directed investors since the beginning
Speaker 1: of the pandemic. And second is a complete reduction or
Speaker 1: a very very significant reduction in commission barriers. How much
Speaker 1: of a headwind is inflation going to be? You know,
Speaker 1: it's a I don't think we're allowed to say the
Speaker 1: word transitory anymore. I think that's that right. It's important
Speaker 1: to keep perspective around these things that clearly inflation is elevated,
Speaker 1: and for many people that's a really unusual thing. I'm
Speaker 1: still old enough that I remember the early eighties and
Speaker 1: inflation was a different kind of animal back then. But
Speaker 1: I think as we look at it from black Rock's perspective, yeah,
Speaker 1: and lation is elevated. But if you think about our
Speaker 1: own views by the end of next year, by three
Speaker 1: those levels will start to moderate out once you get
Speaker 1: through some of the energy shocks and some of the
Speaker 1: supply chain shocks that we've been dealing with. And even
Speaker 1: if you look at the price of oil just in
Speaker 1: the past month or so, um you can start to
Speaker 1: see some reduction. So I think it's it's a it's
Speaker 1: a new risk, it's a real risk in investors portfolios.
Speaker 1: We're certainly seeing it in things like our tips and
Speaker 1: our inflation ETFs, so like our fixed income flows are
Speaker 1: coming into inflation. But we're also seeing it in in
Speaker 1: things that are great inflation hedges, whether that's value stocks
Speaker 1: or kind of our own value ETFs, whether it's in
Speaker 1: things like real estate, and so there are plenty of
Speaker 1: ways for investors to protect and hedge against inflation, both
Speaker 1: in fixed income, inequities and commodities. But it's just new
Speaker 1: and it's a it's just making sure that as as
Speaker 1: investors look at their overall portfolio that they've got the
Speaker 1: right diversification and hedges built into place. Yeah, and that's
Speaker 1: really what we saw this year. The flows are ridiculous
Speaker 1: for all ETFs that they're taking in about four billion
Speaker 1: a day. Normally they've taken in two billion a day
Speaker 1: this year. They took this just double step up. And
Speaker 1: people ask me what why the extra and it was
Speaker 1: the breadth, you know, things like tips, commodities, um, you
Speaker 1: see a lot of the non you know, uh, I
Speaker 1: guess beta e t f s taking in money some
Speaker 1: of the things that lagged small caps the value. I
Speaker 1: guess my question for you is our big theme from
Speaker 1: our outlook next year's ETFs have transcended the passive label.
Speaker 1: I think it's officially not that that association is broken,
Speaker 1: whether it's the tipsy dfs or the you know, smart
Speaker 1: beta or ARC or themes. I don't I don't think
Speaker 1: people I think they really that E t F is
Speaker 1: is much more like a true wrapper. And I could
Speaker 1: you talk a little bit about what you're seeing this
Speaker 1: year in flows and where that extra money is coming from,
Speaker 1: and how people are utilizing the rapper a little bit. Yeah, No,
Speaker 1: it's a it's a great point, Eric, And I'll cite
Speaker 1: a little bit of the global numbers, which will be
Speaker 1: slightly different than the ones that you cited, which I
Speaker 1: think are the US numbers. But if we look at
Speaker 1: the global numbers, you know today there's over a trillion
Speaker 1: dollars that's come into e t f s globally, both
Speaker 1: here in the US as well as in Europe, as
Speaker 1: well as in kind of a range of different locally
Speaker 1: t F lines that we have and that others have
Speaker 1: across the world. And just as context, you know, around
Speaker 1: the time that black Rock bought b g I, so
Speaker 1: back in two thousand and ten, the total et F
Speaker 1: market was a trillion dollars and so and and you
Speaker 1: know this year it's not even over yet. Um, we're
Speaker 1: seeing that amount in the industry and flows. And I
Speaker 1: think the the the amazing thing is when we look
Speaker 1: at the total e t F s for the industry
Speaker 1: relative to the addressable market we think of the addressible
Speaker 1: market is also docks and bonds. That's three of the
Speaker 1: global addressable market. Even if we take the number Eric
Speaker 1: that I think that you've used in in other publications,
Speaker 1: which is the addressable market as all registered UH investment products,
Speaker 1: it's still fift. So whichever way you take it, it's
Speaker 1: still a small number relative to a big system. And
Speaker 1: we absolutely believe, as you said, that the e t
Speaker 1: F is really just a wrapper. It's a more efficient
Speaker 1: way in which to wrap public market securities. And so
Speaker 1: we've kind of moved we we certainly have and are
Speaker 1: very proud of holdings like my son has, which is
Speaker 1: you know that good low cost exposures like i VV,
Speaker 1: but we've also expanded into a whole arena of index
Speaker 1: oriented ETFs, things like factors or E s G or thematics,
Speaker 1: which are transparent, rules based indices, but their goal is
Speaker 1: to outperform a traditional market gap way to index. And
Speaker 1: if you think about that category, you know, for US
Speaker 1: that's about just under four hundred billion dollars of our
Speaker 1: et f s are in those types of things factors,
Speaker 1: E s G and thematics, and that's double what it
Speaker 1: was just a few years ago. And so that's really
Speaker 1: a fast growing kind of area. And and and we've
Speaker 1: also extended it into active management. I mean, it's a
Speaker 1: it's amazing to be just in the past year. You know,
Speaker 1: we launched our low Carbon Transition Readiness e t F
Speaker 1: back in April. It was the largest et F launch
Speaker 1: in US history, active or index, and it was an
Speaker 1: active ETF. And so all of these things are pointing
Speaker 1: to I think Eric, exactly what you're seeing and what
Speaker 1: we're seeing, which is the e t F is a
Speaker 1: is a better technology, it's a better wrapper, and it
Speaker 1: can wrap all kinds of different public market investments. So
Speaker 1: I want to talk about specific areas of growth and
Speaker 1: and the one. The first one I want to ask
Speaker 1: about is E s G because you Black Rock and
Speaker 1: I Shares have been all in on E s G.
Speaker 1: How big of an opportunity do you think remains in
Speaker 1: that space for for influence. I think we're at very
Speaker 1: very early stages of it. And I think we're at
Speaker 1: very early stages of it, uh, despite the very significant
Speaker 1: growth that we've experienced. So if you if you roll
Speaker 1: back the clock Jewel, like three years ago, Uh, you know,
Speaker 1: we had a dozen or two dozen different ETFs around
Speaker 1: the world. We managed about ten eleven billion dollars in
Speaker 1: those et f s and it was mostly a niche
Speaker 1: category catering to a niche clientele that was interested in it.
Speaker 1: And I don't think that was just us. I think
Speaker 1: that was the the whole kind of area of sustainable
Speaker 1: investing just a few years ago. And I think what
Speaker 1: we've seen um uh and Larry think our CEO has
Speaker 1: written pretty extensively about the tectonic shift in sustainable investing
Speaker 1: and in climate investing that we're seeing as a firm.
Speaker 1: But if you look to kind of the number rs today,
Speaker 1: you know we're managing across index funds and E T
Speaker 1: f s and globally kind of north of two hundred
Speaker 1: billion dollars, and we're doing it across more than a
Speaker 1: hundred and seventy different e t f s and index funds,
Speaker 1: all in E s G and so if you dig
Speaker 1: underneath it, what's really driving this growth from our perspective
Speaker 1: is two or three things. One, there's very significant client demand,
Speaker 1: and it was latent client demand. And it's not just
Speaker 1: in Europe. We're seeing growth in the United States, We're
Speaker 1: seeing growth in Japan. We're seeing growth all over the
Speaker 1: world for different ways in which to adopt or get
Speaker 1: into E s G investing. The second thing, which is
Speaker 1: where the E t F comes in, is that clients
Speaker 1: are really wanting choice, and that really drove our decision
Speaker 1: around moving from a couple of dozen products to moving
Speaker 1: to hundred and seventy plus because for many clients, they
Speaker 1: had different pathways in which they wanted to adopt D
Speaker 1: S G investing. Some wanted screen, some wanted optimized, some
Speaker 1: wanted transition readiness, some wanted thematics. And I think the
Speaker 1: third thing is they wanted that with transparency and with efficiency.
Speaker 1: And so every t F WE manufacturer, including the active ones,
Speaker 1: including all the s G ones. We have we believe
Speaker 1: clear labeling on the package, but we have complete transparency
Speaker 1: in terms of all the securities that are inside. We
Speaker 1: were leaders and having complete transparency of all the E
Speaker 1: s G scores, not just for E s G G
Speaker 1: t f s, but for all of them. Uh. You know,
Speaker 1: we've committed that we're going to publish things like implied
Speaker 1: temperature rise by the end of this year UM, just
Speaker 1: to enhance that. But I think you put the combination
Speaker 1: of increased client demand, greater choice and benefits of the
Speaker 1: wrapper UM, combined with our underlying investment thesis that that
Speaker 1: Larry's articulated pretty publicly around these being good longer term
Speaker 1: ways in which to invest, that that package just kind
Speaker 1: of makes us leave that there is very very significant
Speaker 1: growth to be had, even despite the pretty um significant
Speaker 1: growth we've experienced in the past three years. So I
Speaker 1: get the strategic vision for that, and I'm curious though
Speaker 1: there's the consumer demand for it, there's the transparency that
Speaker 1: you can provide, but then there's actually just this kind
Speaker 1: of fundamental thing that I'm wondering how you all wrestle
Speaker 1: with it, which is when you when you invest in this.
Speaker 1: You know, you're you're it's all for better outcomes, right,
Speaker 1: and you're envisioning a better world. But often the data
Speaker 1: that underlies that doesn't actually you know, back that up necessarily.
Speaker 1: You know, like there are companies who are contributing to
Speaker 1: climate change but might get a positive score. How do
Speaker 1: you reconcile that? You know, we come back to this
Speaker 1: point about choice, about transparency and giving the right metrics
Speaker 1: to our clients to be able to help inform them.
Speaker 1: And so let me just give you two contra asked
Speaker 1: to kind of bring out kind of some of these
Speaker 1: things around it. Some of our clients will say, we
Speaker 1: just don't want these sectors or these types of companies
Speaker 1: in our portfolio, and that's great. We can actually create
Speaker 1: and we have a whole suite of ETFs which screen
Speaker 1: out and and and have that. So if you if
Speaker 1: you didn't want, for example, um, certain energy sectors, certain
Speaker 1: fossil fuel sectors in it, we got ETFs to do that.
Speaker 1: There are other clients who would say, and this was
Speaker 1: inherent in the clients that invested in our low carbon
Speaker 1: transition readiness it said, look, even if you exclude these
Speaker 1: stocks from one's portfolio, you haven't really solved the broader problem.
Speaker 1: And the broader problem is, how do you help companies
Speaker 1: that want to invest in a greener transition. They may
Speaker 1: be big carbon emitters today, but they want to lower
Speaker 1: their carbon lower their carbon footprint and they want, if
Speaker 1: you will, investment incentive to do that, and they're willing
Speaker 1: to show the reduction over time, and they've invested in
Speaker 1: things like our Low Carbon Transition Readiness ETF, where the
Speaker 1: carbon footprint of that is is focused on companies that
Speaker 1: do have that may have higher footprints today but are
Speaker 1: committed to reducing them over time. And so those are
Speaker 1: two very different sets of clients with different sets of objectives,
Speaker 1: and so their portfolios may be different. But if we
Speaker 1: give them the choice, if we give them the transparency
Speaker 1: so they know exactly what they're getting, and we give
Speaker 1: them the metrics to make sure that their choices are
Speaker 1: informed as possible, that's the service that we think that
Speaker 1: we're doing to the clients, even though they have very
Speaker 1: different pathways around how they want to invest their money.
Speaker 1: So we talked earlier a little bit about the hundreds
Speaker 1: of millions of clients you have, and we touched on
Speaker 1: on retail and how e t s are so much
Speaker 1: bigger than than the meme stock moment. And I want
Speaker 1: to ask another question kind of in that same vein,
Speaker 1: which is the potential for institutional investment. And when you
Speaker 1: think about that that as a trend, how how much
Speaker 1: more potential for growth is there from the institutional side,
Speaker 1: since you know, again retail get got a lot of
Speaker 1: buzz this year, but like going forward, how about how
Speaker 1: about institutional? Yeah, no, it's a great question, Joel. And
Speaker 1: it's it's important to remember that our roots were an
Speaker 1: institutional right the first client that that Mackott introduced fifty
Speaker 1: years ago as an institutional client. Uh. And and and
Speaker 1: I think and within the E t F kind of
Speaker 1: piece of the business, Uh that one of the really
Speaker 1: important shifts that's happened in a in a positive way
Speaker 1: among the star institutional clients was really catalyzed back in
Speaker 1: So if you think about all the stresses that the
Speaker 1: whole marketplace, uh, that E t F s, particularly BONDI
Speaker 1: tfs went through back in the spring of and you
Speaker 1: think about how they performed kind of through all of
Speaker 1: that stress. And I'm happy to talk about it, We've
Speaker 1: written about it. We're proud about how they performed under
Speaker 1: that market stress. But importantly what happened was that many
Speaker 1: institutional investors that hadn't yet adopted bondy tfs in particular,
Speaker 1: saw their resiliency, saw their ability to withstand market stresses,
Speaker 1: be able to still have the ample liquidity that they did,
Speaker 1: be able to still trade exceptionally well. And and even
Speaker 1: the most skeptical institutional investors have become clients. And so
Speaker 1: you know, if you if you sort of turned the
Speaker 1: old narrative of index investing kind of on its head,
Speaker 1: and Eric, you talked about the blurring of index and active,
Speaker 1: but now eight of the top ten active managers in
Speaker 1: the United States use our e t f s as
Speaker 1: part of their active investment process. In many cases those
Speaker 1: are bondy tfs, and they're using it for liquidity, they're
Speaker 1: using it for lower transaction costs, they're using it to
Speaker 1: be able to access certain corners of the mark get
Speaker 1: much more easily and much more cheaply than the otherwise
Speaker 1: code if they held the bonds. But I think that's
Speaker 1: a It isn't in the hundred million stat but it's
Speaker 1: certainly a area that we're very, very focused on. And
Speaker 1: and It's certainly an area that isn't talked about as
Speaker 1: much because it's almost it almost turns on its head
Speaker 1: the old notion of active versus index, or even active
Speaker 1: and index, which is that active managers are using e
Speaker 1: t s as part of their active investment process. And
Speaker 1: I think that's an area that we're seeing expansion not
Speaker 1: just with other active managers, but we're seeing it with
Speaker 1: insurance companies, We're seeing it with pension plans, We're seeing
Speaker 1: it with other large pools of assets that, especially in
Speaker 1: the bond market, are just finding it too antiquated or
Speaker 1: too non transparent or too expensive, but they're finding the
Speaker 1: opposite to be the case when they're able to access
Speaker 1: the bond market through ts. So that's a whole other
Speaker 1: area that we're we're very, very focused on, even if
Speaker 1: it isn't captured in the hundred million h So you
Speaker 1: touched on the bond market, and I always say, bond
Speaker 1: ETFs let people trade bonds like stocks. Everybody likes the
Speaker 1: way equities trade. ETFs have standardized and made everything trade
Speaker 1: like an equity and it's a beautiful thing. Um. We
Speaker 1: have part of our outlook next year, we have the
Speaker 1: five point oh era of e t f s and
Speaker 1: digital assets, and there's just such a hunger out there.
Speaker 1: You just described it. With the bond market, it's very
Speaker 1: parallel to trade crypto in an e t F UM
Speaker 1: because of all the benefits you just named in the
Speaker 1: way that's difficult advisors don't want to go into the exchanges,
Speaker 1: and the way the bond etf really helped some people
Speaker 1: get access to bonds and it just made it easy.
Speaker 1: I feel like that's going to happen with crypto ultimately.
Speaker 1: And I gotta think there's gonna be a black rock
Speaker 1: total crypto market e t F in five years maybe less. Yeah,
Speaker 1: what I would say to that, And and I think
Speaker 1: the just come back to the bond piece in a moment.
Speaker 1: I think there's a really interesting parallel here are between
Speaker 1: that and digital assets. But I do think the bondy
Speaker 1: t F uh, and you know, I think we're we're
Speaker 1: coming up. I think next year will be our twentieth
Speaker 1: anniversary of the first bondy TF ever launched. That's the
Speaker 1: good thing about having products. It's always someone's birthday or
Speaker 1: anniversary kind of around it. But next year is the
Speaker 1: twentieth anniversary of the first bondy t F which we
Speaker 1: launched and uh and and it's become and it is
Speaker 1: a modernizing force in the bond market, is bringing transparency,
Speaker 1: and it's bringing on exchange pricing, and it's bringing liquidity
Speaker 1: and and so it's a real innovation kind of in there.
Speaker 1: Digital assets is clearly at a much earlier stage, uh
Speaker 1: in the evolution. But I certainly in the believer in
Speaker 1: the disruptive capability of decentralist finance, of stable coins and
Speaker 1: of um uh cryptocurrencies to the entire financial marketplace itself.
Speaker 1: That you can't see it here because on my desk
Speaker 1: and there's a podcast. But I just met with a
Speaker 1: professor at Duke named Cam Harvey has written a very
Speaker 1: good book called Defy and the Future of Finance. And
Speaker 1: I'm a believer that the future of finance is here,
Speaker 1: uh in the decentralized capabilities around it. I think cryptocurrencies
Speaker 1: are one kind of application of it, and certainly not
Speaker 1: the most profound of all the different applications when you
Speaker 1: start to think about decentralized finance. And so we we
Speaker 1: are reading for launch a thematic et F which will
Speaker 1: have blockchain and the ability for people to be able
Speaker 1: to access companies that are active in this space, just
Speaker 1: as my son is able to access kind of you know,
Speaker 1: robotics autonomous vehicles in some of the other uh E
Speaker 1: t f s, And in terms of like actual crypto
Speaker 1: E t f s, I think that we want to
Speaker 1: make sure that whatever we do, whatever we put our
Speaker 1: brand on, whether it's the black Rock brand or the
Speaker 1: I Shares brand, doesn't matter. It's to the highest standards
Speaker 1: that people expect. And that means from a regulatory point
Speaker 1: of view, from a liquidity point of view, from a
Speaker 1: transparency point of view, and so I expect as the
Speaker 1: regulatory environment becomes clearer and as the underlying liquidity dynamics
Speaker 1: in that marketplace become more to our satisfaction, that some
Speaker 1: of those dynamics will work in our favor. And so
Speaker 1: if you put a five year horizon on it, err, yeah,
Speaker 1: like I think so. If you put the next month
Speaker 1: horizon on it, I don't think so. So I'm really
Speaker 1: curious about this and and your interest in a space
Speaker 1: like defy. There's certain players in the world who are huge.
Speaker 1: You're one of them. This could be an existential moment
Speaker 1: for finance. Right, How did someone like you who has
Speaker 1: to wrestle with strategy for I Shares Black Rock, how
Speaker 1: do you make sure that you don't miss out on
Speaker 1: something that could be totally transformational. Yeah, I look. I
Speaker 1: think the I look at at the centralized finance and
Speaker 1: all of its various applications as an opportunity, and I
Speaker 1: look at it as an opportunity first and foremost for
Speaker 1: our clients. And and a lot of the ways in
Speaker 1: which we've grown I Shares, just to take BTF example,
Speaker 1: but you can abstract it to indexation more broadly, is
Speaker 1: by reducing frictions in the system in order to benefit
Speaker 1: our clients. We have the benefit that our only business model,
Speaker 1: our business model is a fiduciary business models. Everything we
Speaker 1: do is on behalf of other people's money. We don't
Speaker 1: have kind of you know, other businesses beyond that. And
Speaker 1: so if we're completely focused on how do we reduce frictions,
Speaker 1: the frictions maybe a commission barrier on a self directed
Speaker 1: platform in Germany or in the United States. The frictions
Speaker 1: may be the lack of transparency in the bond market.
Speaker 1: The frictions maybe it's really expensive, the underlying financial plumbing
Speaker 1: of mutual funds or e t f S actually is
Speaker 1: quite antiquated and expensive, and if decentralized finance over time
Speaker 1: is able to do that in a better, cheaper, more
Speaker 1: efficient way, that's fantastic because that's like the basis on
Speaker 1: which much of our growth has come from, which is
Speaker 1: from reducing frictions to benefit clients. And so the reason
Speaker 1: I get excited about um decentralized finance, including the currency
Speaker 1: aspects of it, is because of that ability to reduce friction.
Speaker 1: And the reason why I see it as an opportunity
Speaker 1: for black Rock is that we're able to do it
Speaker 1: for the benefit of our clients. And a large part
Speaker 1: of how we've gotten as far as we have is
Speaker 1: by if we make it easier and we reduce barriers
Speaker 1: and we think about our clients interests first, and foremost
Speaker 1: good things generally happen. And I think that even that
Speaker 1: we may all speculate or disagree about is it five years,
Speaker 1: ten years to twenty years, twenty five years out, there's
Speaker 1: something really really compelling in the underlying technology case. I
Speaker 1: think of decentralized finance that we are very focused on
Speaker 1: and and and very focused around how and in which
Speaker 1: pockets are the best pockets for us to participate. UM. Okay,
Speaker 1: so pockets and D five is a great segue to
Speaker 1: what a que Another question I have, which is direct
Speaker 1: indexing or custom indexing. UM, you guys do offer this.
Speaker 1: For those who don't know what that really means, is
Speaker 1: that instead of using the e t F we're a
Speaker 1: mutual fund, you would just own all the stocks UM.
Speaker 1: And the benefit of that, they say, UM, is that
Speaker 1: you can custom d index, Like if you don't want
Speaker 1: Microsoft for some reason, or you want to e s
Speaker 1: G if I it, you can do that. It's like
Speaker 1: you know, like a tailor made suit or something. UM.
Speaker 1: The other thing is you can do more tax loss
Speaker 1: harvesting because there's more losses to mess with UM, and
Speaker 1: so there's some tax health opportunity. So advisors also are
Speaker 1: motivated to use this because I think they're feeling a
Speaker 1: little nervous that, hey, if every advisor is in like
Speaker 1: four Core Vanguard or I sharees et F S, how
Speaker 1: can I be different And so the need to differentiate
Speaker 1: I think is might drive some people there that said
Speaker 1: it seems to be going in the opposite direction of simple,
Speaker 1: cheap and passive. It's it's kind of active it's a
Speaker 1: little more expensive, UM, and it's it makes your portfolio complicated.
Speaker 1: That's the debate. I have a lot and we're slightly
Speaker 1: barish on direct indexing relative to the hype. We think
Speaker 1: maybe five temper cent market share in the next five
Speaker 1: or ten years. It will have what say you, I think,
Speaker 1: first of all, if you take a step back and
Speaker 1: and custom custom separate account in disease, it's actually how
Speaker 1: we got started in this business. UH. And if you
Speaker 1: look at you know, our separate account business, which is
Speaker 1: about equivalent size to our et F business, is something
Speaker 1: that we've been doing for institutions, including in customized form
Speaker 1: UH for decades now. And UH the application and it
Speaker 1: was about a year ago that we purchased a Perio,
Speaker 1: which was a real pioneer, we thought in the US
Speaker 1: high net worth in the US wealth market in in
Speaker 1: applying those same techniques that we've been doing for institutions
Speaker 1: for high net worth investors within the United States. And
Speaker 1: so the thesis underneath it was a bullish thesis which
Speaker 1: were which has you know, proven itself out in our opinion.
Speaker 1: But at the same time, all of these co exist
Speaker 1: in a much broader ecosystem and so like the really
Speaker 1: interesting thing and when we were involved in the due
Speaker 1: diligence and you looked at, you know, some of their
Speaker 1: top clients, they were big asheres clients at the same
Speaker 1: time because in many cases, custom s m a s
Speaker 1: work compliments in a broader portfolio that included alternatives and
Speaker 1: included ETFs. And so even for the same client, even
Speaker 1: for the same same institution or individual, they wanted some
Speaker 1: of the convenience, simplicity, lower cost kind of aspects that
Speaker 1: et f s had had provided, and they wanted custom
Speaker 1: features kind of inherent in their portfolio as well. And
Speaker 1: so that's very much what we're seeing when we see
Speaker 1: in US wealth clients moved towards fee based or fee
Speaker 1: based portfolios. UM. They certainly buy e t f s,
Speaker 1: and about half of their portfolios kind of moved towards ETFs.
Speaker 1: They buy UM custom indices or they buy separate i'd
Speaker 1: call it custom separate accounts UH, and that's been about
Speaker 1: ten to fifteen percent of the portfolio. They're also buying
Speaker 1: alternatives and clean mutual fund share classes and the like
Speaker 1: to really be able to think about what do they
Speaker 1: want in the overarching portfolio. And so even for a
Speaker 1: given client, it's rarely been a binary choice of one
Speaker 1: way versus the other way, and it's really been a
Speaker 1: mix of different capabilities. And I think that that's really
Speaker 1: the bet that we're making, which is that a client's
Speaker 1: gonna want choice. Client's gonna want lots of different vehicles,
Speaker 1: and but what they're really gonna want is they're going
Speaker 1: to want things that you know, give them great efficiency,
Speaker 1: whether that's for taxes or total expenses or both. Be
Speaker 1: able to give them kind of strong after tax returns
Speaker 1: and be able to give them a portfolio which does
Speaker 1: what they want over the long term. E t F
Speaker 1: the value proposition they bring is just so strong, liquid
Speaker 1: tax efficient three basis points. And you know, I know
Speaker 1: there's some hype around direct index thing that it's going
Speaker 1: to completely sort of like disrupt et f s and
Speaker 1: UM It could well covered if it does. But every
Speaker 1: year that the flows just aren't there. They're they're very
Speaker 1: mild compared to the flowethon we see an e t F.
Speaker 1: So I guess do you see them if E t
Speaker 1: F s a of the whole um fund pie right
Speaker 1: now and mutual funds are sixty how what what that?
Speaker 1: What might that pie look like in ten years. Yeah,
Speaker 1: I think directing in there. Yeah, I think direct indexing
Speaker 1: will be one. And you're just talking about us, well,
Speaker 1: so the U S Wells marketplace, you're talking about us US. Yeah. Look,
Speaker 1: it's a um, it's a it's gonna be one of
Speaker 1: many different important parts of a portfolio. I personally think
Speaker 1: that ETFs are going to be half of any portfolio
Speaker 1: in a fee based kind of world. Um. I think
Speaker 1: direct indexing is going to be you know, ten fifteen percent.
Speaker 1: I think alternatives are going to be ten ftcent. I
Speaker 1: think clean mutual funds or even just you know, if
Speaker 1: you will, unmanaged securities, maybe maybe holding up the rest
Speaker 1: of it. And I'm fond of talking. I'm sure many
Speaker 1: of your guests are fond of talking about how the
Speaker 1: how the e t F has totally disrupted the mutual
Speaker 1: fund and and e t F is the default investment
Speaker 1: vehicle kind of of this century, just like the mutual
Speaker 1: fund was of the last century. The mutual fund is
Speaker 1: close to a hundred years old in a couple of years.
Speaker 1: But last time I checked, there's still five six times
Speaker 1: the assets and mutual funds as there are in the
Speaker 1: E t f s. And so even though BTF has
Speaker 1: been disrupting the mutual fund for the better part of
Speaker 1: thirty years, there's still a really big uh mutual fund
Speaker 1: business out there. And and I think the best way
Speaker 1: to think about this is not so much in binary
Speaker 1: terms that one takes over the other as it might
Speaker 1: in if you think about like generations of phones or
Speaker 1: you think about generations of of computers, that many of
Speaker 1: these things exist for different purposes in a portfolio, uh,
Speaker 1: and and it's how do you blend them into portfolio?
Speaker 1: And that's the US wealth case versus even if you
Speaker 1: think about things like DC plans, I mean, DC plans
Speaker 1: have mutual funds in them, much to my frustration, they
Speaker 1: don't typically have ETFs in them because there's a technology
Speaker 1: you barrier to having ETFs in many different for a
Speaker 1: one K record keeping platforms kind of within there. So
Speaker 1: there's a big embedded base of mutual funds there that
Speaker 1: that that's kind of got barriers, which aren't you know, uh,
Speaker 1: that they have to do with technology and infrastructure more
Speaker 1: than they have to do with anything else. And so
Speaker 1: I think you're going to have these millions and tens
Speaker 1: of millions and you know, maybe even a hundred hundreds
Speaker 1: of millions of clients, all making lots of different choices.
Speaker 1: Some of them want hyper customization, some of them want
Speaker 1: ease and simplicity, some of them want a bit of
Speaker 1: both to be able to manage across the portfolio. And
Speaker 1: what you're really seeing is the marketplace at work with
Speaker 1: all the um imperfections, irrationalities, human behavioral biases kind of
Speaker 1: all happening all at the same time. And our main
Speaker 1: goal is black Rock, is that are we there to
Speaker 1: be able to serve the client in the way they
Speaker 1: want to be served And so do they want a
Speaker 1: custom s m A as part of their portfolio? Yeah,
Speaker 1: we think probably, and we think there's a really important
Speaker 1: market to serve of been there, which is why we
Speaker 1: ended up, you know, partner with a Perio to kind
Speaker 1: of help us on the journey. Are they gonna want
Speaker 1: e T F s? Absolutely, And if you look at
Speaker 1: kind of just the flows this year and the hopefully
Speaker 1: the flows next year and the flows for the next decades,
Speaker 1: that'll that'll prove it out and there'll be new things
Speaker 1: that will evolve in the marketplace that uh that you know,
Speaker 1: as we get more comfortable that we can meet the
Speaker 1: standards that clients expect of us, things like digital assets
Speaker 1: that will also be kind of elements of people's portfolio.
Speaker 1: So all of this is just a fluid changing marketplace
Speaker 1: as opposed to something binary, you know, moving that one
Speaker 1: eradicates the other. I think these all coexist based on
Speaker 1: different client needs and preferences. So I want to talk
Speaker 1: about model portfolios. And I think you you heard about it,
Speaker 1: but Eric and I did this UH show show on
Speaker 1: a quick take called called Trillions Presents et F Mastership.
Speaker 1: We had you share, that's right, dah. It was a
Speaker 1: great guest other than just show Keith mac It was
Speaker 1: my second favorite show that you all hosted. I thought
Speaker 1: that was a great appreciate it. Um Uh. Eric allegedly
Speaker 1: cooks uh holiday dinners and you know, I'm still waiting
Speaker 1: on an invite, but you know what, we'll find out
Speaker 1: more about that later. Um. But I want to ask
Speaker 1: just about model portfolios and like what's your vision for
Speaker 1: them strategically and where where are you at now versus
Speaker 1: where where you think the that space could go? Yeah,
Speaker 1: and and and I think model portfolios also gets to
Speaker 1: the the the essence of the discussion. Eric you and
Speaker 1: I were having a few minutes minutes ago around the
Speaker 1: US wealth landscape, which is that this is a vast
Speaker 1: by our estimations, it's just short of five trillion dollars,
Speaker 1: So it certainly deserves a place in the Trillions podcast
Speaker 1: kind of series. And it's vast, and it's not necessarily
Speaker 1: always easily understood, because you know, we have a model
Speaker 1: business in black Rock where we have a group of
Speaker 1: portfolio managers who manage black Rock model portfolios. But if
Speaker 1: you think of it in the context of that five
Speaker 1: trillion dollar market, you know, it's about five or even
Speaker 1: less in the single digit percentage points of that total
Speaker 1: marketplace that we look at. There are many different other
Speaker 1: asset managers that will run models of of model portfolios,
Speaker 1: including having a significant portion of ice shares in them.
Speaker 1: There are many of our wealth management clients that will
Speaker 1: run model portfolios that will have significant portions of ice shares.
Speaker 1: And then there are I A S and wealth managers
Speaker 1: that are customizing models all over which will have components
Speaker 1: of ice shares, and it will have components of custom s,
Speaker 1: m as and and the likes. This is this is
Speaker 1: a vast ecosystem, and we think that it's going to grow.
Speaker 1: Our own projections are that you know, four or five
Speaker 1: trillion dollar marketplace is going to be a ten trillion
Speaker 1: dollar goold place. And you can look at that through
Speaker 1: the lens of the growth of fee based wealth across
Speaker 1: the United States. And what we've seen is that as
Speaker 1: advisers move more and more to fee based wealth, they're
Speaker 1: moving to model portfolios, and they're differentiating themselves um in
Speaker 1: part based off of the portfolio and and customizing the
Speaker 1: portfolio to the client's needs and aspirations, but also in
Speaker 1: part because it allows them to focus more time on
Speaker 1: the relationship development aspects of their business model. And that
Speaker 1: could mean intergenerational wealth transfer, it could mean setting up trusts,
Speaker 1: it could be understanding of family's entire situation and all
Speaker 1: the complexities well beyond the investment complexities. And so from
Speaker 1: an I shares point of view, we look at all
Speaker 1: parts of the model infrastructure as potential clients. Certainly, there's
Speaker 1: a black rock models that include ETFs. That's a small
Speaker 1: part of the overall kind of piece. Uh, there's a
Speaker 1: much larger piece, which is other asset managers, wealth managers,
Speaker 1: advisors who are using I shares as component parts of
Speaker 1: their overall model portfolio, and that piece, from our estimations,
Speaker 1: is like two to three times the size and growing
Speaker 1: of the parts that are just kind of the black
Speaker 1: Rock model portfolios. And and we're sufficiently optimistic that, you know,
Speaker 1: if you think about all kinds of model portfolios, it's
Speaker 1: about a third of our flows in the United States.
Speaker 1: We expect it's going to be about half of our
Speaker 1: flows from a U S I shares point of view
Speaker 1: over the next four or five years. And so more
Speaker 1: and more of our I shares are going to be bought,
Speaker 1: not like my kids buy them, which is a single ticker,
Speaker 1: either for a price or for a theme, but they're
Speaker 1: really just bought as a component part of a much
Speaker 1: broader portfolio. Uh. And it could be for a reason
Speaker 1: around thematics or E s G or lower cost or
Speaker 1: lower carbon, or a whole series of things that the
Speaker 1: the the I shares can now do one of the
Speaker 1: things that you have not done. But we are very
Speaker 1: bullish on his conversions from mutual fund basically immediately converting
Speaker 1: to an e t F d f A has done it.
Speaker 1: JP Morgan has done it. We're predicting a trillion worth
Speaker 1: of conversions in the next ten years with hundreds of funds.
Speaker 1: Now that's only ten percent of all mutual funds. There's
Speaker 1: been fifty seven billion though this year, and that's up
Speaker 1: from nothing a year ago. Um, what's your take on
Speaker 1: that this would be versus entering the E t F
Speaker 1: world with a clone like product like the way Fidelity
Speaker 1: Magellan came in with the Fidelity. Yeah. Look, I I
Speaker 1: whether it's really set the world on fire? Yeah, I
Speaker 1: I think these these whether it's conversions or redirections, you know,
Speaker 1: vanguards different because it's a share class. But JP Morgan
Speaker 1: and Dimensional did wholesale kind of shifts and have been
Speaker 1: pretty public about it. I do think it's a trend,
Speaker 1: whether it has the numbers you associated to it or not.
Speaker 1: I think it's a It's clearly a trend which is
Speaker 1: going to be measured in the hundreds of billions of
Speaker 1: dollars over the the years. And for us, the way
Speaker 1: that we look at it is that it's just the
Speaker 1: next stage of growth of the E t F that
Speaker 1: each of these different firms. The way that we look
Speaker 1: at it is what they're what what's being declared across
Speaker 1: the marketplaces. The t F is the default vehicle for
Speaker 1: millions of investors to invest, and uh, and all the
Speaker 1: benefits that are in the t F that have talked about,
Speaker 1: People are moving more and more towards that. Some of
Speaker 1: them do it through a launch, some of the do
Speaker 1: through a conversion, some of them do it through a
Speaker 1: redirection of their kind of internal flow around it. But
Speaker 1: what the trend line is is that this is becoming
Speaker 1: the default vehicle for how more and more people want
Speaker 1: to invest. And we think that's great because it also
Speaker 1: then moves to the point that we talked about earlier,
Speaker 1: which is that they're not just moving to a singular
Speaker 1: E t F. It's not just everyone moving everything and
Speaker 1: converting everything to you know, I VV or an SMP
Speaker 1: type exposure. It's it's basically a whole range of things
Speaker 1: from pure indexation too, uh, you know, if you will,
Speaker 1: quantitative or quasi index quasi active like some of the
Speaker 1: E s G exposures, or some of the factor oriented
Speaker 1: exposures that firms like demensional and moved towards even you know,
Speaker 1: embracing traditional security selection wrapped in an E t F
Speaker 1: and so both because it's becoming the investment vehicle of
Speaker 1: choice and because it's really accelerating the shift that we
Speaker 1: talked about, which is it's it's becoming a rapper for
Speaker 1: all public securities. We think that's really exciting because again,
Speaker 1: to go back to the beginning of this conversation, whether
Speaker 1: you look at the e t F market as we do,
Speaker 1: as three percent of the addressable, or you look at
Speaker 1: it as you do, which is of the addressable of
Speaker 1: regulated funds, that's still a vast opportunity to get more
Speaker 1: and more people to adopt it. And and so you
Speaker 1: know it also we mean more competition for us, which
Speaker 1: is great. We welcome it because what we also think
Speaker 1: is going to happen is it's going to mean that
Speaker 1: the overall pie or the overall category is going to
Speaker 1: expand at a very very rapid rate, which we're which
Speaker 1: we're really exciting about continuing to lead and and and
Speaker 1: continuing to kind of expand the universe. If you will, Okay, see,
Speaker 1: I'm going to ask you a question that we ask
Speaker 1: everyone who comes on on trillions. What is your favorite
Speaker 1: E t F ticker that is not your own? Oh,
Speaker 1: my favorite E t F ticker that is not my own.
Speaker 1: I have a lot of interest in what arc is
Speaker 1: doing in part because I think that they're really pioneering
Speaker 1: the e t F as a transparent form for security selection,
Speaker 1: and you know, they'll go up, they'll go down kind
Speaker 1: of as as a security selection kind of goes. But
Speaker 1: I think that's a really really interesting development that's happened
Speaker 1: over the past I mean, they've been in business for
Speaker 1: you know, six seven years, particularly over the past couple
Speaker 1: of years. I think that's a really pioneering expansion. Certainly
Speaker 1: one uh we're looking to expand ourselves into. But I
Speaker 1: think that's a really interesting development in this blurring that
Speaker 1: we talked about. Selen rom G, thank you so much
Speaker 1: for joining us on Trillians. Thanks Cherl, Thanks Eric, Thank
Speaker 1: you guys for having me. Thanks for listening to Trillions.
Speaker 1: Until next time. You can find us on the Bloomberg Terminal,
Speaker 1: Bloomberg dot com, Apple Podcast, Spotify, and wherever else you'd
Speaker 1: like to listen. We'd love to hear from you. We're
Speaker 1: on Twitter, I'm at Joel Webber Show. He's at Eric Falcinas.
Speaker 1: This episode of Trilliance was produced by Magnets and Drumson.
Speaker 1: Francesca Levy is the head of Bloomberg Podcast by the setter,
Speaker 1: the saster,