WEBVTT - Samara Cohen on Global Markets Insights With BlackRock 0:00:02.600 --> 0:00:11.160 Bloomberg Audio Studios, Podcasts, radio News. This is Master's in 0:00:11.240 --> 0:00:17.479 Business with Barry Ridholds on Bloomberg Radio. This week on 0:00:17.520 --> 0:00:22.920 the podcast, I have an extra special guest. Samarcone is. Wow. 0:00:22.960 --> 0:00:27.520 What a career. She has Chief Investment Officer of ETF 0:00:27.600 --> 0:00:32.480 and Index Investments for Blackrock, the investing giant that manages 0:00:32.760 --> 0:00:36.760 ten trillion dollars. She's responsible for about six point six 0:00:37.280 --> 0:00:42.040 trillion of that. She sits on the Blackrock Global Markets 0:00:42.080 --> 0:00:46.120 Executive Committee. She leads a team of portfolio managers and 0:00:46.159 --> 0:00:50.640 traders and platform marketecs and market structure developers. Really a 0:00:50.800 --> 0:00:56.000 unique insight into how markets operate, how money flows, what 0:00:56.200 --> 0:01:01.320 investors are looking for. Just an absolutely fascinating set of 0:01:01.360 --> 0:01:06.360 positions at the largest investing firm in the world. I 0:01:06.480 --> 0:01:13.440 found our conversation about passive versus active, about the bitcoin ETF, 0:01:13.600 --> 0:01:18.039 and about changes in market structure really to be absolutely intriguing. 0:01:18.560 --> 0:01:23.039 With no further ado my discussion with black Rocks. Samara Cone, 0:01:23.480 --> 0:01:24.160 thanks so much. 0:01:24.200 --> 0:01:25.920 It's great to be here in person with you. Barry. 0:01:26.040 --> 0:01:28.960 Yes, it's great to have you so Last time we 0:01:29.040 --> 0:01:32.440 went pretty in depth into your background and education. You 0:01:32.520 --> 0:01:36.000 have a BS in economics, from Wharton and a BA 0:01:36.280 --> 0:01:39.920 in Theater Arts from their College of Arts and Sciences 0:01:40.240 --> 0:01:44.319 at the University of Pennsylvania. As a refresher, how do 0:01:44.400 --> 0:01:48.560 you go from theater to finance? What's the relationship? 0:01:49.200 --> 0:01:51.840 Well, I started with theater, as you said, because when 0:01:51.840 --> 0:01:54.880 I was in high school, I loved it. And now 0:01:54.960 --> 0:01:57.720 I am the parent of two high schoolers Berry, so 0:01:58.120 --> 0:02:00.400 I think back to how important it was to me 0:02:00.840 --> 0:02:03.040 to go all in on something that I loved. And 0:02:03.080 --> 0:02:05.360 that's my hope for them that they find something they're 0:02:05.360 --> 0:02:09.200 passionate about. For me, it was theater, not film, not entertainment. 0:02:09.280 --> 0:02:13.080 It was bringing people together in a live way in 0:02:13.160 --> 0:02:16.240 an audience to have some sort of experience that would 0:02:16.240 --> 0:02:18.200 maybe change them a little bit. And that's big, the 0:02:19.240 --> 0:02:22.280 total big theater nerd, right, And so I went to 0:02:22.320 --> 0:02:25.000 college wanting to pursue that as a major. Now in 0:02:25.080 --> 0:02:27.360 high school, I was also very good at math, but 0:02:27.680 --> 0:02:30.120 it didn't feel like something I loved, but it was 0:02:30.120 --> 0:02:32.200 something I was good at. But when I got to college, 0:02:32.360 --> 0:02:34.720 I had all of this credit so that I didn't 0:02:34.720 --> 0:02:37.680 need to take another math class, and to my surprise, 0:02:37.880 --> 0:02:41.400 I found that I missed it. So I discovered economics. 0:02:41.440 --> 0:02:43.560 I heard about a professor he was supposed to be good, 0:02:43.600 --> 0:02:47.840 and felt like learning about markets and economics felt like 0:02:48.000 --> 0:02:51.240 math with a purpose to me, and so I started 0:02:51.280 --> 0:02:54.240 pursuing that in parallel. That made my parents really happy, 0:02:54.320 --> 0:02:56.600 of course, because I was spending my summers working for 0:02:56.680 --> 0:02:59.720 regional theater companies, so they felt secure in the idea 0:02:59.760 --> 0:03:02.360 that I had a backup plan, and I felt like 0:03:02.800 --> 0:03:04.880 I got to live in these two different worlds, which 0:03:04.960 --> 0:03:09.239 really kind of widened my aperture on lots of things. 0:03:09.680 --> 0:03:12.639 And then when it was time to graduate, I wanted 0:03:12.960 --> 0:03:15.800 to take my backup plan out for a test drive 0:03:15.880 --> 0:03:18.360 and make some money so that I could support myself 0:03:18.360 --> 0:03:21.720 and be financially independent. And I found that I really 0:03:21.760 --> 0:03:22.560 loved markets. 0:03:22.960 --> 0:03:26.880 Huh, that's really interesting. I'm kind of intrigued by something 0:03:26.960 --> 0:03:31.639 you told Fortune magazine not too long ago. Ninety percent 0:03:31.680 --> 0:03:37.240 of directing is casting, right, fascinating conversation. Lots of film 0:03:37.280 --> 0:03:41.320 directors have said similar things to that, and the world 0:03:41.360 --> 0:03:44.680 has changed so much that they're even now adding a 0:03:44.760 --> 0:03:49.680 casting director oscar, which amazingly hasn't existed for years. But 0:03:49.960 --> 0:03:54.880 I'm curious how you think of casting in the job 0:03:54.960 --> 0:03:58.000 you have now, where you're managing so many different teams 0:03:58.000 --> 0:04:01.680 and so many different people, is ninety five percent of 0:04:02.240 --> 0:04:03.840 index management casting? 0:04:04.200 --> 0:04:07.800 I think ninety five percent of leadership Barry is putting 0:04:07.840 --> 0:04:11.920 the right person in the right job and assembling teams 0:04:11.960 --> 0:04:17.479 that build trust and can work together and maximize their 0:04:17.560 --> 0:04:21.960 individual strengths. So, I guess what felt so specific to 0:04:22.160 --> 0:04:24.919 theater to me when I was doing it, and especially 0:04:24.960 --> 0:04:27.840 when I was directing, now feels like a pretty profound 0:04:27.920 --> 0:04:29.040 lesson in leadership. 0:04:29.200 --> 0:04:33.080 It's less a specific idea to theater and instead is 0:04:33.120 --> 0:04:34.479 really a very broad principle. 0:04:34.880 --> 0:04:36.880 I think it's absolutely true. Look, when you're a leader, 0:04:36.920 --> 0:04:39.080 your job is to make the most to get the 0:04:39.120 --> 0:04:43.440 most out of people and organizations. It's not what you yourself 0:04:43.440 --> 0:04:46.560 can do. It's how you position other people to do 0:04:46.600 --> 0:04:49.000 their best work. That's pretty much what casting is. 0:04:49.480 --> 0:04:52.840 So you mentioned you spend summers doing regional theater. There's 0:04:52.920 --> 0:04:56.200 a lot of technical work that goes into that direction. 0:04:57.120 --> 0:05:00.920 Lighting design, set design, There's just a ton of background 0:05:00.920 --> 0:05:04.560 work that goes to staging the show. What parallels can 0:05:04.600 --> 0:05:08.840 we draw to asset management? How much of the daily 0:05:08.920 --> 0:05:12.240 block and tackling that goes into putting on a show, 0:05:12.600 --> 0:05:14.440 it goes onto managing assets. 0:05:14.640 --> 0:05:16.839 So I've often been asked about the theater part of 0:05:16.880 --> 0:05:19.800 my background. I've never been asked that question, so thank you, 0:05:19.920 --> 0:05:23.359 because I love bringing back those memories of being in theater, 0:05:23.480 --> 0:05:26.400 being in tech week of a show. And I would 0:05:26.440 --> 0:05:29.359 start by saying, there's lots of different types of theater, 0:05:29.760 --> 0:05:32.719 and there's lots of different types of asset management. So 0:05:32.800 --> 0:05:35.680 the place that has the most relevant parallel for me 0:05:36.720 --> 0:05:42.480 was putting on large scale musical productions during theater festivals 0:05:42.520 --> 0:05:45.640 where you had multiple stages going at the same time. 0:05:46.200 --> 0:05:48.640 In the business that I'm in right now, which is 0:05:48.640 --> 0:05:51.760 the ETF business at Blackrock, I would say that work 0:05:51.880 --> 0:05:55.120 is similarly orchestral. We like to say it takes an 0:05:55.200 --> 0:06:00.640 ecosystem for our ETFs to really deliver to investors, which 0:06:00.680 --> 0:06:04.080 means really being sensitized to all of the different places 0:06:04.120 --> 0:06:06.640 how they work together, and how they work together, especially 0:06:06.760 --> 0:06:09.200 during moments of high velocity in markets. 0:06:09.400 --> 0:06:12.279 So let's talk about a moment of high velocity. We're 0:06:12.320 --> 0:06:16.120 recording this twenty twenty four. Twenty twenty two was one 0:06:16.160 --> 0:06:19.720 of those years where velocity picked up, volatility picked up. 0:06:19.760 --> 0:06:22.760 It was a big negative for equities, it was a 0:06:22.800 --> 0:06:26.679 double digit loser for fixed income, unusual both of those 0:06:27.200 --> 0:06:30.560 in one year. How did ETFs hold up and what 0:06:30.600 --> 0:06:33.640 did we learn in that rough year of twenty twenty 0:06:33.720 --> 0:06:36.200 two about the ETF complex. 0:06:36.560 --> 0:06:39.080 Well, as you said, twenty twenty two was a remarkable 0:06:39.200 --> 0:06:42.560 year for markets around the world because we had declines 0:06:42.600 --> 0:06:45.479 in both equity markets and bond markets. It was the 0:06:45.520 --> 0:06:48.880 worst bond market in fifty years. I will say, as 0:06:48.880 --> 0:06:51.920 someone who has really had the bulk of my career 0:06:52.160 --> 0:06:55.880 in the bond market, markets overall, in the bond market 0:06:55.920 --> 0:07:00.760 in particular, are much more resilient, transparent, and excessive today 0:07:01.040 --> 0:07:05.520 because ETFs are in them. So ETFs have contributed in 0:07:05.560 --> 0:07:09.479 a very important way to market structure, growth and development. 0:07:09.880 --> 0:07:13.200 And what we saw in twenty twenty two is first 0:07:13.640 --> 0:07:19.160 a lot of really important portfolio reallocation decisions being made. 0:07:19.280 --> 0:07:21.480 All of a sudden. Investors really had to think the 0:07:21.600 --> 0:07:24.360 role of bonds in their portfolio, how they were going 0:07:24.400 --> 0:07:27.880 to position for higher interest rates, what inflation would actually 0:07:27.880 --> 0:07:30.239 look like, what was the meaning of this new regime. 0:07:30.760 --> 0:07:32.840 And the first place that they turned to to do 0:07:32.920 --> 0:07:37.040 this was off in ETFs. So we saw ETF trading pickup. 0:07:37.120 --> 0:07:40.880 And that's not flows, that's just people using ETFs buyers 0:07:40.920 --> 0:07:45.000 and sellers to manage their risk and reallocate their portfolios. 0:07:45.440 --> 0:07:49.840 And we did also see ETF inflows, particularly in fixed 0:07:49.880 --> 0:07:56.080 income ETFs. So fixed income ETFs gathered really over two 0:07:56.200 --> 0:07:59.520 hundred billion dollars in twenty twenty two. And the reason 0:07:59.600 --> 0:08:03.000 for that is the bond market has historically really lacked 0:08:03.040 --> 0:08:07.200 transparency and been harder to access for individual investors who 0:08:07.280 --> 0:08:09.680 all of a sudden were realizing they probably needed a 0:08:09.720 --> 0:08:13.280 much more significant allocation to fixed income than they'd had before, 0:08:13.520 --> 0:08:14.840 so they turned to ETFs. 0:08:15.000 --> 0:08:17.480 You know, it's funny we're talking about this now looking 0:08:17.520 --> 0:08:20.200 back at twenty twenty two. When you and I spoke 0:08:20.280 --> 0:08:23.640 in the spring of twenty twenty two, we talked about 0:08:23.680 --> 0:08:28.120 the volatility of twenty twenty and you pointed out ETFs 0:08:28.240 --> 0:08:32.000 held up splendidly. If anything, there were certain stocks that 0:08:32.040 --> 0:08:35.840 were halted, other parts of the market had structural issues. 0:08:35.840 --> 0:08:38.760 ETFs came through that with flying colors. Is that a 0:08:38.840 --> 0:08:39.480 fair statement. 0:08:39.720 --> 0:08:43.520 That's exactly right. And during these stressed markets, high velocity markets, 0:08:43.840 --> 0:08:47.960 investors need some outlet for risk management and for transparency. 0:08:48.240 --> 0:08:50.960 And so if ETFs have matured in the market, which 0:08:50.960 --> 0:08:53.680 has been over the past thirty years in the US. 0:08:54.000 --> 0:08:56.520 It has actually improved markets broadly. 0:08:56.920 --> 0:09:00.960 So you mentioned flows. I think people assume there flows 0:09:00.960 --> 0:09:04.280 into a particular fund and the prices go up, but 0:09:04.320 --> 0:09:07.319 that it's not always correlated. That easily. What we saw 0:09:08.000 --> 0:09:12.040 into the rally in twenty twenty three were outflows and 0:09:12.080 --> 0:09:17.600 the market went up regardless. How do you at Blackrock 0:09:17.640 --> 0:09:21.600 and you overseeing all these ETFs think about the role 0:09:21.800 --> 0:09:25.280 of money flows into and out of various funds and 0:09:25.360 --> 0:09:27.959 what it might mean for the health of those funds 0:09:28.040 --> 0:09:31.840 and the subsequent performance of those funds and the market. 0:09:32.080 --> 0:09:35.320 Well across the ETF complex, As you pointed out, there 0:09:35.400 --> 0:09:37.800 are you know, at I Shares we have thirteen hundred 0:09:38.080 --> 0:09:42.880 different ETFs. So being able to provide ways for investors 0:09:42.960 --> 0:09:46.679 to quickly change their exposures move out of one fund 0:09:46.760 --> 0:09:49.240 into another fund, it's a healthy thing for markets, it's 0:09:49.240 --> 0:09:52.400 a healthy thing for portfolios. I don't know if your 0:09:52.480 --> 0:09:56.080 question is more around the role of ETFs and price 0:09:56.160 --> 0:09:58.840 formation and markets just generally. 0:09:58.880 --> 0:10:02.680 So you know, I'm always astonished when I flip on 0:10:02.720 --> 0:10:04.880 the TV and I hear someone say, oh, there are 0:10:04.880 --> 0:10:07.360 a lot of outfunds from mutual funds and ETFs. That 0:10:07.559 --> 0:10:11.960 bodes poorly for the market. We sort outflows pretty much 0:10:12.080 --> 0:10:16.079 right from the lows in twenty twenty two in October 0:10:16.160 --> 0:10:20.040 straight up to the recent highs. It's only recently they 0:10:20.080 --> 0:10:23.920 started turning positive. It seems like people are drawing the 0:10:24.000 --> 0:10:27.840 wrong conclusion by tracking flows. I don't know if I'm 0:10:27.880 --> 0:10:31.520 getting into the weeds too much. This is too much arkana. 0:10:31.840 --> 0:10:34.920 It just seems that whenever I hear people discuss flows, 0:10:35.520 --> 0:10:38.040 the context doesn't always tell the full story. 0:10:38.160 --> 0:10:40.760 I think that's right with respect to direction of markets. Now, 0:10:40.840 --> 0:10:43.959 we actually love talking about our investment strategists actually have 0:10:44.000 --> 0:10:47.560 a piece that they published called Flow and Tell, where 0:10:47.600 --> 0:10:50.600 they look to flows which give lots of different types 0:10:50.640 --> 0:10:55.360 of information, but not necessarily directional information. So one of 0:10:55.400 --> 0:10:58.160 the things about ETFs is because they are trading in trade, 0:10:58.240 --> 0:11:01.959 they're super transparent, they're measured on exchange, they actually give 0:11:02.000 --> 0:11:07.559 us some pretty useful measures around investor sentiment, also around positioning, 0:11:07.920 --> 0:11:12.520 around allocation decisions, and so there is lots of information 0:11:12.600 --> 0:11:16.760 that can be extracted from the transparency and availability of 0:11:17.040 --> 0:11:21.000 fund flow data, particularly with ETFs. But to your point, 0:11:21.040 --> 0:11:24.840 that doesn't necessarily translate into direction of markets. And just 0:11:24.880 --> 0:11:28.920 as an example, there's a statistic that I love to 0:11:28.960 --> 0:11:32.000 look at. We call it the imputed flow statistic, which 0:11:32.040 --> 0:11:35.760 tells you how much flow into or out of ETFs 0:11:36.400 --> 0:11:39.240 was present in a particular stock And if I look 0:11:39.240 --> 0:11:43.400 across the entire US stock market, that statistic is usually 0:11:43.480 --> 0:11:47.160 about five or six percent. It actually goes down during 0:11:47.200 --> 0:11:49.959 times of market stress that there's actually less market flow 0:11:50.000 --> 0:11:53.040 attributable to ETFs. So I think there's a lot of 0:11:53.040 --> 0:11:56.360 other things going on with respect to price formation, but 0:11:56.440 --> 0:12:00.200 there are really important I think sentiment conclusions you can 0:12:00.280 --> 0:12:02.640 draw from, you know, flow intel type data. 0:12:02.679 --> 0:12:06.160 I love that name flow and tell use it. Sentiment 0:12:06.240 --> 0:12:09.360 is obvious. I think if you suddenly see people selling 0:12:09.480 --> 0:12:13.800 value funds and flowing into anything that's tech heavy, clearly 0:12:14.200 --> 0:12:17.360 there's been a shift in investor sentiment when that happens. 0:12:17.760 --> 0:12:20.120 What other data points do you look at and flow 0:12:20.160 --> 0:12:22.320 and tell that might surprise people? 0:12:22.880 --> 0:12:27.840 Definitely asset allocation decisions. So how people are shifting portfolios around. 0:12:28.160 --> 0:12:30.400 Is that from stocks to bonds or is it even 0:12:30.440 --> 0:12:32.840 within the equity market? What sectors are dominating? 0:12:33.120 --> 0:12:34.880 It can be from stocks to bonds, and it also 0:12:34.960 --> 0:12:38.280 can be very interestingly within the fixed income complex, and 0:12:38.320 --> 0:12:41.800 that's been important particularly lately given kind of all of 0:12:41.840 --> 0:12:45.720 the focus and you know, potential surprises coming out of 0:12:45.720 --> 0:12:48.360 the FED and direction of monetary policy. So you've seen 0:12:48.440 --> 0:12:52.240 a lot of kind of implicit curve positioning happening across 0:12:52.240 --> 0:12:53.880 the fixed income ETF complex. 0:12:54.080 --> 0:12:56.680 Though since the last time we spoke two years ago, 0:12:57.080 --> 0:13:01.800 the ETF space has definitely evolved. What do you see 0:13:01.800 --> 0:13:04.720 as some of the bigger changes since we last spoke. 0:13:04.840 --> 0:13:06.640 So I feel like, Barry, if you have me back 0:13:06.679 --> 0:13:09.200 in two years, I'm probably going to say the last 0:13:09.240 --> 0:13:11.520 two years have been the most exciting years. 0:13:11.600 --> 0:13:14.559 We'll talk about remember that volatility right after we had 0:13:14.600 --> 0:13:15.760 the recording. 0:13:15.360 --> 0:13:17.480 In exact years. But the point is this has been 0:13:17.480 --> 0:13:19.920 a fast moving stream. A lot has been happening in 0:13:19.960 --> 0:13:22.720 the ETF space and in markets. What I would say 0:13:22.760 --> 0:13:25.480 to me has really defined the last two years since 0:13:25.520 --> 0:13:28.040 we spoke are two things, and they're both really exciting. 0:13:28.120 --> 0:13:31.880 The first is the move that we are seeing around 0:13:31.920 --> 0:13:35.200 the world with what we call self directed investors, but 0:13:35.280 --> 0:13:39.160 more and more invest more and more savers becoming investors, 0:13:39.440 --> 0:13:42.240 and we can measure that globally, there were about forty 0:13:42.280 --> 0:13:45.599 million individual investor accounts that have been open in the 0:13:45.679 --> 0:13:49.640 last two years. That's more than the past decade combined. 0:13:50.080 --> 0:13:54.200 Forty million individual investors coming to the market. Now. When 0:13:54.280 --> 0:13:57.160 I when I say, and I will say this everywhere 0:13:57.600 --> 0:14:02.080 markets are better today, it's because to me, a healthy 0:14:02.120 --> 0:14:06.760 capital marketplace is one that has the transparency, resilience and 0:14:06.800 --> 0:14:10.440 agility to bring more people off the sidelines so that 0:14:10.520 --> 0:14:14.240 they can save for retirement or whatever financial wellness looks 0:14:14.320 --> 0:14:17.040 like to them. So that's theme number one, and the 0:14:17.080 --> 0:14:23.560 second one is the ongoing convergence between index and active 0:14:24.040 --> 0:14:26.960 And you will never hear me use the word passive barrier. 0:14:27.120 --> 0:14:29.400 In fact, if I ever have my own podcast, it's 0:14:29.440 --> 0:14:32.600 going to be called there is nothing passive about ETF 0:14:32.600 --> 0:14:37.440 and index investing, because we've really obliterated that concept. There 0:14:37.440 --> 0:14:41.120 are so many different types of strategies and outcomes that 0:14:41.160 --> 0:14:45.000 are available now through index strategies which investors buy through 0:14:45.080 --> 0:14:48.680 ETFs that it gives them again much more agility with 0:14:48.760 --> 0:14:51.200 respect to their portfolios and their goals. 0:14:51.560 --> 0:14:54.080 And even the S and P five hundred is there 0:14:54.120 --> 0:14:57.520 are a lot of active decisions. It's market cap weighted 0:14:57.680 --> 0:15:00.920 that's a choice. There are rules that determine who can 0:15:01.000 --> 0:15:04.720 and can't be in there. Companies get added and subtracted 0:15:04.760 --> 0:15:08.720 all the time. There's a decent amount of active within passive. 0:15:09.200 --> 0:15:12.360 But I want to come back to the forty million 0:15:12.440 --> 0:15:16.520 new accounts. When I think of new accounts, I kind 0:15:16.520 --> 0:15:20.520 of harken back to twenty twenty in the pandemic lockdown 0:15:20.920 --> 0:15:23.840 and all the kids playing on Robinhood and that sort 0:15:23.880 --> 0:15:27.720 of stuff. Are these small fun accounts or are these 0:15:28.160 --> 0:15:31.920 people really saving for things like paying for college or 0:15:31.960 --> 0:15:34.680 retirement or buying a home? Like when what are the 0:15:35.280 --> 0:15:38.520 constitution of these forty million new accounts? 0:15:39.120 --> 0:15:41.520 I think it's both of those things. So when people 0:15:41.560 --> 0:15:44.400 had their stimulus checks and there was commission free trading, 0:15:44.480 --> 0:15:47.480 and to your point, they were home and learning about 0:15:47.520 --> 0:15:49.920 all of the things they could do with technology, maybe 0:15:49.920 --> 0:15:53.560 some people got involved more to just check out the 0:15:53.600 --> 0:15:56.280 ecosystem and what it felt like. But when you look 0:15:56.320 --> 0:15:59.720 at the data, despite all of the headline excitement that 0:15:59.760 --> 0:16:04.960 meets stock mania generated, more people were actually buying ETFs 0:16:05.000 --> 0:16:07.640 than we're buying meme stocks. So I think it has 0:16:07.720 --> 0:16:11.000 been a really important moment for investors who are coming 0:16:11.040 --> 0:16:14.200 into the market and coming in maybe because they're starting 0:16:14.240 --> 0:16:18.520 with a single stock decision, but actually moving and learning 0:16:19.000 --> 0:16:22.800 about ETFs and then participating in a more diversified and 0:16:22.840 --> 0:16:23.560 long term way. 0:16:23.760 --> 0:16:25.800 I would like to see the flow and tel piece 0:16:26.080 --> 0:16:30.960 that looks at potential investors looking at some of the 0:16:31.000 --> 0:16:33.840 crazy meme stocks and saying, you know what, I'm just 0:16:33.920 --> 0:16:35.520 going to buy a broad index and put it away 0:16:35.560 --> 0:16:38.800 for a few decades and not get sucked into this mania. 0:16:39.080 --> 0:16:40.640 Do you guys track that closely? 0:16:40.880 --> 0:16:43.200 We do. We do track it closely, and a few 0:16:43.200 --> 0:16:46.640 people have done really interesting work, particularly Nasdaq has done 0:16:46.640 --> 0:16:51.520 some interesting work on individual stocks versus allocations to ETFs 0:16:51.600 --> 0:16:54.440 and to index And this trend that we're talking about, 0:16:54.480 --> 0:16:58.520 the individual investor trend, is absolutely across the market. We've 0:16:58.560 --> 0:17:02.360 seen it in options as well, which is why ETFs 0:17:02.400 --> 0:17:05.679 that have some sort of embedded options outcome are also 0:17:05.760 --> 0:17:09.719 seeing a lot of interest, particularly from the self directed investors. 0:17:10.080 --> 0:17:13.000 Really really intriguing. So let's talk a little bit about 0:17:13.040 --> 0:17:19.360 some interesting news. Recently, low cost index atfs and mutual 0:17:19.400 --> 0:17:24.080 funds now make up more than fifty percent of the 0:17:24.240 --> 0:17:28.399 fun complex. Put a flag in the ground and declare victory. 0:17:28.800 --> 0:17:32.480 Does this mean that it's the end of active. Is 0:17:32.520 --> 0:17:35.760 there a ceiling for passive? What does that fifty percent 0:17:35.800 --> 0:17:36.280 line mean? 0:17:36.600 --> 0:17:38.919 First of all, Barry, I am a huge fan of 0:17:39.040 --> 0:17:42.840 active managers and what they can achieve. My disclosure here 0:17:42.920 --> 0:17:45.960 will be that I'm married to a brilliant active manager, 0:17:46.040 --> 0:17:48.760 So I like to say that we are an alpha 0:17:48.880 --> 0:17:54.080 beta couple. But increasingly active managers use have beta allocations. 0:17:54.119 --> 0:17:56.960 They always have. Of course, they might use SMP futures, 0:17:56.960 --> 0:18:00.000 for example, as part of their strategies, and increasingly, really 0:18:00.200 --> 0:18:03.520 all of the biggest active asset managers in the world 0:18:03.640 --> 0:18:07.520 use ETFs for some part of their alpha seeking strategy. 0:18:07.760 --> 0:18:10.240 So let's look at two things. Number one, the statistics 0:18:10.240 --> 0:18:13.240 that you gave. This is really about the fund market. 0:18:14.200 --> 0:18:17.800 It's important to realize that what is available through an 0:18:17.840 --> 0:18:22.720 index strategy has evolved massively over the past few years. 0:18:23.000 --> 0:18:26.880 So we're really not just talking about traditional cap weighted strategies, 0:18:26.960 --> 0:18:28.920 which are kind of what you would get in a 0:18:29.520 --> 0:18:32.199 future type strategy like with you know, Russell two or 0:18:32.320 --> 0:18:37.360 SMP five hundred. There are factor strategies. There are increasingly 0:18:37.400 --> 0:18:41.919 diverse range of bond market strategies across the different subasset 0:18:41.920 --> 0:18:46.480 classes of fixed income, so increasingly for us, we like 0:18:46.560 --> 0:18:50.359 to think of that whole new genre of index ETFs 0:18:50.400 --> 0:18:54.680 as almost active risk benchmark. Anything that's not cap weighted 0:18:55.040 --> 0:18:59.920 represents a decision by the investor to take some active 0:19:00.160 --> 0:19:04.240 risk versus the standard cap weoided benchmarks. So that's why 0:19:04.320 --> 0:19:07.919 I really think of index and active as a really 0:19:07.960 --> 0:19:12.560 broad continuum, with index being able to take on more 0:19:12.600 --> 0:19:16.840 and more types of strategies that importantly were never accessible 0:19:16.880 --> 0:19:20.760 to individual investors before. And that's why I maintain that 0:19:20.800 --> 0:19:25.200 today's markets as a function of index and ETF technology 0:19:25.480 --> 0:19:29.840 are simply better because they're more accessible and diversification and 0:19:29.880 --> 0:19:34.159 more sophisticated strategies. For example, like target date funds. For 0:19:34.359 --> 0:19:37.280 the fifty seven million Americans that actually don't have a 0:19:37.359 --> 0:19:42.080 workplace savings account, they can now through an ETF access 0:19:42.119 --> 0:19:45.600 target date investor investing where they basically make one decision, 0:19:45.680 --> 0:19:48.480 which is when do I think I'm going to retire, 0:19:48.840 --> 0:19:51.320 and then they can allocate to the ETF and the 0:19:51.400 --> 0:19:55.359 ETF will manage their risk exposure. 0:19:54.920 --> 0:19:58.920 Their stock bond proportion over time automatically adjust it. And 0:19:59.000 --> 0:20:01.720 since it's an ETF rapper, there's no capital gains to 0:20:01.760 --> 0:20:04.000 pay until you finally cash that in. 0:20:04.280 --> 0:20:07.240 So it's a victory for investors, and it's a victory 0:20:07.359 --> 0:20:10.040 for those, you know, millions of people who are moving 0:20:10.080 --> 0:20:13.280 from being savers to investors, which is incredibly important in 0:20:13.320 --> 0:20:16.320 today's world as we think about you know, retirement and 0:20:16.600 --> 0:20:19.679 what and people being able to retire with dignity. And 0:20:19.720 --> 0:20:22.040 then the other important part of your question though, and 0:20:22.080 --> 0:20:23.640 I know you agree with me on this because I've 0:20:23.640 --> 0:20:25.680 heard you talk about it, is we have to look 0:20:25.680 --> 0:20:29.359 at the equity market overall. Right, So that fifty percent stat, 0:20:29.720 --> 0:20:32.199 you know, is a little bit misleading with respect to 0:20:32.240 --> 0:20:36.920 the denominator. ETFs are probably about twelve or thirteen percent 0:20:37.520 --> 0:20:41.520 of the equity market, not fifty percent. And that gets 0:20:41.520 --> 0:20:44.520 back to these questions about, you know, is there a 0:20:44.600 --> 0:20:48.960 ceiling like there is mostly active management happening in price 0:20:49.040 --> 0:20:50.760 formation in global equity market. 0:20:50.920 --> 0:20:57.560 The broadest interpretation of passive indexing that I've seen is 0:20:58.200 --> 0:21:03.280 of the total equity market, about seventeen percent can be 0:21:03.400 --> 0:21:08.680 described as managed through a broad index, not active stock selection. 0:21:09.280 --> 0:21:12.920 People have argued that, well, you can look at flows 0:21:13.000 --> 0:21:18.320 and foundations and sovereign well funds are managing stuff passively 0:21:18.400 --> 0:21:22.600 quote unquote, but some of the numbers, thirty five forty 0:21:22.600 --> 0:21:26.800 percent seem kind of fabricated. You want to say it's 0:21:27.320 --> 0:21:31.160 twenty percent, okay, back of the envelope, we can pretend, 0:21:31.600 --> 0:21:34.920 but there's just no data, no evidence showing that it's 0:21:35.040 --> 0:21:37.880 even that big. And when we look at we can 0:21:37.920 --> 0:21:39.880 add up what's in ETFs, we can add up what's 0:21:39.920 --> 0:21:42.959 in mutual funds, and it's a relatively small part of 0:21:43.000 --> 0:21:49.040 the total asset management world. Unless you think I'm overstating. 0:21:48.440 --> 0:21:51.560 This, I think you're exactly right. And I think additionally, 0:21:51.760 --> 0:21:55.040 if we agree that as a gut check, twenty percent 0:21:55.400 --> 0:21:59.480 of the equity market is indexed, right ETFs or otherwise, 0:21:59.480 --> 0:22:03.520 it's important to remember that that is often by active managers, 0:22:03.560 --> 0:22:07.040 who are who have beta as some component of their 0:22:07.080 --> 0:22:10.800 alpha seeking strategy. So their decision to make a beta 0:22:10.880 --> 0:22:15.600 allocation through some sort of index strategy is an active 0:22:15.640 --> 0:22:18.959 one and as part of the broader setup of their portfolio. 0:22:18.960 --> 0:22:22.560 And potentially given the technology, and you know, indexing has 0:22:22.640 --> 0:22:29.000 risen alongside computing power, it actually required Actually the first 0:22:29.080 --> 0:22:32.160 kind of commercial microchip came about around the same time 0:22:32.400 --> 0:22:35.639 as index investing, because you needed computing power to be 0:22:35.680 --> 0:22:38.720 able to do that and now that asset managers can 0:22:39.400 --> 0:22:43.080 make beta allocations, they can focus their attention and resources 0:22:43.080 --> 0:22:46.840 on their highest conviction single stock or bond opportunities. 0:22:47.160 --> 0:22:49.280 And let's put a little flesh on that, because I 0:22:49.320 --> 0:22:52.119 don't know if lay people are aware of how fund 0:22:52.160 --> 0:22:55.840 managers behave. You're running a concentrated portfolio, you have thirty 0:22:55.880 --> 0:22:59.880 or forty stocks, and suddenly this stock generates a cels 0:23:00.000 --> 0:23:02.640 IGNO and you remove it from your portfolio, and that 0:23:02.720 --> 0:23:06.240 stock gets taken over by another company and it's achieved 0:23:06.320 --> 0:23:09.240 ninety nine percent of your price target. Now suddenly you 0:23:09.359 --> 0:23:12.440 have a five or ten percent slug of cash, which 0:23:12.480 --> 0:23:14.359 if it's sitting around in cash, you're going to be 0:23:14.440 --> 0:23:18.320 underperforming an upmarket. So instead you turn around and say, 0:23:18.320 --> 0:23:21.600 my benchmark is this. Here's the ETF that tracks that. 0:23:21.920 --> 0:23:23.880 I'm going to park this cash here so I don't 0:23:23.880 --> 0:23:27.639 fall behind my benchmark. And when I'm ready to actively 0:23:27.680 --> 0:23:31.280 select a replacement for these stocks, I'll swap out of 0:23:31.320 --> 0:23:34.760 one to another. Again, fair description of how it works 0:23:34.760 --> 0:23:35.439 in the real world. 0:23:35.720 --> 0:23:38.600 Totally fair description, But I would say it's a relatively 0:23:39.040 --> 0:23:42.720 modern one because even five years ago those managers might 0:23:42.760 --> 0:23:46.560