Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. This is Master's in
Speaker 1: Business with Barry Ridholds on Bloomberg Radio. This week on
Speaker 1: the podcast, I have an extra special guest. Samarcone is. Wow.
Speaker 1: What a career. She has Chief Investment Officer of ETF
Speaker 1: and Index Investments for Blackrock, the investing giant that manages
Speaker 1: ten trillion dollars. She's responsible for about six point six
Speaker 1: trillion of that. She sits on the Blackrock Global Markets
Speaker 1: Executive Committee. She leads a team of portfolio managers and
Speaker 1: traders and platform marketecs and market structure developers. Really a
Speaker 1: unique insight into how markets operate, how money flows, what
Speaker 1: investors are looking for. Just an absolutely fascinating set of
Speaker 1: positions at the largest investing firm in the world. I
Speaker 1: found our conversation about passive versus active, about the bitcoin ETF,
Speaker 1: and about changes in market structure really to be absolutely intriguing.
Speaker 1: With no further ado my discussion with black Rocks. Samara Cone,
Speaker 1: thanks so much.
Speaker 2: It's great to be here in person with you. Barry.
Speaker 1: Yes, it's great to have you so Last time we
Speaker 1: went pretty in depth into your background and education. You
Speaker 1: have a BS in economics, from Wharton and a BA
Speaker 1: in Theater Arts from their College of Arts and Sciences
Speaker 1: at the University of Pennsylvania. As a refresher, how do
Speaker 1: you go from theater to finance? What's the relationship?
Speaker 2: Well, I started with theater, as you said, because when
Speaker 2: I was in high school, I loved it. And now
Speaker 2: I am the parent of two high schoolers Berry, so
Speaker 2: I think back to how important it was to me
Speaker 2: to go all in on something that I loved. And
Speaker 2: that's my hope for them that they find something they're
Speaker 2: passionate about. For me, it was theater, not film, not entertainment.
Speaker 2: It was bringing people together in a live way in
Speaker 2: an audience to have some sort of experience that would
Speaker 2: maybe change them a little bit. And that's big, the
Speaker 2: total big theater nerd, right, And so I went to
Speaker 2: college wanting to pursue that as a major. Now in
Speaker 2: high school, I was also very good at math, but
Speaker 2: it didn't feel like something I loved, but it was
Speaker 2: something I was good at. But when I got to college,
Speaker 2: I had all of this credit so that I didn't
Speaker 2: need to take another math class, and to my surprise,
Speaker 2: I found that I missed it. So I discovered economics.
Speaker 2: I heard about a professor he was supposed to be good,
Speaker 2: and felt like learning about markets and economics felt like
Speaker 2: math with a purpose to me, and so I started
Speaker 2: pursuing that in parallel. That made my parents really happy,
Speaker 2: of course, because I was spending my summers working for
Speaker 2: regional theater companies, so they felt secure in the idea
Speaker 2: that I had a backup plan, and I felt like
Speaker 2: I got to live in these two different worlds, which
Speaker 2: really kind of widened my aperture on lots of things.
Speaker 2: And then when it was time to graduate, I wanted
Speaker 2: to take my backup plan out for a test drive
Speaker 2: and make some money so that I could support myself
Speaker 2: and be financially independent. And I found that I really
Speaker 2: loved markets.
Speaker 1: Huh, that's really interesting. I'm kind of intrigued by something
Speaker 1: you told Fortune magazine not too long ago. Ninety percent
Speaker 1: of directing is casting, right, fascinating conversation. Lots of film
Speaker 1: directors have said similar things to that, and the world
Speaker 1: has changed so much that they're even now adding a
Speaker 1: casting director oscar, which amazingly hasn't existed for years. But
Speaker 1: I'm curious how you think of casting in the job
Speaker 1: you have now, where you're managing so many different teams
Speaker 1: and so many different people, is ninety five percent of
Speaker 1: index management casting?
Speaker 2: I think ninety five percent of leadership Barry is putting
Speaker 2: the right person in the right job and assembling teams
Speaker 2: that build trust and can work together and maximize their
Speaker 2: individual strengths. So, I guess what felt so specific to
Speaker 2: theater to me when I was doing it, and especially
Speaker 2: when I was directing, now feels like a pretty profound
Speaker 2: lesson in leadership.
Speaker 1: It's less a specific idea to theater and instead is
Speaker 1: really a very broad principle.
Speaker 2: I think it's absolutely true. Look, when you're a leader,
Speaker 2: your job is to make the most to get the
Speaker 2: most out of people and organizations. It's not what you yourself
Speaker 2: can do. It's how you position other people to do
Speaker 2: their best work. That's pretty much what casting is.
Speaker 1: So you mentioned you spend summers doing regional theater. There's
Speaker 1: a lot of technical work that goes into that direction.
Speaker 1: Lighting design, set design, There's just a ton of background
Speaker 1: work that goes to staging the show. What parallels can
Speaker 1: we draw to asset management? How much of the daily
Speaker 1: block and tackling that goes into putting on a show,
Speaker 1: it goes onto managing assets.
Speaker 2: So I've often been asked about the theater part of
Speaker 2: my background. I've never been asked that question, so thank you,
Speaker 2: because I love bringing back those memories of being in theater,
Speaker 2: being in tech week of a show. And I would
Speaker 2: start by saying, there's lots of different types of theater,
Speaker 2: and there's lots of different types of asset management. So
Speaker 2: the place that has the most relevant parallel for me
Speaker 2: was putting on large scale musical productions during theater festivals
Speaker 2: where you had multiple stages going at the same time.
Speaker 2: In the business that I'm in right now, which is
Speaker 2: the ETF business at Blackrock, I would say that work
Speaker 2: is similarly orchestral. We like to say it takes an
Speaker 2: ecosystem for our ETFs to really deliver to investors, which
Speaker 2: means really being sensitized to all of the different places
Speaker 2: how they work together, and how they work together, especially
Speaker 2: during moments of high velocity in markets.
Speaker 1: So let's talk about a moment of high velocity. We're
Speaker 1: recording this twenty twenty four. Twenty twenty two was one
Speaker 1: of those years where velocity picked up, volatility picked up.
Speaker 1: It was a big negative for equities, it was a
Speaker 1: double digit loser for fixed income, unusual both of those
Speaker 1: in one year. How did ETFs hold up and what
Speaker 1: did we learn in that rough year of twenty twenty
Speaker 1: two about the ETF complex.
Speaker 2: Well, as you said, twenty twenty two was a remarkable
Speaker 2: year for markets around the world because we had declines
Speaker 2: in both equity markets and bond markets. It was the
Speaker 2: worst bond market in fifty years. I will say, as
Speaker 2: someone who has really had the bulk of my career
Speaker 2: in the bond market, markets overall, in the bond market
Speaker 2: in particular, are much more resilient, transparent, and excessive today
Speaker 2: because ETFs are in them. So ETFs have contributed in
Speaker 2: a very important way to market structure, growth and development.
Speaker 2: And what we saw in twenty twenty two is first
Speaker 2: a lot of really important portfolio reallocation decisions being made.
Speaker 2: All of a sudden. Investors really had to think the
Speaker 2: role of bonds in their portfolio, how they were going
Speaker 2: to position for higher interest rates, what inflation would actually
Speaker 2: look like, what was the meaning of this new regime.
Speaker 2: And the first place that they turned to to do
Speaker 2: this was off in ETFs. So we saw ETF trading pickup.
Speaker 2: And that's not flows, that's just people using ETFs buyers
Speaker 2: and sellers to manage their risk and reallocate their portfolios.
Speaker 2: And we did also see ETF inflows, particularly in fixed
Speaker 2: income ETFs. So fixed income ETFs gathered really over two
Speaker 2: hundred billion dollars in twenty twenty two. And the reason
Speaker 2: for that is the bond market has historically really lacked
Speaker 2: transparency and been harder to access for individual investors who
Speaker 2: all of a sudden were realizing they probably needed a
Speaker 2: much more significant allocation to fixed income than they'd had before,
Speaker 2: so they turned to ETFs.
Speaker 1: You know, it's funny we're talking about this now looking
Speaker 1: back at twenty twenty two. When you and I spoke
Speaker 1: in the spring of twenty twenty two, we talked about
Speaker 1: the volatility of twenty twenty and you pointed out ETFs
Speaker 1: held up splendidly. If anything, there were certain stocks that
Speaker 1: were halted, other parts of the market had structural issues.
Speaker 1: ETFs came through that with flying colors. Is that a
Speaker 1: fair statement.
Speaker 2: That's exactly right. And during these stressed markets, high velocity markets,
Speaker 2: investors need some outlet for risk management and for transparency.
Speaker 2: And so if ETFs have matured in the market, which
Speaker 2: has been over the past thirty years in the US.
Speaker 2: It has actually improved markets broadly.
Speaker 1: So you mentioned flows. I think people assume there flows
Speaker 1: into a particular fund and the prices go up, but
Speaker 1: that it's not always correlated. That easily. What we saw
Speaker 1: into the rally in twenty twenty three were outflows and
Speaker 1: the market went up regardless. How do you at Blackrock
Speaker 1: and you overseeing all these ETFs think about the role
Speaker 1: of money flows into and out of various funds and
Speaker 1: what it might mean for the health of those funds
Speaker 1: and the subsequent performance of those funds and the market.
Speaker 2: Well across the ETF complex, As you pointed out, there
Speaker 2: are you know, at I Shares we have thirteen hundred
Speaker 2: different ETFs. So being able to provide ways for investors
Speaker 2: to quickly change their exposures move out of one fund
Speaker 2: into another fund, it's a healthy thing for markets, it's
Speaker 2: a healthy thing for portfolios. I don't know if your
Speaker 2: question is more around the role of ETFs and price
Speaker 2: formation and markets just generally.
Speaker 1: So you know, I'm always astonished when I flip on
Speaker 1: the TV and I hear someone say, oh, there are
Speaker 1: a lot of outfunds from mutual funds and ETFs. That
Speaker 1: bodes poorly for the market. We sort outflows pretty much
Speaker 1: right from the lows in twenty twenty two in October
Speaker 1: straight up to the recent highs. It's only recently they
Speaker 1: started turning positive. It seems like people are drawing the
Speaker 1: wrong conclusion by tracking flows. I don't know if I'm
Speaker 1: getting into the weeds too much. This is too much arkana.
Speaker 1: It just seems that whenever I hear people discuss flows,
Speaker 1: the context doesn't always tell the full story.
Speaker 2: I think that's right with respect to direction of markets. Now,
Speaker 2: we actually love talking about our investment strategists actually have
Speaker 2: a piece that they published called Flow and Tell, where
Speaker 2: they look to flows which give lots of different types
Speaker 2: of information, but not necessarily directional information. So one of
Speaker 2: the things about ETFs is because they are trading in trade,
Speaker 2: they're super transparent, they're measured on exchange, they actually give
Speaker 2: us some pretty useful measures around investor sentiment, also around positioning,
Speaker 2: around allocation decisions, and so there is lots of information
Speaker 2: that can be extracted from the transparency and availability of
Speaker 2: fund flow data, particularly with ETFs. But to your point,
Speaker 2: that doesn't necessarily translate into direction of markets. And just
Speaker 2: as an example, there's a statistic that I love to
Speaker 2: look at. We call it the imputed flow statistic, which
Speaker 2: tells you how much flow into or out of ETFs
Speaker 2: was present in a particular stock And if I look
Speaker 2: across the entire US stock market, that statistic is usually
Speaker 2: about five or six percent. It actually goes down during
Speaker 2: times of market stress that there's actually less market flow
Speaker 2: attributable to ETFs. So I think there's a lot of
Speaker 2: other things going on with respect to price formation, but
Speaker 2: there are really important I think sentiment conclusions you can
Speaker 2: draw from, you know, flow intel type data.
Speaker 1: I love that name flow and tell use it. Sentiment
Speaker 1: is obvious. I think if you suddenly see people selling
Speaker 1: value funds and flowing into anything that's tech heavy, clearly
Speaker 1: there's been a shift in investor sentiment when that happens.
Speaker 1: What other data points do you look at and flow
Speaker 1: and tell that might surprise people?
Speaker 2: Definitely asset allocation decisions. So how people are shifting portfolios around.
Speaker 1: Is that from stocks to bonds or is it even
Speaker 1: within the equity market? What sectors are dominating?
Speaker 2: It can be from stocks to bonds, and it also
Speaker 2: can be very interestingly within the fixed income complex, and
Speaker 2: that's been important particularly lately given kind of all of
Speaker 2: the focus and you know, potential surprises coming out of
Speaker 2: the FED and direction of monetary policy. So you've seen
Speaker 2: a lot of kind of implicit curve positioning happening across
Speaker 2: the fixed income ETF complex.
Speaker 1: Though since the last time we spoke two years ago,
Speaker 1: the ETF space has definitely evolved. What do you see
Speaker 1: as some of the bigger changes since we last spoke.
Speaker 2: So I feel like, Barry, if you have me back
Speaker 2: in two years, I'm probably going to say the last
Speaker 2: two years have been the most exciting years.
Speaker 1: We'll talk about remember that volatility right after we had
Speaker 1: the recording.
Speaker 2: In exact years. But the point is this has been
Speaker 2: a fast moving stream. A lot has been happening in
Speaker 2: the ETF space and in markets. What I would say
Speaker 2: to me has really defined the last two years since
Speaker 2: we spoke are two things, and they're both really exciting.
Speaker 2: The first is the move that we are seeing around
Speaker 2: the world with what we call self directed investors, but
Speaker 2: more and more invest more and more savers becoming investors,
Speaker 2: and we can measure that globally, there were about forty
Speaker 2: million individual investor accounts that have been open in the
Speaker 2: last two years. That's more than the past decade combined.
Speaker 2: Forty million individual investors coming to the market. Now. When
Speaker 2: I when I say, and I will say this everywhere
Speaker 2: markets are better today, it's because to me, a healthy
Speaker 2: capital marketplace is one that has the transparency, resilience and
Speaker 2: agility to bring more people off the sidelines so that
Speaker 2: they can save for retirement or whatever financial wellness looks
Speaker 2: like to them. So that's theme number one, and the
Speaker 2: second one is the ongoing convergence between index and active
Speaker 2: And you will never hear me use the word passive barrier.
Speaker 2: In fact, if I ever have my own podcast, it's
Speaker 2: going to be called there is nothing passive about ETF
Speaker 2: and index investing, because we've really obliterated that concept. There
Speaker 2: are so many different types of strategies and outcomes that
Speaker 2: are available now through index strategies which investors buy through
Speaker 2: ETFs that it gives them again much more agility with
Speaker 2: respect to their portfolios and their goals.
Speaker 1: And even the S and P five hundred is there
Speaker 1: are a lot of active decisions. It's market cap weighted
Speaker 1: that's a choice. There are rules that determine who can
Speaker 1: and can't be in there. Companies get added and subtracted
Speaker 1: all the time. There's a decent amount of active within passive.
Speaker 1: But I want to come back to the forty million
Speaker 1: new accounts. When I think of new accounts, I kind
Speaker 1: of harken back to twenty twenty in the pandemic lockdown
Speaker 1: and all the kids playing on Robinhood and that sort
Speaker 1: of stuff. Are these small fun accounts or are these
Speaker 1: people really saving for things like paying for college or
Speaker 1: retirement or buying a home? Like when what are the
Speaker 1: constitution of these forty million new accounts?
Speaker 2: I think it's both of those things. So when people
Speaker 2: had their stimulus checks and there was commission free trading,
Speaker 2: and to your point, they were home and learning about
Speaker 2: all of the things they could do with technology, maybe
Speaker 2: some people got involved more to just check out the
Speaker 2: ecosystem and what it felt like. But when you look
Speaker 2: at the data, despite all of the headline excitement that
Speaker 2: meets stock mania generated, more people were actually buying ETFs
Speaker 2: than we're buying meme stocks. So I think it has
Speaker 2: been a really important moment for investors who are coming
Speaker 2: into the market and coming in maybe because they're starting
Speaker 2: with a single stock decision, but actually moving and learning
Speaker 2: about ETFs and then participating in a more diversified and
Speaker 2: long term way.
Speaker 1: I would like to see the flow and tel piece
Speaker 1: that looks at potential investors looking at some of the
Speaker 1: crazy meme stocks and saying, you know what, I'm just
Speaker 1: going to buy a broad index and put it away
Speaker 1: for a few decades and not get sucked into this mania.
Speaker 1: Do you guys track that closely?
Speaker 2: We do. We do track it closely, and a few
Speaker 2: people have done really interesting work, particularly Nasdaq has done
Speaker 2: some interesting work on individual stocks versus allocations to ETFs
Speaker 2: and to index And this trend that we're talking about,
Speaker 2: the individual investor trend, is absolutely across the market. We've
Speaker 2: seen it in options as well, which is why ETFs
Speaker 2: that have some sort of embedded options outcome are also
Speaker 2: seeing a lot of interest, particularly from the self directed investors.
Speaker 1: Really really intriguing. So let's talk a little bit about
Speaker 1: some interesting news. Recently, low cost index atfs and mutual
Speaker 1: funds now make up more than fifty percent of the
Speaker 1: fun complex. Put a flag in the ground and declare victory.
Speaker 1: Does this mean that it's the end of active. Is
Speaker 1: there a ceiling for passive? What does that fifty percent
Speaker 1: line mean?
Speaker 2: First of all, Barry, I am a huge fan of
Speaker 2: active managers and what they can achieve. My disclosure here
Speaker 2: will be that I'm married to a brilliant active manager,
Speaker 2: So I like to say that we are an alpha
Speaker 2: beta couple. But increasingly active managers use have beta allocations.
Speaker 2: They always have. Of course, they might use SMP futures,
Speaker 2: for example, as part of their strategies, and increasingly, really
Speaker 2: all of the biggest active asset managers in the world
Speaker 2: use ETFs for some part of their alpha seeking strategy.
Speaker 2: So let's look at two things. Number one, the statistics
Speaker 2: that you gave. This is really about the fund market.
Speaker 2: It's important to realize that what is available through an
Speaker 2: index strategy has evolved massively over the past few years.
Speaker 2: So we're really not just talking about traditional cap weighted strategies,
Speaker 2: which are kind of what you would get in a
Speaker 2: future type strategy like with you know, Russell two or
Speaker 2: SMP five hundred. There are factor strategies. There are increasingly
Speaker 2: diverse range of bond market strategies across the different subasset
Speaker 2: classes of fixed income, so increasingly for us, we like
Speaker 2: to think of that whole new genre of index ETFs
Speaker 2: as almost active risk benchmark. Anything that's not cap weighted
Speaker 2: represents a decision by the investor to take some active
Speaker 2: risk versus the standard cap weoided benchmarks. So that's why
Speaker 2: I really think of index and active as a really
Speaker 2: broad continuum, with index being able to take on more
Speaker 2: and more types of strategies that importantly were never accessible
Speaker 2: to individual investors before. And that's why I maintain that
Speaker 2: today's markets as a function of index and ETF technology
Speaker 2: are simply better because they're more accessible and diversification and
Speaker 2: more sophisticated strategies. For example, like target date funds. For
Speaker 2: the fifty seven million Americans that actually don't have a
Speaker 2: workplace savings account, they can now through an ETF access
Speaker 2: target date investor investing where they basically make one decision,
Speaker 2: which is when do I think I'm going to retire,
Speaker 2: and then they can allocate to the ETF and the
Speaker 2: ETF will manage their risk exposure.
Speaker 1: Their stock bond proportion over time automatically adjust it. And
Speaker 1: since it's an ETF rapper, there's no capital gains to
Speaker 1: pay until you finally cash that in.
Speaker 2: So it's a victory for investors, and it's a victory
Speaker 2: for those, you know, millions of people who are moving
Speaker 2: from being savers to investors, which is incredibly important in
Speaker 2: today's world as we think about you know, retirement and
Speaker 2: what and people being able to retire with dignity. And
Speaker 2: then the other important part of your question though, and
Speaker 2: I know you agree with me on this because I've
Speaker 2: heard you talk about it, is we have to look
Speaker 2: at the equity market overall. Right, So that fifty percent stat,
Speaker 2: you know, is a little bit misleading with respect to
Speaker 2: the denominator. ETFs are probably about twelve or thirteen percent
Speaker 2: of the equity market, not fifty percent. And that gets
Speaker 2: back to these questions about, you know, is there a
Speaker 2: ceiling like there is mostly active management happening in price
Speaker 2: formation in global equity market.
Speaker 1: The broadest interpretation of passive indexing that I've seen is
Speaker 1: of the total equity market, about seventeen percent can be
Speaker 1: described as managed through a broad index, not active stock selection.
Speaker 1: People have argued that, well, you can look at flows
Speaker 1: and foundations and sovereign well funds are managing stuff passively
Speaker 1: quote unquote, but some of the numbers, thirty five forty
Speaker 1: percent seem kind of fabricated. You want to say it's
Speaker 1: twenty percent, okay, back of the envelope, we can pretend,
Speaker 1: but there's just no data, no evidence showing that it's
Speaker 1: even that big. And when we look at we can
Speaker 1: add up what's in ETFs, we can add up what's
Speaker 1: in mutual funds, and it's a relatively small part of
Speaker 1: the total asset management world. Unless you think I'm overstating.
Speaker 2: This, I think you're exactly right. And I think additionally,
Speaker 2: if we agree that as a gut check, twenty percent
Speaker 2: of the equity market is indexed, right ETFs or otherwise,
Speaker 2: it's important to remember that that is often by active managers,
Speaker 2: who are who have beta as some component of their
Speaker 2: alpha seeking strategy. So their decision to make a beta
Speaker 2: allocation through some sort of index strategy is an active
Speaker 2: one and as part of the broader setup of their portfolio.
Speaker 2: And potentially given the technology, and you know, indexing has
Speaker 2: risen alongside computing power, it actually required Actually the first
Speaker 2: kind of commercial microchip came about around the same time
Speaker 2: as index investing, because you needed computing power to be
Speaker 2: able to do that and now that asset managers can
Speaker 2: make beta allocations, they can focus their attention and resources
Speaker 2: on their highest conviction single stock or bond opportunities.
Speaker 1: And let's put a little flesh on that, because I
Speaker 1: don't know if lay people are aware of how fund
Speaker 1: managers behave. You're running a concentrated portfolio, you have thirty
Speaker 1: or forty stocks, and suddenly this stock generates a cels
Speaker 1: IGNO and you remove it from your portfolio, and that
Speaker 1: stock gets taken over by another company and it's achieved
Speaker 1: ninety nine percent of your price target. Now suddenly you
Speaker 1: have a five or ten percent slug of cash, which
Speaker 1: if it's sitting around in cash, you're going to be
Speaker 1: underperforming an upmarket. So instead you turn around and say,
Speaker 1: my benchmark is this. Here's the ETF that tracks that.
Speaker 1: I'm going to park this cash here so I don't
Speaker 1: fall behind my benchmark. And when I'm ready to actively
Speaker 1: select a replacement for these stocks, I'll swap out of
Speaker 1: one to another. Again, fair description of how it works
Speaker 1: in the real world.
Speaker 2: Totally fair description, But I would say it's a relatively
Speaker 2: modern one because even five years ago those managers might
Speaker 2: buy futures instead of et apps and what we found
Speaker 2: when we engaged with a lot of them. One of
Speaker 2: the things we did was we built technology to help
Speaker 2: asset managers evaluate the relative value between an ETF and
Speaker 2: a futures contract. It really mattered what they were earning
Speaker 2: on their cash had to be earning something in order
Speaker 2: to make it worth the price of the futures. Otherwise,
Speaker 2: the ETF looked quite cheap, and as it turned out,
Speaker 2: remember where rates were five years ago, it was much
Speaker 2: more economic for them to move into the ETF. So
Speaker 2: using the ETF for the cash equitization has become a
Speaker 2: really standard active use of an ETF strategy, but it
Speaker 2: is a more modern one.
Speaker 1: So let's talk a little bit about You mentioned market structure,
Speaker 1: and we're talking about active versus passive. Last month I
Speaker 1: had hedge fund manager David Einhorn of Greenlight Capital on
Speaker 1: and he said, I view the markets as fundamentally broken.
Speaker 1: Passive investors have no opinion about value. They're going to
Speaker 1: assume everybody else has done the work. Claused the big Star.
Speaker 1: Everybody kind of freaked out about a little bit. But
Speaker 1: it raises the question, what has been the impact of
Speaker 1: this shift towards indexing and passive investing. I know you
Speaker 1: don't love that word on overall market, its structure and
Speaker 1: the resiliency of our modern market economy.
Speaker 2: Markets are more transparent and resilient as a result of
Speaker 2: ETFs being in them than they have ever been in history.
Speaker 2: Barry and I reject the notion that a transparent, resilient,
Speaker 2: and more accessible market. Again, look at these forty million
Speaker 2: investors that are coming into the market and are only
Speaker 2: able to do it through diversified strategies because of ETFs
Speaker 2: and index. I reject the notion that there's anything broken
Speaker 2: about that. That is a healthy market, and that is
Speaker 2: a market that is better positioned for the next decade
Speaker 2: of growth than ever before.
Speaker 1: So let's talk a little bit about index and ETF technology.
Speaker 1: What is it specifically about that approach that rapper around
Speaker 1: in a stock investment that provides transparency and resiliency. How
Speaker 1: is this different than the way we used to manage
Speaker 1: assets twenty thirty years ago.
Speaker 2: Well, first, ETFs are literally transparent. You always can see
Speaker 2: what's in the holdings of a particular ETF that's available
Speaker 2: on a daily basis. But even more critically, ETFs trade
Speaker 2: on exchange all day long and provide price formation in
Speaker 2: that way. So one of the things we often see,
Speaker 2: for example, in country fund ETFs. Perfect example of it
Speaker 2: is looking at ETFs with China equities underlying them over
Speaker 2: the Lunar New Year. They are providing price formation by
Speaker 2: trading on stock exchanges, so investors can exchange risk on exchange,
Speaker 2: while those underlying equity markets are actually closed. The bond market,
Speaker 2: by the way, you probably know this, I'm a bond
Speaker 2: market veteran, like the bond market has a lot of
Speaker 2: closure days where equity markets aren't open. So bond ETFs
Speaker 2: are providing a price transparency to fixed income markets all
Speaker 2: of the time. And we really saw that profoundly over
Speaker 2: the COVID volatility period where bonds, because you know, the
Speaker 2: bond market had largely traded and still trades, big parts
Speaker 2: of the bond market trade in a very bilateral voice
Speaker 2: over telephone way, and these traders were literally packing up
Speaker 2: their desks and having to go home and reconstruct their
Speaker 2: workstations at home. And so there were days where if
Speaker 2: you took an investment grade ETF, its top ten holdings
Speaker 2: might trade thirty five times in the day. In the
Speaker 2: bond market, we can see that through trace reporting, while
Speaker 2: the ETF itself traded ninety thousand times. So that's an
Speaker 2: example of real time price formation that just wasn't available
Speaker 2: in the bond market before the ETF.
Speaker 1: I think a lot of lay people don't realize the
Speaker 1: Russell five thousand is what thirty four hundred stocks. Today,
Speaker 1: there are millions and millions of q SIPs of specific bonds,
Speaker 1: different credit ratings, different vintages. Every municipality has a run
Speaker 1: of bonds, every state, every city, there are tons of bonds,
Speaker 1: hundreds of thousands, maybe even millions of bonds. So pricing
Speaker 1: is opaque and it's not always current. That's not true
Speaker 1: on the fixed income side. For ETFs, it's all day
Speaker 1: long and you get a price whenever you look at
Speaker 1: the ETF.
Speaker 2: Yeah, so that's totally true. But one of the things
Speaker 2: that gets me super excited, because I am just a
Speaker 2: career markets modernizer, is that there's been a virtuous cycle
Speaker 2: and effect back on the bond market. Because investors have
Speaker 2: really demanded and wanted to participate in fixed income ETFs,
Speaker 2: bond dealers in trading desks have had to develop algorithmic
Speaker 2: pricing capabilities so that they could make markets in those ETFs,
Speaker 2: and that has had the effect of increasing electronification and
Speaker 2: transparency in the underlying bond market, which is why again
Speaker 2: there's been this you know, introduction of ETFs as a
Speaker 2: new bond tool has actually had an important modernizing effect
Speaker 2: on that underlying market ecosystem.
Speaker 1: So you guys have in one of the larger bond
Speaker 1: fund managers. Over years and in old Wall Street there
Speaker 1: were hundreds of shops that were managing individual bond portfolios.
Speaker 1: What's it like when you want to put together a
Speaker 1: bond ETF. I would imagine your desk has to revert
Speaker 1: to some form of old school, you know, picking up
Speaker 1: the phone and hey, who has these bonds? We want
Speaker 1: to we're a buyer. What can you get us? How
Speaker 1: do you marry the old with the new? How do
Speaker 1: you marry the phone with the algorithm?
Speaker 2: Well, one of the things we talked about before are
Speaker 2: the challenges of cash management in a portfolio, and certainly
Speaker 2: in a bond market portfolio. That's a challenge for a
Speaker 2: manager who doesn't want to underperform the benchmark.
Speaker 1: But especially when you have some yield these days, that's.
Speaker 2: Right, who has to put cash to work? Now? One
Speaker 2: of the most exciting aspects of the ETF innovation is
Speaker 2: the fact that portfolio managers ETFs don't have to manage
Speaker 2: the cash. They can if they want to, but they
Speaker 2: can also do what we call in kind trades with
Speaker 2: the street or with liquidity providers if so. First, if
Speaker 2: people are buying the ETF, number one difference, just to
Speaker 2: take a step back, is that you can go and
Speaker 2: buy the ETF on exchange through your brokerage account. You
Speaker 2: don't have to write a check and send it into
Speaker 2: a mutual fund company. You are buying the ETF on exchange.
Speaker 2: Somebody is selling it to you, and if they have
Speaker 2: the seller on the other side, then there's nothing that
Speaker 2: the portfolio manager has to do. The buyers and sellers
Speaker 2: match off on exchange, and that's important because on average
Speaker 2: it's about six to eight times as much trading happens
Speaker 2: on exchange as in the actual ETF. But let's say
Speaker 2: that there is an imbalance of demand. More people want
Speaker 2: to buy that ETF than sell that ETF, so we
Speaker 2: start to see the price of the ETF. Actually we
Speaker 2: traded a little bit of a premium to those underlying bonds,
Speaker 2: So then what the market maker can do is create
Speaker 2: more ETF shares to meet that demand by buying the
Speaker 2: underlying bonds delivering it to me. I will be the
Speaker 2: portfolio manager in this case, and then we give you
Speaker 2: the ETF shares, so I don't have to put the
Speaker 2: cash to work. The market has done that for me.
Speaker 2: They've been incentivized to do that because this market maker,
Speaker 2: she has captured the arbitrage spread that was available, and
Speaker 2: I didn't have to incur transaction cost drag for the
Speaker 2: shareholders in my fund. So that's one of the mechanisms
Speaker 2: that have made ETFs deliver so effectively for investors.
Speaker 1: So let's talk about who are the holders of ETFs.
Speaker 1: How granular can you get in identifying here's who who
Speaker 1: owns our ETFs for this fixed thing, hump product, this
Speaker 1: equity product. As a mutual fund company, you know exactly
Speaker 1: who owns that fund. Is it the same thing with
Speaker 1: ETFs or is it a little fuzzier.
Speaker 2: It's a little bit harder with ETFs. But our ability
Speaker 2: to capture an analyzed data just is this much more
Speaker 2: information on everything, even if it's just looking at the
Speaker 2: nature of prints on exchange, we are able to derive
Speaker 2: much more data to make assumptions and really educated guesses
Speaker 2: about who owns the ETFs, and increasingly we actually do
Speaker 2: have end user information. So really important and exciting announcement
Speaker 2: we may and we're the first to do this, is
Speaker 2: to in our SMP five hundred ETF for certain investors
Speaker 2: individual investors, give them the ability to decide if they
Speaker 2: want to vote their shares. And that's been a really
Speaker 2: important dialogue in the market because as an asset manager,
Speaker 2: we don't own the shares, but for our ETFs often
Speaker 2: the laws say we need to vote the share, but
Speaker 2: our job is to be asset managers, and so if
Speaker 2: clients want us to vote their shares for them, we can,
Speaker 2: but we prefer and with our institutional clients, we give
Speaker 2: them voting choice so they can tell us Blackrock, we
Speaker 2: want to vote our own shares, or we give them
Speaker 2: a menu of options and they direct us. And so
Speaker 2: we have been until now really unable to offer that
Speaker 2: to individuals. But as we get better data and information,
Speaker 2: we're able to expand choices to our clients.
Speaker 1: So there's so many things to unpack with that. There's
Speaker 1: been a lot of pushback to the concept of indexing
Speaker 1: generally as well, look at it's Blackrock, Vanguard, and State Street.
Speaker 1: They control almost x percent of the market, and therefore
Speaker 1: they're running the world, and we should break this up.
Speaker 1: It seems to be a fundamental misunderstanding of who owns
Speaker 1: this stock and what the role of the big index
Speaker 1: providers and big etf providers are in this space. You're
Speaker 1: owning these shares not on behalf of you or Larry
Speaker 1: Fans or Blackrock, You're owning these on behalf of millions
Speaker 1: of investors.
Speaker 2: Yeah, you're spot on. So the number one misunderstanding is
Speaker 2: who owns them. We are a fiduciary, the investors own
Speaker 2: those stocks. And then beyond that, it's more of a
Speaker 2: regulatory and technology problem to fix. The regulations say that
Speaker 2: the asset manager votes the shares, and so what we
Speaker 2: started to do in our institutional accounts where regulation permitted
Speaker 2: it was just technology and operations, was to create a
Speaker 2: program of voting choice that other asset managers actually then
Speaker 2: went and copied to say to institutions, let's let's separate
Speaker 2: the two and if you want to vote your shares,
Speaker 2: go ahead and vote your shares. But it's been much
Speaker 2: harder to do that for individual investors. So being able
Speaker 2: to take a first step towards that is a really
Speaker 2: exciting progress.
Speaker 1: I kind of feel like I'm cheating, like I brought
Speaker 1: in a ringer, because this is just an exercise in
Speaker 1: confirmation bias for me. You know, it's you know, I
Speaker 1: have read over the years that indexing is un American,
Speaker 1: it's Marxist, it's a communist plot, there's going to be
Speaker 1: price fixing, just every crazy theory that you could come
Speaker 1: up with as to why indexing is so bad. And
Speaker 1: when you trace these arguments back, they invariably are coming
Speaker 1: back to people who are the ones who are losing
Speaker 1: market share to indexing. And it's hard to have a
Speaker 1: legitimate discussion where hey, you know, you're talking your book,
Speaker 1: and again, full disclosure for both of us, I'm talking
Speaker 1: my book because I'm a big believer in indexers. But
Speaker 1: you guys, of the ten trillion you have in assets,
Speaker 1: how much of this is indexed and how much of
Speaker 1: this is more active management?
Speaker 2: Well, remember, even within the index category, it's becoming increasingly active.
Speaker 2: So there are index strategies that take a lot of
Speaker 2: design principles around how to algorithmically provide a strategy right
Speaker 2: and those are like everything as we talked about these
Speaker 2: active risk benchmarks, anything beyond upmarket cap weighted. But also importantly,
Speaker 2: in twenty twenty three in the United States, twenty five
Speaker 2: percent of new money going into ETFs was in active ETFs.
Speaker 2: So in twenty nineteen, actually the SEC passed a long
Speaker 2: awaited ETF rule that made it much easier for any
Speaker 2: type of asset manager who wanted to distribute their strategy
Speaker 2: in the ETF wrapper to do so. And there was
Speaker 2: actually a lot of questioning at the beginning, well, because
Speaker 2: ETFs are transparent, would they do that, would they actually
Speaker 2: want to have to publish their holdings on a daily basis,
Speaker 2: or would they resist thinking that that was giving up
Speaker 2: some sort of secret sauce. And as it turns out,
Speaker 2: a lot of managers were comfortable with the transparency. There
Speaker 2: was some experimentation with non transparent active ETFs, but as
Speaker 2: it turns out, I think those were pretty easily reverse engineered.
Speaker 2: So going through the trouble of making it non transparent
Speaker 2: didn't help that much given how much they trade. But
Speaker 2: investors still want active strategies. The question is is that
Speaker 2: manager delivering alpha or excess return such that the incremental
Speaker 2: fees justify it, and the transparency of return that traditional
Speaker 2: ETFs give investors really holds those alpha seeking managers accountable.
Speaker 2: But when they can produce it, people will pay for it,
Speaker 2: and they'll pay for it in an ETF wrapper.
Speaker 1: Really interesting. So let's talk a little bit about the
Speaker 1: bitcoin ETF. What are your thoughts on the process of
Speaker 1: getting here, What do you think is happening in that
Speaker 1: space now?
Speaker 2: It's been a journey for markets, Barry, I think when
Speaker 2: I first started getting asked about bitcoin ETFs it was
Speaker 2: about five years ago, and when I first heard about
Speaker 2: bitcoin it was probably about ten years go. And for us,
Speaker 2: the question of whether we should provide access to bitcoin
Speaker 2: in an ETF is something that came about really in
Speaker 2: the last few years. There were issuers that filed for
Speaker 2: bitcoin ETFs before we did. There were issuers that actually
Speaker 2: launched futures based bitcoin ETFs before we did, And I
Speaker 2: think that journey for the industry showed us a few things. First,
Speaker 2: it showed us, with respect to the futures ETFs, that
Speaker 2: wasn't really delivering what investors were looking for, meaning for
Speaker 2: a whole bunch of reasons, particularly position limits. The futures
Speaker 2: ETF actually underperformed spot bitcoin, which is what investors wanted
Speaker 2: now full disclosure. When I first got asked a few
Speaker 2: years ago about bitcoin ETFs, and remember I am a
Speaker 2: bond market veteran, so I thought to myself, look, I
Speaker 2: will come into the office like all day long. I
Speaker 2: get excited about bringing access and transparency to markets where
Speaker 2: it didn't exist before. So the high yield market, high
Speaker 2: you old bond market, for example, that's a no brainer
Speaker 2: to put into an ETF wrapper. But to me, it
Speaker 2: seemed like it was pretty straightforward to just buy some
Speaker 2: bitcoin using your mobile phone. And so for us to
Speaker 2: really be convinced as to the value proposition of an
Speaker 2: ETF really took hearing from investors, all types of investors
Speaker 2: over the subsequent years, and this is what we heard.
Speaker 2: Number one. We heard they wanted access to bitcoin. Many
Speaker 2: of them, for different reasons, were interested in as kind
Speaker 2: of an emerging asset classet. They wanted some access, and
Speaker 2: they were trying to get access in a variety of ways,
Speaker 2: none of which were fully satisfying. Whether they were buying
Speaker 2: it in a trust structure where they didn't have a
Speaker 2: lot of liquidity and high fees, if they were buying
Speaker 2: a futures based product which really wasn't delivering bitcoin. If
Speaker 2: they were buying actual bitcoin, they were having to deal
Speaker 2: with a whole new set of infrastructure and pipes and
Speaker 2: custody questions that weren't transparent and hard to understand.
Speaker 1: Passwords and anti hacking, and what's easier than an ETF
Speaker 1: and what could be harder than buying bitcoin? For the
Speaker 1: average mom and pop investor, it seems like a natural marriage.
Speaker 2: And we heard from advisors too, who were getting asked
Speaker 2: by their clients and they wanted to provide whole portfolio
Speaker 2: solutions to their clients. So I think we really became convinced,
Speaker 2: first of all, that investors wanted access, and second that
Speaker 2: the ETF would actually provide a better access path than
Speaker 2: was currently available out there in the market.
Speaker 1: Why do you think it took so long for this
Speaker 1: ETF to get over the finish line? I mean, the
Speaker 1: SEC has been talking about this and having hearings and
Speaker 1: listening to investor input on this. It seems like it's
Speaker 1: been years five years.
Speaker 2: Well, first, I think the narrative from investors really grew
Speaker 2: over the past few years. The infrastructure in the crypto
Speaker 2: world was also evolving, but regulation and policy has been
Speaker 2: evolving as well and still has a long ways to go.
Speaker 2: So I think regulators needed to and the SEC in
Speaker 2: particular needed to hear from investors, needed to work through
Speaker 2: the operating model. And then also remember, I mean you
Speaker 2: and I have talked about what the past three years
Speaker 2: have looked like. This SEC has a very ambitious equity
Speaker 2: market structure agenda on their plate, and that's really been
Speaker 2: their priority. But I think ultimately investor demand and desire
Speaker 2: for access in an ETF one out.
Speaker 1: I never had any doubt that it would eventually happen.
Speaker 1: I just had no idea if it was this decade
Speaker 1: next decade. But I'm curious as to your experience. What
Speaker 1: was it like going through the process of applying for approval.
Speaker 1: Blackrock is such a giant participant in the market. I
Speaker 1: have to imagine that you were one of the key
Speaker 1: firms the SEC was consulting with about things like security
Speaker 1: and password protection and anti hacking issues and all the
Speaker 1: custody issues that go with that. What was it like
Speaker 1: processing the oh, here's a new ETF application. We're just
Speaker 1: going to sneak this in with a big pile of
Speaker 1: other ETFs.
Speaker 2: Look, I think for all types of ETPs, as we
Speaker 2: talked about, it takes an ecosystem to make them work.
Speaker 2: Given our experience as a market's risk manager in all
Speaker 2: types of markets, we engage frequently with all types of
Speaker 2: regulators who are a key part of the ecosystem on
Speaker 2: how things are working with our observations around ETFs, around markets,
Speaker 2: around trading, and around liquidity. So with respect to the
Speaker 2: sec our engagement was much less about the if and
Speaker 2: much more about the how. Here are the ways to
Speaker 2: provide robust and resilient access to investors in an ETF.
Speaker 1: So you guys came out much less expensive than just
Speaker 1: about every other provider. Where do you think the bitcoin
Speaker 1: ETF can go this scale up to something along the
Speaker 1: sizes of any sort of large index or is this
Speaker 1: going to be a little niche product.
Speaker 2: I don't know yet, Barry. I'm definitely curious your thoughts
Speaker 2: on that as well. We know that there is demand
Speaker 2: for access. We know that there were and are a
Speaker 2: lot of holders in bitcoin in vehicles that investors view
Speaker 2: is less preferable to the ETFs that are now out there.
Speaker 2: So in terms of the flows that we're seeing, unclear
Speaker 2: is that new demand? Is that just rapper switching demand?
Speaker 1: Sure?
Speaker 2: So I think this is like early stages of how
Speaker 2: the story is going to play out. I would say,
Speaker 2: by the way, though, I think we're kind of middle
Speaker 2: of the pack when we think about what investors will
Speaker 2: look for in terms of costs of an ETF, we
Speaker 2: really encourage people to look at what we call total
Speaker 2: cost of ownership, which is not just the expense ratio,
Speaker 2: but the liquidity, the spread, the access on exchange, the
Speaker 2: resilience of the operating model. So all of those things
Speaker 2: can tribute to total cost of ownership, which isn't necessarily
Speaker 2: all captured by the expense ratio.
Speaker 1: So there's so many different ways to go with that. First,
Speaker 1: there's some crazy stat twenty twenty five percent of all bitcoin. Ever,
Speaker 1: mind it's lost has been good lost, right, the passwords, lost,
Speaker 1: the art drivers. So I think people, especially main street investors,
Speaker 1: are looking for a familiar name black Rock clearly is that.
Speaker 1: The other thing is all of the interim solutions that
Speaker 1: have come out. You described that as rapper migration. I
Speaker 1: have to think that the futures bitcoin products are all
Speaker 1: gonna move to ETFs, along with the various trusts and
Speaker 1: mutual funds. It seems this is the ideal structure to
Speaker 1: put that in. Other than that, I have no guess
Speaker 1: as to where this. If you were to tell me
Speaker 1: five years from now it's one hundred billion dollars, I
Speaker 1: would shrug. And if you said, oh, you've never really
Speaker 1: caught on and it's just a couple of billion dollars,
Speaker 1: maybe I'm more surprised by that outcome. But it's certainly
Speaker 1: in the range of possibilities. It could be a giant smash,
Speaker 1: it could be pretty good, or maybe it goes nowhere.
Speaker 1: It's hard to judge. If you're decentralizing finance. If that
Speaker 1: narrative about crypto is we're going to take finance away
Speaker 1: from the big banks, well then the whole concept of
Speaker 1: an ETF.
Speaker 2: Does right exactly. That was initially what we thought when
Speaker 2: people approached us, like there were a lot, We got
Speaker 2: so many calls from you know, various crypto players who
Speaker 2: wanted us to list in ETF, and the question we asked,
Speaker 2: the first question I asked, was why do you even
Speaker 2: want this? Isn't this whole isn't the whole point like disintermediation,
Speaker 2: DeFi like I'm pretty cefi with this, with this you know,
Speaker 2: etf rapper thing going, But I guess, you know, as
Speaker 2: it turns out, it really is that desire buy investors
Speaker 2: for whole portfolio risk management. So for me, I guess
Speaker 2: I think about what is the best long term outcome
Speaker 2: for investors, and it's probably an integration of these ecosystems
Speaker 2: as opposed to them living separately so that you can
Speaker 2: manage risk holistically. But like you, we need to see
Speaker 2: how it plays out.
Speaker 1: And the other thing that is obvious in hindsight the
Speaker 1: whole concept of trustless transactions where you don't need to
Speaker 1: have a trust relationship with the opposite party. How has
Speaker 1: that worked out. We've seen all the big crypto exchanges implode.
Speaker 1: It seems there's just between the criminals and the blackmailers,
Speaker 1: and the just crazy run of crypto criminals. Doing it
Speaker 1: yourself seems so fraught with risk. But if I could
Speaker 1: say to black Rock, hey, I'm going to outsource all
Speaker 1: of my risk management to you. Take care of the custody,
Speaker 1: take care of the passwords, I don't want to deal
Speaker 1: with any of this stuff just seems to be so
Speaker 1: much easier. I guess it's laziness. I want the most
Speaker 1: friction free approach to making a purchase, and I don't
Speaker 1: want to have to engrave a password that's ninety seven
Speaker 1: letters long on a piece of metal and bury it
Speaker 1: in my backyard. That doesn't appeal to me. So what
Speaker 1: are you hearing from others in the space in terms
Speaker 1: of what they're looking for in a crypto.
Speaker 2: Etf The convenience of ETFs is incredibly compelling for investors.
Speaker 2: They understand the ecosystem. Now importantly with the Bitcoin ETFs,
Speaker 2: the institutional greed custody is really important for investors as well.
Speaker 2: Now to your question about the crypto ecosystem separate for metfs,
Speaker 2: I think there's a lot of questions there around how
Speaker 2: that evolves in terms of what we've seen so far.
Speaker 2: Is it the technology that's created it, or is it
Speaker 2: really the fact that there have been no guardrails around
Speaker 2: the ecosystem that is built around it. I would say
Speaker 2: the technology has a lot of promise in terms of
Speaker 2: its transparency and auditability. This is a technology that presumably
Speaker 2: could actually decrease the utility for illicit finance. However, we
Speaker 2: would really need a regulatory and policy environment supporting it,
Speaker 2: and I think that's where there's a lot of questions,
Speaker 2: particularly in the US, around future direction.
Speaker 1: So we have a bitcoin ETF, what about other coins
Speaker 1: like ethereum.
Speaker 2: We'll have to watch this space, I think. I think
Speaker 2: there's really with respect to what we hear from investors,
Speaker 2: there's one other coin right now, and then a whole
Speaker 2: lot of coins that we'll just call them alt coins. Right,
Speaker 2: But the question as to whether investors are interested in
Speaker 2: an ethereum METF, yes, we're definitely hearing that they are.
Speaker 2: I think we're early days of bitcoin ETF trading. There's
Speaker 2: a lot of policy and regulator change that will probably
Speaker 2: have been in twenty twenty four. We'll have to see
Speaker 2: what happens from here.
Speaker 1: And the Blackrock I shares Bitcoin ETF is IBIT, right,
Speaker 1: that's the stock symbol. What have the assets flows looked like?
Speaker 1: Where is this is this thought of as a successful launch?
Speaker 1: Where have you gone so far in assets under management? There?
Speaker 2: So ibit is a little bit over five billion dollars.
Speaker 1: In really assets. That's pretty quick to five billion considering
Speaker 1: how new this is.
Speaker 2: It is and remember this dynamic that we talked about
Speaker 2: with respect to Rapper switching. So we do know that
Speaker 2: there were a lot of you know, bitcoin holders that
Speaker 2: were in rappers that they felt were less convenient, less transparent,
Speaker 2: maybe didn't offer them the same sort of you know,
Speaker 2: custody that they have, and also maybe holders who are
Speaker 2: also interested in being able to lend out ETF shares
Speaker 2: where it was harder to deploy securities lending type trading
Speaker 2: in underlying cryptos. So I think this question that we
Speaker 2: were talking about before, in terms of where does the
Speaker 2: long term demand come out, it really depends on on
Speaker 2: how investors and how advisors think about this in the
Speaker 2: context of portfolio allocation.
Speaker 1: So I'm going to assume black Rock doesn't take bitcoin,
Speaker 1: or do you If a client pulls up and says, hey,
Speaker 1: I have a million dollars at my bit X custodian
Speaker 1: and I want to transfer it into an ETF, is
Speaker 1: that something a broker can do a custodian can do
Speaker 1: or are we not quite at that point yet?
Speaker 2: Oh, we are absolutely holding crypto on behalf of our
Speaker 2: clients in these ETFs. I would think of it very
Speaker 2: similarly to gold, where an investor who buys our gold
Speaker 2: ETF or our silver ETF we have a custodian who
Speaker 2: is storing silver bars or gold bars in their vault. Physically,
Speaker 2: it's the same thing in bitcoin. So we work with
Speaker 2: a custodian who is storing the actual bitcoin for our
Speaker 2: investors in cold storage, and on a daily basis, we
Speaker 2: are sweeping actual coin into that cold storage and that
Speaker 2: custody and the fact that they are actually owning the crypto.
Speaker 2: That's an important part of the value proposition.
Speaker 1: That's really interesting. Since all bitcoins are created equal, I
Speaker 1: assume it's not like this fund manager or that stockscreen
Speaker 1: or that index. At a certain point, it has to
Speaker 1: come down to cost. Given your guys expertise scale the
Speaker 1: ability to drive costs down. Is this just going to
Speaker 1: become a race to the bottom in terms of fees
Speaker 1: or how do you see this evolving over time?
Speaker 2: Investors care about total cost of ownership, Barris, we were
Speaker 2: talking about.
Speaker 1: So it's not just the fee, it's everything.
Speaker 2: Else that's evolved with It's the liquidity, it's the on
Speaker 2: exchange access, it's the diversity of the counterparty ecosystem. All
Speaker 2: of these things you can measure broadly in thinking about
Speaker 2: market quality. Is there an options ecosystem on the et
Speaker 2: ap and importantly, the operating model matters as well. How
Speaker 2: is the custody working, is it? You know, institutional grade custody,
Speaker 2: And if you really want to get into the details,
Speaker 2: you will start to see differences in some of the
Speaker 2: operating models, as you would with commodity ETFs as well.
Speaker 1: So it's not strictly going to be a competition based
Speaker 1: on fees. There are other factors there. Because you guys
Speaker 1: have the ability to dominate in terms of fees versus
Speaker 1: smaller competitors. You know, my instinct is, oh, we can
Speaker 1: dominate this market share by just undercutting everybody else. It
Speaker 1: sounds like you're taking a more holistic approach than that.
Speaker 2: We just take a more holistic approach, and I think
Speaker 2: that's what investors ask us for. We're certainly seeing this
Speaker 2: in the fixed income ETF complex, particularly in treasury ETFs,
Speaker 2: where there's been a lot of interest and attention lately
Speaker 2: in the longer part of the curve. And what you
Speaker 2: will see as is ETFs that have much more liquidity
Speaker 2: options ecosystems will actually maintain higher price points, but from
Speaker 2: an investor's experience perspective, probably a lower total cost of
Speaker 2: ownership and they're bigger.
Speaker 1: Interesting. I haven't seen a whole lot of marketing for IBIT.
Speaker 1: In fact, I haven't seen a whole lot of marketing
Speaker 1: for many bitcoin ETFs, although they're starting to bubble up online.
Speaker 1: Is this a product that requires a lot of marketing
Speaker 1: muscle or is this something that hey, if you want
Speaker 1: to buy a bitcoin etf, you know where to go
Speaker 1: find one.
Speaker 2: This is a product that was launched in answer to
Speaker 2: investor demand for access. So it really is a journey
Speaker 2: of education in terms of what access we're providing and
Speaker 2: for investors who want to learn more, not just about bitcoin,
Speaker 2: but also it's an opportunity to teach investors about ETFs,
Speaker 2: to get them to participate in a market's ecosystem that
Speaker 2: allows them to get diversified exposures across lots of different
Speaker 2: types of asset classes. So for us, it's an opportunity
Speaker 2: to talk about access to markets in a broader way,
Speaker 2: and that's it's going to bring us the next you know,
Speaker 2: one hundred million of savers into equity and bond markets.
Speaker 1: And this is still really very early days. Right when
Speaker 1: did the ibit come out?
Speaker 2: Second week of January?
Speaker 1: I read somewhere you were like the fourth or fifth
Speaker 1: largest flows for bitcoin ETFs without doing a whole lot
Speaker 1: of marketing. What does that say about where investors want
Speaker 1: to manage their risk, who they're comfortable with, who they're
Speaker 1: familiar with.
Speaker 2: I think that looking at the bitcoin ETF flows, you
Speaker 2: do have to be very sensitive to the rapper switching
Speaker 2: dynamics and what's driving it right now.
Speaker 1: For running, were you running a Future's bitcoin ETF.
Speaker 2: No, we weren't running it show, So it's not like it.
Speaker 1: Was coming from internally. This is flows from.
Speaker 2: Out Oh absolutely, yeah.
Speaker 1: No.
Speaker 2: When I say rapper switching, I'm talking about all different
Speaker 2: types of rapper switching, whether it's from a trust, whether
Speaker 2: it's from a Future's ETF, or whether it's somebody who
Speaker 2: is holding bitcoin who actually you know, would prefer to
Speaker 2: hold their bitcoin in any yeah, because they're worried about
Speaker 2: losing their key or whatever it is.
Speaker 1: For there seems a much more secure way to do it.
Speaker 2: So we were talking earlier Barry about flow and tell
Speaker 2: what do you read into from flows? The point that
Speaker 2: I'm just making here is a month in it's a
Speaker 2: little early to extract anything about demand for bitcoin. It's
Speaker 2: very clear what investors are saying about ETFs and their
Speaker 2: desire to manage whole portfolio risk and the convenience of
Speaker 2: the rapper for the exposures that they want, the ETF
Speaker 2: is the first choice, and I think you're going to
Speaker 2: have to just have me back in a couple of
Speaker 2: years to see what the bitcoin journey is.
Speaker 1: So I don't want to put words in your mouth,
Speaker 1: and I'm going to say what you're not saying. We
Speaker 1: already know. Vanguard came out and they said they're not
Speaker 1: going to do it. State Street seems to be lagging.
Speaker 1: I can easily see Blackrock being the dominant bitcoin ETF
Speaker 1: twelve eighteen months from now, especially because you don't have
Speaker 1: those internal flows that some of your bitcoin competitors do.
Speaker 1: And you're still kicking butt. So I'm being complimentary and
Speaker 1: you're kind of being coy about it, and I understand
Speaker 1: what your corporate charge is. But I think it's a
Speaker 1: really fascinating story and it's going to be interesting to
Speaker 1: watch what happens with Ethereum. But really it's come down
Speaker 1: to a couple of coins that serve slightly different technological
Speaker 1: purposes and then the rest of the technology around it.
Speaker 1: It feels like We've been talking about a bit quinny
Speaker 1: TF for years and years and now it's here and
Speaker 1: five billion dollars in a month, is, you know, just
Speaker 1: kind of bonkers. Let's leave the ibit story behind and
Speaker 1: jump to my favorite questions that I get to ask
Speaker 1: all of my guests, starting with what are you streaming
Speaker 1: these days? Tell us what you're watching or listening to.
Speaker 2: I know you always asked this, Barry. So, so here's
Speaker 2: the secret with me and podcasts. I do listen to them.
Speaker 2: I'm not a regular on any My trick is that
Speaker 2: if there's a topic I want to learn about or
Speaker 2: a person that I'm interested in, I search for that
Speaker 2: and just listen to recent podcasts. So I've been interested
Speaker 2: in hearing how people are covering bitcoiny taffs. And I
Speaker 2: also actually currently am listening to a podcast with a
Speaker 2: woman named Randy Brown, who we are having speak at
Speaker 2: Black Rock. But she just wrote the new playbook for
Speaker 2: women at work and I'm excited to meet her. I'll
Speaker 2: be interviewing her. So that's how I listen to podcasts.
Speaker 1: What about Netflix, Amazon Prime, anything like that.
Speaker 2: So my husband is the curator of family shows and
Speaker 2: right now he's going through like a zombie series phase.
Speaker 2: So I don't have a current show that I'm super.
Speaker 1: Not a zombie fan, not a big zombie fan.
Speaker 2: I'm not a big zombie fandary.
Speaker 1: Yeah, everybody talked about Walking Dead and it's not what
Speaker 1: I want to see.
Speaker 2: I love Buffy the Vampire Slayer, but that's a.
Speaker 1: Whole First of all, it's got an element of humor
Speaker 1: and wit in it. It inverts the whole model of
Speaker 1: instead of the pretty cheerleader being killed by the monster,
Speaker 1: it's exactly it turns it on its head and she's
Speaker 1: the vampire Slayer from its inception. It has a certain
Speaker 1: snarky knowingness that I just didn't pick up in The
Speaker 1: Walking Dead. The Walking Dead was just a forwarfit.
Speaker 2: I'm really happy to hear you're a Buffy fan.
Speaker 1: I'm a big sci fi geek, so me too. And
Speaker 1: it's always funny when you discover people that you would
Speaker 1: never in a million years guess are like deep sci
Speaker 1: fi nerds. So it kind of comes with the math territory.
Speaker 1: There's a big you know, the Venn diagram has a
Speaker 1: big overlap with that. I'm still having an image in
Speaker 1: my mind of I don't remember if it was the
Speaker 1: series of the movie where it's Peewee Herban at the
Speaker 1: end where he's impaled on the stake and the death
Speaker 1: scene of him just going ah, just slowly dying. It
Speaker 1: like that sort of hilarious parody of the genre. If
Speaker 1: you're a film buffer a sci fi you have to
Speaker 1: really appreciate that. It's just sick people, you know, don't
Speaker 1: make movies that way. But it's really interesting. I don't
Speaker 1: remember if last time we spoke about my two favorite
Speaker 1: streaming sci fi recommendations.
Speaker 2: I don't think so.
Speaker 1: One is Altered Carbon, which is this short two season
Speaker 1: series that if you're like a hardcore sci fi game, okay,
Speaker 1: it's amazing.
Speaker 2: I've heard of it.
Speaker 1: And then second on Amazon Prime was The Expanse, which
Speaker 1: is insane and just it morphs over time and goes
Speaker 1: in all sorts of crazy places. But the universe it
Speaker 1: creates that's not a million years in the future. It's
Speaker 1: not radical technology. It's far enough in the future that
Speaker 1: people live on Moon, people live in Mars, people live
Speaker 1: out in the work in the asteroid belt, and they
Speaker 1: live out on I think Titan, one of the moons
Speaker 1: of Jupiter. And then what are the geopolitics of the Belters,
Speaker 1: the Earthers, and the Martians. So the technology is close
Speaker 1: enough to today that it's very believable, and the world
Speaker 1: that it creates is just it's completely mayhem, really really fascinating.
Speaker 1: You don't have to build weapons if you have the
Speaker 1: ability to just heave asteroids towards your enemy. It's just wild.
Speaker 1: So it definitely takes a couple of wacky turns in
Speaker 1: the latter seasons, but the whole ride is if you're
Speaker 1: a sci fi geek, you may appreciate it. On my list,
Speaker 1: let's talk about your mentors who helped shape your career.
Speaker 2: My earliest mentors were actually in theater. I had my
Speaker 2: first real backstage experience being a stage manager. The head
Speaker 2: of the drama department reached out to me. He wrote
Speaker 2: me a note afterwards, and he let me follow him
Speaker 2: everywhere and just taught me a lot that He wrote
Speaker 2: me a note that said, and I kept this note
Speaker 2: for years. It said, you've got what it takes tomorrow,
Speaker 2: thanks for sharing it with us. And I remember I
Speaker 2: saved that note, and even when I was doing things
Speaker 2: that had nothing to do with it, gave me a
Speaker 2: lot of confidence. So I would say that was kind
Speaker 2: of my first real mentorship experience.
Speaker 1: You mentioned some books earlier. Let's talk about some of
Speaker 1: your favorites and what you're reading now.
Speaker 2: Well, now that you said the sci fi thing, I
Speaker 2: will share my favorite book that I read in twenty three.
Speaker 2: I don't know if you've read this. It was called
Speaker 2: Cloud Cuckoo Land, which is a really cool book. It's
Speaker 2: I think six or seven different intertwined stories that range
Speaker 2: from ancient Greece to sometime in the future, but it's
Speaker 2: a story about hope and resilience and space and time
Speaker 2: and connections. And I thought it was just gorgeously written.
Speaker 2: And I read a lot of fiction, and I like
Speaker 2: things that just kind of expand how I think about
Speaker 2: the world. So I would definitely recommend Cloud Cuckoo Land.
Speaker 2: And then I'm also a market's history nerd and I
Speaker 2: always will be. So I am reading right now the
Speaker 2: Bitcoin Standard, which is less about bitcoin, I think, and
Speaker 2: more about the history of money and the ways civilizations
Speaker 2: have sought to find different ways to transfer value across space,
Speaker 2: across time. That's fascinating to me, and I think really
Speaker 2: instructive and thinking about the future markets.
Speaker 1: Did you happen to read either of the two big
Speaker 1: crypto Sam bankmin Freed FTX books, either Going Infinite or
Speaker 1: Number Go Up. They're both delightful in different ways. Number
Speaker 1: Goes Up is a little more horrifying because you see
Speaker 1: the cd underworld of how criminals, yeah and human traffickers
Speaker 1: use bitcoin. I'll use all sorts of crypto, but it's
Speaker 1: really a great work of journalism and revealing and Going Infinite.
Speaker 1: Anything Michael Lewis writes is always going to be delightful.
Speaker 1: So our last two questions, what sort of advice would
Speaker 1: you give a recent college grad interest in a career
Speaker 1: in investing, at indexing, any of the work you do
Speaker 1: at Blackrock.
Speaker 2: If they are interested, My advice would be to go
Speaker 2: for it. I talk to a lot of college grads
Speaker 2: who are wondering, well, I be good at this? Should
Speaker 2: I try it? And look, I had a theater background
Speaker 2: and I gave it a shot. There are so many
Speaker 2: different ways to be successful in investing in markets, and
Speaker 2: I've heard people say, you know, know your strengths and
Speaker 2: lean into your strengths, and sure that's true in the
Speaker 2: long term, but I think college and learning, and again
Speaker 2: I'm saying this is a parent of teens. It's about
Speaker 2: uncovering your passions and leaning into those. You have no
Speaker 2: idea what you're going to be good at until you try. So,
Speaker 2: if you're interested in investing and in markets, there's so
Speaker 2: many different jobs and types of ways to get involved,
Speaker 2: whether it's in an asset manager or a trading firm,
Speaker 2: or a broker dealer or a wealth manager. So get
Speaker 2: your foot in the door, start to see if it
Speaker 2: is you know what you want it to be.
Speaker 1: And finally, what do you know about the world of
Speaker 1: investing today you wish you knew thirty years or so
Speaker 1: ago when you were first getting started.
Speaker 2: The moments that feel the worst in markets, the scariest,
Speaker 2: the most volatile, are the moments where you can define
Speaker 2: the outcomes that you're delivering investors and define your career.
Speaker 2: I look across my career at these moments that I thought,
Speaker 2: oh my gosh, we never thought, you know, this sort
Speaker 2: of flash crash, this sort of dislocation, this sort of
Speaker 2: black Swan event would happen. But over the course of
Speaker 2: a thirty year career, which I've had, there have been
Speaker 2: many of those. And what we learn in those moments,
Speaker 2: how we stay close in those moments manage risk for investors,
Speaker 2: and what we learn coming out of them are the
Speaker 2: biggest contributions we can make from a portfolio perspective, and
Speaker 2: I think from a market's perspective. So it would have
Speaker 2: been interesting to have been told that on my first
Speaker 2: day of work, which was about thirty years ago.
Speaker 1: I love that answer. I have a vivid collection in
Speaker 1: the middle of the financial crisis of saying to one
Speaker 1: of the traders a line from Apocalypse Now the Daval character.
Speaker 1: You know, someday this war is going to end, he says,
Speaker 1: with a bit of longing and bittersweet recognition, that it's
Speaker 1: a unique moment in time, and drink it all in
Speaker 1: because you're not going to see anything like this again.
Speaker 1: And I think people sometimes don't appreciate that, at least
Speaker 1: in the mayhem of the moment. Exactly, really fascinating take
Speaker 1: on this. Samaraw thank you so much for being so
Speaker 1: generous with your time. We have been speaking with Samara Khone.
Speaker 1: She is chief investment Officer of ETF and Index Investments
Speaker 1: for black Rock. If you enjoy this conversation, check out
Speaker 1: any of the five hundred previous discussions we've had over
Speaker 1: the past ten years. You can find those at iTunes, Spotify, YouTube,
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Speaker 1: I would be remiss if I did not thank the
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Speaker 1: Wald is my producer, Jan Taurus is my audio engineer.
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