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