State of the ETF Industry With BlackRock’s ETF Captain

you gotta go to where the assets are. And so when you think about where the real money is because sometimes I I challenged myself, I'm like recovering the meta E t F like relentlessly, But when when you really sort of think about where assets are, the big chunk of money is with black Rock and Vanguard and State Street and a lot of those funds that you know might not get a lot of attention, but boy did

they get the assets. And so um, you know, you gotta you have to talk to the industry leaders, um, you know, regularly, and we have one today. In fact, we have the biggest E t F company on planet Earth. So we have number one today, black Rock In case you haven't guessed it, I Shares has two point four trillion dollars in US E t F assets. That is unbelievable. I remember when you hit a trillion um. Now it's two point four, and now you know it's not just flows.

The market appreciation is building the assets and so you know at some point you know this is black Rock and Vanguard particular are going to lead e t F sets beyond mutual funds. And we've had several guests from black Rock before, but they've all worked for this guy. So Salim Romg the global head of I shares and Index Investments for black Rock Or he's also a member of the firm's Global Executive Committee, this time on trillions, looking back and looking ahead with the global head of

EYE Shares, Salem, Welcome to Trillions. I'm excited to be here, Joel and and and Eric and thank you guys for having me. You and black Rock very close to having ten trillion dollars assets under management. Do you guys have like a big shot clock and and like how much time until you hit ten trillion? Increasingly, the number I focus on the most, I kind of from where I sit is actually the number of clients that we serve.

And I think the the amazing thing is and we don't talk about it because assets are are clear and transparent. But you know, in the fifty years since we got our first client, and and you all interviewed Mac McCown, who was our you know, the inventor of the whole category, which I enjoyed, and he secured the first client for Wells Fargo that became b g I, that became that

we acquired, UH through black Rock. You know, we now have a hundred million people all around the world we use our index capabilities and and and I think if there's one number that's that's the most remarkable to me. Uh. I know, you'd have to rename your show hundreds of millions,

and that's kind of less impressive than trillions. But but if there's a number that's that's the most impressive to me, it's that it's that there are a hundred million people all around the world using our e t f s and using our index capabilities for savings, for investing, for a whole assortment of things from that very first client that Mac had secured for us back in ninety one. I mean, you know, that actually brings up an interesting question.

You forget how many people are investing an in particular year shop like when you are in your regular life, you know, throughout a year. Um, do people kind of I don't know, bring up the I shares ets they own, like a are you a little bit of a celebrity given that I Shares is so prevalent in many people's portfolios at this point. Uh, well, this is the first job that I've had that I've been able to explain to my kids. Uh, And so if that's one indicator,

I wouldn't call myself a celebrity. With my fifteen year old and eleven year old, I'm happy to report that to them put their birthday money into I Shares. That's sort of a household requirement. But um, are you are you? Are you willing to disclose the tickers I have? And it's actually it's it's fascinating. So, uh, they had saved up about about a thousand dollars a piece that I'd open up, opened them up in account, commission free account, and I told them that they could invest in whatever

they wanted as long as it was I Shares. It was about a year or two ago, and my eleven year old is uh, pretty frugal, and he had invested in two I Shares tickers he'd invested in I VV, which is three basis points, and he'd invested in I T O T, which is three basis points. And he really wanted to invest in the lowest cost ones that were out there, and so that that's what he has

in his portfolio. My fifteen year old is into technology, uh and in what I think was a very well market time investment, he invested in the I robo and he also tested in our software dedicated et F which are a little bit more expensive in the thirties or forty kind of basis points, depending on the exact investment.

But they've done really well. And and and you can't over extrapolgalate over kind of two people who happened to live with you, But I do think it brings out kind of just the diversity of many different types of investors out there. And and some are really looking for the theme and some are looking for the low costs, some are looking for both. And and it's just you know, you extrappol like that across tens of millions of people, and you get kind of the business that we've got.

So cele one of the things we want to do is look back on this year, and then we're also going to look ahead. But as long as we're talking about your your kids and looking back at the year, what did you What did you tell them when they came to you and said, Dad, what's up with these mean stocks? They aren't that into investing that. They were

into the memestocks and the like. You know, we obviously saw that, We looked at it, we researched at you know, for a brief period of time, there was some run up in in silver and including in our in our some focus on our silvery t f Oh yeah, that's right. But hold on, can I just give the audience a little background here? So the meme Reddit crowd went to game Stop, then a m C. But then they all had this idea that if you, if you somehow corner

the silver market, the whole financial system would collapse. Like they it was almost like that little thing in the Death Star that if you can get the laser beam right in there, the whole thing will explode. And but they just didn't have enough. I'm not even close. But they used SLV to attempt this destruction of the financial system. It was all kind of like Keystone compish in my opinion. But they did buy SLV one day and create volume that I believe was record volume for the ticker, and

then it it immediately sort of like faded away. But it was a story for a week. I think it was a story for like a couple of days in a week, and and and I think part of it, yeah, it was that. And so it was I do think the Meme stock piece while it was, while it was very noteworthy, and Eric, I'm not sure if it was you who has written about this that, like the media sometimes about five percent of the activity and it's and

the more straightforward stuff doesn't get written about. But you know, as we looked at this phenomenon and we really started to see where was the movement around self directed commission free investing going, because a lot of this coincided with commission free platforms in the United States and massive growth

and self directed investors. Actually, the truth is, if you will a little bit more mundane, about one percent or a very small fraction of total retail trading in the United States over the past kind of year two has been in meme stocks. Two thirds of it has been into e t F s UM and it's mostly just

purchases of ETFs. And so that was really the trend that we took a lot of faith in, a lot of focus in and and and that doesn't show any real signs of abating, if you will, because I think there's a fundamental shift that's underway, one of which is a massive growth and self directed investors since the beginning of the pandemic. And second is a complete reduction or a very very significant reduction in commission barriers. How much

of a headwind is inflation going to be? You know, it's a I don't think we're allowed to say the word transitory anymore. I think that's that right. It's important to keep perspective around these things that clearly inflation is elevated, and for many people that's a really unusual thing. I'm still old enough that I remember the early eighties and inflation was a different kind of animal back then. But I think as we look at it from black Rock's perspective, yeah,

and lation is elevated. But if you think about our own views by the end of next year, by three those levels will start to moderate out once you get through some of the energy shocks and some of the supply chain shocks that we've been dealing with. And even if you look at the price of oil just in the past month or so, um you can start to see some reduction. So I think it's it's a it's a new risk, it's a real risk in investors portfolios.

We're certainly seeing it in things like our tips and our inflation ETFs, so like our fixed income flows are coming into inflation. But we're also seeing it in in things that are great inflation hedges, whether that's value stocks or kind of our own value ETFs, whether it's in things like real estate, and so there are plenty of ways for investors to protect and hedge against inflation, both

in fixed income, inequities and commodities. But it's just new and it's a it's just making sure that as as investors look at their overall portfolio that they've got the right diversification and hedges built into place. Yeah, and that's really what we saw this year. The flows are ridiculous for all ETFs that they're taking in about four billion a day. Normally they've taken in two billion a day

this year. They took this just double step up. And people ask me what why the extra and it was the breadth, you know, things like tips, commodities, um, you see a lot of the non you know, uh, I guess beta e t f s taking in money some of the things that lagged small caps the value. I guess my question for you is our big theme from our outlook next year's ETFs have transcended the passive label.

I think it's officially not that that association is broken, whether it's the tipsy dfs or the you know, smart beta or ARC or themes. I don't I don't think people I think they really that E t F is is much more like a true wrapper. And I could you talk a little bit about what you're seeing this year in flows and where that extra money is coming from,

and how people are utilizing the rapper a little bit. Yeah, No, it's a it's a great point, Eric, And I'll cite a little bit of the global numbers, which will be slightly different than the ones that you cited, which I think are the US numbers. But if we look at the global numbers, you know today there's over a trillion dollars that's come into e t f s globally, both here in the US as well as in Europe, as well as in kind of a range of different locally t F lines that we have and that others have

across the world. And just as context, you know, around the time that black Rock bought b g I, so back in two thousand and ten, the total et F market was a trillion dollars and so and and you know this year it's not even over yet. Um, we're seeing that amount in the industry and flows. And I think the the the amazing thing is when we look at the total e t F s for the industry relative to the addressable market we think of the addressible market is also docks and bonds. That's three of the

global addressable market. Even if we take the number Eric that I think that you've used in in other publications, which is the addressable market as all registered UH investment products, it's still fift. So whichever way you take it, it's still a small number relative to a big system. And we absolutely believe, as you said, that the e t F is really just a wrapper. It's a more efficient

way in which to wrap public market securities. And so we've kind of moved we we certainly have and are very proud of holdings like my son has, which is you know that good low cost exposures like i VV, but we've also expanded into a whole arena of index oriented ETFs, things like factors or E s G or thematics, which are transparent, rules based indices, but their goal is

to outperform a traditional market gap way to index. And if you think about that category, you know, for US that's about just under four hundred billion dollars of our et f s are in those types of things factors, E s G and thematics, and that's double what it was just a few years ago. And so that's really a fast growing kind of area. And and and we've also extended it into active management. I mean, it's a

it's amazing to be just in the past year. You know, we launched our low Carbon Transition Readiness e t F back in April. It was the largest et F launch in US history, active or index, and it was an active ETF. And so all of these things are pointing to I think Eric, exactly what you're seeing and what we're seeing, which is the e t F is a is a better technology, it's a better wrapper, and it

can wrap all kinds of different public market investments. So I want to talk about specific areas of growth and and the one. The first one I want to ask about is E s G because you Black Rock and I Shares have been all in on E s G. How big of an opportunity do you think remains in that space for for influence. I think we're at very very early stages of it. And I think we're at very early stages of it, uh, despite the very significant

growth that we've experienced. So if you if you roll back the clock Jewel, like three years ago, Uh, you know, we had a dozen or two dozen different ETFs around the world. We managed about ten eleven billion dollars in those et f s and it was mostly a niche category catering to a niche clientele that was interested in it. And I don't think that was just us. I think that was the the whole kind of area of sustainable

investing just a few years ago. And I think what we've seen um uh and Larry think our CEO has written pretty extensively about the tectonic shift in sustainable investing and in climate investing that we're seeing as a firm.

But if you look to kind of the number rs today, you know we're managing across index funds and E T f s and globally kind of north of two hundred billion dollars, and we're doing it across more than a hundred and seventy different e t f s and index funds, all in E s G and so if you dig underneath it, what's really driving this growth from our perspective is two or three things. One, there's very significant client demand, and it was latent client demand. And it's not just

in Europe. We're seeing growth in the United States, We're seeing growth in Japan. We're seeing growth all over the world for different ways in which to adopt or get into E s G investing. The second thing, which is where the E t F comes in, is that clients are really wanting choice, and that really drove our decision around moving from a couple of dozen products to moving to hundred and seventy plus because for many clients, they had different pathways in which they wanted to adopt D

S G investing. Some wanted screen, some wanted optimized, some wanted transition readiness, some wanted thematics. And I think the third thing is they wanted that with transparency and with efficiency. And so every t F WE manufacturer, including the active ones, including all the s G ones. We have we believe clear labeling on the package, but we have complete transparency

in terms of all the securities that are inside. We were leaders and having complete transparency of all the E s G scores, not just for E s G G t f s, but for all of them. Uh. You know, we've committed that we're going to publish things like implied temperature rise by the end of this year UM, just

to enhance that. But I think you put the combination of increased client demand, greater choice and benefits of the wrapper UM, combined with our underlying investment thesis that that Larry's articulated pretty publicly around these being good longer term ways in which to invest, that that package just kind of makes us leave that there is very very significant growth to be had, even despite the pretty um significant

growth we've experienced in the past three years. So I get the strategic vision for that, and I'm curious though there's the consumer demand for it, there's the transparency that you can provide, but then there's actually just this kind of fundamental thing that I'm wondering how you all wrestle with it, which is when you when you invest in this. You know, you're you're it's all for better outcomes, right,

and you're envisioning a better world. But often the data that underlies that doesn't actually you know, back that up necessarily. You know, like there are companies who are contributing to climate change but might get a positive score. How do you reconcile that? You know, we come back to this point about choice, about transparency and giving the right metrics to our clients to be able to help inform them. And so let me just give you two contra asked to kind of bring out kind of some of these

things around it. Some of our clients will say, we just don't want these sectors or these types of companies in our portfolio, and that's great. We can actually create and we have a whole suite of ETFs which screen out and and and have that. So if you if you didn't want, for example, um, certain energy sectors, certain fossil fuel sectors in it, we got ETFs to do that.

There are other clients who would say, and this was inherent in the clients that invested in our low carbon transition readiness it said, look, even if you exclude these stocks from one's portfolio, you haven't really solved the broader problem. And the broader problem is, how do you help companies

that want to invest in a greener transition. They may be big carbon emitters today, but they want to lower their carbon lower their carbon footprint and they want, if you will, investment incentive to do that, and they're willing to show the reduction over time, and they've invested in things like our Low Carbon Transition Readiness ETF, where the carbon footprint of that is is focused on companies that do have that may have higher footprints today but are

committed to reducing them over time. And so those are two very different sets of clients with different sets of objectives,

and so their portfolios may be different. But if we give them the choice, if we give them the transparency so they know exactly what they're getting, and we give them the metrics to make sure that their choices are informed as possible, that's the service that we think that we're doing to the clients, even though they have very different pathways around how they want to invest their money.

So we talked earlier a little bit about the hundreds of millions of clients you have, and we touched on on retail and how e t s are so much bigger than than the meme stock moment. And I want to ask another question kind of in that same vein,

which is the potential for institutional investment. And when you think about that that as a trend, how how much more potential for growth is there from the institutional side, since you know, again retail get got a lot of buzz this year, but like going forward, how about how about institutional? Yeah, no, it's a great question, Joel. And it's it's important to remember that our roots were an institutional right the first client that that Mackott introduced fifty

years ago as an institutional client. Uh. And and and I think and within the E t F kind of piece of the business, Uh that one of the really important shifts that's happened in a in a positive way among the star institutional clients was really catalyzed back in So if you think about all the stresses that the whole marketplace, uh, that E t F s, particularly BONDI tfs went through back in the spring of and you think about how they performed kind of through all of

that stress. And I'm happy to talk about it, We've written about it. We're proud about how they performed under that market stress. But importantly what happened was that many institutional investors that hadn't yet adopted bondy tfs in particular, saw their resiliency, saw their ability to withstand market stresses, be able to still have the ample liquidity that they did, be able to still trade exceptionally well. And and even

the most skeptical institutional investors have become clients. And so you know, if you if you sort of turned the old narrative of index investing kind of on its head, and Eric, you talked about the blurring of index and active, but now eight of the top ten active managers in the United States use our e t f s as

part of their active investment process. In many cases those are bondy tfs, and they're using it for liquidity, they're using it for lower transaction costs, they're using it to be able to access certain corners of the mark get much more easily and much more cheaply than the otherwise code if they held the bonds. But I think that's a It isn't in the hundred million stat but it's

certainly a area that we're very, very focused on. And and It's certainly an area that isn't talked about as much because it's almost it almost turns on its head the old notion of active versus index, or even active and index, which is that active managers are using e

t s as part of their active investment process. And I think that's an area that we're seeing expansion not just with other active managers, but we're seeing it with insurance companies, We're seeing it with pension plans, We're seeing it with other large pools of assets that, especially in the bond market, are just finding it too antiquated or too non transparent or too expensive, but they're finding the opposite to be the case when they're able to access

the bond market through ts. So that's a whole other area that we're we're very, very focused on, even if it isn't captured in the hundred million h So you touched on the bond market, and I always say, bond ETFs let people trade bonds like stocks. Everybody likes the way equities trade. ETFs have standardized and made everything trade

like an equity and it's a beautiful thing. Um. We have part of our outlook next year, we have the five point oh era of e t f s and digital assets, and there's just such a hunger out there. You just described it. With the bond market, it's very parallel to trade crypto in an e t F UM because of all the benefits you just named in the way that's difficult advisors don't want to go into the exchanges, and the way the bond etf really helped some people get access to bonds and it just made it easy.

I feel like that's going to happen with crypto ultimately. And I gotta think there's gonna be a black rock total crypto market e t F in five years maybe less. Yeah, what I would say to that, And and I think the just come back to the bond piece in a moment. I think there's a really interesting parallel here are between that and digital assets. But I do think the bondy t F uh, and you know, I think we're we're coming up. I think next year will be our twentieth

anniversary of the first bondy TF ever launched. That's the good thing about having products. It's always someone's birthday or anniversary kind of around it. But next year is the twentieth anniversary of the first bondy t F which we launched and uh and and it's become and it is a modernizing force in the bond market, is bringing transparency, and it's bringing on exchange pricing, and it's bringing liquidity and and so it's a real innovation kind of in there.

Digital assets is clearly at a much earlier stage, uh in the evolution. But I certainly in the believer in the disruptive capability of decentralist finance, of stable coins and of um uh cryptocurrencies to the entire financial marketplace itself. That you can't see it here because on my desk and there's a podcast. But I just met with a professor at Duke named Cam Harvey has written a very good book called Defy and the Future of Finance. And I'm a believer that the future of finance is here,

uh in the decentralized capabilities around it. I think cryptocurrencies are one kind of application of it, and certainly not the most profound of all the different applications when you

start to think about decentralized finance. And so we we are reading for launch a thematic et F which will have blockchain and the ability for people to be able to access companies that are active in this space, just as my son is able to access kind of you know, robotics autonomous vehicles in some of the other uh E t f s, And in terms of like actual crypto E t f s, I think that we want to make sure that whatever we do, whatever we put our brand on, whether it's the black Rock brand or the

I Shares brand, doesn't matter. It's to the highest standards that people expect. And that means from a regulatory point of view, from a liquidity point of view, from a transparency point of view, and so I expect as the regulatory environment becomes clearer and as the underlying liquidity dynamics in that marketplace become more to our satisfaction, that some of those dynamics will work in our favor. And so if you put a five year horizon on it, err, yeah,

like I think so. If you put the next month horizon on it, I don't think so. So I'm really curious about this and and your interest in a space like defy. There's certain players in the world who are huge. You're one of them. This could be an existential moment for finance. Right, How did someone like you who has to wrestle with strategy for I Shares Black Rock, how do you make sure that you don't miss out on

something that could be totally transformational. Yeah, I look. I think the I look at at the centralized finance and all of its various applications as an opportunity, and I look at it as an opportunity first and foremost for our clients. And and a lot of the ways in which we've grown I Shares, just to take BTF example, but you can abstract it to indexation more broadly, is by reducing frictions in the system in order to benefit our clients. We have the benefit that our only business model,

our business model is a fiduciary business models. Everything we do is on behalf of other people's money. We don't have kind of you know, other businesses beyond that. And so if we're completely focused on how do we reduce frictions, the frictions maybe a commission barrier on a self directed platform in Germany or in the United States. The frictions may be the lack of transparency in the bond market.

The frictions maybe it's really expensive, the underlying financial plumbing of mutual funds or e t f S actually is quite antiquated and expensive, and if decentralized finance over time is able to do that in a better, cheaper, more efficient way, that's fantastic because that's like the basis on which much of our growth has come from, which is

from reducing frictions to benefit clients. And so the reason I get excited about um decentralized finance, including the currency aspects of it, is because of that ability to reduce friction. And the reason why I see it as an opportunity for black Rock is that we're able to do it for the benefit of our clients. And a large part of how we've gotten as far as we have is by if we make it easier and we reduce barriers and we think about our clients interests first, and foremost

good things generally happen. And I think that even that we may all speculate or disagree about is it five years, ten years to twenty years, twenty five years out, there's something really really compelling in the underlying technology case. I think of decentralized finance that we are very focused on and and and very focused around how and in which

pockets are the best pockets for us to participate. UM. Okay, so pockets and D five is a great segue to what a que Another question I have, which is direct indexing or custom indexing. UM, you guys do offer this. For those who don't know what that really means, is that instead of using the e t F we're a mutual fund, you would just own all the stocks UM. And the benefit of that, they say, UM, is that you can custom d index, Like if you don't want Microsoft for some reason, or you want to e s

G if I it, you can do that. It's like you know, like a tailor made suit or something. UM. The other thing is you can do more tax loss harvesting because there's more losses to mess with UM, and

so there's some tax health opportunity. So advisors also are motivated to use this because I think they're feeling a little nervous that, hey, if every advisor is in like four Core Vanguard or I sharees et F S, how can I be different And so the need to differentiate I think is might drive some people there that said it seems to be going in the opposite direction of simple, cheap and passive. It's it's kind of active it's a little more expensive, UM, and it's it makes your portfolio complicated.

That's the debate. I have a lot and we're slightly barish on direct indexing relative to the hype. We think maybe five temper cent market share in the next five or ten years. It will have what say you, I think, first of all, if you take a step back and and custom custom separate account in disease, it's actually how

we got started in this business. UH. And if you look at you know, our separate account business, which is about equivalent size to our et F business, is something that we've been doing for institutions, including in customized form UH for decades now. And UH the application and it was about a year ago that we purchased a Perio, which was a real pioneer, we thought in the US high net worth in the US wealth market in in applying those same techniques that we've been doing for institutions

for high net worth investors within the United States. And so the thesis underneath it was a bullish thesis which were which has you know, proven itself out in our opinion.

But at the same time, all of these co exist in a much broader ecosystem and so like the really interesting thing and when we were involved in the due diligence and you looked at, you know, some of their top clients, they were big asheres clients at the same time because in many cases, custom s m a s work compliments in a broader portfolio that included alternatives and

included ETFs. And so even for the same client, even for the same same institution or individual, they wanted some of the convenience, simplicity, lower cost kind of aspects that et f s had had provided, and they wanted custom features kind of inherent in their portfolio as well. And so that's very much what we're seeing when we see in US wealth clients moved towards fee based or fee based portfolios. UM. They certainly buy e t f s, and about half of their portfolios kind of moved towards ETFs.

They buy UM custom indices or they buy separate i'd call it custom separate accounts UH, and that's been about ten to fifteen percent of the portfolio. They're also buying alternatives and clean mutual fund share classes and the like to really be able to think about what do they want in the overarching portfolio. And so even for a given client, it's rarely been a binary choice of one way versus the other way, and it's really been a

mix of different capabilities. And I think that that's really the bet that we're making, which is that a client's gonna want choice. Client's gonna want lots of different vehicles, and but what they're really gonna want is they're going to want things that you know, give them great efficiency, whether that's for taxes or total expenses or both. Be able to give them kind of strong after tax returns and be able to give them a portfolio which does

what they want over the long term. E t F the value proposition they bring is just so strong, liquid tax efficient three basis points. And you know, I know there's some hype around direct index thing that it's going to completely sort of like disrupt et f s and UM It could well covered if it does. But every

year that the flows just aren't there. They're they're very mild compared to the flowethon we see an e t F. So I guess do you see them if E t F s a of the whole um fund pie right now and mutual funds are sixty how what what that? What might that pie look like in ten years. Yeah, I think directing in there. Yeah, I think direct indexing will be one. And you're just talking about us, well, so the U S Wells marketplace, you're talking about us US. Yeah. Look, it's a um, it's a it's gonna be one of

many different important parts of a portfolio. I personally think that ETFs are going to be half of any portfolio in a fee based kind of world. Um. I think direct indexing is going to be you know, ten fifteen percent. I think alternatives are going to be ten ftcent. I think clean mutual funds or even just you know, if you will, unmanaged securities, maybe maybe holding up the rest

of it. And I'm fond of talking. I'm sure many of your guests are fond of talking about how the how the e t F has totally disrupted the mutual fund and and e t F is the default investment vehicle kind of of this century, just like the mutual fund was of the last century. The mutual fund is close to a hundred years old in a couple of years.

But last time I checked, there's still five six times the assets and mutual funds as there are in the E t f s. And so even though BTF has been disrupting the mutual fund for the better part of thirty years, there's still a really big uh mutual fund

business out there. And and I think the best way to think about this is not so much in binary terms that one takes over the other as it might in if you think about like generations of phones or you think about generations of of computers, that many of these things exist for different purposes in a portfolio, uh, and and it's how do you blend them into portfolio?

And that's the US wealth case versus even if you think about things like DC plans, I mean, DC plans have mutual funds in them, much to my frustration, they don't typically have ETFs in them because there's a technology you barrier to having ETFs in many different for a

one K record keeping platforms kind of within there. So there's a big embedded base of mutual funds there that that that's kind of got barriers, which aren't you know, uh, that they have to do with technology and infrastructure more than they have to do with anything else. And so I think you're going to have these millions and tens of millions and you know, maybe even a hundred hundreds of millions of clients, all making lots of different choices.

Some of them want hyper customization, some of them want ease and simplicity, some of them want a bit of both to be able to manage across the portfolio. And what you're really seeing is the marketplace at work with all the um imperfections, irrationalities, human behavioral biases kind of all happening all at the same time. And our main goal is black Rock, is that are we there to be able to serve the client in the way they want to be served And so do they want a

custom s m A as part of their portfolio? Yeah, we think probably, and we think there's a really important market to serve of been there, which is why we ended up, you know, partner with a Perio to kind of help us on the journey. Are they gonna want

e T F s? Absolutely, And if you look at kind of just the flows this year and the hopefully the flows next year and the flows for the next decades, that'll that'll prove it out and there'll be new things that will evolve in the marketplace that uh that you know, as we get more comfortable that we can meet the standards that clients expect of us, things like digital assets that will also be kind of elements of people's portfolio.

So all of this is just a fluid changing marketplace as opposed to something binary, you know, moving that one eradicates the other. I think these all coexist based on different client needs and preferences. So I want to talk about model portfolios. And I think you you heard about it, but Eric and I did this UH show show on a quick take called called Trillions Presents et F Mastership. We had you share, that's right, dah. It was a great guest other than just show Keith mac It was

my second favorite show that you all hosted. I thought that was a great appreciate it. Um Uh. Eric allegedly cooks uh holiday dinners and you know, I'm still waiting on an invite, but you know what, we'll find out more about that later. Um. But I want to ask just about model portfolios and like what's your vision for them strategically and where where are you at now versus where where you think the that space could go? Yeah, and and and I think model portfolios also gets to

the the the essence of the discussion. Eric you and I were having a few minutes minutes ago around the US wealth landscape, which is that this is a vast by our estimations, it's just short of five trillion dollars, So it certainly deserves a place in the Trillions podcast kind of series. And it's vast, and it's not necessarily always easily understood, because you know, we have a model business in black Rock where we have a group of

portfolio managers who manage black Rock model portfolios. But if you think of it in the context of that five trillion dollar market, you know, it's about five or even less in the single digit percentage points of that total marketplace that we look at. There are many different other asset managers that will run models of of model portfolios, including having a significant portion of ice shares in them.

There are many of our wealth management clients that will run model portfolios that will have significant portions of ice shares. And then there are I A S and wealth managers that are customizing models all over which will have components of ice shares, and it will have components of custom s, m as and and the likes. This is this is a vast ecosystem, and we think that it's going to grow. Our own projections are that you know, four or five trillion dollar marketplace is going to be a ten trillion

dollar goold place. And you can look at that through the lens of the growth of fee based wealth across the United States. And what we've seen is that as advisers move more and more to fee based wealth, they're moving to model portfolios, and they're differentiating themselves um in part based off of the portfolio and and customizing the portfolio to the client's needs and aspirations, but also in part because it allows them to focus more time on

the relationship development aspects of their business model. And that could mean intergenerational wealth transfer, it could mean setting up trusts, it could be understanding of family's entire situation and all the complexities well beyond the investment complexities. And so from an I shares point of view, we look at all parts of the model infrastructure as potential clients. Certainly, there's a black rock models that include ETFs. That's a small

part of the overall kind of piece. Uh, there's a much larger piece, which is other asset managers, wealth managers, advisors who are using I shares as component parts of their overall model portfolio, and that piece, from our estimations, is like two to three times the size and growing of the parts that are just kind of the black

Rock model portfolios. And and we're sufficiently optimistic that, you know, if you think about all kinds of model portfolios, it's about a third of our flows in the United States. We expect it's going to be about half of our flows from a U S I shares point of view

over the next four or five years. And so more and more of our I shares are going to be bought, not like my kids buy them, which is a single ticker, either for a price or for a theme, but they're really just bought as a component part of a much broader portfolio. Uh. And it could be for a reason around thematics or E s G or lower cost or lower carbon, or a whole series of things that the the the I shares can now do one of the

things that you have not done. But we are very bullish on his conversions from mutual fund basically immediately converting to an e t F d f A has done it. JP Morgan has done it. We're predicting a trillion worth of conversions in the next ten years with hundreds of funds. Now that's only ten percent of all mutual funds. There's been fifty seven billion though this year, and that's up

from nothing a year ago. Um, what's your take on that this would be versus entering the E t F world with a clone like product like the way Fidelity Magellan came in with the Fidelity. Yeah. Look, I I whether it's really set the world on fire? Yeah, I I think these these whether it's conversions or redirections, you know, vanguards different because it's a share class. But JP Morgan and Dimensional did wholesale kind of shifts and have been

pretty public about it. I do think it's a trend, whether it has the numbers you associated to it or not. I think it's a It's clearly a trend which is going to be measured in the hundreds of billions of dollars over the the years. And for us, the way that we look at it is that it's just the next stage of growth of the E t F that each of these different firms. The way that we look at it is what they're what what's being declared across

the marketplaces. The t F is the default vehicle for millions of investors to invest, and uh, and all the benefits that are in the t F that have talked about, People are moving more and more towards that. Some of them do it through a launch, some of the do through a conversion, some of them do it through a redirection of their kind of internal flow around it. But what the trend line is is that this is becoming the default vehicle for how more and more people want

to invest. And we think that's great because it also then moves to the point that we talked about earlier, which is that they're not just moving to a singular E t F. It's not just everyone moving everything and converting everything to you know, I VV or an SMP

type exposure. It's it's basically a whole range of things from pure indexation too, uh, you know, if you will, quantitative or quasi index quasi active like some of the E s G exposures, or some of the factor oriented exposures that firms like demensional and moved towards even you know, embracing traditional security selection wrapped in an E t F and so both because it's becoming the investment vehicle of choice and because it's really accelerating the shift that we

talked about, which is it's it's becoming a rapper for all public securities. We think that's really exciting because again, to go back to the beginning of this conversation, whether you look at the e t F market as we do, as three percent of the addressable, or you look at it as you do, which is of the addressable of regulated funds, that's still a vast opportunity to get more and more people to adopt it. And and so you know it also we mean more competition for us, which

is great. We welcome it because what we also think is going to happen is it's going to mean that the overall pie or the overall category is going to expand at a very very rapid rate, which we're which we're really exciting about continuing to lead and and and continuing to kind of expand the universe. If you will, Okay, see, I'm going to ask you a question that we ask everyone who comes on on trillions. What is your favorite

E t F ticker that is not your own? Oh, my favorite E t F ticker that is not my own. I have a lot of interest in what arc is doing in part because I think that they're really pioneering the e t F as a transparent form for security selection, and you know, they'll go up, they'll go down kind

of as as a security selection kind of goes. But I think that's a really really interesting development that's happened over the past I mean, they've been in business for you know, six seven years, particularly over the past couple of years. I think that's a really pioneering expansion. Certainly one uh we're looking to expand ourselves into. But I think that's a really interesting development in this blurring that we talked about. Selen rom G, thank you so much

for joining us on Trillians. Thanks Cherl, Thanks Eric, Thank you guys for having me. Thanks for listening to Trillions. Until next time. You can find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcast, Spotify, and wherever else you'd like to listen. We'd love to hear from you. We're on Twitter, I'm at Joel Webber Show. He's at Eric Falcinas. This episode of Trilliance was produced by Magnets and Drumson. Francesca Levy is the head of Bloomberg Podcast by the setter, the saster,