ETF Edge - The next big things, live from Exchange ETF conference 3/24/25

Episode Date: March 24, 2025

What are the hottest areas for growth in the ETF industry? We find out, live from the single largest gathering of ETF industry professions, asset managers and RIAs: Exchange conference in Las Vegas. ��  Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by Invesco QQQ, proud provider of access to innovation for the last 25 years. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you are looking to learn the latest insights on all things, exchange, traded funds, you're in the right place. Every week we're bringing you interviews, market analysis, and breaking down what it all means for investors. I am your host, Bob Pisani. We are live from the 2025 Exchange ETF Conference in Las Vegas, talking about the hottest growth trends, and the next wave of innovation.

Here is my conversation with Ben Johnson, head of client solutions at Morningstar. Ben Slavin is global head of ETFs at B&Y Mellon. Jay Jacobs is U.S. head of pneumatic and active ETFs at BlackRock, and Travis Spence is J.P. Morgan's global head of ETFs. Ben, let me talk with you. I often say you're the philosopher of ETFs. Probably a thousand investment advisors here.

What are they looking to get out of this conference? I'm sure they want some help managing all the trading chaos that's going on, But what else are investors looking to get out of this conference? Yeah, Bob, I think the advisors that are here today with us are looking for what they're always looking for, which is answers, answers to their questions and by extension their clients' questions about what's going on in the markets, how do they respond? I think importantly, who are the partners here that are represented in these halls that they can trust to give them those answers, that context, those tools, those products that help them to build sensible,

well-constructed, diversified portfolios on behalf of their clients, so that they can weather any sort of environment, be it the chaos that we've had recently or calmer times like we had as recently as last year. Ben Slaven, B&Y Mellon manages a lot of the back office functions. You manage and run the plumbing here, but what I find is these RIAs really want some help also managing their business, what we call practice management. They want to know how to grow their assets under management. They want to know how to handle things like back office functions.

Are they getting help here to try to do that? Well, I would certainly agree with the philosopher here for sure. But I would also say that, you know, it is a increasing trend where it's more and more about helping those advisors, again, with their practice, with those back office functions, which making possible to make their jobs easier instead of just talking about products, which is increasingly. becoming a noisy space here. There are an incredible number of products that have come to market, and from a B&Y perspective, we're running at about the same pace in terms of both new issuers and new products that's creating a ton of noise in the market, making it more complicated than ever for the advisors here to sort through that range of products. What's BlackRock doing to help people here? You have many products to choose from,

but they also want help managing that business, that practice management part. What is BlackRock? have to offer? Well, I think there's many aspects to this. One is product innovation is still key to helping advisors manage their business. One of the trends we see right now is in digital assets, how much advisors can help their clients, particularly millennial or Gen Z clients who have been buying things like Bitcoin on their own, but now increasingly want an advisor to help that manage that in the context of a broader portfolio. So I think that is one solution. Another is looking at model portfolios and how BlackRock delivers really kind of entire solutions for advisors that are looking to focus more on their client, we can provide the kind of backing to that with well-constructed

portfolios across ETFs, and equities, fixed income, and even alternatives. Travis J.P. Morgan has the same thing. You have similar products to help the RAAs out in terms of asset management. But as I mentioned, they also want help. How do you help them grow their assets under management? That's holy grail here, the RIA. Yeah, well, look, I think, I think, you know, an event like this gives all the advisors a chance to think about what's at the leading edge, what's happening in terms of trends in the industry. They also want to be at the leading edge for their clients and understanding those trends and what's working, especially in a market which is so choppy and volatile right now.

So I think one of the biggest things that we've seen, Bob, is the continued growth on active ETFs. So you think about that. Last year, about 8% of assets took in 26% of flows here in the U.S. it's already up to about 34% this year. Active is becoming a bigger part of portfolios, and a lot of advisors are trying to think about how can they start to introduce active ETFs into their portfolios for clients? Well, that is a hot topic, Ben.

Actively managed ETFs are about 10% of the assets now. We have $11 trillion in the ETF business. About 10% of it is active. And I'm looking here, 30% of the flows this year have gone into active ETFs. Cohen and Steers just started. An old firm, very respected, an active real estate fund there. So what's happening with active?

We've seen this trend really start to emerge starting last year, even before that, but it's really picked up some steam. There's a lot of reasons why that's happening in the market. Part of it is, again, just the number of products that are on the shelf at this point. There's more options for advisors. But also when you step back and you think about what's going on in the market, Certainly the market conditions have given advisors more of a reason to look at active, but also a lot of these products have started to scale,

which has made them available or eligible to be put on platforms, effectively opening them up to being invested by advisors and their clients. And also many of these products had been planted a few years back, and the track records are starting to build with three plus-year track records that are really another hurdle for advisors and clients to give a real serious look to using active inside their portfolios. Your point is three years is what a lot of people use as a benchmark for one year's not enough. Three years is sort of minimal. Five years is better. Jay, you have a whole suite of active products there. What is BlackRock doing here?

We do, and I think key to what Ben was just saying is the market environment. If you look at the last 10 years, the average annualized return of the S&P 500 was 13.5%. So most people got away with just kind of broad, bait. to the markets in delivering their financial goals. Going forward, our capital market assumptions and a lot of firms around Wall Street are saying it's more like 6% within US large cap. So increasingly investors have to look

at differentiated strategies, active strategies that can add alpha. We've seen a ton of success in rotation strategies that are playing some of the volatility in the market today, whether it's DYNF, which is actively rotating factor exposures, or Thro, which is actively rotating themes like artificial intelligence and tariffs to be able to play some of this market ball and generate alpha.

Bob, there are a couple of trends that I would point out. We've seen about a hundred billion already going to active ETFs this year. That's pretty tremendous. I mean, that's kind of on record pace. You think about last year was a record in the active ETF industry. We're already above that active pace. But there's two things that are happening within the active ETF space that are trending. So one is just a more risk aversion, you know, and I think just given volatility that we've seen so

far this year. So things on our platform like JEPI and JEPQ, which give a lower VAL access to the equity markets, but they're still giving income 7 to 9% to 9% to 11% in the NASDAQ side. That's been really attractive. And so there's been a de-risking. The other big thing that's happening is fixed income and active fixed income and ETFs. It's made up about 40% of all the fixed income ETF flows this year. And we've already seen, again, about $100 billion that's gone into fixed income ETF. So that's really starting to pick up. But I think as more options become available, as Ben said, most active ETFs are still under three years old. As they gain track record, as they gain scale, we're going to see that 10%. We think grow to about 20% by the end of

this decade. Ben, I want to move on because fixed income is another hot topic here. Ben, Ben Johnson, big inflows, as he mentioned, into bond funds this year. I'm wondering why. I mean, it seems to be there's a market volatility, so there's a sort of flight here, a flight to safety play too. But also, and you and I have talked about this, the population is aging. So it seems to be there's a sort of natural upward bias towards bond ownership. But tell us what's going on. We're seeing significant flows this year into fixed income, particularly ultra-short, is happening. Yeah, bond funds have some very strong. secular tailwinds at their back, right? You think of just the aging investor demographic and the

fact that as you get near or enter retirement, you're naturally going to want to de-risk your portfolio. You're going to take equity risk, take stock risk off the table, reallocate to fixed income, which today in 2025 is fundamentally much more appealing than it was just a few short years ago when the risk-free rate in real terms was negative. You were losing money after accounting for inflation. So now that we've seen the return of the risk-free return, now that we see appealing yields, now that we have these demographic tailwinds at our back, it's not surprising to me that we've seen flows into all form of bond funds. It actively managed ETFs, indexed ETFs, and actively managed mutual funds absolutely served. It makes perfect sense to me. Our viewers

love their money market funds. I mean, 4%. You're right. It was nothing of few years ago, makes perfect sense to them, and they're actually getting an inflation-adjusted real return for the first time. And that is a very sticky group of people. It is hard to move them out. Even with 22 percent in the S&P 500 last year, we had, what, $6 trillion in money market funds? They didn't move. We kept saying, when is this going to move? And it didn't move. So are people making rational decisions at this point? Well, it didn't move. Those balances remain high, and we saw a record for the ETF industry last year, so it goes to show you that money is coming from somewhere else,

and it's actually a bullish sign for additional flow. But going back to fixed income for a second, I would say that, you know, when you think about actively managed ETF history, it was really fixed income actively managed ETFs that were the OGs, so to speak, of the industry. They were the ones that really sort of led the way. Ultimately, equities took over,

and now they're sort of making a comeback. Part of that reason also is really the action that we saw in the fixed income markets, a lot of that money came out when the bond market got hit. And as we know, in these market cycles, when money comes out of mutual funds, the ETFs once again benefit. That money is not going back into the mutual fund wrapper. It's ETFs that are picking up that share, and we're starting to see that in fixed income ETFs, especially the active variety. I want to move on to another topic because there's four or five of them I want to hit here. Private equity, private credit, very high levels of interest. But the

Assets are illiquid, and this is proving to be very tricky to provide an ETF wrapper. We saw PRIV recently go public. There is some CLOS offerings out there. It seems to me like it's still not clear if ETFs will be the nominant space for trading private equity and private credit. Give us some thoughts on how this can happen, or maybe it's not happen. Maybe BDCs is the better route to go. I don't know. It's very tricky here, it seems to me. Look, I'll kick it off, and I'm sure we all have views on this.

I think the great trend that's there is innovation, right? And that's always been a hallmark of the ETF industry. And I think that's what we're seeing happen. Now, the question that needs to be answered is, can you take a private that doesn't trade that much and is illiquid? And you have a premium for being illiquid into the ETF wrapper. It needs to be priced on a daily basis, and you need to be able to have extra liquidity, and there needs to be a market for it. So I think there's still some questions that need to be answered around this.

But those are some of the topics that need to be unpacked in terms of bringing this to the next level and making it a reality. I think you can look at the financial space of so many different structures for different users and different asset types, right? Mutual funds still continue to make a ton of sense for retirement accounts, for more liquid assets where portfolio managers want to shield what they're buying. buying every day. Interval funds have been really successful for private credit thus far. I do think a lot of wins are still blowing towards ETFs and I think we'll see more innovation with private investments. One of the things we're looking at is can you do more indexing of private investments? So we made an acquisition with Prequin this year and a lot of it was really around the idea that

if you have time series and you have the data aggregating a lot of what's happening in the private space, you can start to index private assets, and then maybe you can build some products off it. We've seen plenty of different. Precran does private credit analysis essentially. I mean, you mentioned Precun. Don't assume they know what they do, but that was a big acquisition for BlackRock. Yeah, so they're an alternative data provider. They do, you know, all different types of private investments, whether it's, you know, private equity, private debt, et cetera. But what it opens up is the ability to potentially do more indexing of private assets. And what we've seen in the ETF space is you can index a lot of different

things. You don't necessarily need to physically hold them as long as they're indexed and you could have futures or other derivatives tracking those types of investments. You can potentially build an ETF to track. I guess Ben Johnson, the question is can we shoehorn private credit, private equity into the ETF wrapper? We have structures that already business development corporations, BDCs, they do this. That's what they do. Inable funds. These are sort of like closed-in funds, those of you don't know folks, and they've existed in this structure for years and years and years. Can you fit this somewhat illiquid asset and shoehorn it into the ETF wrapper? Yeah, Bob, I think there are a few different questions here, which is can we? We've proven that

we can. Should we? I'm still not certain. And does it ultimately deliver what investors are expecting? I think at least in many of its current forms, I think back to the old Wendy's commercial where they lift the hamburger bun and they ask, where's the beef. Well, you're not getting a lot of beef right now because you have to water down a lot of what investors really want what they're after, which is private markets exposure to get it to work in an UTIF wrapper. You have to water down because the SEC won't allow a huge amount of illiquid in a investment in a private fund. That's absolutely right.

So that's not to say we couldn't reach a point in time. And I think back to the example of bank loans, circa 2011, where you looked at that asset class, you looked at the infrastructure, you looked at the liquidity and balked in that moment at the idea of ever wrapping bank loans in an ETF, but now it seems fairly commonplace, fairly mundane. BKLN did that, actually. Perfect example. There's a bank loan. The State Street did that, right?

BESCO did that, yeah. I'm sorry, excuse me. I think a great example of where this might go, but for the time being, to Jay's point, there are already a number of different vehicle types, I think, most notably interval funds that allow you to get that exposure at the level that you want with the outcomes that you want. But they're not publicly traded, though. They're not publicly traded, but they're ticker-based. You can subscribe daily in many cases.

You're sacrificing liquidity on the way out because maybe you can only get out once a quarter. But nonetheless, you get fuller exposure to these private assets. So your point is maybe we shouldn't shoehorn this in an ETS space because you're not really getting what you think. You think you're getting private credit, but in fact, there's a limitation of what you can do in this. And I think interval funds and other evergreen funds are better vehicles. Non-traded BDCs are kind of the middle bowl of porridge in this Goldilocks scenario. Any thoughts here?

I was going to say, first of all, I love the analogy for the first time with private credit, talking about the beef and beyond meat sort of analogy, which is a great way to think about it. But I would just say, you know, agree with sort of the comments that have been made. But stepping back across our business, we are looking at an incredible amount of demand from ETF investors who are looking for access, which has been one of the hallmarks of ETFs from day one. And the other side of this is really those managers, especially who are, focus on alternatives. Some of the largest investment managers in the world are looking to push more into that wealth space to tap into that growth. And ultimately, it's about trying to meet

investors where they're at. And ETFs obviously are the place where investors are going. But again, there's these other structures that are also trying to satisfy that demand. Bottom line is it may or may not be the right structure, but we already have structures to address investing in private equity and private credit. I want to move on here. So another hot area, and this is somewhat in the active management space, is option income and buffer products that are out there. Option income products are very interesting that's going on with them. These are tapping into the interest in people who want to provide regular income, essentially. So these ETF sell call options, and these are typically on the S&P 500, and they cap some upside potential for, but also provide a monthly income, essentially,

from selling the call options. And the buffered products provide exposure to the S&P 500, typically the S&P, up to a limit, and then they provide a buffer against some of the losses. So these products have become very popular with investors who want to stay in the market, but provide some kind of downside protection. So we've seen this, Innovative Response Fund,

some of the other ones that are out there. these products make some sense to me. Ben, how have these products been received? They seem to be gathering assets under management. Do they make sense to you, too? Clearly, when you look at the flows, there is demand for these products, and they're filling a need in the market.

I think we've certainly seen a couple things. At this point in the market, obviously, it's resonating with advisors. I think also there's been tremendous amount of marketing and education that's gone on around these products. I mean, ultimately trying to raise assets, but that has also helped to really get the word out to advisors and also explain how these products can be used inside their portfolios, which, again, until recently was not really well known.

Right. So in option incomes, and I want everybody to understand this point, you're selling call options, you're collecting premium, and you're distributing that to the investors. It depends on what the percentages, 7, 8, 9, 10%. With Buffer products, you get exposure to the S&P up to a limit, and then if it drops, you get downside protection. So what I like about this is people aren't just exiting the market. Oh, I'm 70 years old. I'm worried.

I want to drop my exposure from 70% stocks to 20% stocks, and I'm not in the market. I'm here. I'm still in the market, but I have a collar around the essentially. And I don't think it's just about exiting. I think a lot of this is about entering, the market, when you see the trillions of dollars on the sidelines and money market funds, a lot of investors are using buffered products to step out of cash and into the markets.

No one wants to be the person that held cash for five years, just put their money in the market and watch to sell off 10%. So using a product like a max buffer ETF that limits the entire downside at the beginning of its inception period with a capped up side can be a really good tool for kind of almost a replacement for dollar cost averaging, bringing people out of cash back into being invested in the markets. This has been one of our biggest strategies. And as you know, with JEPI and JEPQ, we were an early innovator into this space to provide that outcome of being able to stay in the market and collect income along the way. We see it as there's multiple ways to win within a strategy like this. You can remain invested in the equity side and get the return from the equity market. You can

capture that extra premium income that adds to, I think a growing need and a growing desire for for income investing across all asset classes. And so we see that as a really effective way to keep people invested. And usually when you come out of the market, that's when you lose the most. We want to keep people invested through the cycle. And so we've seen a lot of demand,

especially this year, given the volatility in the market, that's where these products really shine. And that's been an effective outcome. And Jeffey, that was the leader in selling call options and collecting premium. What kind of yield are we talking about right now? like on JEPI, what's it throwing off? So JEPI is taking a broad market access.

That's what you get in the underlying portfolio. But you're getting 7% on that. In the NASDAQ version, in JEPQ, it's about 11% now. So really attractive to keep people invested through the cycle. The EPQ is the NASDAQ version. Right. So 7%. Now you are, of course, as people understand,

you're selling a call option here. So you're giving up some upside protection. Yeah. But you're getting income at the same time. And you should be willing to give up some of that upside in order to, you know, it's a tradeoff, but that's an effective tradeoff, I think, in a market that's going to be a little bit more choppy, where you still want to have active management on the underlying portfolio, which, again, I think we're going to see more and more appetite for active management

just within overall broad, traditional portfolios. Ben, you want to say so? Yeah, and Bob, I would emphasize that this is kind of an instance of almost like old wine and new bottles. None of these strategies or anything in many cases that aren't unfamiliar to advisors. JP Borg is doing this for their headier, more advanced clients, for 30 years, right? But now it's just in this wrapper that we see in BlackRock. You've been doing this for a long time, right?

Come back to everything that we know and love about ETFs is that they make it easier to tap into these strategies to implement these strategies. They make it cheaper to implement these strategies to the extent that buffer ETFs at the margin are ticking share from structured products, which can be really expensive, super illiquid, and generally just investor. That's the beauty of this wrapper.

The guys like J.P. Morgan have been doing this for clients for decades, and now you actually have advantage of stuff that you couldn't have done. 30 years ago, you would have had to have been a high-in client at J.P. Morgan. They would have done a custom portfolio for you. I think that's another fact that I think people are starting to realize is that in the active management space within the ETFs, a lot of times you're bringing the best of your capabilities as what we try to do into the ETF wrapper.

So you're right. We've been running strategies for 30, 35 years with great track records, and we're now introducing that to give the access of an ETF to those same portfolio managers, the same research analysts that they would have otherwise had in other vehicles, but now it just becomes easier to access those. I want to move on. Another hot topic is ETF share classes of mutual funds. Now, you may know, Vanguard actually pioneered this structure, and it allows an ETF to be used as a share class within a mutual fund. Now that the Vanguard patent has expired, there's roughly 50 firms that have filed to offer

ETF share classes of their mutual funds and are awaiting SEC approval. So give us a little sense. We had a panel yesterday with a bunch of lawyers, which is very interesting. They seem to think this is a real hot, front burner issue with the SEC. Are we going to see this and sort of explain why this is important? Don't assume everybody understands what's going on. The first question, Bob, my thesis has been that it's a matter of when and not if, per that panel yesterday, it's sooner than I think I would have expected.

They expected it to happen maybe as soon as by the end of this summer. And why this is important is because it's a structure that ultimately could benefit millions of investors who have assets in mutual fund share classes today that would benefit from being in a combined fund that would have an ETF share class that could be used to manage the tax profile of the fund. So part of the reason mutual funds have been in outflows now for so long is that every year a lot of them have been sending investors effectively a lump of coal in their stocking at year end in the form of a taxable capital gains distribution, which they didn't earn. They earned because other investors left that fund. So the ETF share classes appended to the

mutual fund would help improve the tax efficiency of the fund to the benefit of everybody. Because the ETF structure allows you to essentially wash a lot of that away. Can send all the low-cost lots out the back door via in-kind redemptions. So 51 firms now have filed as of Friday. It may be happening soon, but I think it's the first step on a longer journey because there's a lot that still has to be done and just kind of the plumbing of the industry to actually make this a reality.

Just explain what, if I have a mutual fund and then I have an ETF share class in that, Does it matter if I'm in the ETF share class or in the mutual fund share class if this actually happens? Is there any advantage here? What should I do? I presume this is a good. This is an unallied good thing, right? It is a good thing. I think you did a great job articulating how it's good for investors,

and it's also good for a lot of the issuers here at this conference, for sure. It's really a game changer. And look, there's a lot of work that needs to be done in the background from a servicing perspective to make all the plumbing work, as you say. But the concept of multi-share classes certainly has been around the industry in the mutual fund context for forever or for many decades. It's also a concept that is applied to ETFs really in other parts of the world where it's commonplace. It's just not the case here. So all of that know-how and the infrastructure really exists, and we're looking to apply that here.

But ultimately, there needs to be a common solution that really helps to standardize this process along the industry. to make sure that it effectively functions the same way. And also, most importantly, the distribution platforms, the brokerage platforms where clients access ETFs are able to do so, and those platforms are able to handle any kind of switching easily with a seamless experience for the shareholders. And easy to say a little bit more challenging. I want to move on, but any quick thoughts?

Again, for the viewer here, if I have an ETF share class and I have a mutual fund share class, Does it matter anymore, whether I own one or the other? It's more choice and access for investors. I think you've heard it multiple times on this panel. ETFs have been democratizing investing for a long time. We've seen it with active ETFs launching. We've seen it with some of the alternative strategies coming out.

I think you could view share glass if that gets passed as being another sign of kind of more access to more investors of different strategies. So you can wash capital, these kinds of capital gains, essentially through both of these share class. classes when they're there. That's the key point here. Yeah, look, I think it's adding optionality for the issuers to be able to deliver the strategies that they have in the most effective way for end clients. And I think that's where this will wash out ultimately. So it's adding flexibility, which I think is a good thing overall. And we're just going to have to

see, you know, by strategy and from some of the distributors, what do they need to have in order to deliver the most effective solution to their client? I want to move on. One or two final topics here, crypto. We haven't talked about Bitcoin yet. The Bitcoin ETFs, you all know this, one of the most successful launches of any product ever in history. Nearly $100 billion is now sitting in Bitcoin and just plain spot Bitcoin ETFs and more in futures and options. I guess what's next? We have Solano Futures trading now. There you go. Okay, we got futures going. Sufficient size markets here. That's sort of a buzzword, folks. They spot Solanas Cummings down the road.

Any thoughts here? Yeah, I mean, we'll see. Certainly the regulatory environment is much more favorable than it was just months ago, and you've seen issuers respond with just a raft of filings for everything from Solana to, I think the most recent one was for a Puggy Penguins ETF. So I think issuers are trying to test just exactly how far can we go to continue to expand access to these different underlying assets in a form. format that is just more convenient, more useful, more accessible to your average investor?

What I find, I've had issues with Bitcoin in a use case for Bitcoin for a while. I've been a big backer of blockchain in general. But one thing I've always supported is ETF is the safe wrapper to have. Just like I supported the gold ETF in 2004, people had gold coins, they lost them, they couldn't find them. Now the gold's held in a vault. You pay a small fee. It's safe. It's the exact same idea for Bitcoin.

Whether you think Bitcoin has a use case or not, doesn't matter. If you think it does, this is a safe or a wrapper to have for it. And it's been remarkably successful. Of course, you see when it's down 20%, you get pressure on potential outflows. But regardless, I guess the question is, can they replicate that with other? Is Bitcoin a unique use case in the crypto community? Or can you do it with Ether or Solano or other forms? I don't know the answer.

Bitcoin is very different from the rest of digital assets. I will say that. It is really seen as this global monetary alternative, whereas Ethereum and a lot of other digital assets are more kind of a bet on the disruptive abilities of blockchain technology more broadly. What I would say is, you know, I think there's been a lot of focus on innovation.

I think there's just still a lot of focus on adoption of Bitcoin. We are still very much in the early innings of people thinking about could Bitcoin be playing a role in my portfolio. Right now you're mentioning, you know, the success of, I-Bid and Bitcoin ETPs last year, only about 20% of those assets that we've seen into Ibit have come from the advisor community. And I think as you see more millennials using advisors as they build up their wealth, more

Gen Z, more transition of wealth from the boomers to millennials, you're going to see more advisors thinking about how can I help my clients use Bitcoin in a responsible way in a broader portfolio. I mean, that's a good point. Only 20% institutional. I mean, that means it's mostly retail still going in there. So it's about 50% retail. 20% advisors and about 30% institutions is the breakdown today.

And I think it's still very early innings for those latter two. But it's also all about access. I mean, I think that's a theme that keeps coming up. And again, back to some of these other filings that we've seen. I think, again, it's a race to provide that access clearly with the products that are in the market. There's been a proof of concept. I think another iteration that we're also going to see, and certainly in some of the filings, has been index-based products.

again, trying to target those advisors that really are not looking to allocate in between individual assets but are looking for broad-based exposure, not just Bitcoin, but the wider market. And Travis, is the advisor community getting more comfortable with recommending Bitcoin? I mean, there are suitability issues here that haven't gone away. I said a few years ago, Bitcoin for Grandma, that's a tough sell. What does it do for your portfolio? you have to say, well, it reduces volatility or it improves returns. You just say, oh, well, it's Bitcoin and it's a get rich quick story.

What does it do for your portfolio? How do you make that argument? My sense is that a lot of advisors are still trying to figure out what they do with Bitcoin or crypto in general and where they put it in portfolios. Again, I think it's an access piece, and we've seen that for the industry. But the majority of flows and what we track and see, so that's one area that, you know, you know, has seen some growth. You've also seen some of the leveraged and 2X type ETFs have some growth.

But the bulk of the assets, and especially the bulk of the active ETF assets, are sitting in those traditional core sectors. And we see that is really the battleground for where the active ETF industry is going to be one or lost bob over the next, you know, five, ten years. So most of the development, most of the issuance that's been happening, has been in those traditional core sectors, both equities, and fixed income. So again, some of these other areas are interesting in terms of additional portfolio allocations, not something that we have been involved in on the crypto side.

And we typically are, we're not quite sure where they fit in portfolios yet, but those traditional core sectors is where our focus is. Ben Johnson, you have always been the voice of sobriety in the ETF business. You mentioned cushy penguins a minute ago. We were talking about this a little while ago, and I was asking, so tell me about all these new products coming out. You said new product development has officially jumped the shark. This is what Ben says. Remember, Ben's the philosopher here. Caneling the fonts. And that there has been a proliferation of new products that catered to investors' worst instincts. So what's going on here? Did I say that? I did say that, Bob.

And I think part of it is just part of the current zeitgeist, especially among young investors, that you're going to learn their lessons and going to take their lumps no different than many of us in the past. Like, I used to think that I was going to be an excellent. exceptional stock picker, and that did not pan out for me. So, you know, a lot of this product, a lot of the speculative product, leverage single stock ETFs, now, you know, product like battle shares that pits one stock versus another long Tesla short Ford, I think is designed to like apply to some of our, or appeal to some of our worst instincts, to some gambling instincts, it's going to scratch and itch, have at it if you do a good job of saying, I'm going to allocate 5% of my portfolio

to just having fun buying lottery tickets. But I think, and I'm concerned about, like, that vein of product development, because it doesn't anchor in anything that long-term investment should be anchored in, which is growth, which is expansion, which is investment, and benefiting in all of... But you're not surprised that there's silly products that come out of at this point. I have a broader philosophical question. Does the world really need three times inverse some stupidly high beta tech stock that's out there? Do we really need some of these products?

And the problem I have with the industry is when I go to them, they say, hey, Bob, we're not telling people to buy this stuff. We're neutral on zero-data expiration options or a three-time leverage inverse. We're not telling people to buy it. We're just saying, if you want to, here is our products. And so I guess it goes down to, is there any responsibility

at all? to say, we don't need these products. And some people, places like Vanguard, said, we're not doing Bitcoin at all. So I know I'm throwing out an open-ended question here, but you get my point. He said it's sort of silly season in some of these that have happened. I think you need an ethos to innovation in this industry. You know, the way that we look at it is, one, is there an investment thesis to this exposure? Two, is there client demand that people want this?

And three, is it suitable in an ETF? And that has really guided the type of innovation that we've done at BlackRock, and I think that suited our clients very well. Even as innovation continues to proliferate, I think there's a lot of rationale for why a lot of products are coming, but you need to have an ethos for why you're bringing this to your clients. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs.

This is the Markets 102 portion of the podcast. Ben Johnson, Morningstar's Client Solutions and Asset Management Head, continues with us now. I'd like to call him the ETF philosopher. We hit on a lot of subjects today. but give me your sense of overall flows. It's been a little bit choppy this year. I see money continuing to go into plain vanilla equity ETFs,

which we had for many, many years. I noticed a lot more money going into bond ETFs, fixed income. I thought there would be more money going into gold, frankly, with gold at new highs. The flows seem very modest in that area. It's a bit, yeah, and certainly gold flows as compared to gold performance. It doesn't register the way you'd think it registered. If anything, I'm with you, Bob, I would have thought,

given just the state of markets, the volatility, we've seen gold naturally being a place that investors look to as the safe haven, that it would have gotten more of a bid that you would have seen more flows thus far this year. But I think if you frame it more generally, just in terms of safe haven flows altogether, you mentioned fixed income flows, which have ticked up, especially if you look at short and ultra-short bond funds,

More generally what we're seeing is kind of a flight to safety, which makes sense in the context of the current market environment, the volatility that we've lived through in recent weeks. So not at all unsurprising because it's a pattern that is very consistent with what we've seen historically in ETF flows and specifically flows into those short and ultra-short bond funds, which have tended to spike any time the going has gotten tough in the market more broadly. Yeah. For gold, I'm wondering if there's a bit of a disconnect here because the marginal buyer of gold may be central banks at this point. And they may be what's driving the price up, but they're not buying gold ETFs. They're owning gold bullion at this point. So the central banks seem to be interested in diversifying their holdings a little bit away from just pure dollar amounts. And that, I think, may be a factor helping to explain that. What other flow aspects do you find interesting at this point? I had earlier, we didn't discuss leverage and inverse ETFs, but I've had problems with them for years. I used to say there were 2% of the assets under management and 98% of the problems,

does the world really need all of these leverage and inverse ETFs? And yet the assets under management are growing. It's close to 6% or 7% of total AUM now. Well, and it's another category, Bob, consistent, although maybe not intuitively with what I described in terms of patterns and short-term bond fund flows, leverage and inverse products tend to see their flows spike around these moments of volatility. And they tend to see flows spike because people might be taking directional bets or people are just simply betting on volatility.

These are effectively squiggly lines at the end of the day. So when markets go haywire, there's more money to be made in these products. And if I take any degree of comfort in terms of like the existence of these products, the use of these products, is that we've arrived at a moment where most people who are investing in them or using them in some way, shape, or form, they know exactly what they're getting into. They're going in eyes wide open. And they're using them in very specific and sometimes exotic ways to capture and capitalize on moments of in the market like we've seen recently where volatility just spikes. So not surprising. consistent with a familiar pattern that we've seen, you know, now over years and years and years, dating back to the global financial crisis when these products really kind of first made headlines, albeit back then probably for not so great reasons. And, of course, these products reset on a daily basis. So in a down market, you can get some really catastrophic moves in a few, literally a few days.

I mean, we've seen some of these single-stock ETFs down 30% or more in the, month of March just immediately. Absolutely. A newcomer in this market, actually, that pairs two stocks against each other. The ticker is Elon, which goes along Tesla short Ford and applies leverage to the mix. In the now just over five weeks that it's been a fund is down something like 65%. So, you know, no full well that when you're dabbling with these products, you're kind of playing with a chainsaw and you should be wearing all the requisite safety equipment and reading the user's manual before you pull the cord

and get that thing going. Fortunately, most of the money still is going into plain vanilla index funds, right? You and I, we sort of watch some of these crazy things that come out, but the actual amount of money is fairly small. The real money is in plain vanilla, S&P 500, Triple Q funds. I mean, Bob, if we were in the middle of a packed exhibit hall right now and we were just still and quiet, You could almost hear the billions of dollars of investors hard-earned money that is going into the biggest, the most broadly diversified, the cheapest, the most tax-efficient ETFs that have been with us now, in some cases, for decades.

That doesn't get a lot of attention because it is very unsexy, right? Investors continue to dollar cost average into things that are going to help them sleep at night and help them meet their goals, you know, is not going to. I grab a lot of headlines, but I take great comfort in that because it's emblematic of a lot of good that this industry has done for a lot of investors over a long time. Well said. Ben Johnson, Morningstar, thank you very much for joining us. As always, appreciate your insight. That does it for ETF Edge, the podcast. Thanks for listening. Join us again next week, or remember, you can see all the shows, etfedge.cc.cc.com. How does InvescoQQQQ rethink possibility? By rethinking access to innovation and the NASDAQ 100. Let's rethink possibility.

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