The Compound and Friends - Individuals Outsmart the Pros, Live From Chicago With Ben and Callie, Morningstar CEO Kunal Kapoor

Episode Date: June 6, 2025

On episode 195 of The Compound and Friends, ⁠⁠⁠Michael Batnick⁠⁠⁠ and ⁠⁠⁠Downtown Josh Brown⁠⁠⁠ are joined by Ben Carlson and Callie Cox in front of a live audience to discuss: the biggest market surprises of 2025 so far, government spending, the risk of recession, cash on the sidelines, and much more. Then at 36:48, Morningstar CEO Kunal Kapoor joins Josh and Michael on stage to discuss: how AI is changing finance, the growth of active ETFs, access to private markets, and more! Recorded live on 6/3 at The Chop Shop Chicago. This episode is sponsored by F/m Investments. Check out RBIL today – for potential yield and as a hedge for inflation fears by visiting: https://www.ustreasuryetf.com/etf/rbil/ Sign up for The Compound Newsletter and never miss out: ⁠⁠⁠thecompoundnews.com/subscribe⁠⁠⁠ Instagram: ⁠⁠⁠instagram.com/thecompoundnews⁠⁠⁠ Twitter: ⁠⁠⁠twitter.com/thecompoundnews⁠⁠⁠ LinkedIn: ⁠⁠⁠linkedin.com/company/the-compound-media/⁠⁠⁠ TikTok: ⁠⁠⁠tiktok.com/@thecompoundnews⁠⁠⁠ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of ⁠⁠⁠Ritholtz Wealth Management⁠⁠⁠, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here ⁠⁠⁠https://ritholtzwealth.com/advertising-disclaimers⁠⁠⁠. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: ⁠⁠⁠https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's episode of The Compound and Friends is brought to you by FM Investments. Go to USTREASURYETF.COM to learn more about their new ETF called RBIL. And this is for investors concerned about inflation. RBIL is an ETF that harnesses the inflation-protected power of TIPs, which are Treasury Inflation-Protected Securities issued by the United States Treasury. TIPs have the full faith and credit of the US government and the principal and coupon of TIPs adjust daily based on changes in CPI. Arbil makes investing in tips easy as buying an ETF.

And Arbil is the only tips ETF committed to holding ultra short duration tips. That makes Arbil a lower risk, lower volatility way to help protect purchasing power. Check out Arbil today for potential yield and a hedge against inflation fears. Please welcome to the stage, Josh Brown, Michael Badnick, Kelly Cox, and Ben Carlson. Let's go, make some noise!

Oh man, I love this city. Chicago, one more time for yourselves. Let's go. This guy. All right. All right. I think I got this set up. You guys, this is such a thrill for us. We are so excited to be here.

We go all over the country. We do live shows. I can't believe we haven't been here yet. This is our favorite place, literally, in America. We love this city so much, and this week has been so special to all of us. But we couldn't come here, do our grand opening of our office, without seeing you guys, seeing the fans, and seeing our friends. You guys are Pounders.

We love our Pers and I got to tell you tonight is gonna be a really special treat. We've been working really hard to put this show together for you and I hope everybody leaves having had a great time, learned a lot, gotten some new ideas to think on and with a smile on your faces. So one more time guys. All right. We've got an incredible program for you this evening. We're starting out with some of the compound favorites. I'd like to introduce you all to the chief strategist at Ritholtz Wealth.

You know her, you love her, Callie Cox. Hey guys, come to be here. Michael's boyfriend is here. They went shopping for Michael's shirt today. True story. Ben Carlson is the head of institutional asset management at Ritholtz Wealth. He is the author of A Wealth of Common Sense and several amazing investment books.

Give it up for Ben Carlson, please. He is the author of A Wealth of Common Sense and several amazing investment books. Give it up for Ben Carlson, please. All right. So it is the beginning of June 2025. We're not quite at the halfway point yet, but this has been a year of unbelievable moments. It's like a situation where we come into the year into what we think is a huge bull market. That lasts about six weeks. Then we have one of the fastest all-time bear markets, the S&P at its low. You probably

know better than me. Negative 19.6%. Yeah, about there. Almost an official bear market. And now we've gained it all back, like nothing ever happened. And one of the things that I wanted to start with tonight is just to kind of get a sense of what the biggest surprises were so far this year. And Ben, we're going to start with you. What was your biggest surprise year to date for the economy, the markets, whatever's on your mind? My biggest surprise tonight is Michael's outfit because he looks great. So I think my surprise is kind of a theme for tonight.

And it's just the resilience of households with everything, spending, investing. And I think everyone has been thinking of this idea through its cyclical, right? But what if this is secular? So the Great Depression spawned a whole generation of people who were risk averse and frugal, and that even like bled into the next generation a little bit. And what if the pandemic flipped a switch and people keep saying, just wait, just wait until sports come back and people can start betting on sports, then they'll give up on the stock market

and just wait until all the excess savings from the pandemic go away. Then people are going to cut back and just wait until inflation hits and just wait until a recession hits. And okay, just wait till a once in a lifetime crash hits. But what if this embracing of risk is secular? What does that mean? Who's this guy? Who's this? But I'm just, what does that mean going forward? So generational.

What if it is? And what if that, I don't know, leads to bubbles? And I don't know what the implications are. I mean, throw this in my face in six months if we get a recession, but what if this is a total mine? We haven't had that in a very long time because after the Great Recession, it was the other way. It was the fetal position.

And now what if we have a whole generation of people who are just, they have that switch now that says, no, I'm okay with risk. What does that mean? People learn from their own experiences and the experience so far of anyone that's ever sold anything is, oh my God, I can't believe I sold. And there's only a certain amount of times people can live through that paradigm and

not get the message. And one time it'll be wrong, but so far it's been the right move every time to double down. And I sort of agree with you that there is a generational thing going on, and this generation doesn't have the battle scars of secular bear markets. They just haven't seen one. Yeah. And the once in a lifetime crash is rare by definition. Right.

I think Ben's right. Because these people, the younger investors that Ben's talking about, they did get- What do you mean these people? These people. You know who I'm talking about? Yeah, say ages, please. They did get destroyed in 2022. All of their favorite stocks fell by two-thirds. Nvidia, Netflix, like all the stocks that they were told to buy that went up, and they didn't go anywhere. If you look at Robinhood's user growth, their deposit growth, it's up and to the right,

even though there was a two year bear market that we pretended didn't exist for some reason, we just, doesn't exist, from 22 to 24. And then again, earlier this year, Nvidia fell 35% in the first quarter. Like they didn't stop. I don't even remember it happening. They didn't stop coming. Are you sure it did?

I'm positive, I was there. So I think Ben's right there is something to this idea that these people are not risk averse in this. Now it's also like they're also young and so talk to them when they're 40 or when they're 50. Do you see a distinction between um I'll open this up to all you guys do you see a distinction between millennial investors versus gen z investors because I sort of do I do you do I do so I Did some research on this so millennial investors and I'm I'm generalizing here So remember maybe you are not like this, but millennial investors started out scared They were the type of investors that couldn't find a job during the great financial crisis. I wasn't looking for a job.

I wasn't even in college, but both my parents lost their jobs during the great recession. So I definitely felt it, even though I wasn't old enough to open a brokerage account. But millennial investors have consistently held higher levels of cash than Gen X and Boomers at age adjusted, right? Still. To that point, the first thing that I bought, I'm a millennial. One of the first things that I was trading. We're not going to hold that against you.

Was F-A-Z, which is the triple inverse bank ETF. So I was shorting banks after they fell 90%, which whatever. I was learning. I was learning. And this is why Michael's on this stage right now. I was learning. But you're right. our introduction to the market was like, holy shit.

Michael shorted the S&P to hedge against his wedding. That's, I forgot about that. What's funny about you being triple short banks that people don't even understand about you. I was working at a bank. The punchline is, you did that right after reading three books on Warren Buffet. That's what makes it funny.

And I did it as, I was an intern at Citigroup, shorting the stocks. after reading three books on Warren Buffett. That's what makes it funny. I did it as I was an intern at Citigroup shorting the stocks. But so is that, oh wow, Warren Buffett, this is amazing. Wow. No, I took all his lessons. Let me do literally the exact. Absolutely. Absolutely. Callie, what's your biggest surprise of 2025 so far? All right. Before I answer that, I just want to point out that I'm the only one raw dogging this podcast Right now, which is very cheap market strategist very very

Term raw dogging by the way become applicable to literally everything It's highly disturbing because I'm from a prior generation. We had a very specific definition of what that meant. I'm from the 1900s and we didn't just casually talk about raw dog. Okay. Well, hey, we're millennials. We're scared in so many different ways. All right, go ahead. Okay, so-

So we have no computer. We're all very impressed. All right, so my biggest surprise of this year was number one, Mark Zuckerberg getting a broccoli haircut, which kind of surprises me, but doesn't really because that man is so insecure. My other surprise, which honestly, Ben, you kind of took mine. So I'll add something on. I mean, I agree. The resilience of households, the resilience of the American consumer, the ability for Americans to just keep spending through incredible shocks has been really amazing to me. And I'll say too, the resilience of businesses to keep their profit margins afloat

through four or five years of just operational turmoil. It's amazing. If you look at S&P 500 margins, and I will say that there's a difference here. Smaller companies, midsize companies haven't had as much margin power here, but larger companies, even when you break out big tech, I mean, margins have been so healthy across. So like Visa, Home Depot, we don't, not technology companies per se, but companies that are using a lot of technology. It's not the Max 7 versus everybody else. And that's part of the reason why hiring has stayed.

It's weaker now, but it's why hiring has stayed so solid. It's why income growth has been relatively good for the past four to five years. That's why we keep spending money. So you know what's so weird? We accept that there is progress being made on so many fronts. When you think about medicine, for example, the way that we treat things now versus even 10 years ago, there's progress in every field, but we have this blind spot. We forget that there's progress in the way people run companies.

They're just better at it. They have all the lessons of CEOs and CFOs from the 70s, the 80s, the 90s. They'll make mistakes, but they don't make those mistakes. And we sort of like, we look past that like, yeah, but there's still stocks. Stocks are better. I know that sounds bubbly and toppy and blah, blah, blah, but-

The foundation keeps building and building and building. I agree with that. And companies went through the biggest supply shock in history, I would argue history in 2020 and 2021. So tariffs are devastating. I'm not out here saying that tariffs are great policy, but companies are in such a good position to deal with them because we went through a dress rehearsal. We also had millions of people start working from home out of nowhere. If they would have

just decided, let's all do this, it would have taken a decade's worth of McKinsey studies to figure out what the implications are going to be we just did that in a matter of weeks and Nothing broke like things kept going and corporations kept operating. Yeah, one of the consequences of that is It's the strangest thing if you go to a shopping mall on a Tuesday at 2 o'clock in the afternoon It's filled with people and you're like who the hell are these people? How are they? How are they doing? I have a return at Forever 41.

I'm allowed to. But you say to yourself, who the hell are these people? And then you see an AirPod in their ear and then you hear them take a customer service call and you realize, oh, this is why everyone's shopping because they're multitasking their job. But that's a whole other story.

Michael, what was your biggest surprise of 2025 so far? I want you to go first. Okay. Mine is that there was not even a hiccup in the AI theme. So arguably, I think in 2030, if we look back and we say, what was the biggest investing theme of the decade? I'm pretty sure it's not going to be inflation, it's not going to be tariffs, it's not going to be US versus international or vice versa, it's going to be AI.

That's going to be the decade defining investment theme. And I cannot believe we had a 20% S&P haircut. And the response to that from corporate America is to come out on their conference calls and double and triple down on everything they said they were gonna spend on AI. I would argue it probably saved the stock market in April, the earnings season, when Microsoft and Meta and Amazon

and Alphabet and company after company came out and said no we're still buying GPUs, still spending 80 billion, still spending 100 billion. That's probably the reason why the S&P is back to more than any other reason, right? Because we have no trade deal, we have a trade deal with England, somehow against all odds we managed to negotiate a trade deal with our closest ally in the history of the world. We can now all say wanker in the States. It's incredible.

We did it. But I think why is the S&P all the way back? The answer is the AI theme stayed intact. I have a question for you because I asked Michael this on Animal Spirits. And so there's all these people who for years and years are worried about... What? Are you touching him? It's almost... Chris is going to cry. All right, keep going.

They're worried about deficits and government spending. Isn't AI the solution? Like, you can't be worried about government spending and deficits and also worry that AI is going to be deflationary. Isn't AI just, if AI is this big for us and it's going to be deflationary, if it's as big as everyone says it's going to be, isn't that the solution? And aren't we going to have to spend more money? Isn't it going to be like a push and pull? So I personally just, and this is all anecdotes,

I have no data, but I think AI is like the mother of all disinflationary bombs. Right? My personal opinion. I talk to business owners, I talk to people that are executives. And they go to the mall on Tuesday afternoon. I do. At the mall. And your theme of buy the robots, like that's the hedge. I honestly think that that's the way we get out of inflation. It's not going to be because we're better at negotiating with countries than we were. I think it's because we just find ways to do things cheaper.

So I kind of agree with that. All right. A few things I have on my list. I'm surprised nobody mentioned this, but you said that there was no hiccup in the AI story and you're 100% right on the capex spending side. Google, Amazon, they're not relenting, but there definitely was a hiccup because Deep Seek was a tape-up. That was over the weekend too, wasn't it?

Yeah. It was on a Monday. Nvidia opened down 11% that day. It was one of the worst days for the stock in a couple of years. And because the market is back up year to date, we forget what just happened. Nvidia fell 37%, peaked a trough this year. It just happened. For the people who weren't paying attention during deep seek weekend, what was the news?

What was the thing that triggered that sell off? This Chinese company was able to replicate or even exceed the models that Nvidia and all these companies are putting out, much cheaper, faster, and it called into question, wait a minute, do all these companies need to be spending as much as they are? And it turns out that they are. So okay, I'm surprised that nobody mentioned international stocks. Oh. Because coming into the year, it was- Do those things still trade?

It was as bleak as it's ever been from the point of diversified investors, and I'm talking about globally diversified investors in the US, why do I own Europe? What are we doing? It really felt like it just might continue forever. The fact that international stocks are having their best quarter relative, to start a year, in 25 years. Holy shit. Nobody had that on their parlay.

If it's up 18 percent this year and the S&P is up to unbelievable. Nobody nobody believes that that can continue. Do you talk to anyone that thinks that that's a sustainable outperformance like developed markets versus US? I think it can actually. No, I agree that it can, but do you think anyone thinks that? Oh, no. It's like a very unpopular.

Couldn't we also see the dollar online too, and that's the big tailwind is that the dollar, because the dollar has been strong for years. Yeah, well, the dollar structurally is helping because a lot of these investments are priced in dollars, but I mean, it's a bit of a tech story because banks are a big sector for developed markets. It's a bit of a tech story because banks are a big sector for developed markets. It's a bit of a tariff story.

Germany's step into more fiscal. That's the biggest thing, I think, is them spending money. I think that was a big surprise. It was a surprise and it was a major pivot. I've got three more real quick. Number one, I hope everybody's caught up. It's too late for spoilers. They really killed Joel in episode two. That was a big surprise. People that played the game knew he would die but

even they didn't think that they would kill him in the second episode of the second season. All right I can't believe that stocks are up. Like think about how dark it was on April 9th and the V-shape recovery has definitely caught me off guard. I am surprised. And then my fourth surprise is at the bottom in April when Bitcoin was at 74,000 I was like, am I an idiot? Like why didn't I sell? And now it's at 110 or wherever it's trading today. Unbelievable. Are you still 10% Bitcoin? What? Are you still 10% Bitcoin? That was between us. No, I own more. No, I have more than 10% and it's too much. Okay, but I mean, I agree with you. That's a huge surprise. I can't believe I didn't think of it. And iBit just had the largest inflow ever in May. Incredible. What a turnaround. Yeah.

Were you surprised by Bitcoin breaking the mold of everyone thinking it's just another NASDAQ, it's just another tech trade, and then all of a sudden, it literally does its own thing and outperforms gold? Were you surprised by that? I think it's still a shape-shifter. Say more. Depending on where interest rates are, depending on where sentiment is, yes, or depending on where, what headlines are coming out, like, yeah, Bitcoin can act like gold, Bitcoin can outperform gold.

We can call it the safe haven, but I think that still flips. If you just pick a timeframe, you could say, this is NASDAQ or pick a different timeframe. This is digital gold. Yeah, it's not necessarily new either. And then sometimes it does nothing like any of them do. this is Nasdaq or pick a different time frame. This is digital gold. Yeah, it's not necessarily does nothing like any of them do. I remember three years ago when everyone said, well, Bitcoin is like that doesn't do anything. Ethereum, that's going to be smart money and DeFi and all these things. And Bitcoin is still the winner. Even the people in crypto were saying Bitcoin is like it's old.

It doesn't. And that's still the winner. It's like the brand name. Do you mean within the crypto industry? Because I mean, I think that's pretty much settled. It's like Bitcoin or nothing. Sorry, not a recommendation. I promise none of this is. I think Ethereum just rallied,

ETH just rallied like 50% though in the last three weeks-ish. Okay. Wild. All right, let's do a chart. John, if you please. So, Callie, I'm sure you've seen this data series before. This was new to me. So, Liz Ann Saunders tweeted,

personal interest income. You know about this series? What's personal interest income? Okay. So personal interest income, I'll turn it over to you, Callie. Hit a new high in April, and there's so much worry about the deficit and not enough attention being paid to the fact that it's our asset.

The biggest holder of US treasuries is us, and it's producing. Are we using that as a crutch to just be like, so what if the debt grows, we're the holders of the debt? I'm not saying so what. I the debt grows, we're the holders of the debt. I'm not saying so what. I'm just saying that this is also part of the story. So what has been the best thing to say though? For everyone who's ever said the US is going bankrupt, so what has been the right answer? Because what has, have we seen a crisis yet?

Just wait, it's going to happen. I've been hearing that my whole life. My entire career has been somebody in the background saying, yeah, but the debt. And it only goes in one, obviously, it only goes in one direction. The deficit lessens or gets greater, but the debt is the debt. But don't you think that this is the first time, at least in my memory, that the market is worried about the debt? Because I think that gold is responding to it. Like that's, I think, for the strength of- You don't think gold is more responding to the chaos of the tariffs that gold is responding to it. Like that's I think for the strength.

You don't think gold is more responding to the chaos of the tariffs? No, I don't. Do you think gold finally just now cares about the debt? Yes. Do you think? Get out of here. Do you think the 30 year treasury breaking above a 5% yield on the heels of something taking place in Washington is enough evidence to

say the market finally cares about what we do with our fiscal policy? I think for now, yeah. It's enough. And I agree with Michael. The market is reacting to the fact that the deficit could explode by 4 trillion or 5. I can't remember the number for the big, beautiful budget bomb, whatever we're calling it these days. But trillions of dollars being added to the deficit, finally the market is responding.

That's why we're seeing the 10-year yield break away from economic fundamentals. Same thing with the 30-year. Yeah, that worries me, even though you can't really put a finger on a worrisome number or the fact that the deficit is still expanding. I compare it to eating chocolate chip cookies, right? There's this bakery in Charlotte that has amazing chocolate chip cookies. What's the close shout out? Salted melon.

Salted, okay. All right. Everybody's like, woo, I have no idea what that is. This is a donut crowd. My counterpoint is the 30-year trades at a spread of 70 basis points to the three-month T-bill. Why isn't it way wider than that? And it's a good point. It has been way wider in history. But rates up, dollar down, gold up, that is the market telling you that the deficit is

now front and center. Yeah. And dollar down is also a reason to worry about this because usually the dollar down is because foreign investors are selling. They're moving money back into their countries. Yeah. Why? Why?

Tariffs. No, I'm saying that rhetorically. They're talking about taxing foreign capital. I'm saying it rhetorically. So there's a lot of words. It's not just one thing. It's not just one thing. We're on the same page.

Do we want to do recession indicators really quickly? I think it's worth getting into for a second. So this is the thing that we just keep talking about. It's all about the labor market, right? What is it going to take for us to stop our spending habits? Look at Michael's shoes. They're not going into recession if he doesn't notice. No way. The best recession in here. Those are the driver mocks.

Alright, there is now, according to Kalashie, a 31% chance of a recession this year. It got as high as 70% earlier. And Bank of America, who serves everyone, Brian Moynihan said, let's see. So he said- It's a live podcast. What? Relax. They can wait. Cons it's a live podcast. What? I just relax. They can wait. Consumers are spending money. That means the US economy is an anchor to

windward, that's a weird word, to windward that very few economies have because that's huge consumer-based spends and our customer base supports that across the board. Perhaps a better quote from MasterCard. Last time that we all spoke was at our earnings call. We had the first quarter data and we had up until the 20th of April. So everybody was saying just wait, just give it like a few weeks, a few months, they're going to change, people are super bearish, they're going to stop spending. Well he said if now if you include the first three weeks of May we see exactly the same. So spending trends have largely been the same. If you look at the headlines, if

you look at the sentiment surveys, and we've just seen one yesterday, I was surprisingly positive. You look at all the rhetoric, you see a lot of the headlines, and it really hasn't translated into consumer behavior. So enough about the sentiment surveys. It's all political. As long as we don't see a spike in initial jobless claims, we'll get data later this week from NFP, as long as the labor market is fine, there's nothing else to talk about.

I just like no more leading indicators. So I want to add to that there's also too much money. There's too much money to have a recession. Let's put up the cash obsession chart. So you could interpret this as a sign of people being risk averse and afraid of investing. I'm not sure that's the whole story. I just think that we are still feeling the reverberations of $14 trillion worth of COVID era stimulus.

It's still slashing around the economy. It's still got velocity and people are still holding onto tons of cash, tons of buying power, and it's hard to get them to act like they're on the verge of a recession when they're as flush as they are. What if this is also just a baby boomer thing where they're preparing for retirement and it's going to make the fixed income money market stuff look weird for a while? Could 100% be an element of that. This is money market stuff look weird for a while. Could 100% be an element of that. This is money market fund assets.

This is not behaving as those stocks are in the bull market. Is this my best call ever? What's that? Is this my best call ever? It's a pretty great call. I said it's going to stay. It's cash. So here are some numbers I want to attach to this.

Rachel's still pretty high, though. Talk to me at 3%. So here are some numbers I want to attach this. Rates are still pretty high though. Talk to me at 3%. So Michael's call is that we will not see money leave money markets. Like the money that's in cash stays in cash. You might be right. I said this two years ago because it's just inertia. Like this, it's not respond to the stock market.

It moved into higher yielding instruments and it's just staying put. So what if the rate comes down? Staying. As of May, $6.95 trillion in just money market funds. But when you look at the Federal Reserve's Z1 financial accounts, there's even more money than that. There's about $19.44 trillion when you include total currency and deposits inclusive of money markets, so bank accounts, savings accounts.

$20 trillion is a lot and we have a couple of charts just to illustrate this for you guys. And I think this is a really important visual. The first one is money market funds alone. So that's the $7 trillion. But then throw in all the other cash that's not in money market funds. This is total cash. This is unlike anything we've ever seen. I'm just showing you 10 years. This is the weird dichotomy to my risk thing. People are really risk taking, but they're also in other ways not.

They also have 20 trillion. There's a lot of cash. It's a bizarre environment. There's too much money. You're right, Josh. We're going to talk to Kunal later about this, but look at private markets. Yeah. Everyone's just sloshing from... It's too much.

Agreed. On the resilience of the consumer, I agree with Michael's take. I think the bottom line is if people are working, they're going to spend money. People will absolutely change their spending habits if and when they're not working, but we're still at 240,000 initial claims, which is a very normal number. Not at all confirming. But if we see the, let's say we have a recession, whenever that is, and unemployment goes from four and a half percent to seven percent or something, is the other 93% still going to be spending money or are they really are they going to bat down the hatches because their neighbor lost their job? I think assuming that is adjacent to saying recessions only affect a small number of people.

Right. But I think people forget that recessions affect everybody in one way or another. Your family member loses their job. Your favorite pizza place down the street looses. You might get a pay cut. Yeah, or you don't get a raise or yeah. Yeah, there are like these little unquantified effects that happen. street closes, you know, you might get a pay cut. Yeah. Or you don't get a raise or yeah. Yeah. There are like these little unquantified effects that happen.

Even fear, you know, I see this happening all around me. You know, what am I, should I save my own money? Should I, you know, stop spending here and there? I think that happens and that's harder to quantify. So now that the, in my opinion, the tariff risk, the headline risk is behind us, the VIX is at seven. Yeah. You better knock on wood, buddy. You think it's behind us or we've gotten used to it?

No, it's behind us. OK. All right. I'm not saying that it can't get it can't flare up again, but the VIX is at what? 16. I do think you're right, though, in that we saw something so crazy on April 2nd that I feel like it just kind of pushed the bar. Every Taco Tuesday, he's going to announce a new tariff. You just wait. think about on Friday He said 50% tariffs on Europe the market Had every reason to give back a little bit right after just being up

It closed at the highs of the day yields didn't move like nobody cares about tariffs anymore. So my question to you to Cali is Obviously nobody could see the future. But what are you worried about in the back half of the year? Uh Well, actually I have a chart for this. John, can you throw up continuing claims? It'll go. It's going through. It's coming. Okay.

So I think the job market is pretty solid right now. I think it's weakening and I think both those things can be true. And what you said, Michael, it really does come down to, if Americans are spending money, then we're good. We're the best at spending money in the world. Consumer spending is 70% of GDP. Most Americans get their primary income from their jobs. If you have a job, you're spending money. So this is continuing claims. This is jobless claims, unemployment claims. If you're in the second week or longer of unemployment claims, not in your first week, not in your initial week, you fall into this number right here. And

this is claims divided by the total workforce to put some context there. Continuing claims are still quite low, but they're moving in the wrong direction. They're moving higher. And usually when you see this trend moving higher, then a recession is around the corner, probably coming soon based on history. We haven't quite seen that. Claims have been moving higher for a while, but I worry with all this extra pressure, the Doge cuts, the tariffs, which ultimately somebody's going to pay that price. It's going to be consumers or it's going to be companies.

Mexico. Mexico? They're going to pay it. Mexico pays it. Can I counter continuing claims? Yeah. Can you show my restaurant chart? Show Josh at the mall chart, John. Okay, that's not it. I'll give you guys a second. So this is the S&P 1500 restaurants sub-industry group, versus the regular equal weight, versus the regular S&P 1500 equal weight, and then for fun I threw in the Fidelity Select

Leisure Portfolio. Why is there an S&P 1500 restaurants index? Nobody's trading it. It's not an ETF, it's an index, nobody's trading it. I feel like you made this up. I did not make it up, it exists. Shout to... Wait, so let's just for one second, let's spend a second on this. The Fidelity Select Leisure Portfolio is up 18% of the last year. The equal weight S&P 1500, as you could see, is effectively flat. It's done nothing. And even the restaurant group is up about 12%. So anything related to consumer spending on leisure or you know a quick meal out with the family, all of those things are absolutely fine. Door dish! But can I counter that? Do you know

what's in this portfolio? We have a table. Cali, McDonald's, Booking Holdings, Starbucks, Hilton, Marriott, Chipotle, Royal Caribbean, Airbnb, Domino's. This is my gauge. People could say whatever they want to a survey. I'm telling you what the stocks are doing. They're mostly up and to the right. I spent $23 on a smoothie today from DoorDash.

And then he went to Marine Layer and bought a new shirt. That's a resilient consumer right there. So I completely agree. I think the goods versus services conversation is a little different because of course tariffs are a reality that we have to consider right now. And we still haven't seen a lot of those costs passed on. I've seen little anecdotes here and there of like a tariff

fee on like the final bill of like a shirt that you buy online. But I do still wonder if we're waiting for the economic fallout there. And if when it happens, it's like the pressure that cracks. Those stocks will turn fast. Well, and the labor market thing is weird too, because people keep saying, listen, in the next recession, what if a lot of the jobs don't come back because of AI? Like what if we see softening in the labor market because of AI? Is it too soon to like worry about that where the economy is still doing okay

and the unemployment rate is going up because people are losing jobs to AI? Is that like too much of an immaculate handoff at this point? I mean, it depends on who you ask. If you ask a coder in Silicon Valley who can't find a job right now because pro and business services hiring

has been pretty much flat, then yeah, that's a problem. We see it here and there, but overall, I mean, white collar jobs haven't been driving the hiring anyway. So it could be this handoff that we eventually hit, but I think AI is going to take five or 10 years to work its way through the economy anyway. So to wrap this conversation, I want to ask you guys, what do you think are the biggest stories to watch this summer, aside from the very obvious stuff that's in the headlines

every second of the day? What is the thing that you're watching for right now, Callie? God, I have to go first. You go last. This is what I get for not bringing a laptop. OK, so the job market, Michael's right, spike in initial claims. I wonder if we see that spike in initial jobless claims, first time claims for unemployment benefits, if that's less of a leading indicator than it usually is given this economy is so

bifurcated and funky. I think about that a lot. High frequency labor market data, I think the job market is a big story. Obviously, tariffs are a big story too. What actually happens there, how it affects economic data, how it ultimately affects spending. I mean, that's where I'm laser focused right now to the point where I do get a little nervous that I'm missing things on the perimeter. Ben, what are you watching this summer? What do you think is going to be important?

What if, I think this was on our list, we didn't get to it, but for years people were worried about, well, the yield curve is inverted. It's over, it's doom. What if the yield curve un-inverting is just the economy normalizing finally, and things are just getting back to normal a little bit, whatever that means?

Yeah, we seem to not be talking about yield curves anymore. We're now just talking about the absolute level of rates. It seems to be like a bigger deal. What are you watching this summer? A lot of shitty horror movies. I didn't want to see the new one. What's it called, Bring Her Back? I'm very excited for that one.

I am curious to see what the Fed does. How many cuts are we pricing it now? Two? I think two or three. Despite the stock market and despite me spending $23 at DoorDash today for a smoothie, I do think financial conditions are too tight, particularly for the first time home buyer, and I think rates need to come down. I think we're ready for it.

So I'm excited to see what Powell is doing. of these rates going from seven to five would be a huge stimulus. Yeah, right. There was a survey about this from John Burns. How I think the question was around, you know, where would you step out and potentially look at buying a house and 5% was the magic number. There's a ton of buyers on the sidelines right now. Just waiting.

Yeah, and 20 trillion dollars. just waiting. Yeah. And $20 trillion, just saying. Yeah. Right. So from my perspective, I think it's the younger people who are going to bail us out of this whole thing because they're not risk averse. They do want to spend. And if you put them in a position where they can actually buy real estate, the multiplier effect of the next generation literally becoming their

parents, which happens every generation, I feel like that's a really powerful economic tailwind and we're not going to be crying about deals with China. So I'm hopeful for that reason. I think we have the people in this country, they want to live a normal life and spend money and invest and go out and do things and they're just waiting for certain things to fall into place. You guys like that idea? Yes? We end on a note? Yeah, I love it. Alright ladies and gentlemen, Callie Cox and Ben Carlson. Alright we're gonna take a 30 second break while they change the set

and we'll come back with Kanainal Kapoor. Thank you guys. All right, we back on? All right, guys thanks for bearing with us. This is a really special, this is a really special conversation that we're going to have. I am so excited to introduce our next guest. Kunal Kapoor is the CEO of Morningstar. Before assuming his current role in 2017, he served as president, responsible for product development and innovation, sales and marketing, and driving strategic prioritization across the firm. Kunal is a Morningstar lifer. He has held a

variety of roles at the firm. He was the director of mutual fund research. He was part of the team that launched Morningstar Investment Services. Before moving on to other roles, he's been a director of business strategy for international operations and later became president and chief investment officer of Morningstar Investment Services. Ladies and gentlemen, please give it up for Chicago's own, Kanaal Kapoor. Welcome. Thank you. All right. This is a home game for you. It is. Pretty exciting.

So I wanted to start with what you... Before we get into Morningstar stuff, what do you see as the state of the individual investor in 2025? Let's not start there. Can I do my surprise? Sure. Your show. So I mean, we're in Chicago.

Nobody mentioned the Cubs? I feel like that's a surprise. This is your chance. And what are you watching this summer? Probably most people are watching the Cubs. Okay, or the Tigers, but go on. Who? Not in Chicago.

The Tigers are just getting lucky because they're beating up on the White Sox. All right. Big Cubs fan, big Bears fan. It's good, yeah. Bears are going to make it to us here. You're a true Chicagoan through and through. Okay, we love it. Big bears fan. That's good, yeah. Bears are going to make it to us here. You're a true Chicagoan through and through. Yeah. Okay, we love it.

Now, what is the state of the individual investor in 2025? Okay. It's pretty bright. I think as you guys have surmised, there's... I think people are investing and most importantly buy and hold has really taken hold. If you go back and look at our data, you really see patterns where people are increasingly investing and investing for the long run, which is a great thing, and they're investing in a low-cost way. And so I think the state of the investor

is good. You showed some charts and made some points about risk-seeking, and there's certainly risk-seeking going on. People probably have a little bit more leverage and are investing in ETFs that, you know, even single security ETFs and things like that. So there's a little bit of animal spirits, so to speak, I think out there. You know, your employee and my friend Jeffrey Pupack recently wrote that the Vanguard Total Stock Market Index Fund has 1.7 trillion dollars in net assets which is the largest fund of all time. Yeah it's amazing. I mean I remember when I started Morningstar, I mean indexing had still not fully bloomed right and people considered what John Bobo was doing as a

bit of a sideshow so and you kind of look at it today and wow, huge change. You recently celebrated 20 years of Morningstar as a public company. So, Morningstar went public on May 3rd, 2005. And you wrote a really good piece just kind of commemorating the moment. And I want to quote you and have you react. You said, our business has grown 10x from a revenue and operating income perspective over that period. We have grown from a team of 1,000 to a team of more than 10,000. Shareholders have been rewarded with the stock compounding at approximately 15% on an annualized

basis, which by the way is incredible. You say while we did not pay a dividend at the time of going public, if you bought shares at the $18.50 IPO price, your yield on that original price based on the 2025 dividend payout is approximately 10%. And we looked this up, there were 662 firms classified as a financial since you guys came public. You were the 25th best performer overall with a total return of 1,615%.

Give that a round for Morningstar Show. That's amazing. Did you know those numbers? I did not, but I want to know who the other 24 are. All insurance. All insurance. So Morningstar is like the paper of record for the mutual fund industry. For people that advise on 401ks, there are plenty of providers and services where if you are not having certain Morningstar rating, you cannot be, like it is legit. It is a very big deal. But Morningstar is so much bigger than just the rating business.

What else does Morningstar do that people in this audience, myself included, just might not be aware of? Yeah, so if you think about it, Morningstar actually was founded here in town. Our founder is Joe Mansuado. Founded the company in his Lincoln Park apartment in 1984. And you're right, we started with mutual funds. And, you know, Joe was an analyst and what he found was that there was no easy way to actually figure out what various mutual funds were doing and he wanted to compile that. And he sort of saw this growth trend and obviously Morningstar benefited greatly from that. And to this day, we are the record when it comes to managed that. And he sort of saw this growth trend, and obviously Morningstar benefited greatly from that. And to this day, we are the record when it comes to managed products.

And by the way, there's tons of managed products now over and above mutual funds, even active ETFs, managed portfolios, all those have been helpful. But the investor portfolio has changed quite a bit since I started. So it used to be pretty simple when I started, stocks, bonds, cash. We kind of went in in there and that's kind of what your portfolio looked like, what mine looked like. And it was relatively simple. The investor portfolio has changed.

And today the investor portfolio is a lot more, you know, people own private equity, some people own VC, some people take, you people take lenses such as ESG investing and put it to work. They have preferences. That's illegal now. Well, preferences that they're trying to put into a portfolio and you also are looking at things from a data perspective where there's so much more data to collect. And so Morningstar, over time, has essentially tried to be where we can serve

the investor. And so if you look at P and VC markets, we own PitchBook, which is the largest provider of data in that space. We're now the fourth largest credit rating agency in the world. And by the way, among the four, you referenced that the three have already changed their rating on US debt. We have not. So we're the only holdout so far. You don't make that decision though. You got a team that makes that decision. Our analysts make that decision, yeah.

So that's sort of interesting, right? And so we've kind of evolved our business in that way as well. I didn't realize that you were the fourth largest. No offense. When I think of the rating agencies, I don't think of more. I think of three. We're going to change that. Okay.

You're the lone bull on the US treasury as an issuer. Well, we certainly stuck by our rating, yeah. Okay, all right. You have talked about this idea that there is a crucial need for a common language of investing. One of the ways that I think about Morningstar is that Wall Street traditionally has made a lot of its money from information asymmetry. They know things that the customers can't know, wouldn't know, even if they knew, they

wouldn't know what to do with that information. I see you guys as a force for equalizing that information asymmetry and arming people who are making decisions with their own money with way more information than anyone else has a vested interest in giving them. Right. Do you see yourselves that way and what do you mean by a common language of investing? Yeah, absolutely. So let me start on the first point, which, when I first came into the business, and I think

to this day, people often say retail investors are sort of the dumb money. This is like a trope that you sort of always hear. And when we looked at the data across Morningstar, one of the things we found is actually retail investors, particularly in their retirement accounts and longer-term investments, tend to stick with things. And so we have this really interesting thing where we look at published returns versus what we call investor returns. particularly in the retirement accounts and longer term investments tend to stick with things. And so we have this really interesting thing where we look at published returns versus what we call investor returns.

Or dollar weighted returns. Right, exactly. So it's actually if you're putting a dollar in, how is it performed? And generally speaking, over time, retail investors you see kind of buy and hold and stick with things. And yet there's sort of been this narrative that they don't. And so one thing we've tried to sort of point out is actually that a lot of the market movements

are not coming from retail investors. And so it's kind of been unfair that that has happened. But one thing Morningstar has done over time is, at least when it comes to mutual fund investing, stock investing, we've created this common language. So when you think about Motes, Buffett popularized it, companies of Motes. And we took it a step further and kind of developed it beyond there

when it comes to mutual funds and ETFs. We have star rating, style boxes. What has been lacking as more and more people have gotten to PE and VC is there's no common language. So how do you think about liquidity? How do you think about leverage? How do you think about the fact that suddenly in your portfolio you might have something

that's very liquid that you can get out of today at this minute and something that you may not be able to get out for seven years. There's not kind of a common framework and language to look at that and assess it and so when we think about the future we think public and private convergence is real. I mean there's only 6,000 public companies in the US today, more than 12,000 PE backed, and even more VC companies. And so you need a language for people

to be able to assess what that means in their portfolios. Do you think we're going to go to a place where the ordinary investor, I know, first of all, I hate the dumb money paradigm. I think the industry benefits greatly from this idea that people underperform their own investments famously and therefore they can't do any sort of investing without an adult holding their hand. I've always hated that.

We don't use that in our marketing as intermediaries. We don't believe in that concept. We talk to really savvy, accomplished individual investors who have never been advised and we talked to people who hand up, I need help I'm not good at this, we talked to everyone. But do you think we'll get to the point in this public-private convergence where the ordinary investor is comfortable with terminology like IRR and can even begin to vet a private credit opportunity or a private equity opportunity and understand the underlying holdings and what risks they're taking? Because I'm a little bit skeptical that we'll ever quite be able to get there.

I think you don't necessarily need to have terminology like IRR. We were talking back there about what the future looks like if you're an analyst and what kinds of things you should be studying, right? And I would say it's a job of a firm like Morningstar to tell that story and create the language that's accessible to everybody. So when we talk about common language, it's just that, right? Like jargon sucks. Let's just be honest about that.

Yeah. And it doesn't need to be as complicated as needing to say it's IRR. There are other things that we can certainly help with to kind of demystify that. Do I think every aspect, though, of private markets and VC investing is going to be fully accessible? I don't think so. Just the bad stuff. No, I think there will be good stuff. And look, if you look at credit, for example, what was one of the big changes post-GFC,

global financial crisis? It's that banks have become limited in terms of their ability to lend. And so what happens? You do have newer firms emerging, and you have firms like Apollo and Blackstone and others kind of getting into the business. And I think reputationally they do care and it is going to be important.

And over time you're going to see a normalization, for example, between what's called private credit and high yield. And you already sort of see that in portfolios. I think that that can work. I agree with you. It is coming. There is no doubt about it. There's going to be a lot of crap.

And you always have to watch out. And again, that's our job to help people sit through that. So BlackRock is all in. Larry Fink in his annual letter spent the first six pages talking about the explosion of private markets. But the problem as I see it is how do advisors and investors really, and maybe that's where Morningstar comes in, really diligence these companies?

Are we looking at terms? Are we looking at term sheets? I think there will be products similar to mutual funds and ETFs that will own these. And some of that will come about by regulatory change, and some of that will come about by new structures. Already you see State Street and Apollo testing the limits with private credit ETF. And nobody wanted it. Right and you see interval funds are also taking off, right?

So here in the US in the last year if you look at the number of ETFs, I'm sorry number of interval funds that have launched, it's remarkable. And so what's an interval fund? It's basically you don't get daily liquidity, you get to come in let's say once a quarter and exit once a quarter or some such thing. So people are starting to experiment in a way that'll make it accessible. And there's some really good managers starting to pay attention to it. Do you think that private assets belong in vehicles with minute by minute liquidity? No. You agree that that's probably not the best wrapper for that? in vehicles with minute-by-minute liquidity? Is it?

No. You agree that that's probably not the best wrapper for that type of asset? I'm generally not a fan of assets that people want to trade minute-by-minute. I think generally speaking, you want to have longer time horizons with things, and I think investors generally do better

when they buy and hold public or private. Okay. Do you think that we will see a... so I don't know what I don't know what the size of private assets could be in a traditional asset allocation but when they have the private credit conferences and the private equity conferences I don't know how much of this is just firing up the troops or how much of this they actually believe. But you hear them say things like, we think it's 50, 30, what does that equal? 20.

We think that's the asset allocation of the future. This is where it's going. It's going to be 50% public stocks, 30% public debt, and then the other 20 will be some amalgam of private credit and private equity solutions, funds, whatever. That seems really far-fetched to me just because people have a liquidity need that institutions don't. So just with that as a starting point, where do you fall in that debate? So I think you're exactly right. I think in their retirement assets it's more likely that you could see

people do that. In fact, some of the biggest investors around the world in private assets tend to be pensions and endowments and all sort of the Yale model. They have an unlimited time horizon. That's right. That's right. And so I think that's how we have to think about it in the context of individual investors as well.

It's asset location. What do you think is the driving force behind the private equity sponsors all of a sudden, for 40 years, ignoring the millionaire next door, ignoring traditional wealth, all of a sudden, the last two years, it's like, oh my god, you guys are so horny. Why are you chasing me down the street with private equity opportunities? What do you think is behind that? I think he has to give a diplomatic answer. Well, no, no, no, I don't need to. But first of all, I don't think it's private equity. Private equity gets all the headlines.

It's really private equity. It's more of a private equity phenomenon. Okay. I mean, private equity is, I think, way harder to kind of put into that format. And what you see is sort of traditional mutual funds beginning to own a little bit of private equity because those are sort of the companies that they might have owned early stage IPO 10 years ago that are staying private longer and so you're seeing some of the larger managers take stakes in

those and I think that that's a reasonable way. It's really private credit where it's changing and I think it's just partly because they need the capital. And- So that's what Michael's theory is, like they ran out of institutions to tap, so they need a new pot, and this is a big pot. It is that.

It is clearly partly that, but I think it's also, at the end of the day, the reality that there's demand. So, okay, I don't want to give the impression that it's all bullshit, because it's not. It's definitely not. What is it like? I mean, every financial innovation has some degree of caution to approach it. Of course, of course. But the fact is that something like 90% of all companies

in the United States that do over $100 million in revenue are privately held. And so, they obviously can't tap the public markets, and the banks aren't doing it, and so enter Blackstone, KKR, Ares, et cetera. Exactly. And they do generate higher yields. And so there is great opportunities.

And the track record of a Cliffwater, for example, goes back. This is not a fly-by-night company. They've been around for a long time. But the thing that worries me a little bit, more than a little bit, is the end investor and their ability to know what they're buying and to do diligence other than, yeah, it's Blackstone. But again, I think it comes down to firms like Morningstar doing that job for them.

That's our business, right? So it's to help demystify what's happening in those markets. Well, Kunal, let's be specific about how you're doing that. So you've got a Morningstar medalist waiting for semi-liquid funds. That's going to come out this year, yeah. So tell us why that's necessary now and how investors should think about that. So I talked earlier about the launch of more and more integral funds. Is that a semi-liquid fund?

Exactly, because it's semi-liquid in many instances and it's because you don't have instant liquidity, right? And so the methodologies we've had have largely been focused on vehicles that provide immediate liquidity and so we're extending it. One of the interesting things that we're trying to do though is we're trying to place liquid next to semi-liquid because all of us when we're building portfolios, we don't want to necessarily say, well, I'm willing to give up something to have the semi-liquid. Well, why should you?

If you can own a semi-liquid, it has to justify doing better than the liquid. So you're trading liquidity. You're trading instant liquidity. What are you getting in return? It better be higher something. So our methodology seeks to answer that question. Can you talk about the methodology?

Because a lot of people, they just look at the star rating. What goes into it other than just backward looking returns? Because I know you guys have professional analysts. The medalist in particular is largely driven by analysts. And it's not, you know, backward looking is not the primary driver of it. So the medalist ratings in particular are driven by analysts. Star rating obviously has a little bit more of a dependency

on past risk and return for where it kind of goes. The medalist is like gold, silver, bronze. Correct. Okay the star rating is more backward looking on performance. That's right. Okay you guys seem to be de-emphasizing the star rating in recent years. Am I making that up? No we're not. Star rating is incredibly important. It's still our calling card. Our analysts will always tell you it's the starting point that we always say you should use for your research and then go deeper.

Okay. I want to ask you about the personalization trend and kind of the evolving needs and wants of the investor class. I very much agree with you here. Personalization is the frontier. And I think it's the single best way as wealth managers, if we can highly personalize a client's portfolio and really imbue them with a sense that this has been built just for you based on unique attributes that we discussed in

your life, your risk tolerance, the things that you worry about, et cetera. I think people are less likely to abandon that type of personalized portfolio, especially when times are tough. It's not the kind of thing you throw out the window like here's seven ETFs everybody else owns. Yeah, yeah. So it seems like you and I are very much on the same page. Yeah, I remember a conversation going back 15 years with a local asset manager who has

a big business in what are called separate accounts. And so they had a mutual fund and then they had these separate accounts which were for high net worth individuals. And I remember asking, like, you know, what's the catch here? Like, are you guys personalizing? And the answer at that time was not really, it's just a great marketing tool. We basically do the same thing in separate accounts as we do mutual. Everyone's a special snowflake.

Right. Right. Today, today, that's just a great marketing tool. We basically do the same thing in separate accounts as we do in retail. Everyone's a special snowflake. Right. Right. Today, that's not true anymore. You actually can personalize. You might walk in, for example, you might be working at company A and your friend might be working at company B and you might say, give me your best ideas, but I want to exclude company A and any other company in the sector because I've already got my human capital tied up so heavily here, so I don't want my

stock portfolio to reflect that as well. And you can get the Morningstar US market index, not the other indexes you've been mentioning. And you can get that taken out of there right away. So that's a simple thing. Or you have a tax situation, and you can harvest tax losses without maybe changing the profile of your portfolio. So what is the Morningstar role in the era of customized portfolios? I think we're in the era of custom not saying direct indexing, but I think we're all sort of saying that it's data.

Okay, the core of our business's data and research and and honestly even going back to AI theme like that's what sort of it's fueling And honestly, even going back to AI theme, that's what it's fueling a lot of the discovery in that sense. Another big theme this year on top of the personalization and customization are active ETFs. All of the, not all, a lot of the biggest new launches are active strategies, whether it's the buffered ETFs, the call option strategies. Now it's the 13030, which are not in the ETF wrapper,

but active is having its moment, alongside of course the traditional. Are you surprised by that, because it took a really long time? I'm not, because the reality is like, there's this active passive debate that takes place, and what our analysts have been saying for a long time, that's actually the wrong debate.

The debate is high cost versus low cost. Because low cost is winning in every space. And active ETFs ultimately are a good way for active managers to suddenly be available at low cost. 75 basis points is sort of like the standard that a lot of them have landed on. Or even going lower. You know what's interesting?

Like, thematic was the active ETFs back, not back, four years ago. And now, like,atic was the active ETFs back, not back, four years ago. And now, like that's over, and now it's the options, the targeted duration fixed, even there's innovation of fixed income ETFs now. Yes. I don't like some of the ETFs that are very, very narrow in particular and have a huge amount of leverage.

But when I think of active ETFs, I actually think of some of the larger asset managers that are basically taking clones of their mutual fund portfolios and launching them. Like dimensional? Dimensional, T.R. Price, American funds, and they're doing it at a much lower cost. I've given Kathy Wood credit for kicking the door down to active ETFs and making them a category. Even if you disagree with her investing style,

which I'm sure a lot of people do, she is the first active manager to launch an active ETF and have it get to $50 billion. That was just absolutely unheard of. And now we're not surprised at all when somebody like Tom Lee comes along, raises a billion dollars into an active ETF in the first week. Now it's like a standard thing that people can do if they have a great idea, good marketing, good timing. I think it's good for the active industry.

I completely... Costs don't matter, though. Costs don't matter. Yeah. Okay. You think costs are going lower for active ETFs? They need to. Okay. You think costs are going lower for active ETFs? They need to. OK.

And you think we'll continue to see asset managers cannibalize their own AUM from mutual funds by building copycat versions as ETFs? That'll continue. I think it's another channel for them. And so I don't even think it's cannibalization. The reality is most mutual funds, the death of the mutual fund has been greatly exaggerated.

The reality is like it's very sticky assets and in the retirement space that continues to be a lot of assets flowing there. And I think what you see is that asset managers are able basically to take a strategy and put it into many vehicles today. And so you can get it in the vehicle that you want. So you see it more as additive as opposed to replacing investment dollars from one to the other. Let's talk about AI. So you're a data company.

This seems like it's going to be an amazing moment. You have the data that everyone that's going to build AI solutions for the investment business wants to buy. Who are you talking to? What are people thinking? What do you think we're going gonna see in terms of real world impact from the age of AI investing?

Yeah, I think it's super real. And actually one of my surprises for this year has been that there aren't still further progresses when it comes to AI and consumer apps. I sort of would have expected further kind of leaps and bounds and that has not quite happened yet. I think the tipping point with AI and use of AI really comes through consumer apps first and foremost,

as opposed to kind of professional or enterprise tools. So we'll kind of see how that plays out. But it's clearly a big deal. And you just look at all the data we collect, for example. And if today you're trying to go through our database, you either are using a screener, or you're doing some kind of querying,

or you have to be a really good programmer. And when we started to tour around with AI and we developed something called Mo, it's sort of our AI avatar. Your AI avatar is called Mo, short for Morningstar. Very clever. But the thing about Mo, you just go to ask a question and within seconds go through our database

and any research that was ever written. Two weeks ago, the New York Times struck a deal with Amazon for the use of New York Times, what they consider to be their intellectual property inside of Amazon's AI environment. This struck me as very notable because during the first go-round of the internet, the search engines told all of the journalism entities and all of the data entities,

no, no, no, just let us have it for free, it's great for you. Turned out to be the end of journalism as we knew it. It seems this time, everybody's being a lot more circumspect. Are you having conversations or meetings about who is able to take Morningstar data and suck it into their engine? How much you guys think you should be paid for it? What are you going to provide to different players? What does that look like for you?

Yeah, and I think it's the problem every content provider has is sometimes you go online and you're like, huh, how did they find that data and where did they pull it from? And so we absolutely... And can we sue them? Fair. Okay. That's one way of framing it. Okay.

We haven't quite gone there. But I do think they need to be fair use cases. And what's interesting, the internet analogy is interesting because a lot of those companies, let's be real, were broke back then. And they couldn't pay for the content and one or two broke through and it was fine. The technology is interesting because a lot of those companies, let's be real, were broke back then. Yeah. And they couldn't pay for the content and one or two broke through and it was fine. These days a lot of the AI companies are flush, so I totally reject the argument that they can't pay for what they can pay.

And so I think that's what you're seeing. Kunal, where are you on AI as it relates to the advisor industry? Maybe 10 years ago there was this huge push into robos. There was the threat that they were going to replace or displace financial advisors. And that just did not come true. UBS just closed their robo. They're one of the last holds out.

It did not work to the extent that some investors, like VC investors thought that it would. So where does AI fit into financial advice on the advisor side and maybe even on the end client side? What's interesting just even with the robos though, what the robos did do is that it forced advisors to think about the parts of the investment process that they could automate. And whether they call them a robo or not, advisors have generally automated investment processes more heavily.

I agree with that. A decade ago or two decades ago. And I think that's going to be the same thing here. Advisors push a heck of a lot of paperwork. And they spend a ton of time filling out forms, complying with regulations, doing those kinds of things. And I think AI changes a lot of that and puts the focus probably on value additive activities, such as talking to clients, figuring out what they really need,

and sort of being concierge, right? The world is changing in that sense, and I fully expect that AI will mean that the advisor will have to kind of keep upping her or his game. Do you think there will be a killer B to C AI advisor app in the marketplace? I think so. It feels inevitable.

Is that a 2025 thing or 2027 thing? Always easier to predict in retrospect. Yes. I think we're not that far off from it, and I actually think it does not have to be a new app. I think some of the most interesting things that are happening are at firms that already are large and are putting a lot of money to work in this space. You mentioned a CFP board survey where, can this be true, one in three investors said they would act on financial planning advice from AI without verifying it.

Yes. That's real? Who sponsored that survey, OpenAI? CFP board. financial planning advice from AI without verifying it. That's real. Who sponsored that survey, OpenAI? CFP board. CFP board sponsored that. And here's another interesting thing. So with Mo, one of the things we find is when people first approach Mo, they're highly transactional, right?

Give me the methodology for the star rating. Tell me where I can go find some information on X or Y. And then when they come back, they start to ask more personal questions about their financial situation. And so when I talk to advisors, I always say my learning from that has been that as people get more comfort, they're willing to push the envelope on what

they're going to ask. And we live in a world where it's like, hey Siri, hey Alexa, hey Moe. And so it's inevitable that you're going to get that to some degree. What large language model is Mo built on? We have worked primarily with ChatGPT on it. Okay.

Can I give you some advice to make the Morningstar stock go up? I have a feeling you're gonna give it to me. What if we rename the company Morningstar AI? That's gotta be worth like another four or five billion on the market cap, yeah? Maybe for a little while. Okay. Kunal, what advice would you give to a young person, you have a young person in your family who's entering our industry, what advice would you give them given the rise of automation and compute power and maybe a diminishing respect,

I don't know if that's the right word, but for the human part of the work that we all do. I think integrity still matters a ton. And for the human part, people don't talk enough about integrity these days and the importance of doing the work for your client in a trans... What's your son's integrity star rating? You'll have to ask him.

But I think that's a really important point. And it's been at the core of Morningstar is this notion of independence and transparency. I think those things matter for anyone who's entering the industry. You can still fight the good fight for investors. When I came in, expenses were high, disclosure was poor in the public

markets. And I feel like we won that fight. But all these new things that are coming along, we've talked about private markets and all. Part of the reason you're asking those questions and rightly asking them is transparency is poor, fees are too high. There's lots of good fights to be fought. And so I think being on the right side of the investor is where people should be. Well, Kunal, you've been on the right side of everything so far. And I think being on the right side of the investor is where people should be. Well, Kunal, you've been on the right side of everything so far, and I think Morningstar has fought the good fight. Except my sports fan.

Fair, fair. But I do think investors armed with insights, data, information from Morningstar, all in all are equipped to make better decisions than investors who are just flying blind. And so for that, I'd like to give you a round of applause. Thanks for having me. Before we fully sign off, I want to acknowledge some of the people who have helped us put this show on for you guys, this live event, but also who put on the shows that you love every week, almost every day it feels

like sometimes. We have an incredible crew, they have been working for months planning this event, making sure everything went perfectly and I just want to make sure that they get their due because this has been an incredible experience for us. Hope you guys have had fun as well. Ladies and gentlemen, round of applause for Nicole. Don't cry. Don't cry, Queen. Rob Passarella, Daniel, John, Travis. Guys, give it up for Duncan. Where's Duncan? Duncan. They work so hard on all of the YouTube and all of the podcasts and all the live events we do and they love you guys so much. They think about how you're going to take everything that we do.

So much effort is being made all the time to make sure that what we deliver into your AirPods or your car stereo is as perfect as it could possibly be. They kill themselves in that effort and they made tonight possible. Guys, thank you so much once again. you