Senior MD & Head of Global Client Business, BlackRock
ETFs Act as 'Shock Absorbers,' BlackRock's Wiedman Says
Oct.24 -- Mark Wiedman, global head of iShares at BlackRock, discusses the influence of market volatility on ETFs, the asset manager's push into ESG offerings, and ETF fee structures. He speaks with Bloomberg's Erik Schatzker on "Bloomberg Markets: European Close."
About Mark Wiedman
In an October 2018 interview, Mark Wiedman, then global head of iShares at BlackRock, stated that ETFs act as "shock absorbers" and liquidity vehicles that allow buyers and sellers to find new prices during market stress. He said this conclusion is shared by the Financial Stability Board, the Bundesbank, and the SEC. Wiedman also discussed BlackRock's approach to ESG offerings, saying the firm charges "basically the same very low cost" for these products and that in emerging markets, an ESG-oriented portfolio "may actually outperform over the long haul." Wiedman said BlackRock has not entered the leveraged ETF business and that he does not expect a zero-fee ETF from the firm, as its revenue model is aligned with offering low-cost investing. He described the U.S. market offering at three basis points as "pretty much close to that asymptotic limit." Wiedman projected the ETF market would grow at 13 to 15 percent organically over the next five years, which he said would mean a doubling in size.
Transcript (8 segments)
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Eric0:11
In the event of a disorderly market sell-off, what do you say to the people who haven't yet forgotten, or perhaps who still remember August 24th, 2015?
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Mark Wiedman0:20
We'll see that ETFs act as systemic stabilizers. In the 2015 fixed-income stress, prices were struck fastest in the ETF. The Financial Stability Board, the Bundesbank, and the SEC have come to that conclusion. More than 30 trillion dollars of assets are held in funds that promise daily liquidity despite illiquid underlying assets. That is a reference to mutual funds, not ETFs. Mutual funds are forced sellers; ETFs trade on an exchange and find a counterparty. We solved that problem with the ETF. I don't know what Governor Carney referred to, but I look forward to educating him. The Bundesbank gets that ETFs act as shock absorbers. As your president Rob Kapito emphasized, BlackRock focuses on brand and liquidity.
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Eric3:33
What's the risk that bad behavior could come to damage the ETF industry as a whole?
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Mark Wiedman3:39
When I talk about ETFs, I'm talking about plain vanilla, pass-through, unleveraged, unstructured vehicles. That's the vast majority. The world is changing. There is a growing segment of investors who want to express their values in their portfolio. They ask for simple, easy-to-use products that track the market and express those values. We charge basically the same low cost because we want these to be central in portfolios. If you hold an ESG-oriented portfolio, it screens out poorly governed firms. In developed markets, we track the market dead-on. In emerging markets, you might outperform. Stocks like tobacco may reprice, but over the longer run, they'll have a higher expected return. I look forward to your sound; this may be a real question from my child.
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Eric6:21
Mark, BlackRock stock hasn't traded above $500 since August 1st, the day Fidelity cut fees on some of its index mutual funds to zero. I know you like to rebut that by saying Fidelity also cut commissions on a number of BlackRock ETFs to zero. My question is: how long until the first zero fee ETF?
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Mark Wiedman6:45
I don't think we'll see it, certainly not at BlackRock. Our revenue model and service proposition are totally aligned. We offer clients a very low cost way of investing. Banks in the 80s offered toasters free with checking accounts, but toasters still cost something. I don't think the model of low price to get people in the door will change what is fundamentally a tool for building portfolios. The trajectory on fees is down. Long term, as the industry grows, yes, I would expect to see fees go lower. But let me get where you're going, Eric. The question is how low can fees go. We offer the entire US market for three basis points, three cents on a hundred dollars. I really think we're pretty much close to that asymptotic limit.
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Eric8:29
Let me come to that point on the swoon we've seen in the stocks of all asset managers, not just financials. Do ETFs help explain the extraordinary outperformance of BlackRock stock for the five years 2012 to 2017? Do they explain in any way, given the slowdown in flows, what's happening to BlackRock stock now?
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Mark Wiedman8:49
I can't really speak to why buyers and sellers of BlackRock stock set the price. Here's what I'd say: we see this market was over 20%. I think what's changed is that investors are getting nervous about global markets, especially non-US equity markets and maybe now US equity markets. Dollar cash yields are actually positive for the first time in ten years. Put those together, you get a slowdown. Last year was overheated. Long-term trajectory is 13 to 15% growth in the industry, and we think that's going to pull.