Talk Your Book: Investing in BlackRock's Mega Forces

0:00Today's Animal Spirits Talk Your Book is brought to you by BlackRock. Go to BlackRock.com, iShares.com to learn more about their ETFs. You can check out their thematic investing update, which we talk about on today's show. That's BlackRock.com or check out iShares.com to learn more. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

0:38Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:46Welcome to Animal Spirits with Michael and Ben. On today's show, we spoke with Jay Jacobs. Jay is the US head of thematic and active ETFs for a little company called BlackRock. 2024 saw the most successful ETF launch, thematic ETF launch of all time. Yeah, you can count crypto or Bitcoin as thematic, I guess, right? Absolutely. Yeah, which credit to you, you were right. That thing blew everything out of the world. So I bet the iShares fund has$20 billion or something in it, which is just an insane amount of money, especially with all the competition that's out there. Ethereum ETF is also coming.

1:19I think by the time this show hits, it'll be there. We're recording Monday. Bloomberg is reporting that it's going to start trading on Tuesday. So by the time this comes out, we'll see. We'll see. Any guesses on ETFs, on the ETH ETF? Will it be over under one-tenth as successful as Bitcoin? I would put the over under at 15 % of Bitcoin ETFs. Is that fair? Okay. Something like that. I do think that it's a harder sell for people. But what if most of the money that comes in is just people who have it somewhere else and they want to swap out their current ETH position for an ETF? I didn't buy that for Bitcoin.

1:58I don't buy it for ETH. Why would you pay taxes just to get into an ETF? That's fair. I do think what ETH has that Bitcoin – well, Bitcoin had it too – is a tailwind of favorable prices. If this is launching into a nasty bear market, I think it would probably be challenged. But crypto assets have been behaving well, at least Bitcoin and ETH. And I could be behind on the news, but how quickly until we have an ETH Bitcoin ETF that just tracks? I did see somebody speculating on when that gets launched. I'm going to say within the next six months. But I don't know. I don't know if that's a regulatory thing.

2:32I have no idea. You'd think if both ETFs are available, someone could just package the two ETFs together, right? That would make sense. I do think the idea of thematics being the active investing of today makes a lot of sense to me, as opposed to active stock pickers, security selection, all that stuff where you just invest in a theme. I think that makes way more sense to me. I think sectors were the first one, obviously, and all the different technology you can go into. And I think that makes more sense to me as the sort of satellite position for a lot of people. So 23, maybe 24-2 is the year of the option overlay.

3:0824 is the year of crypto. 25 will be the year of, I don't know. Stick around. We'll find out. All right. Please enjoy this conversation with Jay Jacobs from BlackRock.

3:21Jay, welcome to the show. Thank you for having me. We're going to talk today mostly about thematic and active ETFs. Obviously, iShares is a gorilla, one of the biggest players in the room. But before we talk about the thematic side, Eric Beltrunas tweeted the year-to-date flows for various ETFs. And IVV is number two on the list. It's BlackRock's or iShares S &P 500 ETF. And it's taken in$34 billion in the first half of the year. Looks like it's on pace to break an all-time record of$50 billion. Does the fact that index and strategies that track indexes, does the fact that they are getting so much money make your job easier, more exciting, harder?

4:12How does that fit into how you all think about things? Well, what we're seeing is an evolution of portfolio management that increasingly investors are looking to get broad, diversified, tax efficient, low cost course in their portfolio, whether that's IVV or ITOT or other types of broad based kind of benchmark exposure. And then they're complementing that with different types of exposures for satellite positions. Maybe that's getting really granular within a specific theme or subsector to play a transformational event like artificial intelligence or rewiring of supply chains. Maybe that's looking at different income solutions, looking at things like buy right strategies that can generate more income.

4:50Maybe it's about managing risk with what we call our buffer strategies. Or maybe it's even just introducing an active manager into an area like high conviction U.S. stocks where you can add some real kind of stock picking alpha to complement that diversified core. So really, it's both. We're seeing the rise of index alongside more concentrated and differentiated exposures in the satellites of people's portfolio to try to outperform and adapt their portfolio to a changing world. Do you look at thematics as a new type of active for a lot of people, or is it in its own bucket where you have indexing and active and then thematics over in another area?

5:26Well, so I see thematic as people really trying to look forward and anticipate how the world is changing. And there's a lot of different ways to play those changes. You could use index-based themes that are really kind of trying to provide exposure to an entire value chain of a specific theme. You can use active managers that are trying to pick winners within a theme, or you can really be rotating across several themes and trying to play kind of these changes as they evolve. And so, you know, really this is about anticipating the changes that are happening around the world today and getting really granular, pure exposure to those themes to make sure it's differentiated from what you're otherwise getting in the core of your portfolio.

6:03Yeah. The one thing that you mentioned in your mid-year outlook on thematics is AI, which of course is a big thing people are paying attention to. How hard do you think it is to pick the winners there? Because my contention is, I don't know, I think the indexes are going to pick up on the winners. And I think trying to pick who the winners are this early in the game is really, really difficult. Shocking, shocking take from Ben. You know, I think it is difficult. And I think it's because this is such an early theme. And so kind of try to own the entire theme and get broad, we would call it almost thematic beta.

6:38So just as you would get beta exposure to US equities, you get beta to a specific theme by owning an entire value chain. That's one way to play it. You would benefit from kind of a rising tide across AI. You could be using an active manager who has an expertise in this area to pick winners as well. Or what we talk about in our thematic outlook is actually looking at specific slivers of the AI tech stack. So AI is this huge concept that's going to change the economy in a lot of different ways. We look at the tech stack as a way to kind of think about the different layers within artificial intelligence and who benefits at what points of this thematic cycle.

7:13So right now, where you see the market paying a lot of attention is largely in the platforms, the companies that are building ChatGPT and Claude and these different kind of generative AI platforms that underpin a lot of AI today. But when we look at the parts of the market that have been underappreciated thus far and underrecognized by the broader investor community, what we like is really the infrastructure layer that maybe we don't know exactly who the winners will be five years from now, or maybe the theme evolves in some way that we don't totally foresee. But what we know is as AI grows, there's going to be more demand for data centers and digital infrastructure that really hosts all of this computing power.

7:57There's going to be more demand for semiconductors, which is really the engine behind artificial intelligence. All of this data is being processed to power and train and run these models. And we know there's going to be more demand for energy because AI is quite power hungry and is actually really changing the equation for energy demand in the United States right now. So if you're really kind of looking at AI as this early stage theme, which we do, we believe that picks and shovels are this really important kind of base layer that is going to benefit no matter which way AI goes from here in terms of how it evolves.

8:32Jay, I was going to give you credit for using picks and shovels because that to me always sounds very intelligent from stock picking perspective, the picks and shovels. Right? I always tell Michael, that's like the best CNBC line you can use is picks and shovels because it always works. It plays, right? It always plays. Jay, so I want to talk about how you all at BlackRock and iShares think about implementing thematic strategies. So for something like AI, had you known in January of 2022 that ChatGPT would drop in the winter, well then, yeah, you would have gotten out ahead of it, but you couldn't have.

9:07So you had to be reactive to the AI super cycle that we're seeing. But for things that you can maybe see coming that you can telegraph, like the Bitcoin ETF, which we're going to talk about, and the Ethereum ETF, which is coming, I'd love to hear what does the process look like inside of the company? Is there a committee? What sort of discussions are you guys having? What sort of thresholds need to be met for consideration? What does the sausage-making process look like? Well, a few things. I guess I would take a step back and have some contention with the fact that we didn't see this coming. Robotics and artificial intelligence has been a theme of ours for several years now since bringing out our first product in 2018.

9:44So this is absolutely an area we had an eye on. Now, I will say in the early stages of the robotics and AI theme, I think there was more of a view that the developments would happen in the automation stage, that this would be about kind of replacing the physical with automation. And what we're actually seeing with generative AI is Actually, it's a replacement of kind of more of the thinking, more of the processing, the creation of content, where artificial intelligence is really having a breakthrough right now. So the theme has evolved, as we would expect. All these nascent themes evolve, sometimes in predictable, sometimes in less predictable ways.

10:22But it's certainly an area we've had our eye on for several years. Going to a higher level, what we do when we think about thematic investing is we start with our Megaforces framework, which was introduced mid-year of last year. And the idea behind the Megaforces framework is we brought together the BlackRock Investment Institute, we brought together investors across the firm, and created five different pillars of disruption across the global economy that we believe are going to be real drivers of change over the next decade and beyond. So those five pillars are digital disruption and AI, a transition to a lower carbon economy, demographic divergence, so really the difference between aging populations in the developed world versus youthful populations in the emerging markets, the future of finance, as well as geopolitical fragmentation and rewiring supply chains.

11:16And so when we think about themes, they really should map to at least one of these megaforces. But oftentimes we see they map to several of them, that something like how artificial intelligence is not just a function of innovation and technology, but also a function of how we see investment and policy in the United States around things like semiconductors. And that's more kind of on the supply chain side of things. you start to see that they're really powerful themes kind of spread across multiple megaforces at once. When we see that, when we see that multiple, you know, a theme is mapping to multiple megaforces, that gives us a lot of conviction behind the theme.

11:56And then that's when we work with either one of our portfolio managers or our indexing product innovation arm to come out with the right solution for how to play the theme. Maybe it's active, maybe it's indexed. It really depends on how we determine kind of the best way to get exposure to a theme is. On that supply chain theme that you talked about, you had some really cool charts in your piece about manufacturing. So you show the total construction spending in manufacturing in the US is up four times since 2014. And this one surprised me. Since 2010s, the number of US manufacturing jobs has actually been growing quite steadily.

12:28There was a drop off in COVID, but back on trend now, basically. And I have to say, this really surprised me. What are the macro implications here? Does this make prices for inputs for companies higher? Does it actually decrease prices eventually because we're on trying? What does it mean? Well, what it means is that in the previous 20 years or so, there was a major focus on low-cost supply chains. How can we get goods as inexpensively as possible? And what COVID-19 revealed was that it doesn't really matter if goods are low-cost or not. If you can't buy anything because supply chains are disruptive, that is a massive risk to the economy.

13:10It's a massive risk to individual companies. And now the pendulum has swung away from low cost towards resilience. How do we build supply chains that are more secure, whether that's a pandemic, whether that's shipping that's slowed down for whatever the reason? We've seen several things, a ship getting stuck in a canal, slowing down shipping lanes, anything can happen to slow down globally integrated supply chains. More resilience starts at home. How do you have the right infrastructure? How do you have the right factories and manufacturing to build critical components, especially things like semiconductors, which are basically in everything now, including your toaster?

13:47So you really need to kind of restart thinking, where do we get our goods? How do we build more resilient supply chains? And then when we do have global integration, who are those trade partners? Working more closely with countries like Mexico, which not only is close to the United States, has low cost of labor, has free trade through USMCA, really makes sense as a key trade partner of the United States. And of course, we're seeing growing trade with Mexico. We have an election coming up in a couple of months. And our inclination is that people should probably separate their view on politics from how they think about investing.

14:24But nevertheless, people like to vote with their wallets. One of the Bloomberg ETF reporters has been tweeting charts of how an index of democratic companies or republic companies, and I don't even know what's in the input, but ostensibly companies that would do well under one administration versus the other. Has BlackRock ever looked at or thought about, or maybe even have one, a product that is based on politics? No, we don't look at it through that lens. But Michael, I would start by agreeing with you and saying the most important thing for investors to achieve their investment goals is to stay invested and to stay the course.

15:00So political elections or other events around the world are not a reason to get away from your financial goals and to not invest. Now, sometimes you can see that people want to prepare for volatility in the markets. So in the core, that means tilting towards quality companies, more profitable and less leveraged. That's one way to kind of weather some rockier markets. We've seen some people move to our buffer ETFs, which use options to get protection against the downside in case we see volatility as well. But I did mention one of our megaforces is around geopolitics and rewiring supply chains. And what gets us excited is just the amount of consensus you actually see in some of these themes in the geopolitical arena.

15:44For example, infrastructure has been something that's been talked about in this country for years. And we had the bipartisan passage of the Infrastructure Investments and Jobs Act, bringing a trillion dollars to the U.S. to rebuild roads, highways, waterways, airports, really kind of rebuilding the backbone of U.S. infrastructure. We see a similar story today in U.S. manufacturing, that this is an area with a lot of consensus, both in the private sector and the public sector across the aisle. And so we're seeing just a lot of investment in the U.S. right now in building factories and in retrofitting factories.

16:21In fact, the amount of construction spend on manufacturing has tripled since before the pandemic. So a lot of interest in this area as well. And this is a theme that we have conviction behind generally, but it always helps when public policy can help accelerate that. BlackRock is either the first or second largest asset manager in the world. You can correct me when I'm done speaking. On your recent earnings call, you passed$10 trillion, over$4 trillion are in ETFs. So you have to be very thoughtful. You're not some fly-by-night company where you could throw spaghetti against a wall and hopefully get lucky and one or two make up for the other eight or 10 that fail, whatever it is.

16:58What's the track record like at BlackRock for launching and closing ETFs? Well, we have a very rigorous process for identifying opportunities in ETFs and largely it's driven by client demand. What are our clients asking us for? How does this ETF serve as a solution to client needs? Whether that's getting a specific exposure, whether that's wrapping a specific strategy in an ETF. I keep going back to these buffer ETFs, but I think this is a really good example where clients came to us and said, trading options on my own is a difficult thing to do. You have to roll them every month. Maybe there's some risk in execution.

17:35I would prefer to wrap this in an ETF and scale this across my entire book of clients so that if I trade for one, I'm talking about a financial advisor. If I trade on behalf of one of my clients, that can trade for all of them simultaneously with an ETF. And so just wrapping that idea of an option strategy in an ETF can really help create a scalable solution for clients. And so that's just an example of how we listen to a need in the market. We create a product to satisfy that need with the highest quality standards that BlackRock is so laser focused on. And ultimately, that leads to a very high success rate with our ETFs.

18:08So if you look at that$4 trillion number, I think a big part of that is really just listening to our clients and bringing out high quality solutions. I think another big part of it is the growth of ETFs just generally as a vehicle, that increasingly ETFs have become the vehicle of choice for so many investors around the world. So we're incredibly excited about that milestone, but there's also a very deep pipeline of innovation at BlackRock that we've already shown with many of the launches this year. Jay, you didn't answer if you're number one or number two. I'm going to assume that you're number two.

18:41We are number one in asset management. OK, there you go. That's a company man right there. Number one. So obviously, one of the, you probably didn't have to put too many groups of consumers together for this to talk about the demand. But the Bitcoin ETF obviously is a resounding success. Michael and I had some back and forth on this. And I'll put my hand up. I was wrong. I didn't know what the demand would be for this. And Michael said it's going to be huge. And he was right. And I was wrong. Are you surprised at all at the demand for the Bitcoin ETFs or this kind of in line with your expectations?

19:12It's been a tremendous launch. There's no doubt about that. And surpassing$20 billion in assets under management within the first six months is an incredible milestone. You know, it's very clear to us there is substantial demand, though. You know, you just you think about all the ways people were trying to get exposure to Bitcoin before. You know, people were opening accounts on on crypto exchanges to get direct exposure. People, you know, largely institutions were trading futures. People were using individual stocks that had kind of high beta to Bitcoin to get exposure as well. And in a lot of these instances, there was real trade-offs.

19:45Maybe it was impurity of exposure. Maybe it was operational challenges, dealing with custody or taxes. Maybe it was high trading costs. But you put that together, and Ibit really solved a lot of challenges for investors, giving them the ease of access that ETFs provide. You can just buy it in a brokerage account, and they can sit alongside stocks and bonds. Giving that efficient trading, trading hundreds of millions of dollars a day, and really streamlining that exposure to get really close tracking to the price of Bitcoin. So in a lot of ways, this is a story of ETFs doing what they've always done very well of providing that access and convenience to a specific asset.

20:24But again, I mean, of course, the reception has been tremendous and it's been felt across a lot of different groups, whether that's end investors, financial advisors, or institutions. So Jay, to that point, there's been a lot of debate on Twitter about where the flows are coming from. And$20 billion, it's hard to get there with just retail investors. On the other hand, some people have looked at the average trade size and says, well, it's not that large. Maybe it is primarily retail investors. You obviously have a better lens into this than we do. Could you talk about the mix without giving specifics of where the flows are coming from?

20:57It really is a mix. It's a true mix across those three groups that we generally look at, the institutional groups, the financial advisors, and the end investors. You know, what I can say within the institutional space is, you know, we're seeing it being adopted in a few different ways. We've seen a very large public pension plan adopt digital assets. We've seen some legislation change how institutions can invest in digital assets. We have seen some fund managers that like trading in different asset classes, allocating to Bitcoin because it's a diversifier and behaves very differently from stocks and bonds.

21:37So, you know, if you look within the institutional group, which, you know, often is going to be kind of the slowest to move into a new asset class, we've seen some great adoption there already, even in these first six months. Within the financial advisor space, what we're hearing is a lot of advisors are allocating to Bitcoin because their clients are doing it and they want to be able to manage Bitcoin alongside stocks and bonds, not having their clients have some money with their advisor and then investors kind of trading digital assets on their own. So no, the advisor wants to see the whole financial picture of that client, and that can include digital assets alongside stocks and bonds.

22:16So this is really about an advisor being able to service that client the best they can, and in some ways really kind of have conversations, particularly with younger clients who maybe are more likely to be digital asset users. And then finally, in the end investor space, I think this is an example of just the frictions that ETFs take away, that the difficulty of opening an account on a crypto exchange, trading on the exchange, funding it. End investors want things to be easy and efficient and accessible, and that's what ETFs have been providing since day one. So we've seen tremendous adoption there as well.

22:51I don't know if you'd track this, but do you see more volume in the Bitcoin ETF than you see in other ETFs, or is it similar to any other products that you see? IBIT has become incredibly heavily traded. I'm not sure exactly where it ranks across all ETFs, but I would venture a guess that it's in the single-digit top percentile of how much as trading these days. And in fact, if you look at IBIT during market trading hours, it's one of the most liquid ways to get exposure to Bitcoin, period, across all different vehicles. So it's become a very liquid way for people to express an opinion on Bitcoin.

23:22Jay, Larry Fink was on CNBC last week after your earnings call talking about Bitcoin, and I believe he referred to it as digital gold. I'm curious, how do you think the message is going to be given to end investors? And okay, Bitcoin, we understand. And well, what the heck is Ethereum? Yeah. Yeah. So, you know, when you look at Bitcoin, you know, it's really this global alternative to currency that if you are looking for something that behaves differently and has different characteristics from fiat currency, the fact that it's decentralized, not run by a central bank, is kind of protected against debasement because we know there's only 21 million Bitcoin that can be issued.