The 60/40 Portfolio Is Dying — BlackRock Just Revealed What's Next

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3:02Want to drive? CarMax. All right, let's bring our guest up, shall we? Hey, how's it going? Hi, good afternoon. How are you feeling, man? I'm great. How are you guys? Very good. Glad to have you here. It's good to be back. I was on the show last year and lucky enough to be invited back again. Yeah, we appreciate you being here again. Appreciate you having me. Jay Jacobs, U.S. Head of Equity ETFs at BlackRock. Yes, pleasure to have you back. How are you doing? I'm doing well. Markets are good. Weather is good. Tough to complain. For sure. So let's get into it. You're the Head of Equity ETFs at BlackRock.

3:45It's been a great ride over the last year, two years, really. Since COVID, actually. It's kind of just been up. Friday was a short reset. Everybody's talking about a bubble. Everybody's talking about a bubble, panic, fear, saying that it's too good to be true, AI valuations. How are you looking at this space right now for your ETF portfolio that you guys have in BlackRock and just the market overall? Sure. Well, first off, if you go back 10 years, the average return that an investor got buying the S &P 500 was over 15%. That's not normal. That's like double what's normal. So it's been a tremendous ride for investors, frankly, just doing kind of the most basic form of investing, which is just getting exposure to a broad asset class like US stocks.

4:38But a lot has changed over the last 10 years. In fact, one of the things I think has changed the most is how we think about resilience in the markets. So historically, if you wanted to build a diversified portfolio, you'd buy some stocks and you'd buy some bonds. And usually those two things kind of move in opposite directions, which gives you good diversification. But we've seen over the last couple of years, the stocks and bonds are moving together. So it's really hard to get a more diversified portfolio to weather the storm of the sell-offs that we've seen here and there over the last couple of years.

5:11On top of that, we've seen bouts of volatility, whether it's because of trade relationships, whether it's because of AI, whether it's because of economic doubts. So people have been trying to navigate that. And then third, I think a lot of people are just trying to understand kind of where the world is headed. There's so much new technology. There's so much change. People are trying to make more resilient portfolios that can kind of stay out ahead of all that change. So over the last 10 years, again, like a really simple portfolio just did great. Just own stocks, have stocks, bonds. Like it was really simple.

5:45I think things have gotten a little bit more complicated for investors, but that doesn't mean there isn't more opportunity. People just have to think about the world a little bit more granularly than they did in the past. So are you nervous or concerned that we could have a major cliff moment where the stock market goes down 40 % in one year? I mean, volatility is never out of the question. I think overall, we see that the market is resilient. We've seen a tremendous earnings environment over the last quarter or so. Companies are delivering earnings much faster than people expected. You know, you were asking about a bubble.

6:24Usually that's tied to artificial intelligence. We actually don't see there's a bubble. AI companies grew their earnings faster than their stock prices went up last year. That means valuations actually came down because their earnings were going up faster than their stock price. So like a stock per earning ratio was cheaper. And a lot of this is justified. These AI companies are delivering just tremendous amounts of growth. We looked at one AI company, you know, the unit of sales for an AI company is tokens, right? It's kind of a unit of intelligence. They grew their token sales last year 17x.

7:01Like a high-growth company usually grows 17%. This was 17x in AI tokens. And, you know, yes, AI companies are growing really quickly. Yes, you know, we've really never seen this kind of rapid escalation in a theme like this. But so far it looks fairly justified given the rapid adoption of artificial intelligence and the total market opportunity. it feels like ai is in all rights a defining investment theme of our lifetime right every time you listen to professionals and you kind of just alluded to it we've never seen anything like this before like this is such a new thing the way that these companies are growing like you said the revenue is incredible um the multiples are incredible what also is happening is the creation of ETFs.

7:57I mean, it's at a record number. I wonder how you're looking at it from your standpoint, right? Are people going into individual equities or are more people looking at ETFs at this point? ETFs have been growing tremendously quickly. And I think a lot of it is people moving from buying stocks to buying ETFs, going from kind of picking an individual company to buying a basket of companies. And a lot of the reason is for diversification and simplicity. A lot of people might buy a semiconductor company because they like AI. And they say, you know, I'll buy a big semiconductor company. But instead of doing that and having the risk of one company, you can buy an ETF that invests in 50 different AI companies, you're going to be diversified across sectors, across geographies, looking across the AI value chain.

8:43So not just a semiconductor company, but a large language model company, a data company, a company using artificial intelligence and its products and services, digital infrastructure names involved in power or real estate. You can access all of that in one trade with an ETF, one called Arty, A-R-T-Y. And it's just simple for investors to be able to access that entire theme with one click. You could even take it further than just one theme, though. So there's ETFs out there that actually are an entire portfolio in one click. So think about usually when people have a 401k in their companies, they have the option to buy a target date fund.

9:26I'm going to retire in 2065, so I'm going to allocate 100 % of my 401k savings to that target date 2065 fund. Inside that fund, there's stocks, there's bonds, probably thousands of positions overall. But now you can do that in the ETF as well. It's not just limited to your 401k. you can buy an ETF with one click that gives you a diversified portfolio with thousands of positions. I'll just ask to follow Jacob really quickly because as I'm looking, they're growing so fast. I wonder how you as the company look at a subsector like Memory and say, hey, there's companies that are moving and this subsector is moving at an exponential rate, right?

10:06do we now have to create something to say, we need to take advantage of, we need to put our community inside of this subsector? If there's a durable investment case that's doable in an ETF, it's something that we'll absolutely consider. Some of these themes are a little too narrow, that it's really just kind of looking at a couple of companies, not really a basket of companies. And if it's really just about a couple of companies, we don't think it makes sense in an ETF today. ETFs are really at their best and they're investing in you know, call it 25 to a few thousand companies where you're really getting that benefit of diversification.

10:42But when it's AI, when it's infrastructure, we see a ton of people looking for ways to play power infrastructures. AI is going to use more electricity demand. If you're looking at defense companies, when you're looking at, you know, autonomous vehicles, all of these are very doable baskets in an ETF and we've built products for all of those. As a follow-up to the bond market topic that you brought up, it's been six years since the 30, 10-year, 2-year have been down on the long-term trend. Do you think the 60-40 portfolio is dead? And if not, what do you think is going to take for the bond market to stabilize and get back to being a balanced diversification kind of investment for the 60-40 portfolio?

11:26I mean, the correlations between stocks and bonds have been more resilient than I think people expected. originally the narrative was, you know, as rates were going up really quickly, this is why, you know, bonds were selling off. And it was also not great for the stock market. A lot of the stock market is tech stocks. They tend to be more sensitive to rates. So rates went up and everything sold off together. Everyone kind of thought once rates peaked and maybe started to come down, you would see that correlation break. And frankly, it just hasn't broken yet. So the implication for portfolios is 60-40 used to be kind of the base case for most people's portfolios, we think we're probably moving to a 50-30-20, that 20 % of things that are not a stock or a bond.

12:07Think about gold, Bitcoin, liquid alternative strategies, think about like hedge funds, long short strategies, some private exposures, basically just looking for stuff that lives outside of stocks and bonds because you're not getting a really diversified portfolio anymore, just looking at those two assets.

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16:33People who are younger are going to want more stocks. People in retirement and might want more fixed income, but that 50, 30, 20 probably solves most people's allocations. Let's talk about Bitcoin, iBit, and BlackRock, obviously, one of the largest holders of Bitcoin. iBit has suffered this year, just like Bitcoin has suffered this year, a lot of volatility, and recently it went down a lot last week. So are you guys still bullish on Bitcoin? What is the outlook? What is the plan? I know there was a lot of talk about moving more into 401ks and having more adoption. A lot of that conversation kind of has not been had recently.

17:13It's not in the news, obviously, because Bitcoin's price is down. So nobody's really talking about it in that form of adoption. So what's the message for IBIT and Bitcoin as a whole in regards to BlackRock's thinking in regards to it? I mean, our long-term case hasn't changed. Bitcoin is a monetary alternative. So as people look for things outside of the US dollar, outside of other fiat currencies issued by centralized governments that they want to have be decentralized, non-sovereign, global in nature, Bitcoin will tend to benefit. And we've seen Bitcoin do well over the longer term. If you zoom out over three or four years, the performance is still very strong.

17:55Similarly, its spiritual cousin is gold, and that's done quite well over the same period as well, because people looked at gold as a monetary alternative, as you see rising debt of different governments around the world, distrust of governments and fiat currencies, etc. So the case for Bitcoin is the fundamental case for Bitcoin, I think, is still very strong. In the near term, a lot of it is driven by supply and demand dynamics, and we actually know what the supply of Bitcoin is at any given time. So largely it's driven by shifts in demand and sentiment. But that tends to be a much more shorter term phenomenon.

18:29Over the longer term, I think it's really about education, more people understanding what Bitcoin can do in a portfolio. This is not just about individual investors. This is about financial advisors across the United States. This is about institutional investors like sovereign wealth funds and endowments making more strategic allocations. A lot of that education process is happening. But it takes time and it happens kind of quietly. You know, people don't just wake up one day and buy Bitcoin. It takes, you know, for professional investors, it can take many months or years to get to that level of comfort.

19:03So all of that is continuing to happen. But in the meantime, the price of Bitcoin, you know, is volatile as it has been over its entire history. Yeah, I wonder if the thesis is the same around Ethereum. Obviously, blockchain, when we talk about platform and we talk about digital assets, I mean, people have Bitcoin, but Ethereum, it used to be in the conversation. I feel like it's kind of been left out. I wonder if the thesis is still the same when you look at the Ethereum trust ETF that you guys hold. Is it a similar outlook for this as well? I think there's certainly some similarities. I would say the similarities are education is definitely a key piece of the puzzle where more people understanding what Ethereum is, what blockchain technology is and how it can be used is a really important part of the story.

19:53But Ethereum, we just look at very differently than Bitcoin. You know, if Bitcoin's spiritual cousin is gold, Ethereum's spiritual cousin is really like the Apple app store. You know, it's a decentralized computer. It's a platform for being able to use technology for decentralized software, things like stable coins, tokenized real world assets. There's growing interest in these use cases, but we're still early. So I think just the more we hear about tokenization, the more value it can provide to DeFi and stable coins. I think the more powerful that narrative is going to be over time. For the investor who may be worried about the length of how long the AI trade will last, How long do you think we have for the AI investment?

20:41And what do you think are some second or third layer opportunities coming in the future for us to be able to invest in? It's a great question. And I would say there's a difference between the AI trade and the AI investment. Because I think the AI trade implies a little bit more of a shorter term outlook. And a lot of that has been focused on semiconductor stocks and large-scale model developers. the AI investment across the value chain is going to be a decade. This is just where you're seeing entire economies and business models shift to accommodate artificial intelligence, much like we saw with the internet 30, 40 years ago.

21:21What's kind of the next stage? We're looking at it from a couple of different angles. I would say right now, really the beneficiaries have been more in the infrastructure layer. The data centers, the power infrastructure, and the semiconductors are a lot of today's winners. And it makes sense because that's where the revenue is going. You have to build a data center, you have to fill it with semiconductors and you have to pay the power utility or buy some power generators to be able to turn on these AI machines. The next phase, I think will be a little bit more about the implementation of AI. You can look at this at some of the companies that are adopting artificial intelligence.

21:57They're not the builders of AI. They're just companies that are being smart about using it and it can really benefit their business. And another group that I think will be really interesting is more about real world AI. Think about autonomous vehicles, robots, et cetera. The ways that AI is being used not just sort of in a digital sense when you interact with ChatGPT, but more in a physical world sense. That's still in the really early stages because frankly that's much harder AI. It's more AI or it's more compute intensive. So that's where I think over the next several years, we'll start to see more growth as well.

22:35Are you more bullish on the newer companies? We just talked about Marvell. We talked about, obviously, Micron, a variety of these companies, or the established companies like the Googles of the world where they have moved slower, but they're probably in position to kind of still be the leaders if they can maintain their dominance. I mean, that's the big question, right? Maintaining the dominance. I think there's huge advantages to the biggest companies in the world. They have some of the most data, proprietary data, whether it's their social media that they operate, whether it's the software that they operate, et cetera.

23:15These guys have data. They have some of the most software engineers on the planet because this is what they've been doing for decades. And then they have the lowest cost of capital. These are huge mega cap companies that get to issue debt really cheaply compared to small businesses. And a lot of this artificial intelligence game is literally just the math of how much data, how much engineering, and how much does it cost to be able to fund all these capital expenditures. I mean, these companies are going to spend close to a trillion dollars this year on CapEx. So their cost of financing is actually a really important part of this puzzle.

23:46But with that being said, really small innovative companies can move quickly and do things that others can't. So I think there will be a balance. I mean, certainly we're seeing some new companies that could be IPO-ing this year that are fast and nimble and newer. So it'll be a little bit of a blend, but I think some of these big companies have really entrenched modes that are going to be difficult to displace. I wonder, as you're watching it from your perspective, what are some of the themes that you're seeing? The younger investors, moving to ETFs, our options trade? What are some of the themes that you're seeing from your side?

24:23I mean, definitely huge growth of individual investors participating in the markets. This started with COVID. You saw about 40 million accounts in the United States open up during COVID of individual investors starting to participate in the markets. A lot of those new investors using ETFs as their vehicle of choice to express views. Some people just want to buy the broad market and sit there and hold their funds for a long time. Other people, a little more tactical, a little more trading oriented. But either way, they're using ETFs to express those views. A couple of trends, though. One is a huge amount of growth in thematic investing.

24:59And it just makes sense. This is what's driving the markets today. Markets are up and down because of AI, because of geopolitics, because of different infrastructure needs. Those are themes playing out in real time. So it makes sense that people are increasingly thinking about their portfolio, not through traditional classifications of U.S. versus international or technology versus health care, but through themes like AI and geopolitics. The second, though, is definitely the growth of option investing. A lot of this is really about investors trying to get more control over their investments. You know, what are you trying to get out of your investment?

25:37Are you trying to get income, which you can use options to generate more income by selling covered calls? Are you trying to protect against the downside? Another thing you can do using options, really kind of buy protection, buy insurance using option products. So option growth has been a huge piece of the puzzle. And then we mentioned this before as well, digital assets. Just a huge amount of, frankly, taking two worlds that have been fairly distinct. to the traditional finance world and the decentralized finance world, and then being pulled closer together. You know, IBIT's a great example of Bitcoin, a decentralized finance asset, being brought into the TradFi world via an ETF.

26:21And we're increasingly seeing these two worlds interact closer and closer. In your opinion, what should people be looking at inside of the ETF before they actually buy if they haven't invested in one before? I mean, the number one thing is look at the holdings. What is it actually investing in? You know, it might have a name. The ETF will have a name, but what's being reflected in that name? Is that really what you see under the hood? Is that the kind of exposure you want? There's a lot of different ways to build an AI ETF. There's a lot of ways to build a U.S. large-cap ETF. Every business has an ambition.