#110 - Leland Clemons: Bond ETF Innovation

0:05Leland Clemons:Welcome to the Insightful Investor Podcast, a weekly series that seeks to share industry, investment, and market insights. We define insights as concepts that are counterintuitive, widely misunderstood, or underappreciated. In other words, unique ideas that you probably won't hear elsewhere. I'm Alex Shahidi, the host of the podcast and co-CIO of Evoke Advisors, a leading investment advisory firm. Learn more about our show at insightfulinvestor.org.

0:38Leland Clemons:Today's guest is Leland Clemens, founder and CEO of BondBlox, a fixed income only ETF issuer managing about$7 billion as of year-end 2025. Before launching the firm about four years ago, Leland spent nearly 15 years in senior leadership roles at BlackRock's iShare business, including serving as global head of markets and investment strategy, where he helped grow ETF assets from under$100 billion to more than$2 trillion. Welcome to the podcast, Leland. Hey, Alex. Thanks for having me. Of course. You've been involved with ETFs for about 25 years. How do you feel the ETF ecosystem has evolved over that period?

1:19Yeah, I guess first and foremost, fortunate me for being in and around such a vibrant market over the last 20 plus years. I think the evolution of the ETF ecosystem has really been incredible. You've got in less than three decades, there are hundreds of product providers, thousands of individual ETF products, trillions of dollars invested across advised accounts, institutional accounts. so many investors benefiting from the cost and convenience of the ETF wrapper. And equally amazing, I think, is the capital markets evolution that is supporting these funds continues to get more and more efficient every single year.

1:57So that's great. I think if you're going to think about how the markets evolved, though, we always talk about at Bond Blocks, you've got to credit the end investors, whether that's an asset manager, a financial advisor, or a self-directed investor. The creativity, the ingenuity of how investors have learned to use ETFs in portfolios has really been what spurred the industry along and sort of the impetus behind a lot of the innovation that we've seen.

2:27Leland Clemons:And if you think about it from a high level, we started with just cheap passive exposure. And then we've had active management within ETFs and then obviously more precise slices within asset classes. Like you said, it's the end user that ultimately determines what comes out because they're the buyers of these different funds. And it is really interesting how it started so simple and it's become much more sophisticated over time. Yeah, really incredible. So you held senior seats at iShares BlackRock before 2021. What did you see from those vantage points that convinced you a bond-only ETF firm that focused just on bonds needed to exist?

3:08Yeah, so a little bit of origin story of bond blocks. As you mentioned, I was very fortunate to spend 15 plus years at iShares in those formative days of building the ETF industry, both here in the US as well as internationally. And a lot of that focus and time was spent building out fixed income products, focusing on fixed income capital markets infrastructure. I left in 2019, actually, to join a fixed income trading and analytics business and was really able to see from a front row seat the change that was being driven in the fixed income markets that was not so different from those changes that brought more efficiency to the equity markets in the late 1990s and early 2000s, right?

3:56moving from a dealer-oriented market to a more exchange-traded, more transparent, more electronic marketplace, all of which is very conducive to the build-out of an ETF product and an ETF marketplace, ultimately leading to, hopefully, better investor performance through greater transparency of markets, better accessibility of consistent pricing. And then in 2021, I'm very fortunate to have now founders, but also long-term colleagues and co-workers across the ETF industry. And some of those conversations were looking at the convergence of several really powerful forces. So one of those would be client demand.

4:38Clearly, investors were voting with their clients' accounts that ETFs were the preferred vehicle for how they were going to scale their business. The industry evolution of ETFs and more specifically fixed income, as I said, was evolving to really enable fixed income product development and portfolio construction to think about the next stage of development. But there was also an innovation gap. When you had a lot of the ETF market really being propelled by a handful of firms, you can only do so many things at once. right? You've got equities, you've got factors, a real thing, I'd say, through the mid-2010s that a lot of asset managers were focused on commodities, leveraged and inverse.

5:27Crypto was starting to be a topic of discussion. And fixed income just really hadn't been front and center at the table. And I think the fourth driver of what made us interested in focusing on a fixed income only ETF business would be some regulatory change. So the SEC made some rule changes in 2020, 2021, that really enabled a leveling of the playing field so that there could be more innovation that could be pointed at the fixed income market. And so through those conversations, we said, let's go do something interesting that both scratches an itch to innovate and be entrepreneurial, while also looking at a really large part of the market that is fixed income that just hasn't gotten the right attention.

6:18Leland Clemons:Also from 2009 until about 2021, bonds were relatively unpopular as rates were very low. And so I guess you had a decade plus period where there just wasn't as much attention. So what problem did bond blocks set out to solve that wasn't being adequately addressed? Yeah, I think that's a great point. We sort of talk about it as the lost decade of fixed income post the financial crisis. Obviously, you had interest rates that were historical lows for a prolonged period of time. So we talked about that in the context of what got us to that point, 2021. But really, we started to think when we were thinking about building bond blocks and a fixed income only ETF issuer, we were thinking more about what's coming.

7:09What are the problems that might be of the next decade? How might the market environment change? How could we think about building tools that would take advantage of this technology evolution in fixed income markets? We believe first and foremost, we believe the market environment was due for a change. As I said, you got interest rates that were historically lows for a long period of time. But you also had really low market volatility, which led to a perception of uncharacteristically low risk premium in the market. So portfolios had just gotten dramatically overweight equities. We felt like at some point that has to change.

7:49Obviously, we weren't betting on the Fed necessarily doing what they did in 2022. We might have started a different business. But we felt like we could build tools that would allow financial advisors and investors to utilize fixed income in a way that was relevant in the next market cycle, which is where we find ourselves now into interest rates that are more normalized, volatility that is certainly higher than it had been, and a world where the income is very much back in fixed income, allowing it to play just a different role in portfolios than it did for that lost decade.

8:23Leland Clemons:And if you think about it, that was pretty insightful at that point because the concepts that you just described, you were contemplating when rates were still low. And because when you build a business, you're building it not for a year or two, you're building for a decade plus, that you envision what the world might look like in the future, so let's build it now, recognizing that it's going to change, not knowing that it's going to change right after you launch the business, obviously. Obviously, yeah. That came very quickly. But again, as I think we've seen, In markets and our sign of the times world more broadly, I mean, part of what we're seeing is just cycles are shorter and change comes more frequently.

9:03And so our job as a company, as a partner to our clients is how do we help them think about that? What's coming next and create tools for that?

9:12Leland Clemons:Let's talk about the overall Bond Blocks philosophy and how it shows up in product design, transparency, risk construction, and anything else you'd like to cover. When we think about our philosophy at Bond Locks back to even prior to starting the business, we recognize that in building any business, and I think this is not just crude for an investment management business, but for any business, you have to start with how do we earn every day, not just once, but over and over again, trust and really foster relationships with advisors and clients that are grounded in, from our perspective, sound investment views.

9:50products that do what they say they're going to do. And do that over and over every day with helping clients think about how you'd use our products. Because we recognize we're not the only product provider. We're not the only investment manager that most of our clients speak with. And so we have to be differentiated. We hire people and we partner with firms that very much align to that. The customer is at the center perspective. And I know it may sound cliche, but again, when you're building a business from scratch, as opposed to joining a business that could have been around for 100 years, we know we've got to earn it every day.

10:33And so that's really central to how we think about focusing on fixed income, focusing on ETFs, and really delivering excellence at the center of that. Because that's how we earn trust. Hopefully that makes sense.

10:48Leland Clemons:It does. So obviously, we talked a little bit about the evolution that's occurred in ETFs. But when you look ahead, what future innovations do you feel that fixed income investors will need most? We think investors are going to continue to look at bonds, particularly in this stage of fixed income market cycle, if you will, sort of not like historically low rates. But I think we're in a fairly, I'll call it normalized world and where rates will allow fixed income to continue to add its more traditional value of income generation, lower volatility, portfolio diversification. So the expectations of that return contribution will always fluctuate, right?

11:32You got markets that are going up 30 % over a nine-month period of time. You will see investors maybe expect different things from fixed income, either outsized return expectations or, hey, I really want something that's going to lower volatility in my portfolio so that I can embrace that equity risk premium. So we think that'll change, but this income generation need, particularly as you see more and more people approach retirement age, right? And we've got a lot more defined contribution accounts that are leading to that end result. Portfolio diversification and income will be valuable. I actually listened to the conversation you had with Jenny Johnson, and I think she made a really great point, and I'll see if I can proxy it.

12:22She said the S &P 500 has changed pretty dramatically over the past 30 to 40 years from being largely brick-and-mortar services, brick-and-mortar or services companies, to being really heavy tech and more recently AI. Just a sign of the times we live in. Fixed income markets are no different. So you think about the innovations that investors will continue to expect from fixed income. I think part of the onus on us as an industry is how do we bring more of what makes up fixed income to those investors? So the Bloomberg Aggregate Index was a good proxy for the broad fixed income markets maybe 30, 40 years ago.

13:02But today, it does not include high yield. It does not include emerging markets, CLOs, private credit. So I expect investors will continue to demand of us. How can you bring that to me in a transparent, efficient vehicle? And I think ETFs have a really important role to play there.

13:20Leland Clemons:And if you think about it, you can use ETFs as a passive tool to actually enable active management by investors, meaning they can take positions based on their active views, but they can implement it using a passive strategy. So would you talk through how your duration credit or sector targeted ETFs can help investors express some of these active views? Yeah, I think it's a really important point that you're making there, Alex, and one that I think has certainly made its way into the, let's say, asset management discussion with clients over the last 10 years. At BondBlox, we think every investment decision is an active one, right?

14:00Using an index-based product is a decision to receive the return of a benchmark. Similarly, buying an active fund is a decision to expect more than that benchmark return, net of fees from a particular fund or a particular portfolio manager. We have both active and passive products. Our clients, I would say, think about using our tools to be active in a couple of ways. One would be as a way of complementing those broader investment decisions. So as an example, an advisor might buy a core fixed income fund from an active or passive manager, but they may allocate 10 % of that portfolio to our private credit ETF if they are looking to either reduce volatility as a component of that broader investment decision or increase coupon payments.

14:53So that would be one. A second way we see our products being used to deliver active investment performance would be by the asset managers of a particular fund or separate account themselves. So, for example, a high-yield fund manager might choose to use our CCC ETF, which is XCCC. It just gives exposure to the CCC segment of the high-yield market, which is pretty difficult, actually, for even high-yield managers to allocate towards because there's a lot of single-name risk in CCCs. So we are increasingly talking to asset managers and seeing them use our XCCC product as a way of getting exposure to, and in some cases, overweighting or underweight relative to the index, that CCC segment just of the high-yield market in their management of the fund, the And so I'd say we're both the ingredient and sometimes a complement to the meal.

15:54Leland Clemons:And advisors or individual investors who want certain exposure can add that using an ETF as well, whether it's actively or passively managed. Absolutely. So like I say, we talk to a lot of financial advisors or RIAs that may own a core bond fund, but they have a view that they want to increase yield. And so they'll buy our private credit ETF, selling out of 10 % of a broad core product and overweighting or buying into private credit to increase yield. We have clients who've done the same thing with our triple C high yield product and other vehicles. So we can either be an ingredient for the asset manager, the portfolio manager themselves, or a tool to complement that fund for the end financial advisor.

16:39Leland Clemons:And the tilting could be with credit that you just described. It could also be with sectors or even duration. You can move up and down the duration spectrum. It's a great point. We had a lot of clients, financial advisors and investors that were using our treasury suite where we have ETFs that get a very defined and consistent duration. So our three month, excuse me, six month, one year, two year duration products will always be at that duration. So they're a great way to manage the duration in an overall portfolio with one single ticker. What do you think you do better than the mega platforms?

17:18Leland Clemons:And where do you feel that they still have the edge? I like the term mega, mega platform. Yeah, having been at both, I had the chance to, as I say, like work at the mega of the megas, if you will, and started a business from scratch. I think one of the things we are able to do at Bond Blocks is focus, right? We do fixed income ETFs. It is 100%. That's all we do. It allows us to be really good thought partners, listeners with our clients. It allows us to think very, very distinctly about the problem we're solving in building a product and deliver a really high degree of craftsmanship around those products so that we feel like when it comes to fixed income ETFs, the integrity of a bond blocks product is the standard for fixed income ETFs.

18:11It also means we don't have 100-person legal teams or technology teams to support the broader business, which at times I wish we did. But I will say having led teams and businesses at the mega and led teams and the business now here at Bond Blocks, there are pros and cons. And for us, we don't have to make trade-offs around an institutional business or a retail business, you're out to the XUS, US, equities, commodities, fixed income, we're able to focus. And certainly when you're building a business, and I go back to trying to earn client trust, focus is really important. And I think we benefit from that.

18:56Leland Clemons:You mentioned you have a couple of actively managed ETFs. And so why partner with outside fixed income managers? And how do you think about the capabilities or perspectives that they could potentially add? Yeah, it's a really good question. And candidly, when we think product by product about long and hard, if we're going to build a business and be known for excellence in fixed income ETFs, we want to make sure that every product we bring to market is best in class. And going back to your previous question, we are not a mega firm with every resource under the sun. And so in order to do certain things, we need to go out and look for other firms that are best in class.

19:42So as an example, we launched a few tax aware ETFs, which look to optimize after tax performance from both taxable bonds and non-taxable bonds. And we partnered with a firm called Income Research and Management, or IRNM, to deliver that because they have been delivering those strategies for decades. And in that way, it allows us to bring our expertise of fixed income markets, our clients, and the ETF product and market to bear with a partner who has real expertise in an asset class. And again, in that way, still deliver best of breed in an ETF product. And again, we can't do that in all areas.

20:27So what we can do is go and find those best partners.

20:31Leland Clemons:You talked about the private credit ETF that you recently launched. Would you talk to us about how you actually built something like that and how you think about the potential liquidity mismatch or any concerns around that? Yeah, it's a great question and not surprisingly one we've had a few times over the last 14 months since the product launched. I think first and foremost, and I'll go back to how we think about every product launch, can we do something that will deliver consistently over time what we say it will, right? Does the advertising on the label match the ingredients and the experience over time?

21:11So there's got to be a high degree of craftsmanship. We have since day one, if not before we actually launched BombBlocks, been getting the question, hey, could you put private credit in an ETF wrapper? I don't think we were the only ones trying to solve for that. But I think we came at the problem with what can we do that would bring this exposure to market that has transparency, diversification, and a way that would allow us to deliver cost benefits of ETF wrapper as the product scales. So we chose to go with delivering middle market loans accessed via the CLO product in an ETF wrapper. Our product just focuses on those middle market lows, which again, I think Jenny Johnson spoke to in your conversation in terms of the size, which is massive, that middle market borrowers make up of the US economy.

22:14So our product, PCMM, is the ticker. It focuses on middle market, CLO market, which is also called private credit CLOs. We own multiple CLOs underwritten by different managers. So we've got CLOs by Aries, Golub, Blackstone, right, to name a few. So you get the largest private credit investors. And within each of those CLOs, you get around 100 individual loans inside the CLO. So broad diversification, access to the CLO market. So we sort of tick a bunch of boxes. To your point on liquidity, we also have 100 % exposure in our product to the private credit CLO market. And CLOs actually trade more actively.

23:08They're not as active as US treasuries, but there's a market every day in these CLOs, not from one counterparty, but from multiple, which means the secondary market or the exchange trading of our PCMM functions effectively. And I think the result is we've had a really good response. That product's about$200 million one year after launch. We're having more and more conversations every week with clients and candidly in a world where private credit might be a little bit different in the next couple of years. We think diversification at multiple levels is really important. And I think our product, we feel very confident the product will hold up in those stressed markets, maybe better than certain interval funds or products that are underwritten by one particular issuer.

23:57Leland Clemons:Are there any underappreciated features of ETF plumbing that investors should understand better? Obviously, I talk a lot about product integrity. You can see I've got a bit of a capital markets and product background. Maybe one thing that investors might not appreciate as much about the ETF products and the issuers of ETF products is the strength of governance around ETFs that is really there to support shareholders. So every new product has to go through an approval process with a trust board. That trust board is there to be a fiduciary to end investors. and ultimately the asset manager, in our case bond blocks, we are accountable to a board that is looking out for shareholder best interest.

24:44We have conversation around performance, whether that's an index product tracking or an active product relative to peers, and all manner of services. How are we supporting our end clients with services to help them understand how to use bond blocks, fixed income ETFs? I think maybe underappreciated or maybe just under-recognize is the amount of governance and scrutiny that is around every ETF and every ETF issuer.

25:12Leland Clemons:So a lot of ETFs are equity ETFs, but I think it would be helpful to dig in a little bit on how fixed income ETFs may differ from equity ETFs in their underlying mechanics and particularly the creation redemption process and how all of that works, particularly given the less liquidity for bonds relative to equities in general? Yeah, I think, again, your point is a good one. And I guess I'd start with building, managing fixed income ETFs is first and foremost just harder than equities, in part for some of the reasons you referenced, right? Although we are starting to see the evolution, electronification of fixed income markets, you know, we're still a couple of decades behind where the equity markets are.

25:58And so navigating that market to deliver an exchange-traded fund just requires a different level of expertise. I'd say a lot more sense of trade-offs. We talked about private credit, but I think the same was true when our team launched the first municipal bond ETF back in 2007, the first high-yield ETF, the first gold ETF. our product team has a lot of experience bringing those innovations together and thinking about how do you reconcile putting a vehicle on an equity exchange to trade in an open-ended manner efficiently when the underlying market functions differently. And so again, I think without getting too into the weeds, the key is, do you have a team that understands how to balance those differences and understand and appreciate the responsibility of delivering a product that still works and does what it says it's going to do.

26:59So in private credit, the reason we chose CLOs is because they give you direct access to the underlying private credit loans via PCMM, but they also have multiple market makers. It can trade on an exchange. We get prices from an independent third party, all things that you have to balance when building an ETF in order to maintain and earn that trust. So I think that's the biggest trade-off. And fixed income, I think we're going to get to a world, just to say it, and I've been working in the trenches and advocating for this for a while. We're going to get to a world where bonds function more like equities.