Episode Transcript
Brendan McCarthy : You know the traditional use case of ETFs. Number one, building blocks, right. Do we have them. Can we sit across this table from our clients and have a conversation about the entirety of their portfolio. And so that's what we're really trying to address right now.
Anthony Rochte : Welcome to the FTSE Russell Convenes. Hello everyone. I'm Tony Rochte and I'm in this session, talking about the progression and growth of the ETF space in 2025. Honored to be joined by two great guests. Brendan McCarthy joins us from Goldman Sachs, where he leads, the Goldman Sachs ETF for his deep experience in the capital markets arena in the ETF space and also leads the distribution effort.
So welcome. Also joined, by Mo Haghbin. I've known Mo for a number of years. He's a pioneer in the ETF industry. He recently joined ProShares, to lead their ETF effort. And, excited to have a conversation with both of them today. So why don't I kick it off?
I'm going to ask both of you a question. And these are speed round answers. A lot of people have read about the growth of ETFs, over the last decade. I know we have. Last year, we finished a year just shy of 15 trillion in global ETF assets.
I've seen projections from BBH, from ORC that this category is going to double in the next 4 to 5 years. Are we going to get to 30 trillion? I think that's that's not the question. The question is how do we get to 30 trillion and what's going to be the main driver. So I'll kick it off with you running.
Brendan McCarthy : Incredible to talk about those type of numbers isn't it. Yes. And I think consensus in the ETF industry would probably lean towards we are going to get there. I think generally, you know, the three ways we're going to get there are the continued product innovation that we see every single day. The continued, adoption by both the retail and institutional community, which is very relevant today as we sit here at your conference.
And third, you said global, right? It is that global expansion. And we're seeing that in real time in Europe and in Asia. So those are three very general statements. But if you look at product proliferation and the innovation that is happening, I'm sure we're going to talk about that across public, private, fixed income, etc.. But in terms of investor adoption, it still does seem to be early days.
It's crazy to say, given we've been around for a while. But new use cases come up every day. And then also really exciting. Just what's happening abroad. It is still very much early innings. When we talk about Europe in Asia.
Anthony Rochte : That's great. Very exciting. And Mo, I know on the innovation front, you know, how do we get there. What do you, as you look around the corner? What are you thinking about? What are you doing at ProShares to. Yeah, to grow that business.
Mo Haghbin : Well, just, you know, expanding on what Brandon said, I think there is an incredible amount of innovation happening right now. And there's a number of reasons for that. I think, the regulatory backdrop has changed post ETF roll post derivative roll. Now you can do pretty much anything in an ETF right.
Which has created this massive innovation act active ETFs. Right. We know this is an area of growth as managers bring some of their capabilities around alpha generation to this modern chassis. And the global piece I think is a really important point. People don't really talk about it, but an ETF is borderless right.
So you can have users and clients from all around the world. So 40 Act funds can be bought in Korea. Yes. Right. Ucits funds can be bought in Latin America. And I think that's a really exciting, catalyst for growth as we get to 30 trillion.
Anthony Rochte : So staying on the theme of innovation, I think, you know, we've been in this industry for a number of years. We've watched the growth, we've seen active ETFs surpass a trillion in assets and I know a decade ago, no, I don't think many people could have predicted that. Again, those same projections.
You know, many think this is a $3 trillion active ETF category globally, which is important, in the next 4 to 5 years. So, you know, maybe if both of you could you share your views on that and then maybe, how active actually works with passive ETFs in the model portfolio environment? Because I don't think it's exclusively active.
Brendan McCarthy : I mean, I think it starts with, defining active ETFs. You know, it's a big statement. It means a lot of different things. It means it can mean your traditional stock and bond picking. It can mean systematic. It can mean solutions oriented. It can mean potentially alternatives. Right. Active can mean a lot of different things. So I think, you know, the industry, needs to spend some time defining that a bit more and then looking at those different lanes.
But I'm excited about all of them, I think. Where have we seen the growth to date in active? It really has been in the more solutions oriented types of products. Products that are using derivatives, income oriented, defined outcome, anything that solves a client problem, that's where you're seeing a lot of the growth in active. And what's really interesting about that, you really dig into it and more. And I can both chat on that is you look at those, it's kind of a blend sometimes between how index and active come together, which is fascinating.
Systematic, right. That is also burning quite a bit of action, when it comes to the growth of active. When you look at the number of products in New issuers coming to market, they tend to be in those categories. And so what I get excited about is what all the use cases for these different things. And you know, what comes to mind first. And foremost is, you know, portfolio construction, what we're all in this business for. Yes. How can active ETFs be portfolio building blocks, like when the ETF industry started, it really was beta instruments helping construct portfolios.
What are we evolving to now is how can active ETFs, whether they be that more traditional, the systematic or even some of these solutions oriented, how can they be inserted as portfolio building blocks. And that's I think that's a challenge. That's an opportunity that people are really, embracing right now. I think it opens the door to more conversation about blending active and index together in whether it be models, portfolios, what you discussed earlier, you mentioned earlier and just how that, you know, the opportunity that it presents to blend these together, is really exciting.
But but again, I think it starts with there's so much buzz right now and energy and excitement around the concept of active ETFs. Let's define that a little bit better. Right. And I think the more we understand those different lanes, the more the use case becomes obvious.
Anthony Rochte : So let's pull on the active ETF thread specifically around options. And I know ProShares has been a leader in that space. Option based ETFs have grown to over 200 billion in what, just over six years.
Mo Haghbin : Yeah, I mean, it went from about 5 billion kind of in 2019, 2018 to about 200 billion today.
Anthony Rochte : Yeah. No. So it's accelerated to find outcome downside protection. This option overlay category and and really investor desire for income. If you could spend a minute on that because it all falls in the active. That's right ETF category.
Mo Haghbin : That's right. Yeah. No it's a great point because what we've done is we've put all of these things in this category called active. And we've said it's growing really, really fast.
But you have to kind of go one layer further and say, well what is it that clients are looking for? How does this actually start to translate into solutions in the portfolio? And one area that has been incredibly, exciting is this options, income and outcome oriented category.
Anthony Rochte : Yes.
Mo Haghbin : And if you just think about what's happening, these are institutional type solutions, structured product type solutions that are being, developed now for the mainstream audience. So you can think about your returns and your risk more precisely, shaping those returns and risk to meet your own risk appetite or income needs. Right. So when we think about covered call strategies, essentially what you're doing is creating a unique income stream by using options.
If you think about buffer strategies, you're creating downside protection to get people to think about investing for longer because they can sleep well at night knowing that the volatility is lower, right. So when you when you look at these use cases to Brandon's point, we see an incredible opportunity for some of these institutional quality strategies to be made available to everyone to mainstream and at a lower cost, with all the benefits that you historically have seen with ETFs transparency, trade, ability. You know, this is an exciting time for for that category.
Anthony Rochte : No. That's great. So we're here where to FTSE Russell conference. We've got clients from all over the world. We have almost 17 trillion in assets benchmarked to FTSE Russell. We couldn't do a conversation without talking about Bitcoin in digital.
We've been focused on this area, you know, for the past five years, you know, from a benchmarking perspective and really working through, the innovation, but, you know, we've seen a hundred billion inflows into the Bitcoin digital ETF category. Love your views. I know this isn't, a prediction. But but clearly it's been a topic of conversation throughout this conference. I'd love to hear your insight on, on the on the Bitcoin ETF space.
Mo Haghbin : You know, we think about cryptocurrencies as just another investable space within the broad market. And when you look at the market capitalization of Bitcoin it represents roughly 1% of all investable assets. So in a way if you just think about it very simply, by not owning it, you're short 1% of the total market cap of investable. Yes, assets.
So we think it's, it's an important conversation. Does it make sense for everyone? Of course not. You know, there's a risk tolerance question. There's a funding question. Where does it fit in the portfolio? You know, if you're an equity investor or, an aggressive equity investor, you're probably more likely to think about bitcoin as part of your allocation than if you're a fixed income investor.
And these are the conversations we need to be having. Not is cryptocurrency good or bad? How do I actually incorporate it into the portfolio if I make a decision to do so. And what do I fund it with? Yes. Do I sell fixed income? Do I sell equities? Does it go into my alts bucket. But we think it's something that's important.
It's a tool for investors. And in our business, what we're supposed to do is not necessarily make, decision, a personal decision around what's good and bad. Yes. We're supposed to create solutions and let the clients decide what's right for them. So to me, it's about access. And this is just another access point for clients.
Anthony Rochte : Well, they're clearly voting, both on option overlay and certainly in the Bitcoin space. Let's pivot back to where we started. You know, we talk about this $15 trillion number growing to 30. This can't be done without Europe and Asia participate. I've spent a lot of time over there over the past few months. And clearly ETFs are growing over there.
I know Goldman, is very focused, on the European market. Love to hear, your views on that space. And then also, you know, do you see the model trend that we've lived through in the US over the last five years, beginning in Europe?
Brendan McCarthy : Yeah, the global expansion is is real. I think that's quite obvious. Just in terms of the the acceleration of product there and assets. Yeah, we've launched, ten products year to date. In, in Europe, both fixed income inequity, all, low tracking or active type of products. But really to address what we discussed before, which was, can these be used as building blocks, can they be used in OCO mandates?
Right. While the models trend hasn't gotten to EMEA just yet, I think at some point it will right into making sure you have, you know, the traditional use case of ETFs. Number one, building blocks, right. Do we have them. Can we sit across this table from our clients and have a conversation about the entirety of their portfolio.
And so that's what we're really trying to address right now is being able to, with confidence, work with our institutional and retail clients across the continent and address the entirety of their portfolio across asset class with active building blocks. Again, I think part of the the dialog we're having is how can these types of products align to what you're doing on the index side? What does that blend look like? You know, what is the right balance of active and index together in portfolio construction? And we you.
Anthony Rochte : See them both. You see active?
Brendan McCarthy : Absolutely. Yeah, absolutely. It's, you know, how do they blend together? You know, core satellite, strategic, tactical, you name it. Right? I think, you know, the, the index, the index ETF, your traditional ETF, in Europe, and in, in Asia, has been prevalent for quite some time.
I think the next iteration is more on the active side. But what we're seeing is the demand is a little bit of a slower iteration and lower tracking error type of products is where we're seeing demand. I think what that may grow to over time is what we're chatting about earlier is more the solutions oriented.
In, in Europe, I think what we've seen in the US, we will we'll see in Europe as well. But really what's exciting Europe is, whether you're in Germany or in the UK or across the continent, the use cases and the demand is consistent. Right. Sure.
There are certain markets where the, the buying demographic is maybe a bit larger, but, what we're seeing is the demand is quite consistent for the wrapper itself. How they can use it both in portfolio construction on the retail side and then in much larger Ushio mandates and, you know, expect that to continue.
Anthony Rochte : You mentioned no CIO mandates, which, really leads down the road of the varied clients that have grown to use ETFs. So I know we think, you know, in the US about the wealth market through financial advisors.
That's critical driving growth. But maybe most spend a minute on sovereign wealth funds, asset owners, the pension market. And what I know you've traveled overseas for a number of years, but what's been your experience with, some of the institutional more.
Mo Haghbin : Sure. Yeah. So I spent, several years actually working with the institution on all channels. So to your point, pensions, foundations, endowments, other official institutions, sovereign wealth funds, insurance companies.
And it's amazing how much they're using these tools as well. You know, I think we sometimes forget because we are focused obviously on the intermediated market or the advisor market, how applicable some of these solutions are and how cost effective some of these solutions are for larger clients.
And we worked with many large plans and official institutions to think about incorporating ETFs into their portfolios, sometimes for equities and or shorter term, type, needs. But then other times for, you know, core strategic reasons.
Yeah. And I think that is an area that we just can't underestimate. This is not a one segment type product conversation. It has universal, you know, demand. And there are really, really important things about what we're doing that apply to institutional as well. And in a multi-asset portfolio to Brendan's.
Anthony Rochte : Point, right.
Mo Haghbin : There's there's not a conversation anymore about is it active or passive? I used to have that conversation. You know, we used to come to these conferences and we used to debate active versus passive. I don't hear that anymore, Tony.
Anthony Rochte : They're using both.
Mo Haghbin : Portfolios incorporate active passive across asset class across vehicle type. It could be a separately managed solution an ETF. It could be single securities. These are all important tools for clients. So this exclusive is it this or is it that I don't hear anymore. And I don't hear that from clients, which I think is a really important development.
Anthony Rochte : I think we're at time, but I want to thank Brendan McCarthy Mahadevan for your insight and your contribution to the growth of this great industry that we've all enjoyed over the years. So, thank you very much. And I'm glad you're able to join the conference as well.
Brendan McCarthy : Thanks, Tony.
Mo Haghbin : Thank you. Thank you.
