BlackRock, Inc. (BLK) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining us today. I am Kirst Kuipers, Head of iShares Institutional Sales for Continental Europe, and it is my pleasure to be joined today by Steve Cohen, Head of EMEA iShares and Index Investments; and Dennis Dijkstra, CEO of Flow Traders. Before we get started with Dennis and Steve, just a couple of programming details. [Operator Instructions] We are going to get to a few topics raised by the audience. If we don't go for your specific question, your relationship manager will follow up with you afterwards. Now without further ado, let's get started with Steve and Dennis. Gentlemen, thank you for joining us today.

You both witnessed market crisis before, but until now, none of us had been through a pandemic. This created massive volatility, as we've seen, and the past couple of months have been the biggest test for ETFs. Steve, what can we learn from this period about the resilience of ETFs?

Great. Thanks, Kirst. And first of all, welcome, everybody, and thank you for being with us and taking time. And thank you also to my guest, Dennis, for joining me. Look, I think that you said it pretty right. We've been through some crisis. We've never been through a pandemic. And I think for ETFs, we've been through some small crises. But since 2008, we've not been through a proper crisis. And I think that March, April 2020 will go down as being a proper crisis, specifically because, clearly, we had huge volatility, huge market sell-off and also very dislocated market participants given what was going on but also because it was the first time since 2008 that we've really had a global market disruption and market volatility of the scale that we saw with ETFs now at the size that they are in the market. So I think that in summary, this is kind of a test that people have been waiting forward. It's definitely a test of fixed income ETFs specifically, which people have been kind of asking about, what happens if there's another 2008. And I would say, broadly speaking, we've seen that ETFs have passed that test or at least they passed what was thrown at them in March and April. I think we saw that in a number of ways. First of all, they did what people expect. And I think at the end of the day, the core most important thing is that ETFs do what you expect them to do, and that means that you're able to trade them when you want to trade them. You're able to utilize them to adjust portfolios, that there is liquidity and, ultimately, there's a price. And we can talk a little bit about some of the dynamics that we saw as we go through this. But I think that most importantly, it's that they give you the liquidity you want when you need it. But there is a secondary point that you made earlier on, which I think we've started to see come through in the crisis of the last 2 months or 3 months. And that is the ETFs' role within the broader underlying market for this concept of price discovery. And I think that we've -- we really -- we've seen this in the past. We've seen it in the U.S. high-yield market a number of times, but we've never seen it more broadly. And particularly, we've never seen it in Europe. And that is where, in the absence of many underlying bonds in this case, in one case, trading, that ETFs continue to trade. And they really help market participants, whether you're a market maker or a bond trader or an investor, understand what actually was really going on in the market, what was kind of, what you might call, the real price of risk. And I think that is a function we've talked about in the past. As I said, we've seen it in U.S. high yield, but we've never really seen it more broadly. And I think this is the first time we saw it happen globally all at the same time, especially here in Europe, which I think is a good sign for the growth -- future growth of the European ETF market. But we also saw it in equities. There were several days when equity futures -- S&P 500 futures were limit up or limit down. We even had a couple of instances where the S&P itself was halted in the afternoons, although in U.K. -- the European afternoons. And for example, the iShares, each S&P 500 ETF continued to trade. So actually, funnily enough, became -- for the biggest, deepest equity market in the world, it became the price discovery vehicle even in 2 instances in U.S. hours for the market, which I think is a real testament to the growth of what we've seen in ETFs and the role that they now play, not just as vehicles themselves but also as helping to keep markets kind of flowing and market visibility clear.

Thank you, Steve. Dennis, how have you experienced this period of volatility?

Hi, Kirst and everybody else, Steve. Thanks for hosting the call and giving also us the opportunity to talk about kind of the resilience of the whole ETP ecosystem or ETF ecosystem during the kind of the markets the last few months. And also there, I think the markets and the industry as a whole has benefited from the open ecosystem it has, also being highly regulated. So also there, ETPs, both traded on exchanges but also on the MTFs. And as Steve said, we -- there was continuous liquidity. Also there, I think the ecosystem and the close kind of collaboration kind of with all the parties involved, so that's the exchanges but also the issuers, the market makers, make sure that there was continuous liquidity, both in equity but also in the fixed income kind of ETFs. There, again, we have seen some kind of elevated volatility before, whether it's kind of the European crisis or in kind of 2011 or '08. And again, I think the ETFs leading by being exchange-traded and even now more also kind of leading from a price discovery perspective. So we're -- we took a lot of precautionary matters and prepared ourselves for periods like this. So also there, also benefiting from ETFs being a global industry helps. I think a lot went well. I think there's also, of course, always a few things that can be done better. I think one of the things was kind of the working from home and not being able to move people around. That's kind of what was a challenge but I think everybody managed really well. So they're very happy with the global performance of the whole ecosystem to date.

Thank you, Dennis. And could you perhaps also elaborate on the volumes that you've seen both on the primary versus the secondary markets?

Yes. Definitely. That's a good question. So on average, about a quarter of all our trading, that's like 1 billion a day, ends up in the primary market. So about 25% really is a create or redeem with the issuer. During the crisis, this went up significantly. So also there, the role of a market maker and AP work really, really well and also having an open ecosystem. So there's many market makers, many authorized participants who can do the create/redeems. So you also see that we have the ability as a group to really facilitate both the in and out flow but, on top of that, also absorb a lot of liquidity and kind of match other -- the other end of the trade. So I think also in the kind of elevated period, and especially in March, we saw our -- in line with the increase in trading, also a slight increase in our primary market activity.

That's excellent. So ETF trading volumes reached new records during the volatility spike. Steve, could you perhaps please give us some examples on how investors have been using ETFs during this period?

Absolutely. Yes. And I think just to build on Dennis' comments, I mean I think just to give some sense of what we saw, I mean, we saw this significant increase. And we know we saw record volumes across both primary and secondary. And our secondary volumes were 2 to 3x what we would normally have expected. In fact, if you look at many of our flagship credit ETFs, we were on the busiest days, 6 to 7x what would -- what we would normally have seen this time in 2019. And bear in mind, 2019 was already a year where we had seen a natural organic increase in volumes anyway as the industry has grown. So I think that the scale of what Dennis was referring to, it's quite important for everyone to kind of -- to get that sense. And I think on the busiest day, we were something like -- ETFs were something like 1/3, 33%, 34% of the overall trading volume -- equity trading volume in Europe. So I think it really has shown that ETFs have kind of arrived as a vehicle, and we're seeing that in the different ways that investors are using them. Some of them were very obvious. They won't be a surprise to anybody. Some of them may come as a bit of a surprise. I think the more obvious one is that increasingly, ETFs have become more of a core position for investors. We're seeing that in terms of wealth investors, wealth managers using them within discretionary portfolios. We're starting to see them emerge into advisory propositions. Particularly, they're making up a big part of our model portfolios. One of the things that is coming out of the crisis is an acceleration of online brokerage in Europe, which is going to be really interesting to watch because, historically, we've lagged to the U.S. in terms of this brokerage -- kind of retail brokerage kind of mentality as well as infrastructure. But we've seen a big increase acceleration in online brokerage sign-ups. We're seeing a number of online brokers or wealth managers launching brokerage offerings to retail investors and wealth investors, and ETFs are very, very central to that. They typically are forming a big part, not just of the brokerage, but particularly of any sort of kind of models offering that sits on those platforms. So -- and that could well be something that is capitalized even more by what we saw over the last kind of 2, 3 months by COVID. In the more, kind of, in the institutional space, I mean, we -- I think we're seeing the evolution, and much of this we've seen in pockets but particularly, we've seen in the U.S. We're seeing the evolution of what we call kind of liquidity sleeves. So this is large institutions using ETFs increasingly to have a kind of a tactical sleeve or a tactical layer within their portfolio. So not just in the core of the portfolio where they may be using them to bring down kind of overall costs but also to have this ability to tap liquidity. And I think this is something that has come out in many of the conversations we've had with clients over the last 2 to 3 months, this need or feel of need for liquidity in a portfolio and to have flexibility in the portfolio to be able to react quickly to what is going on. I think many people saw the market dropped so fast and then rebounded so fast, and many investors didn't have time necessarily to do anything. And I think that this feeling that actually liquidity sleeves can be a very valuable tactical tool. In a world of now 0 interest rates or negative interest rates pretty much everywhere, cash drag is a huge issue for portfolios. So holding kind of -- holding a traditional way of just having cash is now a big, big drag on portfolios, particularly when you have kind of high liabilities because of what's happened also with rates coming down. So that issue is a big issue for many and many investors. And so looking for cash alternatives, cash substitutes is obviously a big focus. So one way, it's not a cash substitute, but one way is to say, well, I'll try and mimic a big chunk of my portfolio, but I'll do it in a tool -- an ETF where I can get liquidity if I need it. So I'm effectively not going to hold cash. I'm going to hold -- I'm going to kind of hold a quasi portfolio but in a very liquid tool. So I'm going to try and get some of that core exposure but with liquidity. And then I'd say probably the one that surprises a lot of people is -- and we've seen this grow over the last 2 to 3 years, but it's really accelerated in the last 3 months, has been fixed income active managers using ETFs. And often, people think that, that sounds kind of strange. If you're an active manager, why you -- you'll pay to deliver alpha? Why are you using ETF? I think increasingly, as ETFs in general but fixed income ETFs specifically have become more granular. They've become bigger. They've become more liquid. It has opened the door for many active fixed income managers to use them in the same way they've used futures in the past and they've used credit derivatives in the past. These are just yet another tool. And I think part of that is breaking down the psychology of thinking of ETFs historically as a passive instrument and a fund that an active manager that's kind of -- that's the antithesis of what I should be using versus actually thinking of ETFs just as a really efficient tool. And we saw that over the last 2 to 3 months. So we've had a range of clients globally now, fixed income managers, who have tried out ETFs in the last 3 months. And it's been a good experience, and they're now talking about increasing their adoption of ETFs. So I think we will continue to see more and more what you historically would have called active managers. Using ETFs is just yet another tool in the tool kit to try and deliver alpha because, ultimately, their active returns are being driven by factor exposures and asset exposures as well as kind of single-line alpha. And so it's just a great tool within that tool kit. So I think that is -- again, I think we always talk about ETFs, just the number of use cases just continues to grow and grow as the investor base grows. But I think the real capitalization we're going to -- will come out of this crisis will be the acceleration by institutional investors who look at the liquidity sleeves, the adoption by fixed income investors. And I think something to watch, which I think is this growth of the kind of online wealth industry, which I think will accelerate usage of ETFs within the wealth and the retail markets as well.

Thank you, Steve. So let's focus on some of the trading aspects of ETFs. There have been a lot of comments recently about ETFs trading at a discount. Dennis, what does that really mean? And why has there been so much noise around this?