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Posted by on May 30, 2014 in CEO Corner

Gillooly Would Be Proud

Gillooly Would Be Proud

By Noah Hamman

So having just commented on BlackRock’s perspective on the potential blow up of inverse and leveraged ETFs, I now see headlines that BlackRock views active ETFs as an “out of money option.” I am thinking to myself, they just finished hitting the extendable baton on the shins of the inverse and leverage guys, and now active – why, why, why?

For a firm that manages close to $1 trillion in ETF assets, in addition to somewhere over $4 trillion globally, and through services that otherwise likely touch close to $20 trillion in assets (give or take a trillion), shouldn’t they be more concerned with dealing with the politicians and regulators who view them as a systemic risk to the financial system – for which I don’t agree. Maybe highlight giving back to local communities, or just pat themselves on the back for all their achieved success – anything besides going after two industries that combine to represent a rounding error for a company the size of BlackRock.

After reading the story, I have to admit that I was surprised.  I had the chance to hear Mark Weidman speak at an event several weeks ago, where he also commented on active ETFs, and it seemed then he did not discern on how they operate.  However, in reading his most recent comments – in my opinion – he clearly articulated why so many traditional mutual fund sponsors may not have entered the active ETF space: “This (active ETFs) would disrupt the distribution of active mutual funds.”

Take a minute for that to sink in and settle.  It’s not about transparency, alpha, the benefits to shareholders, but it rather seems his concern is about BlackRock’s ability to distribute such products.  Honestly, I couldn’t agree more.  I am usually quick to say how difficult it is to distribute actively managed ETFs.  Active ETFs have no up front loads, no trailer loads, nothing to provide a financial incentive to a broker dealer.  When a financial advisor or investor purchases an actively managed ETF, it’s because they truly believe that is an important investment to have in their portfolio.

I wish Mark wouldn’t say things like “a solution in search of a problem” regarding active ETFs. However, I wasn’t there and did not hear the context around the comment.  I think it’s reasonable for him to say that “active ETFs can impact our bread and butter business and it can’t be ignored” and we would prefer not to change the way we sell things today, – that would feel like a less of a shot to the shins.

To be clear, I have had the benefit of hearing Mark Weidman speak several times and he undoubtedly is a smart and intelligent guy.  However, he really doesn’t comprehend the active ETF space. He seems not to be spending time understanding how active ETFs will evolve over time, including the process in which these products will be distributed.  I would easily argue that his comment, “Active products are sold and not bought. Someone has to go out and sell these products to people,” can bring skepticism about his grasp for the marketing and sales process of their index-based ETFs.  iShares has an outstanding marketing and sales team and has clearly been effective in what they do.  Mark’s opinion might then differ if showing the sales and marketing budget for his firm’s passive strategies (just a hint, it’s larger than some small countries’ GDP). Although make no doubt about it, whether index or active ETFs, BlackRock has disrupted the distribution process of mutual funds and that has been a great occurrence for investors.