BlackRock’s Wiedman Sees ETFs Disrupting Markets in Bank Retreat

Jun 12, 2014 12:28 am ET

June 12 (Bloomberg) -- Mark Wiedman, who oversees the world’s largest lineup of exchange-traded funds at BlackRock Inc., cut fees and forged a partnership with Fidelity Investments to attract more individuals to his iShares ETFs.

Now he’s courting insurers, pension funds and other large clients, offering the products as a simpler substitute for derivatives and single securities at a time when Wall Street’s retreat from trading reduces liquidity. That change, Wiedman says, will transform how institutions invest.

“That is where we have the most market transformation ahead,” Wiedman, a 43-year-old Long Island native and head of iShares since 2011, said in a May 28 interview at Bloomberg News’ New York headquarters. “It’s also the most intellectually interesting and disruptive.”

BlackRock, which burst into the $2.6 trillion ETF industry through its 2009 acquisition of Barclays Plc’s investment unit, is taking a different approach than competitors as it seeks to extend its dominance in the fastest-growing segment of the money-management business. Unlike Vanguard Group Inc., which focuses on low-cost ETFs for mom-and-pop investors, or State Street Corp., which targets mainly institutions, BlackRock’s iShares is the only ETF provider fighting for every major type of customer -- and some minor ones.

Wiedman, part of BlackRock’s global executive team of some two dozen leaders headed by Chief Executive Officer Laurence D. Fink, is chasing institutional investors who’ve been slow to warm to ETFs. He’s fighting back against Vanguard’s drive to dominate retail sales in the U.S. and U.K., and he’s targeting niche investors who’ve taken to more expensive, specialized products focused on narrow slices of the market. And that’s making iShares a bigger, more lucrative part of BlackRock.

Fee Growth

ETFs accounted for 21 percent of BlackRock’s $4.4 trillion in assets as of March 31, and 31 percent of investment advisory fees. That’s up from 16 percent of assets and 26 percent of fees in the quarter when he took over in September 2011.

Wiedman compares the advent of ETFs to the use of shipping containers back in the 1950s, which cut the cost to bundle and deliver goods worldwide. Investors are increasingly realizing how easy ETFs are to use, he said.

“Simplicity is seriously underestimated,” Wiedman said. “When you buy an ETF, one trade, you’re done.”

At the top of Wiedman’s target list are insurance companies, pension funds and banks that still buy individual stocks and bonds. He cites a client who recently dumped a fixed- income manager and replaced 2,200 individual bond holdings with positions in two ETFs. Another client, a French insurer, put $400 million in an ETF that invests in U.S. Treasuries, a trade it would normally do through an interest-rate swap.

‘Increasingly Skeptical’

“Chief investment officers everywhere from insurers to Merrill Lynch are increasingly skeptical of the value you can find in security selection,” he said.

ETFs have already proven to be one of the most influential forces in investing for the past 20 years. Since the SPDR S&P 500 ETF Trust appeared in 1993, ETFs have grown to almost $2.6 trillion, including $1.82 trillion in the U.S, according to data compiled by ETFGI LLP and Bloomberg. Hedge funds and other frequent traders were among the first users, while retail investors have poured in over the past decade.

Rising Star

Barclays’s investment division jumped into the market with its iShares brand in 1996. At the time of BlackRock’s acquisition of the Barclays Global Investors in 2009, Wiedman was head of BlackRock’s corporate strategy and Fink tapped him, even before the deal was finished, to weave the unit into the larger firm. Wiedman, who was named head of the iShares division less than two years later, is considered a rising star at the firm, at a time when 61-year-old Fink is grooming a new group of leaders as part of a succession plan.

“If you look at the leadership of iShares under Mark, they’ve married two very different cultures inside BlackRock and they’ve found a winning formula,” Reggie Browne, head of ETF trading at Cantor Fitzgerald LP in New York. “Now it’s just a matter of bringing that formula to customers and finding new adopters.”

An animated speaker, Wiedman keeps his hands and arms in motion as he makes a point. With his shirt sleeves rolled up and jacket off for comfort, Wiedman speaks at a fast clip, often finishing other people’s sentences.

‘Nondescript’ House

He was raised on Long Island -- “Exit 39, in a nondescript suburb in a nondescript house” -- by a father who still practices medicine at age 84. His mother, who died 17 years ago, taught nursing at Nassau Community College.

The nondescript phase of his life ended at Harvard College where he graduated magna cum laude before earning a J.D. from Yale Law School. He then clerked for Judge Richard Cudahy in the 7th U.S. Circuit Court of Appeals in Chicago. The idea of being a judge was appealing, “but 25 years of law practice weren’t for me.”

After a stint at McKinsey & Co. and one in government, he was recruited to BlackRock by his former boss at the U.S. Treasury, Peter Fisher. He helped start BlackRock Solutions, the company’s institutional advisory group that went on to advise the U.S. and other governments around the world on toxic assets after the 2008 financial crisis.

Vanguard Headache

When Wiedman was named head of iShares, his biggest headache was Vanguard, the firm that had popularized index mutual funds and moved into ETFs in 2001. Vanguard is owned by its funds, allowing it to charge lower fees and attract individual investors.

In the year leading up to Wiedman’s iShares appointment, Vanguard’s ETFs took in $41.1 billion, almost double BlackRock’s $22.1 billion, off an asset base about one-third the size, according to data compiled by Bloomberg.

Wiedman responded in October 2012 with the iShares “core” series. He cut the fees on six existing ETFs and added four new products that created a lineup of low-priced, broad market funds designed to appeal to buy-and-hold retail investors.

Wiedman also oversaw a significant expansion of the firm’s cooperation with Fidelity Investments, the Boston-based mutual fund giant that runs the biggest online brokerage with about 15 million client accounts. That gave BlackRock a significant distribution boost.

Reversing Dynamics

The efforts, Wiedman said, have “completely reversed the dynamics with Vanguard.”

Not quite. In the 12 months through May 31, Vanguard ETFs garnered $50.9 billion, compared with iShares’ $36.6 billion. BlackRock’s core series attracted $15.9 billion, compared with $17.5 billion for the 10 corresponding Vanguard offerings, according to data compiled by Bloomberg.

“The primary reason we launched those was to serve that core part of the market and maintain our market share,” he said. “Market share matters. We’re there in the clients’ minds.”

BlackRock’s iShares go many places Vanguard does not, offering what the firm calls “precision instruments” that aim to do everything from lowering volatility to hedging currency risk connected with an international stock position. IShares also continues to capture a bigger share of institutional money within ETFs.

In attacking niche areas, BlackRock draws a line where it thinks ETFs become too complex. Fink has said the firm will never offer ETFs that allow investors to take leveraged or inverse bets on an index.

One of Wiedman’s best allies in gathering institutional clients has been the wave of regulation that hit banks since the financial crisis. Required to hold more capital against liabilities under Basel 3 and more limited in making investments with their own money because of the Volcker Rule, banks now have less room available on their balance sheets to make markets.

Assets Surge

That has already transformed the bond world. With banks less engaged and trading costs rising as a result, many investors have turned to fixed-income ETFs, especially in less liquid corners of the market. At its peak in September 2012, the iShares iBoxx High Yield Corporate Bond ETF held $17.4 billion. That’s more than 20 times bigger than it was in September 2008, when Lehman Brothers Holdings Inc. collapsed.

“How much was driven by bank regulations? I don’t know,” Wiedman said. “But that fund was nowhere. Then Lehman failed and suddenly people discovered it.”

The withdrawal of banks could have a similar impact elsewhere, Wiedman said.

“There’s a permanent shift happening toward ETFs over futures for unlevered investors.”