Editor’s note: This webinar was recorded on Wednesday, April 9, 2025.
Kunal Kapoor: Good morning, everybody, and welcome to the latest edition in our series of these LinkedIn chats. I’m excited today to be joined by Bryon Lake from Goldman Sachs. Bryon’s the Chief Transformation Officer in the Wealth and Asset Management divisions. And Bryon, thanks for being here.
We kind of set this up with the expectation that we’d be talking specifically about active ETFs, and we’re going to get there, but this is a kind of time where the markets are seeing activity like no other. And so I think it’d be wrong for us to drive by without talking a little bit about the markets. And obviously if you’re reading the press broadly, including Morningstar, our economists and analysts do feel like there’s going to be some significant impact on global economies, global companies. And so the market is not necessarily acting irrationally, at least in the short run, but of course underneath all of that, there’s a lot going on.
So what’s the view from Goldman Sachs, and what are you guys telling your clients?
Bryon Lake: Yeah. Well, good morning, Kunal, and thank you for having me. It is great. I think it’s so powerful to have this opportunity to just talk directly and real time, too. I think the notion of transparency and being front and center is really important. We had an all-hands this morning as you’d expect, just talking about the different client conversations that we’re having around the world. As you point out, our clients are watching this information flow in, but there does seem to be a sense of calm as investors are processing what this information really means in the orderly fashion that markets are really reacting to it. There is a tremendous amount of uncertainty out there right now. And so I think people are taking a deep breath and trying to figure out, How do we need to reposition our portfolios in this environment?
I do think we should acknowledge that we’re coming off of relatively high marks as we came into these last couple of weeks. And so I do think that there’s been a sense of things maybe were overpriced. And so there’s just been a little bit of the air coming out of that one as well. From our perspective at Goldman, we’re seeing the markets; the situation is deteriorating. Chiefly, it’s the uncertainty in the markets: How do I make decisions today based on the unknown of how different countries are going to react to their tariff environment? And so I think that’s the challenging part here—is that people can’t essentially put their new game plan into place and say, “OK, here’s what we’re going to do going forward.” And so they’re having to wait for more information to come through.
Kapoor: But you are already seeing shifts in terms of inflows and outflows to different ETFs that you guys are behind. So maybe talk a little bit about that because I think it paints a very accurate picture of what’s happening in the markets.
Lake: Yeah. Well, it’s interesting. If you step back, and a lot of the investors that we work with are long-term investors, they had a thoughtful plan going into this. Their portfolios were constructed to achieve their outcomes, not necessarily the outcomes that they wanted over the last week or so. These are investors that have a longer-term profile.
When we see market disruptions like this, we do tend to see the ETF market do a couple of things. First of all, you see flows into ETFs because of the flexibility that they offer, the convenience of the intraday trading. That is something that investors really appreciate. They know that they’re getting intraday pricing, and so they can grab that liquidity. If you’re rebalancing your portfolio, that also is a pretty significant benefit that you get. And so we are seeing elevated volumes on ETFs. I think they made up about 36% of the tape overall yesterday. And that’s been a kind of continued theme, which is really profound.
And so I think if you think about the different investment groups, so there’s long-term investors, the ultra-high-net-worth category, and we’re actually seeing pretty significant net buying. They haven’t seen these price levels for quite some time now and so if they’re looking at a dollar-cost-average-type strategy or they’re continuing to put money to work, they’re putting it to work at these attractive levels. And so I think we are seeing record flows from ultra-high-net-worth investors into equity markets even, S&P 500, the Qs, and that sort of thing.
We’re also seeing some rebalancing in portfolios. So on our side, we’ve seen rebalancing toward more of a risk-off trade. So we’ve got an ultrashort strategy that gives you some yield above and beyond just cash. And so that’s something that investors are looking at, as well as just Treasuries—going into something that keeps them in markets but also does give them that risk-off trade.
The other interesting thing, and I know that we’re going to talk more about this on the active side, but as you think about the new capabilities that we’re bringing, we’ve launched some buffer ETFs, and these are the types of environments that they’re designed for. If investors need that extra level of information, knowing that a buffer ETF could provide some downside protection, while still allowing them to participate in the upside of the equity markets, that’s a tool that investors now have, and we launched a series of those earlier this year as well. So it’s interesting to see how these conversations are flowing.
Kapoor: Yeah, so a little bit of contrarian buying, but largely a lot of defensiveness to kind of mirror what’s happening elsewhere.
Lake: Yeah, that’s right.
Kapoor: We’re going to talk obviously about active ETFs, that’s why we were here, so let’s kind of pivot in that direction and talk a little bit more deeply about that.
First, let’s talk about what an active ETF is. Everyone has become familiar with ETFs and knows that they’re tracking an index and responding to that. How did an active ETF come to be, and what’s happening there, first of all?
Lake: There’s an important point that we need to establish here. The ETF is actually the wrapper, or the technology, and it’s benefit-rich: It trades throughout the day; in some markets, it’s tax-efficient; it tends to be lower cost; it’s transparent. There’s benefits to the ETF wrapper that investors really appreciate and allow them to use ETFs in their portfolios.
The early ETFs simply used traditional benchmarks or indexes that we’re all familiar with, and they would deliver those and put those into the ETF wrapper. And that was an amazing phenomenon and a great thing for investors. But as we’ve started to appreciate the ETF wrapper as something that gives investors control and increasing convenience, we’ve now identified that you can take traditional active strategies or even innovative new active strategies and deliver those into the ETF wrapper.
The parallel that I like to draw for people is, if you think about MP3s or streaming music, they offer a tremendous amount of control and convenience. We now have every single song that’s ever been written in our pockets, but we can listen to playlists based on the different environments that we want. The technology of streaming, or M3, that’s the wrapper. The type of music that you put into that, whether it’s rock ‘n’ roll, hip-hop, classical, that’s the investment engine in my analogy, if you will.
Kapoor: That’s a great analogy. And one of the hang-ups with active ETS for a long time was, well, if a manager discloses the portfolio in real time, you’re going to give up some advantage to those who might be trying to front-run. And so how has that hurdle been overcome, in particular?
Lake: As you point out, the vast majority of ETFs are 100% transparent. So you can go on Goldman Sachs website today and see every single one of the holdings in every single one of our ETFs. And investors really appreciate that. As consumers in general, we expect more transparency these days. If you’re going to a restaurant, you’re looking at the star rating that that restaurant has. You now have more information in your hands. I think Morningstar in our industry pioneered this, providing a fair and balanced view on the information across the funds environment for investors to make informed decisions. That transparency and that information really changed the landscape out there. So investors really do prioritize that transparency.
To your point, when we have active strategies, if there’s some efficacy in that strategy that is driving the alpha that the manager is trying to achieve, there was concern that providing that transparency could potentially hurt that. From our perspective, there’s a couple of things to think about. First of all, in the product design phase, we would absolutely check to make sure that if we are going to provide transparency here, it doesn’t change the outcome that an investor is going to get on that. And so the strategies that we’re delivering transparently through the ETFs, we have 100% comfort that we’re delivering something thoughtful to investors.
And then the second thing that I would point out is: We say active, but that can mean a lot of different things. That can be different asset classes, so on the fixed-income side or equities, the transparency profile of those different environments are very different. Also in the active space, it’s important for us to talk about outcomes. So it’s not always that an investor wants, Jan. 1 to Dec. 31 relative performance versus a benchmark, maybe they want increased yield, maybe they want more risk-defensive posture. Those are also things that active managers can provide. And so that’s how we’ve thought about that. And then we’ve stress-tested some of these things, and what we have found is that we can provide the transparency across a number of vehicles and it doesn’t impact the efficacy, and so increasingly, the industry is getting very comfortable delivering those active capabilities through the ETF.
Kapoor: And if you look at the data, our data shows that we hit a tipping point where active ETFs have gone from a novelty to what I would describe as full-on interest. And so can you talk a little bit about what you’re seeing in that context and how you think about active ETFs versus passive ETFs and how you think about model building and things like that because it all feeds into one big account, if you will.
Lake: Let’s step back for a second and frame the overall market. Here in the US marketplace, we have the ’40 Act—so think traditional mutual fund and ETF—that environment is $30 trillion, mutual funds plus ETFs. ETFs make up about $10 trillion of that, just to use big round numbers, mutual funds make up about $20 trillion of that. ETFs were launched, the first ETF was in 1983. So, here we are 30 years later-
Kapoor: One year before Morningstar’s founding.
Lake: Oh, amazing. OK, great stats. So, here we are 30 years later, and ETFs, even with all the benefits that they offer, are still making up about a third of the overall landscape. They’re gaining about 2% market share vis-à-vis mutual funds over time, but mutual funds still play a really meaningful role in our overall investment ecosystem. So that’s the broader framing here.
Now we have the advent of active ETFs that have come along and all of the educational stuff that we’ve just talked about and investors starting to get comfortable—OK, I understand how the wrapper works, now I’m going to go back to understanding the different strategies that can be delivered through that wrapper.
And by the way, when we think about that $30 trillion, and $20 trillion still in mutual funds, the vast, vast, vast majority of those are active, which tells us investors are still looking for active outcomes in their portfolios. What I think we’re seeing is the innovation, the intersection of those two things—the convenience of the ETF wrapper combined with active investment capabilities. So, to your point, a couple years ago, I think we really hit an inflection point where investors understood how ETFs work and that active delivered through that ETF wrapper could be a real difference-maker.
Active ETFs make up about 8% of the overall ETF ecosystem. So if we’ve got $10 trillion in overall ETFs, active ETFs are about 8% of that. In fact, growing at about 20%, though, so dramatically outstriping their weighting within the overall space. I do think that, to your point, is driven by models—so, investors that are blending the best of passive and the best of active. I like to say it’s not an active versus passive conversation, it’s an active and passive conversation. There’s different market environments, there’s different regions, there’s different timings where maybe active makes more sense or passive makes more sense. A lot of clients that we were talking to over the last year were becoming increasingly concerned with the weighting of the “Mag Seven” in the primary benchmarks. And even if they felt like those were great companies, the amount of risk that was weighted on those Mag Seven was becoming increasingly concerning.
Kapoor: It’s come home to roost in the past week for sure.
Lake: That’s exactly right. And so an active decision could just be weighting the strategy differently than that, and so that’s just one example of how we’re seeing that pull through.
Kapoor: And that feeds into the whole theme of personalization, the rise of this concept of direct indexing where you get a personalized portfolio. And so all those trends are supercharged because of the availability of these vehicles.
Lake: Exactly right. I think Morningstar is on the forefront of this as well, but technology unlocks so much of this, and you could even take it back to the decimalization of securities on the exchanges, which then allowed ETFs and maybe you think of ETFs as the first fintech, and you’re on this journey. I’m glad you brought it up. I do see as we talk to investors, separately managed accounts, direct indexing, again unlocked by technology, these are outcomes that investors can get.
And so one of the benefits of the ETF wrapper is it does offer some tax improvements or capabilities versus other vehicles. Direct indexing can do that for investors as well. So we’re seeing financial advisors using these in portfolios where the idea is it delivers you the S&P 500 performance over the course of the year, but it’ll trade intra-month when there is market dislocation, embed some of those losses into portfolios, and so hopefully at the end of the year you have some gains, but you’ve also embedded some losses to offset some of that. Again, investors first, we’re thinking about how are investors using these in their portfolios? Well, they’re increasingly concerned about taxes and they understand how taxes can impact their long-term portfolios. And so direct indexing is a way that that …
Kapoor: It’s kind of interesting that all of us talk about this and think about this as financial tools, but a lot of what you’re explaining fundamentally has to do with technology, and it’s taking essentially strategies that have existed for a long time and changing the way the wrappers work to kind of customize and personalize. And it seems like that trend is only going to keep accelerating.
Lake: Yeah, customization at scale, I think, is really where this is going. Whether that’s the increased variety that you have from different ETF capabilities that are offered, whether that’s the direct indexing or separately managed accounts on fixed income and the lowering and lowering thresholds to get into those strategies—I think it’s a great time to be an investor.
And to your point, you sit down and even in market environments like this, “You say, OK, what am I trying to achieve with this money?” And that’s why I love this industry so much because at the end of the day, what we’re trying to do is help investors reach their financial goals. Do you want to retire? Do you want to pay for healthcare? Do you want to give to your favorite charity? These are the financial goals. This is what people are trying to achieve. And so these tools, whether it’s an ETF or separately managed account, these are things that investors can use to build the perfect portfolio to hopefully achieve the goals that they’re trying to achieve.
Kapoor: Correct. And I’m going to start moving here to some of the questions that are coming in a second. But before we do that, I wanted to ask you one additional question, which is: You started to talk about what some might call more-exotic varieties of ETFs, whether they be buffered ETFs or even some that are starting to venture into private assets. You had State Street recently launched a private credit ETF. How do you think about these new frontiers, and do you think the liquidity characteristics of the technology that you talked about will allow for some of these nontraditional structures and nontraditional asset classes to make it into an ETF format, and what needs to happen for all that happen?
Lake: Let me take that in two parts. One is an innovation story, and then two is kind of like a product development conversation.
I always like to point out: The S&P 500 was invented in 1923. It had 233 constituents at the time. And it was just to give me a gist: Did the market go up or down? It didn’t get expanded until 500 securities until the 1950s. It didn’t get put into a mutual fund until the ’70s. It didn’t get put into an ETF until the ’80s. The S&P 500 is a great way to get exposure to the markets. It was a great invention. It took 60 years for it to be made available to the broad investing public, and so, innovation happens sometimes very slowly. A lot of us think that ETFs offer a lot of benefits, but like we talked about, the growth is kind of incremental …
Kapoor: Yeah, yeah. I remember Jack Bogle, the early days of my career, was still considered to be marginal in terms of his view around passive.
Lake: We’re streaming on LinkedIn. One of my favorite stats is “12% of Americans still use VCRs.” So innovation-
Kapoor: Do they really?
Lake: Yes. Again-
Kapoor: Do you have one at home?
Lake: I don’t have one at home. My dad still records Tigers baseball games in Detroit and watches.
Kapoor: So maybe he’s watching you here.
Lake: Yeah, exactly. Well, I don’t know that he’s got the LinkedIn link yet, but we’ll make sure that it gets into his hands.
So the point being that innovation happens, but we are in an industry with really smart people that are working on innovation, and they’re constantly looking for ways to serve clients better. Our firm does that all the time. How can we take the innovations that are coming, whether that’s structural, whether that’s an investment capability, and help drive better outcomes for investors? And I’m an optimist that this is going to continue to get better for investors.
Now that brings us into a product development conversation. I think innovation will continue. I think, increasingly, private assets are going to play an important role in investor portfolios. We talk about private assets, but just to kind of be more specific for investors, the benefits that they can bring. If it’s private credit, maybe enhanced yield. If it’s private equity, maybe enhanced performance. If it’s real estate, maybe it’s diversification or yield. If it’s infrastructure, maybe it’s … These are different benefits that it can bring to a portfolio to help—again, go back to what we were talking about—drive the outcomes that investors are really looking for.
Now, you point out something really interesting, where use the base case of an ETF—it offers intraday trading. Some of the securities that we’re referring to, whether it’s private credit or some of these other things, may not have the exact same liquidity profile of intraday trading. What’s interesting to me is the ETF ecosystem has developed in such a way that 10 years ago, 15 years ago, there’s things that we would’ve said like, “Ooh, that’s a difficult one.” But because so many smart people were thinking about it, it’s developed in a really healthy way, and so I’ll give you one example. Emerging-markets bonds or high-yield bonds, these are securities that were clunky. You would call a bank’s trade desk to get a bid on this, and you now have this interesting thing.
You put that into an ETF, you digitize it, you put it on an exchange, you have multiple market participants that are pricing it, market makers and other participants that are in competition to get that flow, it arbitrages the spreads down, it brings liquidity to the portfolio, investors benefit, and you’ve now got this ecosystem that’s developed around it that actually makes it work really, really well. And when we have market dislocation, we see them time and time again navigate through that in a really healthy way.
And so maybe that just brings us into a conversation around fixed income, which I think fixed income delivered in the ETF technology is absolutely amazing. So instead of going out and buying one bond, clunky, all these other things, you can get a diversified basket of bonds that oftentimes will trade at a tighter spread than if you went out to buy the basket itself. Interestingly, I think that’s going to be a growth driver to active ETFs as well, because if you look at the data, investors still do really embrace active when it comes to fixed income. And so combining again, the ETF wrapper with active capabilities, this time on the fixed-income side, you’ve got some amazing innovation that’s happening in that space as well.
Kapoor: It’s a really important point because I think for the longest time we’ve talked about ETFs and even active ETFs largely as the purview of equities. And it does feel like there’s been a big shift in the last 18 months if you look at our data toward fixed income in particular.
But I’d be remiss if I didn’t ask you though, what could go wrong? Because we’re talking about all the benefits—there are some liquidity concerns, there are some things that people do have to give up when they’re going into more-esoteric types of investments. How do you think about that?
Lake: Yeah, I mean, so obviously you have to do your due diligence. As part of the due diligence, I always encourage people to ask that question. Sticking with, for example, the fixed-income ETF example, we have had multiple stress-test scenarios. I’m reminded of the ’20s. I’m reminded of taper tantrums and things before that. What I would say is you have to be thoughtful about the reality. And I think sometimes investors misunderstand or don’t understand that the price is oftentimes the price. And what I mean by that is oftentimes an ETF will become the price discovery mechanism. And so it may not be trading where you think it would trade, but that’s what the price is right this moment. It’s kind of like a baseball card. You could look on Amazon and say, “Oh, this baseball card, it’s a rookie Michael Jordan, here where we’re in Chicago, it’s worth a million dollars.” It’s not worth a million dollars, it’s worth what somebody will pay for that baseball card.
Kapoor: It’s worth a few million dollars, Bryon.
Lake: Yeah, it’s worth a few million. Yeah, maybe it’s not the rookie card. And so I think that’s an important thing that investors do need to understand how this ecosystem works. Now, an ETF is going to be a reflection of the underlying market. And so if there’s something going on with the underlying market, whether it’s a mutual fund, whether it’s an ETF, whether it’s a UIT, that’s going to simply be a reflection of what’s happening in that.
Kapoor: Yeah. And especially I would expect that in environments like what we’re going through today, that’s where they’re really getting stress-tested. And I’m kind of curious if you’ve noticed any anomalies or anything unusual in the last week in particular?
Lake: Look, there’s stress in the market, anytime you see markets going down the way that they have, you’re seeing that, we haven’t seen anything that’s like a massive dislocation. Things have been relatively orderly. Our firm, we’ve got a capital markets desk, for example, that’s doing calls nonstop with investors, sharing best practices, maybe don’t trade around the open, maybe let the opening auction and the closing auction pass, do limit orders throughout the day to be thoughtful. There’s just some practical things that you can do to understand what’s going on and to make sure you are being smart about it.
Kapoor: Yeah, that’s super helpful. I want to ask one final question before we wrap up today’s session, and that is, when you look at new innovation or structural changes that may occur in the next five years, we’ve been kind of backward-looking, what are some of the things that you think are going to be exciting and will empower investors even more than what’s become available to them? Because obviously there’s a ton of choice, so what do you get from here?
Lake: The choice is a good thing, but it can be kind of overwhelming and so finding the signal through the noise will be a really important thing. If we step back, I think there’s going to be three primary drivers from a product perspective that we’re going to see investors increasingly use, and it’s what we talked about today. ETFs, and specifically active ETFs, I think, are going to continue to be a growth area where innovation happens—strategies that investors are looking for becoming increasingly available through the ETF wrapper.
Number two, I think it’s going to be separately managed accounts, direct indexing, customized outcomes, and models, I’ll put in that bucket as well, is going to just continue to unlock outcomes for our investors in a really powerful way.
And then thirdly, what I’ll call retail alternatives, but what I’ll maybe step back and say a little bit differently is the combination of public and private assets in a combined portfolio. And just to touch on that for a second, we know that companies are staying private for longer, there’s less companies that are IPO-ing because they’re able to access private markets and raise capital in ways that they don’t need to IPO then, but they’re some of the most exciting companies out there that people still want to get exposure to, and so getting access to them through private equity is a really exciting thing as well. And so I think the different capabilities that are out there, whether it’s a BDC or an interval fund, in order to get those private capabilities and bring that into portfolios—I think that’s going to be a big theme as investors understand the combination of public and private capabilities.
Kapoor: Here at Morningstar, we talk a lot about the convergence of public and private markets and how important it’s to create a common language through which we can talk to investors about it and through which investors can evaluate their portfolios. So I think we’re singing from the same hymnbook, so to speak.
But thanks for being here, and I think if you’re taking some key lessons away from listening to Bryon, I think it’s that choice is exploding, but along with that choice, there’s more personalization than ever before, which should lead to great outcomes for investors. I think this is a space, active ETFs, that will continue to resonate and be really important in the years ahead.
Thank you all for taking the time to join us on this edition of our Investors First LinkedIn series. I hope you enjoyed it and look forward to having you here on future series as well. Have a good day, everyone.
