Transcript: BlackRock and Vanguard duke it out over ETF market

This is an audio transcript of the FT News Briefing podcast episode: ‘BlackRock and Vanguard duke it out over ETF market’

Sonja Hutson
Good morning from the Financial Times. Today is Wednesday, January 3rd, and this is your FT News Briefing.

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Russia is continuing a series of deadly air strikes in Ukraine. And Israel’s top court overturned controversial judicial reforms. Plus, BlackRock is slowly losing its grip on the ETF market in the US. I’m Sonja Hutson, in for Marc Filippino, and here’s the news you need to start your day.

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Russia hit Ukraine with a massive air strike yesterday. It’s the second major onslaught of the new year. Ukrainian President Volodymyr Zelenskyy said five people were killed after 100 missiles and drones hit Kyiv and Kharkiv. Russia has drastically stepped up its air campaign in recent days. UN officials estimate that nearly 70 Ukrainians have been killed due to air strikes since Friday. Zelenskyy urged his allies to increase military aid to the country. Both the US and the EU are struggling to approve new funding.

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In a landmark ruling on Monday, Israel’s supreme court struck down a controversial law aimed at overhauling the country’s judiciary. The law sparked widespread protests and demonstrations across the country when it passed and it was in danger of tipping the country into a constitutional crisis. Here to talk to me about where the ruling leaves the country is Neri Zilber. He covers Israel for the FT. Hey, Neri.

Neri Zilber
Hi. Good to be with you.

Sonja Hutson
So take us back really quickly and just kind of walk us through this law that Israel’s supreme court ruled on earlier this week.

Neri Zilber
So this law, called the reasonableness bill, was passed late July by the governing coalition of Prime Minister Benjamin Netanyahu to essentially overhaul, what they would call reform, the Israeli judiciary. And the bill that they passed in late July essentially took away the supreme court’s ability to review both government decisions and the appointment of civil servants, so anyone, like appointing an attorney-general or firing an attorney-general or other key appointees.

Sonja Hutson
So how did the court rule? I mean, what did the justices say?

Neri Zilber
So there were two distinct rulings with regard to this particular bill. The first and most clear-cut ruling was 8-7, deeming the law that was passed last year as essentially undermining Israel’s core democratic character. And then the second part of the decision is Monday night, and arguably the more interesting one was the court in a 12-3 decision ruling very clearly that the supreme court here had the power, had the ability to review these types of laws, what are known here in Israel as quasi-constitutional basic laws. So Israel famously or infamously has no constitution. And so these basic laws that have been passed by parliament over the past few decades have had historically a quasi-constitutional standing in the Israeli legal system. And so for the first time ever, effectively Monday, the supreme court not only struck down for the first time a quasi-constitutional basic law, but also essentially made very clear that it had the power to do so.

Sonja Hutson
OK. So the supreme court not only overturned the reform law itself, it also ruled that the court has the power to review these so-called quasi-constitutional basic laws. What was the reaction to these decisions from the Netanyahu government? Like, where does he go from here?

Neri Zilber
So the reaction by the Netanyahu government ministers, essentially the Israeli right, was quite harsh, arguing that the court both lacked the authority to make these types of rulings and also that the court, in deciding to issue this judgment when it did, ie in the midst of a war, was harming the national unity, harming the war effort. But in practical terms, the war actually has spared Israel further argument, further division, essentially up to and including what many feared would be a constitutional crisis, precisely due to the fact that the country is fighting a war. Now, there’s also speculation that’s growing in recent weeks that Netanyahu may not be long for this world politically, that there may be a move either to topple this current government and maybe even go to snap elections. That’s theoretical at the moment. But again, if we were talking before October 7th, this would be the biggest issue in Israel. After October 7th, it’s definitely taken a back seat.

Sonja Hutson
I guess I’m wondering what this ruling from the supreme court reveals about the state of Israel itself. You know, the war has obviously pushed a lot of the politics to the side. But what sorts of questions is the supreme court ultimately raising here?

Neri Zilber
I think, big picture, this is a manifestation of the deep divisions in Israeli society as exemplified in the political system. And so the real question is whether this wartime unity will outlast the war. And if not, then we will likely see these deep, deep fissures and divisions within Israeli society return, whether on the issue of judicial reform or issues of religion and state, issues of settlements in the West Bank and so on and so forth. And so, big picture, the hope is that at least this decision that we saw by the supreme court Monday is a quote unquote, stay of execution for the deep divisions that are very real inside Israel at the moment.

Sonja Hutson
Neri Zilber covers Israel for the FT. Thanks, Neri.

Neri Zilber
My pleasure.

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Sonja Hutson
BlackRock has been the biggest player in the US exchange traded fund market for years, but now it’s facing some stiff competition. Vanguard is gaining popularity and eating into BlackRock’s dominance in ETFs. I’m joined now by the FT’s Will Schmitt. Hi, Will.

Will Schmitt
Hey, Sonja.

Sonja Hutson
So how much of its market share has BlackRock lost? Can you give us a sense of scale here?

Will Schmitt
So just looking over the last five years in the US ETF market, BlackRock in 2018 was just under 40 per cent of the market, whereas Vanguard was about a quarter of the market. And those numbers have slowly gotten closer together over the last five years, with BlackRock now at about 32 per cent and Vanguard at 29 per cent.

Sonja Hutson
So why are BlackRock’s ETFs losing popularity while Vanguard’s are gaining popularity?

Will Schmitt
Well, and it’s not like BlackRock has totally fallen out of favour, like they racked up over $200bn in inflows globally in 2022, and they’re expecting to be among the leaders again last year once the numbers come in. But what is happening is that, because the stock market has been on fire in a couple of years recently, you know, S&P is up pretty big. And what Vanguard is known for — and what investors know them as really — is for having these broad-based stock and bond ETFs that they can go to, you know, pay almost nothing in terms of fees and get, you know, exposure to the broad US markets. Whereas BlackRock, they have those funds, to be sure, but they’re also much more keen on expanding into like thematic spaces. They’ve applied to launch a bitcoin ETF if and when those things hit the market. So just different approaches and investors have just been a little more keen in recent years on Vanguard’s than BlackRock’s.

Sonja Hutson
OK, so Vanguard offers these cheap ETFs that are really broad and investors like that. But besides Vanguard getting more popular recently, are there other reasons behind why BlackRock is losing market share?

Will Schmitt
What is happening now, too, is that there’s three huge firms — there’s BlackRock, Vanguard and State Street — that control, you know, three-quarters of the US ETF market. But below them, especially in recent years, there have been all these firms launching active ETFs, jockeying for new parts of the market. And there have been some hits, there have been some misses there too. But put those all together, you have a few fractional percentage points here and there, and those firms are now starting to carve out their own much smaller but still noticeable niches of market.

Sonja Hutson
What does this shift in the US say about the ETF industry here more broadly?

Will Schmitt
Well, it’s just becoming more competitive. And you’re seeing that because asset managers, broadly speaking, feel like that is what the investors of the present and the future are wanting. They want ETFs for a number of reasons. They’re easier to access for a lot of people. You don’t have to go through like a traditional mutual fund brokerage approach to get these strategies in your portfolio. They tend to be a little less expensive. And then also in the US, but not in Europe, they have some unique tax advantages, too, that are also making them a little more attractive. So it’s just a space that has been growing and eating into the mutual fund market a little bit every year, kind of the way that BlackRock’s lead has eroded a little bit every year. The space has just become much more competitive and these numbers kind of reflect those trends.

Sonja Hutson
Will Schmitt covers ETFs for the FT. Thanks, Will.

Will Schmitt
Thank you.

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Sonja Hutson
You can read more on all these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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