BlackRock, Inc. (BLK) Q2 2013 Earnings Report, Transcript and Summary

Good morning. My name is Susan, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock, Inc. Second Quarter 2013 Earnings Teleconference. Our host for today's call will be Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Gary Shedlin; and General Counsel, Matthew Mallow. [Operator Instructions] Thank you. Mr. Mallow, you may begin your conference.

Thanks very much. Good morning, everyone. This is Matt Mallow, and I'm General Counsel of BlackRock. Before Larry and Gary make their remarks, let me point out that during the course of this call, we may make a number of forward-looking statements, and we call your attention to the fact that BlackRock's actual results may differ from these statements. As you all are aware, BlackRock has filed reports with the SEC, which lists some of the factors that may cause the results of BlackRock to differ materially from what we say today on the call. BlackRock assumes no duty and does not undertake to update any forward-looking statements. So with that, I will get out of the way and let the call begin. Gary?

Thanks, Matt, and good morning, everyone. It's my pleasure to be here to present our second quarter results for the first time as CFO of BlackRock. Today, I'll provide some opening comments on our financial performance and also reference selected pages from our earnings supplement, which has been posted on the BlackRock Investor Relations website. I'll be discussing primarily as-adjusted results. These results exclude, among other items, the financial impact of a significant Charitable Contribution in the second quarter, which I will review in more detail shortly. Finally, I'll outline some changes we've made to our earnings release to improve transparency and facilitate a better understanding of the drivers of our business. As I discussed at Investor Day a few weeks ago, we're focused on 3 key drivers of shareholder value: organic growth, operating leverage and capital management. Despite some market volatility over the last 6 weeks of the quarter, we delivered on each of these drivers, resulting in a strong quarter and continued earnings growth. We generated second quarter earnings per share of $4.15, up 34% compared to 2012. Operating income was $982 million, 18% higher than a year ago, reflecting record base fees in the quarter and continued margin improvement. Non-operating results reflected a $22 million increase in the market value of our seed and co-investments, as well as a $39 million noncash pretax gain relating to the PennyMac IPO, which we disclosed in our first quarter 10-Q. The second quarter as-adjusted tax rate was 27.3%. During the quarter, we benefited from a number of discrete tax items totaling approximately $29 million, which were primarily attributable to the realization of loss carryforwards. For planning purposes, we continue to believe that 31% is an appropriate run rate based on what we know today. Underpinning our results was continued organic…

Good morning, everyone. Thank you, Gary, and thanks for joining, everyone -- us today on this call. But before we start, I'd like to reiterate how excited I am to have Gary on board. He's been a close partner of mine and adviser to BlackRock for many years, and it's great to have him as a full-time member of our team. Let me begin with a little market context. What started out as a relatively steady first 2 months of the quarter for markets took a turn in late May following a series of global events, all within a concentrated period of time. The Fed's comments on May 22, suggesting a change in narrative, a change in the idea of tapering their bond purchasing program led to markets aggressively selling off to the long end of the curve. What we witnessed to see also is a rapid sell-off from leveraged investment products. The same time, growing uncertainty surrounding Japanese policy makers going all-in on our stimulus efforts, triggered approximately a 20% 3-week sell-off in the Nikkei after a very large run-up. And finally, continuing market worries about Chinese growth and emerging market capital flows sparked a downturn in emerging markets. These events drove a material uptick in market volatility, and we saw different types of investor react in different ways, highlighting the stability of BlackRock's multi-client platform. In fact, we saw very little in the ways of changes from our largest institutional clients as we remain committed to their long-term investment objectives. We did see a market change in trading-oriented investor behavior, particularly with respect to long-duration fixed income and emerging market equity exposure, as those clients used liquidity in our iShares products to reposition their portfolios. Many of these macro and policy concerns that attracted attention in the markets…

[Operator Instructions] Your first question comes from the line of Michael Carrier with Bank of America.

Larry, just one question on the fixed income business. You gave a lot of detail. Just in terms of BlackRock, how you guys are setup from a fixed income product mix, what's your offering when you look at the mix of, say, like the core products versus the -- what you characterize as either the alternative or the flex products? And then also just from like a fee perspective. If we continue to see more of that shift over time, what tends to be the fee rate in those products versus some of the more core products?

On the unconstrained type of product, the margins are -- or the fees are higher than our core products, but I won't say dramatically higher. And as we see more and more growth in that, obviously, we'll look to change that. But right now, the fees are higher than our core products. And as I said for the -- our 1- and 3-year period of time after fees, we've outperformed our peers in that. So that's one positive thing. We're going to have a lot of clients who are not going to be able to move out of core. And we still -- we have great performance in our core offerings also. It is my view that more clients should be moving more towards more the unconstrained type of products, and I do believe you're going to see more and more investors move in that. Let me just also add, 2/3 of our fixed income assets are held by institutional clients, and they're generally slower in terms of movement. But I do believe that the dialogues we're having, more and more institutional clients are asking the question, how should they be looking at their fixed income portfolio. As I said in my prepared speeches, we had a 30-year bull market, people were very accustomed and very convinced that having their assets in a core product was a foundational component of their fixed income allocation. I think that is being -- that will change over time. I think we'll be a big beneficiary of that change. But as I said, institutions are slow to adapt. They have to work with the consultants, and I don't mean that in a negative way. They take -- they have to act as a fiduciary, making sure they're -- they need to make sure they're meeting the needs as a fiduciary. But importantly also, many of our fixed income investors, whether they're insurance companies or other types of organization, they are looking to match their assets to their liabilities. And so a lot of fixed income investing is liability-based investing. And those types of investors, you're not -- they're going to be -- they're not unhappy with rising rates if their liabilities are moving alongside with that. So that's why we're here to say there's going to be a rotation, but it -- and it could be large in some segments of fixed income owners and in some segments, it is going to be much less.

Okay, that's helpful. And then just as a follow-up, you mentioned some of the volatility in May and June and how the ETFs performed. Just on the fixed income side, you mentioned the relationship with MarketAxess, you guys announced something with TradeWeb. Just during that same period of time in May and June, just given the regulations, dealers holding less inventory, any insight in terms of, as a big fixed income player, how the markets performed? And based on those relationships, what you guys are trying to do longer term?

Sure. That's not related to iShares. I mean, but one thing is very clear, that people are using -- I think one of the big trends that I think even surprise me, many investors use iShares in fixed income for beta exposure. Sometimes some investors used to use some form of derivatives and swaps and other forms of options, now they're using ETFs. So that's one of the things that was designed. There was no question during, I guess, those few moments during late June. There were periods of pretty poor liquidity in the fixed income markets, especially in credit. I'm not particularly alarmed about this. I think the Street has done a very good job to try to manage their balance sheet issues, managing their leverage ratio issues, managing their capital issues. We, as long-term investors, are going to have to deal with this. This is why, I believe, more and more fixed income will be traded on electronic platforms in the coming years, and I think we'll find a new source of liquidity. But in the short run, there are bouts of illiquidity, that's the entire market. And I just want to underscore the cash part of the market, the ETF component of the market, I mean, we saw periods of time of illiquidity. But as I reflect now in less -- in more calm periods today, what I'm particularly surprised at how well the exchanges and the market participants of fixed income ETFs performed. As I said, we saw $1 billion of flows in one day, the creates and redeems worked very well. There was periods of time during the day where there were appearances of discounts, but all that was, was a indication of where the cash market was going. And obviously, there is many cases in which, in global bonds, where markets were closed overseas and the ETF market from that close looked like a discount, but it was really telegraphing where the markets were going to go the next morning. And so we were -- I mean, we were very pleased with how they performed. Nevertheless, as the market leader, we are doing whatever we can to assure as great a market liquidity as possible. It is our responsibility to educate and to inform to making sure that we have a more liquid market. But the overall fixed income market is going through this evolutionary change now as Wall Street is relying less on balance sheet, spending much more time on flow. They're dealing -- they're developing their own electronic trading platforms, MarketAxess is another one. And as long-term investors, this is something we're all going to have to live with and adapt.

Your next question comes from the line of Marc Irizarry with Goldman Sachs.

So just following up on fixed income allocations from institutions, just in terms of going from maybe core to non-core products, how are fixed income ETFs playing into those discussions? And just following on, on some of the discussions around the -- what sounds like sort of market dislocations, if you will, that were temporary versus sort of tracking our long-term for fixed income. Maybe you could talk about sort of the market share opportunity?

Mark Wiedman's here, and he's going to be able to answer that question in a lot more granularity than I can. So Mark, why don't you answer that?

Marc, there are 2 things, I think, implicit in your question. Let me address them separately. The first is about growing adoption by what I would call fixed income specialists of fixed income ETFs. So historically, the users of fixed income ETFs have been wealth managers and asset allocators. I call them generalist investors. And that's where the bulk even today of our fixed income ETF holdings are. What's the big transformation that's occurring is we're seeing fixed income specialists who control, I don't know, 98%, 99% of the global fixed income assets, actually starting to use fixed income ETFs in their portfolios. For liquidity purposes, they're using them for tactical positioning. It's our aspiration with the iSharesBond launch that we actually penetrate beyond the tactical position into longer buy-and-hold segments, whether they'd be an insurance, or bank, or corporate balance sheet, or individuals around the world. So that's the broad trend, and we see it every day. It gets a bit masked when you see people flowing out of an asset class because it looks like they're exiting the ETF. What they're doing is using the ETF, and again, those tactical traders, for the exact purpose for which they bought it, which is the ability to get out quickly when they want to. The second question you're addressing is the -- I think, Larry used the appearance, I think that's the right word of a gap between the underlying and the ETF price. And I think the issue here is volatility you can see versus volatility you can't. What ETFs do is they shine a light on intraday volatility in the underlying asset class, the cash market, the underlying securities. And so an optical gap can open up in the short term versus net asset value, which is the…

Okay. And then if you can just give some color on your EM -- on active EM business both in equity and debt. Obviously, we saw -- we've seen a pretty good bout of volatility here. Are you sensing or seeing from your clients any change in thinking about being active in EM versus passive in their allocations toward EM?

No, I think that those are who are -- a core group of our investors believe that active management EM is part of their core philosophy, and this is why we've been so aggressive in building our EM fixed income team and our EM equity team. And EM and also, as I suggested, our EM alternatives. What we did, we have a $500 million win in our EM fixed income team. This is on the active side. As I talked about Andrew Swan in terms of his outperformance in a component of that. But there are another core group of investors, and some of them, official institutions. They're investing in EM principally through a beta product. And so our job, as I've said for many quarters, is to provide an active solution and a beta solution. But Marc, I have not seen any dramatic shift out of beta into active or vice versa. I think those who are -- who believe in active will continue to invest in active, and those who believe in -- who want exposure and they're not as concerned about excess performance they're going to go into beta.

Okay. And then just, Larry, on the active equity business, the flow trends, they look like they decelerate or improved sequentially a little bit. How much of the improvement is sort of redemptions slowing versus wins in active equity? Are you seeing sort of the end of the bout of redemptions, or is it gross sales are picking up or...

I think a lot of the redemptions are the component of when we transition our managers, we expect large outflows. And so some of -- so obviously, that's behind us. Our investors are starting to see the positive turnaround. We have probably more dialogue than ever before. Some of our trends, we are seeing continued flows in European equities where we have a 5-, 3- and 1-year track record that's in top quartile. And so we're -- so some of it is a combination of both. But the other thing that we're seeing -- we continue to see more and more interest in multi-assets where clients are looking for equity exposure but in a more of a multi-asset type of strategy where you could navigate around. So -- and the other thing is it's undeniable, our scientific active equity team has had great results. I expected to start seeing more inflows, but we're not seeing any outflows as you suggested. So I think it's fair to say our -- the outflow drag is probably behind us, and now it's opportunity.

Your next question comes from the line of Robert Lee with KBW. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: Quick question, just going back to the capital management, really on the debt side. I'm just curious, how are you thinking about managing kind of the debt side of the ledger? I mean, I think you had around $750 million of some notes that matured. I mean, should we expect that the objective is to kind of chip away at outstanding debt over time as part of the capital management strategy?

Rob, it's Gary. So our next maturity is in December, so we're basically a little more than a year away from that, and that's about $1 billion. So we're obviously monitoring. There's the constant tradeoff -- I'd say there's 2 trade-offs. One is basically trying to basically get a feel for, obviously, where we think rates are going to go and spreads over the next 16 months, so we're going to be very mindful of that. But we're also mindful of the negative carry. So we're going to try and balance base -- both of those items in terms of trying to have an outlook and understand the negative carry. But we're certainly not going to play that too cute. So whether it's next month or it's 6 to 8 months from now, that remains to be seen based on our continued analysis, but we're very mindful of it. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: Yes, I know you don't -- you guys didn't provide the balance sheet, but -- and I could be mistaken. I guess, I thought you may have some floating rate notes that matured back in April or May, and I'm just kind of curious how you...

Those were pre-refinanced last year at the time of the Barclays buyback. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: Okay, great. Another follow-up question on Aladdin. Just want to make sure I understand how some of the new business flows. You talked about having pretty strong pipeline and expecting double-digit growth there. Am I right in assuming that there's some upfront costs as you bring on those mandates so that maybe it takes a while for profitability on the new mandates to flow through in that. With that, and given the strong growth you've had there in the last couple of years, should we really be expecting maybe some acceleration over the coming year or so in the Aladdin's growth?

Well, as we said, both Gary and I said, we expect double-digit revenue growth. Obviously, it's lumpier. So over course of the year, we expect that. We've signed 5 new mandates in the first quarter and 5 new mandates in the second quarter. We have never seen this type of volume. And we are about to sign one of the largest mandates we've ever had. As I said, more and more institutions are looking to take on Aladdin as their risk management solution. And this is asset managers, this is official institutions, insurance companies, and so we continue to see huge upside and opportunity to build Aladdin. We crossed about another $14 trillion mark in terms of assets that we are now analyzing risk on behalf of our clients. It continues to be an industry leader. And I believe as an industry leader, because of the increased regulatory issues that we all have to face, having a risk system that is across product, that encapsulates regional issues, regional differences, compliance issues, it allows investors, especially the more regulated investors, to deal with the regulatory compliance in a far better way that they would have otherwise. Especially in Europe, as you have each country now adapting regulatory issues a little differently. And so the regulatory issues that we are all facing, BlackRock included, is enormous. And if we did not have at BlackRock -- I'm going to speak for ourselves for a second, if we did not have a monoline platform of risk management, risk understanding, a monoline platform of -- in terms of trade entry, trade discovery, inventory management, we would have far more difficulties. And I think one of the reasons why we continue to have better than industry average in margins has been because of having this technology in face of all the regulatory added needs that we have to face. Our competitors who are asset managers, obviously, have the same issues. They are now becoming our clients. They are faced the same issues, and they're trying to achieve the same type of simplicity and operating structure that we have at BlackRock, and we're happy to make them our clients.

And Rob, I would just add, just specifically that the year-over-year comparison in terms of it being up 5%, I think was your question, is definitely the result of timing and recognition of renewals and implementation fees. So there's no question there's some timing issues in there. And to Larry's point on the pipeline, I'd say the one really very good piece of news is while we're adding -- we added 5 clients in the first quarter and 5 new clients in the second quarter, the run rate of revenues for that group of clients is increasing fairly dramatically. And in fact, in the pipeline, as Larry mentioned, the run rate of those new clients is even greater than the second quarter.

Your next question comes from the line of Bill Katz with Citigroup.

In terms of the money market forum [ph], you didn't really talk -- you touched on it. I know you covered it at the Analyst Day recently, but there's been a little bit more movement maybe by the IRS, and I'm just curious, what's been the feedback from your client base as they've had a chance to ruminate a little bit on some of the proposed change by the SEC, and what might be the behavior around any of these changes?

As I said during the Investor Day, I don't think we're going to see that much change. I think this has been so well telegraphed. If we get the IRS changes as you suggested, we need to deal well with [ph] changes. That's something that's going to be very important. So if we get these changes, which I think are coming forth, we have been working very closely with the regulators. As they finalize this, they've asked for our input as they've asked for other people's input. We've been -- we're providing input to the regulators from input that we have had from our clients. As I said, this is so well telegraphed. We're going to have some clients who are going to have to move probably close -- more to the government-oriented funds because they require some form of guarantee, some sort of backstop, or they -- and they have to have a constant NAV. Some clients are going to be able to adapt to have a floating NAV. And the reality is, Bill, because we publish every day, now, what our NAV is, it really has almost like a implied floating NAV even today. And as our clients are watching, all the clients that are in money market funds are saying how the NAV is staying much more constant. The industry has done a very good job of self-policing itself. And so I think much of this is already in the marketplace. One last thing, we have the final comment letter is due in September. And as I've said, we're getting feedback and we're providing that feedback to the regulators from our clients. But as I said Investor Day, I'm very calm about this.

That's helpful. And then a quick question for Gary. I heard you on the $250 million is a good run rate in terms of repurchased. But with the stock trading where it's at right now and your earnings building, how are you thinking about that on a go-forward basis? And I guess the real question is, as you think about the share count, should we expect that to continue to migrate lower, or will that start to stabilize at this point?

I think we're obviously going to continue to try and be as consistent and predictable in terms of our capital management policy, Bill, as we possibly can. As I said, the run rate for the moment, I think we feel very comfortable with the $250 million a quarter. We're going to try and be really systematic about that as opposed to overwhelmingly opportunistic. And so with that, I would expect for, basically, the second, the third and fourth quarter, you'll expect the share count to come down and obviously, generally kind of gets offset in the first quarter of the year based on employee comp issuance. But overall, you're going to see that count continue to come down.

Yes. I -- we have not discussed this with our board. This is a discussion that we would have probably in our later board meetings. But it's very clear that as long as we generate the free cash flow that we are generating, Bill, which obviously will grow as we grow earnings, it would be my expectation the board would authorize us to continue with the process of reducing our share count. But I mean, obviously, that's subject to conversation. And we do have board authorization for, what? 7 million, 8 million more shares outstanding right now. But right now, our board has agreed to the current rate that we are purchasing right now. But just pay attention to our free cash flow, and we don't need to discuss anymore.

Okay. Just one point of clarification. The $6 billion that you've got on iShares quarter-to-date, did you provide dynamics to where that's coming into in terms of products? I'm sorry, I might have missed that.

No, we did not. I mean, it's all public data. Mark, why don't you just quickly answer that.

It's broadly distributed, I can -- I don't have off-hand the numbers for Core Series by assets. The -- into where they come, but we see -- I give you one example of how the Core Series is achieving its purpose relative to more high velocity trading vehicles. We launched IEMG, which is our low-cost broad EM exposure vehicle. Lower liquidity doesn't have the derivatives ecology of its big sister EEM. IEMG launched in October. It's nearing $2 billion. That money kept flowing in even during massive outflows out of EEM. And what that shows is, there's 2 different segments: there are consistent buyers coming in a trickle, and then you see other buyers or -- and sellers who are moving in and out much faster. So I would say, look at the Core Series for a long-term investment trend, so we can get you that data, it's out there, public. And then for -- you look for more fast money as products like EEM and HYG.

Your next question comes from the line with Matt Kelley with Morgan Stanley.

Just 2 quick ones for me. So I'd just be curious to get your comments on the demand for allocation funds from -- segmented into institutional and retail demand. So as you think about financial advisers and you think about institutions, where is kind of the increase or decrease at the margin and pickup in demand? And how your EM allocation fund is fitting in within that so far as well?

You mean the EM [ph] allocation fund part that we announced -- that we discussed? So where we see clients looking for BlackRock to do the allocation, these are generally fiduciary mandates where we are working alongside with them and we are working with them, and we're seeing a rise in fiduciary types of businesses. But I mean, principally, these allocation types of products are retail-oriented products. That's what they're designed for, or that's where we're seeing, in the RIA channel and other channels where clients are looking to have these types of products. In Global Al, obviously, that's a very large scale retail product and it's expanding now in their RIA channel in itself. And so one should not expect large-scale institutional monies moving into these type of products. But for those clients who are looking for investor decisions as a fiduciary, that will be -- continue to be a larger business of ours. In fact, in this week's P&I, there's a whole article about fiduciary business, talking about how that's a growth area in the investment management business. So that's where we're going to continue to see that. And the other area where we see it, Matt, is in our Defined contribution and our LifePath business, where, as I said earlier, we had another $4 billion of growth, $7 billion over the quarter. And this is where we are taking that investment decision or allocation process.

Okay, great. And then as a follow-up, I saw some news out that BlackRock's considering the launch of a Swiss fund range. So I'm just -- I'm curious and I know that's something you guys touched on in the Swiss market at your Investor Day. So when you think about that, how have you -- what have you set up and what do you still need to set up? Are all the pieces in place, now it's just about kind of execution and distribution?

Mark, I mean...

I think what you're referring to is we acquired the Crédit Suisse ETF platform. That gave us a platform in Switzerland. The primary rationale for that was they're offering Swiss ETFs to Swiss buyers who, for tax reasons, can't by UCITS funds. But it's important to understand that gives us a foundation which we will be building on for offering a broader Swiss complement beyond just ETFs in Switzerland.

Okay, great. And then just to follow up on that. I was actually referring to the broader launch. I'm not sure if that's something you guys can kind of comment on.

Well, in Switzerland, we continue -- we're a big believer in Switzerland. We believe whether it's in Swiss francs, whether it's specifically the investment management platform that we have in Switzerland, our -- I think you're referring to, our Swiss country manager spoke about launching of some Swiss-oriented product, Swiss-based, and that's just a continuation of our desire to build a stronger presence in Switzerland.

Your next question comes from the line of Ken Worthington with JPMorgan. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: First on sort of Barclays AGG versus unconstrained, how much capacity do you think there is in this unconstrained market? It seems very intuitive that you'd see the switch from core to alternative. But I guess, is there enough supply to absorb this meaningful potential demand?

From my perspective, the investment process is no different than managing an Agg. Obviously, it requires more flexibility, a lot more technology, making sure you're managing to the level of risk that you want to take. But there are many competitors in this product. JPMorgan has a great product. PIMCO has a product, our product, so I believe the capacity in the industry is in the trillions. I think this is going to be a very large component of the future bond market, and I look to the key participants to be a big player in it. We just -- we happened, as you've noted in your research report, we have really great 1- and 3-year performance, and we continue to drive great performance in this area and we're continuing to see accelerated flows in these products. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Great. And then 2Q, I think you opened your prepared remarks, saw 2 very to different markets. April and May was very different than June. And I think it was mentioned that the tone with many clients has not changed. But I assume with some clients, it has changed. I'd say, maybe first, with which clients have the conversation or the tone changed, and what actions do you expect them to take because of the change in rates, particularly on the unintuitive side? You mentioned like Barclays AGG to unconstrained. But I guess, are there other areas where you're seeing leading indicators for change, whether it'd be like dividend stocks or real estate or FX products by retail or institutional. So any other things worth highlighting there outside of the unconstrained versus Barclays Agg?

Yes, I think when we see these shifts in attitude, when you see 100-basis-point movements in rates, you certainly have an accelerated dialogue with your clients. So even our most deliberative clients who are looking at long-term solutions, they require a lot of hand holding also, and they ask many questions. But overall, as I've said, institutionally, we did not see much behavior change. As I've said and reiterated, the dialogue we're having related to movement out of core products into unconstrained is one consistent dialogue. But I would say 2 or 3 more trends that we had with our clients. One is, we continue to see more questions related to bar belling. The volatility remind clients -- it frightens clients, that markets can move very rapidly, very violently. So bar belling becomes a bigger component of what the clients are asking. They're looking -- as a result of that, we have not seen any slowdown in the use of index products or beta products. We are also seeing more and more clients looking for more uncorrelated type of products, equity, fixed income and other types of products. So some of our alternative products, we have a lot dialogue in that. But the key there, I think, is every time you have these bouts, clients have to relook at how much illiquidity they can afford. And so one of the key things that I think clients -- why they're moving towards more beta products is these bouts of illiquidity frighten them, and you just have more structural liquidity in index-based products. And that trend has not changed. The other thing that -- but on the same side, as the indication of the bar belling, we have more than $3 billion of illiquid commitments in our pipeline. So we continue to…

Your next question comes from the line of Luke Montgomery with Sanford Bernstein. Luke Montgomery - Sanford C. Bernstein & Co., LLC., Research Division: You've touched a lot of already on the ongoing debate about whether ETFs help or hurt liquidity during times stress. I think particularly with an asset class like fixed income where underlying OTC liquidity is thin and getting thinner. If I could ask you to be as objective as possible, to what extent would you acknowledge that we're in unchartered territory? This is an open question. And do you think that naysayers make any good points, and what could go wrong here that would damage the reputation of ETF vehicle in the mind of investors, and what keeps you up at night?

This is a great question. I'm going to listen to Mark first and I'll give my response after.

I think that I would say the first thing is we have learned we have a lot more work to do in educating clients and other stakeholders about how these vehicles behave, what does the current market price actually represent versus, as I mentioned, the asset values and the like. So a lot of work in educating people how the tools work. The good news is the clients who use the tools are very happy with how they actually perform. So that's the good news. But there's a lot of work in educating a very broad group of people, including clients, about how the actual vehicles work. I think one of the things that I think is underlying is that expectations of market liquidity and ETFs require a little bit of clarification. The minimum liquidity of an ETF is the underlying liquidity of the asset class less arbitrage cost. That's the minimum liquidity. So if the underlying is illiquid, the ETF itself also might be illiquid. But some ETFs create additional secondary liquidity, which Larry mentioned, aggregate [ph] EEM, for example, $5 billion. We see it everyday with our Russell 2000 product, IWM, which trades huge sums every day, which you can never trade in the underlying. So there's additional liquidity creation. Those are the kinds of -- that distinction there, I think it's important for people to understand, so if you're trading in a obscure asset class like some Yemeni securities, you should expect that the ETF will also be illiquid.

We don't trade in those.

We don't trade in those. Not yet. Basically that ETF will also be illiquid. It doesn't, by just becoming an ETF, have magical liquidity. I think that key distinction is the number one thing we need to get out there in the marketplace for people to properly understand how these vehicles are supposed to perform.

I would just add, the markets -- there's heightened scrutiny of ETFs right now, which I actually believe is a good thing. There is no question during the moments of stress, there was heightened inquiry related to the flows and the quality of the markets of ETFs. We welcome this type of scrutiny. It's this type of scrutiny that, in my mind, helps us strengthen the market for the future. I am not here to suggest I don't lose sleep over our commitments in the ETF market. It is a large commitment. We have a lot of responsibility for the fluidity of this market, for the success of this market. And I don't take that responsibility lightly, and I know Mark and his team does not take that responsibility lightly. We believe the potential ETFs, as we stated in some of BlackRock research, would be greater than $2 trillion. We believe this will continue to grow. And so that responsibility is only greater to assure that this market performs as we describe. And as Mark suggested, it requires a lot of education. And that -- and education can go only so far. But we need to make sure that our regulators are updated continuously, we have to make sure that all our competitors are taking that fiduciary responsibility as importantly as we do, we need to make sure that the quality of the products can withstand the test of time, the test of bouts of illiquidity and the test of time of variances of the markets. If we can achieve that, the trends that we see by investor behavior, the ETF market will be more than $2 trillion, which is a great opportunity for the entire market. Mark is now telling me $5 trillion.

Yes, we're at $2 trillion now globally. We're going to $5 trillion.

Excuse me, I knew where the $2 trillion came from, but up to $5 trillion. And so there's a great opportunity to continue to build that. And as I've said, from our viewpoint, despite the noise, the ETF market performed very well, especially when you consider the underlying illiquidity. And it's so important to note, and I have to reiterate it, because I think that point was not understood. The fact that we were able to trade $5 billion at EEM without creating or redeeming, adds $5 billion of market liquidity. So you didn't have to put $5 billion of stocks into the marketplace. And I think that's a very important component of these products. And I should also remind people, when you have, at the end of the day, big inflows or outflows of mutual funds, you don't have that recreate and redeem, that then results, if there's redeems, that then creates outflows and stock pressure. So let's not think of iShares or ETFs as something very different. It's just flowing 24/7 or during the market time opening, whereas in the mutual fund side, it's at the end of the day. I'm just trying to say, the markets are very similar, one's just more transparent. But having the ability to do that creates and redeem through the market makers is a very powerful differentiating feature. I think that's the last of the questions, operator, is that correct?

Ladies and gentlemen, we have reached the allotted time for questions. Mr. Fink, do you have any closing remarks?

No. As I've said repeatedly, what makes me very proud in leading this firm is the diversification of our platform, our multi-client platform having multi-products, global distribution, risk management. In times where we saw big outflows in one business, we saw big inflows in another business, really illuminates how this platform has been built and really allows us to be a very differentiated player in the world of investing. Thank you, everyone. Thank you for your patience. Thank you for all the time you've given us today. Have a good quarter.

This concludes today's teleconference. You may now disconnect.