BlackRock's New CIO of ETFs and Index Investments Samara Cohen on the Ethics of Indexing

You could be forgiven for not noticing that BlackRock, the world’s largest ETF and index product manager, appointed a new chief investment officer. After all, most of us aren’t in the business of following corporate strategy shifts in our asset managers. This time, however, it’s worth paying attention. Samara Cohen started at BlackRock the same year that Bjork released her debut album — 1993 — and has seen how innovation has transformed markets from the best seat in the house for almost 30 years. In January, she stepped into the role of chief investment officer for ETF and index investing.

Samara and I have locked horns a few times over the years on hot-button market issues, but there’s nobody whose opinion I respect more on the roles and responsibilities of index providers, ETF issuers, and market participants. The following is a record of our discussion following her appointment. It has been edited for brevity and clarity.

The Challenge of Stewardship

Dave Nadig: Samara, first congratulations on the role. I can’t think of anyone better for it. But as I was thinking about the idea of having a CIO for an index book of business, I realized, “Gosh, so much of this really has to be about stewardship and voting, right?” At the end of the day, investors trust you not just to deliver a pattern of returns but to be the literal owners of large sections of the economy on their behalf. That’s pretty heady stuff. Have you always been so engaged with this issue?

Samara Cohen: Thanks, Dave. I think the first time I got asked about this as a representative of the index business was by Stacy Cunningham, then president at NYSE. She asked me to come speak to a group of investor relations professionals in 2017 — lots of different companies whom I’d never engaged with — and they were really hungry to understand how to engage with an asset manager like BlackRock, particularly with the index side of BlackRock.

And so the first answer was, you engage with BlackRock. You don’t engage with any specific portfolio manager. We started to be very intentional and transparent with the stewardship principles. Being a champion of transparency is a really big part of our DNA, and we think it adds value to our clients, first and foremost, but to all of our stakeholders, including the companies whose shares we vote.

It’s amazing actually, when I look back on that conversation, it was one of the earliest ESG conversations I ever had, because the answer was that in a lot of cases this isn’t an index-specific issue. We — Blackrock — use environmental, social, and governance screens. Particularly at that time, the governance bit determined our prioritization of engagement with companies. And at that time, we used voting as the very end of the line. Usually, a vote against management results from a failed engagement, and our intent and hope was to be very early in the process of talking to the companies where we had votes and being clear on what mattered to us. 

Dave Nadig: And as BlackRock, everything has to matter, right? At least on the index side, it’s reasonable to say that BlackRock will own some amount of every publicly traded company in the world, and for all intents and purposes, never sell, right? 

Samara Cohen: That was what I think was new for the investor relations people to [get] their heads around. These are index assets where we can’t just sell. Index assets become a source of very significant, patient long-term capital for a company, but that also comes with questions of stewardship and voting. 

And so, over the course of those years, we actually hired a head of BlackRock investment stewardship, Sandy Boss. You’ll hear her talk about “stewardship alpha.” How you vote shares matters, but again, it’s not just the vote. How you engage with companies is specifically a source of long-term return.

Dave Nadig: You and I have talked before about the idea of letting everyone, somehow, vote their own shares on a passthrough basis. Is that starting to happen? 

Samara Cohen: Yeah. This is a big thing for us. We’ve made big investments to enable it. We now enable clients to vote their shares on 40% of our index equity assets under management. But that’s fairly recent. Before that, it was a defacto part of our responsibilities — voting the shares. But there are some places it’s like an actual systems problem. With ETFs, for example… 

Dave Nadig: … there’s really no legal framework to pass the votes down to the ETF shareholder…

Samara Cohen: Right. Legally and structurally, there’s no way to pass it through. But with institutional accounts, it was just a technology problem, so we intentionally decided we wanted to solve that problem and give our clients the choice. And it’s not just separately managed accounts, it’s other commingled funds.

ETFs are actually the most complicated problem. Even if we could solve the technology, which I think we could if we ultimately had the ability via the ’40 Act to pass the votes on, I think we could solve what would be a very complicated technology problem, but that’s not on the table right now.

Dave Nadig: We’ve talked about this for years: How can you get to the endpoint of a ’40 Act vehicle passing through voting? Like, that should be the end state. So it’s interesting that you guys made that first leap to bring the rest of the institutional fold in because it’s doable.

Samara Cohen: That’s right. And it was intentional on our part because we want to create the conversation. You and I kind of have the same views on this, Dave. If this is what the end state is, there’s real work that has to happen from a policy and regulatory perspective. And we also thought it would be good to get the data regarding how many people take us up on it. This is really new for us. 

Dave Nadig: What about the cultural piece of it, though? Because one of the pushbacks I get when I get up on a soapbox about stewardship and voting rights and all that stuff is the kneejerk reaction, “Well, nobody cares.” Can you make people care?

Samara Cohen: ETFs have helped organize markets to make them more accessible to individual investors, they very much have behaved like any other disruptive technology. Think about music. I’m old enough to remember cassette tapes. But now I’m on my Peloton, and I can press “like” when the instructor plays a song I love, and it goes into my Spotify favorites list…

Dave Nadig: …which is absolute Gandalf-magical…

Samara Cohen: It is magical! And I’m old enough to think that it’s magical. But my kids don’t know what magic is because they grew up with it.

ETFs have done that for markets. My view is that I don’t see why we can’t do the same thing for engagement with companies by organizing information. As a personal investor, when I get proxy votes, it would be interesting if the information was organized and on platforms where I can participate. I think it’s a technology problem, but it’s also an organization-of-information-and-access problem, which we’re pretty familiar with.

Dave Nadig: I was going to say, one of the things that you guys did over the last few years was really start highlighting each individual contentious piece of engagement you’ve done: the PDF reports on various companies and such. I’ve learned a lot by reading those! But the challenge is that I’m the kind of person who will go dig for things. You, at BlackRock, have no idea really whether I own a particular one of your funds. 

So there’s this weird thing where you guys are being aggressively transparent, talking about individual company issues and votes, but it feels to get that information to the actual end investor is more than just a transparency problem.

Samara Cohen: That’s right. That’s what I think as well. And I think that’s something that we can not only be good at, but that we love doing. It’s kind of BlackRock DNA. 

I don’t know if you know this, actually, but BlackRock was my first job out of college. I was a theater major and a finance major, but a lot of my finance friends were applying to these big banks, and so I started looking at all of the big investment banks, but then there was this firm at the time called Blackstone Financial Management [NOTE: Name changed to BlackRock Financial Management in 1994] that was recruiting on campus. This is ’93, so BlackRock is a very young firm. But all of its founders had been analysts at investment banks, so they knew the shtick of college recruiting. And I joined for two reasons: It was a firm that had 16 partners at the time. Three were women, I met all three in the process. And in 1993, that was insane. And I was like, these women are amazing, and I want to be any of them. That was number one.

But number two was they had this incredible story around bringing better information directly to investors. The BlackRock story was, at the time, that they took these mortgage-backed security genius engineers from the street and said, “You know what, we can give better data directly to institutional investors. We can give them better information and arm them with better tools so that they can create better financial futures for themselves and their clients.”

Addressing transparency problems? That’s what we do. ETFs have brought 120 million people from around the world into the markets. They are owners of these companies, and I think the next frontier is, what does that mean? What do they want it to mean, and how does stewardship play a role?

The Impact of Indexing

Dave Nadig: I agree. I think it’s extraordinarily exciting. And to be blunt, it’s one of the only reasons I can still sleep at night. I get to work in an industry that’s actually democratized ownership of the economy. 

So with the caveat that I’m obviously a big “passive guy” at heart: There are a lot of folks out there in the market, myself included, who point out the occasional piece of… weirdness that we see in the market that is likely the result of the dominance of certain indexes. I’m not doing a hand-wringing “some worry” thing here, but just the way index exposure and related derivative exposures move through the markets. Is that something that you’re worried about? Is it something you’re focused on? 

Samara Cohen: Well, it’s not something I’m worried about, but it is something I’m focused on because it is literally my job!

I mean, it’s funny, Dave, You and I have a history of candor with each other, and we don’t always see eye to eye. We didn’t on labeling. I remember the moment specifically when you said, “Samara, you might be right on this ‘ETP-or-ETF’ thing, but the ship has sailed, and we’re calling them ETFs.” And we will just agree to disagree (although I still hold out hope for winning the labeling argument.) But in this case, when you say “passive,” everything in me wants to say there is nothing passive about a book of index ETFs!

Dave Nadig: You know I agree with that statement, right? I get that!

Samara Cohen: BlackRock has never had a chief investment officer of the ETF and index book before, and I’m really proud of the firm for recognizing the importance of investment performance in the context of an ETF and index book, and wanting an accountable executive for it. And that’s my job as CIO of the ETF and index book.

Dave Nadig: What does it actually mean to be accountable for the investment performance of an index book though? 

Samara Cohen: At BlackRock, [In the past,] we’ve talked about index tracking, but I’ve never brought up investment performance. We do a readout of investment performance around different parts of the firm, so I decided just to hit the nail on the head and say, look, you all may be thinking, “Isn’t investment performance just outperformance of a benchmark, and aren’t you, Samara, the benchmark, so what is investment performance for an ETF and index book?”

And the answer is that we’ve done much work to define investment performance for an ETF and index book in response to how our clients see it. And it’s a lot of the things you and I have talked about over the years: ETF market quality, volumes, trading cost, premium/discount behavior. And yes, it’s also tracking and it’s delivery of the index outcomes which may be non-trivial in a world where alt-weighted indexes are on the rise.

We’re able to index all kinds of strategies that we couldn’t before, and create rules-based methodologies to deliver them. But that has ramifications for the markets. It has ramifications for how we manage the portfolios. Rebalance strategy becomes critical. Alt-weighted strategies have to trade more, and that brings questions around investability, market impact, and trading costs. And so all of those things are literally what I think about every day.

Dave Nadig: So what’s state of the art there? What are you doing there to ensure that some people’s worst concerns around what could happen in terms of price discovery if “everyone indexes?” I see some of the arguments, but I keep coming back to, “So what?” What’s the alternative? Are you going to “ban” indexes? We saw what happened with the European benchmark regulation: It was basically just a tax on the industry that didn’t really make anyone’s experience better. What’s your thought about that? 

Samara Cohen: I think that investors should hold their asset managers accountable, really for all of those things. Are you delivering market quality in your ETFs? Are you delivering what you’ve told me you will deliver in your index funds and ETFs, just from a tracking perspective? I pay attention to these questions and other health metrics of ETFs a lot. 

We have a team called product engineering who assess these metrics and ask, “Is there something structurally we should change in the product, whether it is a change of the index, change of the creation basket, share splits, that would make it better?” Having those conversations around what creates the most investible and transparent index, I think that’s part of what we do that I hope our clients think differentiates us.

ESG and the Next 100 Million Investors

Dave Nadig: Sitting here now, what are you excited about in the future? I mean, I’ve always known you to be a fixer and solver. So what are you solving next?

Samara Cohen: The honest answer — for me — is the next 100 million investors. What do they need to participate in markets and to create long-term financial wellbeing on their terms? In the U.S., it’s really how do you create more transparency, and transparency that’s accessible to individual investors.

This is a great world for individual investors, but it can be confusing. And not everybody is going to pick an advisor to help them navigate it. Some will go directly to brokerage or robo-platforms and use the tools those platforms have. Helping advisors also reach clients with the tools that help them organize all of that information and access is a big part of what the next frontier is. It is ensuring that this really exciting lowering-of-barriers-to-entry continues, but it happens in a way that contemplates that there are hundreds of millions more people who are participating in markets than in prior decades, and that has significant market structure implications.

Dave Nadig: Well, isn’t a big part of what that incoming audience — younger investors — seem to be demanding is ESG? I know you’re deep into this topic, so let’s talk about it. We have a lot of product, institutional adoption, retail demand, and a decent amount of skepticism from advisors and the media. A lot of that skepticism — particularly when it comes to the interaction between stewardship and ESG — is about whether voting and ownership are the right ways to engender change. 

Samara Cohen: Yeah, I hear the skepticism too. What we’re doing is risk management. Thinking about “climate risk” in the context of “investment risk” has been a journey for me over the last several years, but it really does feel a lot like those early years at BlackRock, explaining the risk in the mortgage-backed securities markets in the ’90s to investors. What we learned is that ultimately what investors wanted from the market varied from investor to investor.

And we see the same thing now. Whether investors want nothing to do with ESG or (as our flows show) if they want some sort of climate risk integration, there’s a spectrum. I think we’re providing the choice and doing it in a measurable way. Something I’m really proud of is the work we did last year on implied temperature rise (ITR). ITR is a metric for every single one of our funds that measures whether the portfolio is Paris Climate Accords-aligned or not, and we also published a paper that showed where MSCI ACWI was overall. [EDITORS NOTE: You can learn more about ITR and the methodology behind it here.]

I think that’s really educational. I think that’s risk management. The data and science are behind this. Climate risk is economic risk. Economic risk translates into investment risk. How do we make our portfolios aware of that, and then manage them to achieve whatever objective the investor has, whether that’s explicitly carbon-optimized or not?

That’s my job at the firm: to be in the investor’s shoes.

Dave Nadig: Let’s dig in a bit on what we’re seeing in the market structure right now. We’ve got sort of competing forces between the shifts in long-term investing — like ESG — and retail investors day trading on their phone. We’ve got the rise of index investing in general and increased derivative usage. We now have so much transparency. We have so much liquidity. Institutions can get exposures on and off at very large volumes. What are the second-order consequences of that, with the next 100 million investors coming?

Samara Cohen: So let’s unpack it. I’m not sure it’s any different than the meme stock conundrum itself. What happens when a lot of people have access to markets, visibility about the markets and themes get trendy? One of the big investment stories of 2021 was idiosyncratic single security volatility. This is the post-crisis reality of financial markets today. Very generally speaking, post-financial crisis there was the desire to reduce the ability of a concentrated few to take massive amounts of risk, and therefore bring risk-taking out to a much broader community of investors. And that has happened. And in a way that I think is pretty healthy for markets.

But you lose some of the ability to aggregate and measure risk and understand how it’s being spread across the world. For the next decade, this may be the single most important thing from a policy perspective to consider, but also from an investment industry perspective. I find it overwhelming the different things you hear on the news every morning about the “role of retail” in the markets. “Retail” is doing this, and “retail worries…” I am sure that we won’t be talking about retail in such a broad-brushed term soon. For years on the institutional side, you’d say “fast money,” or “long-only-levered accounts,” or “hedging accounts,” because each group was all doing different things. It’s the same with retail. Meme stock buying or ETF buying they’re very different investor bases.

And actually, these first-time entrants to the market are likely holding more ETFs than stocks. I think the indexing industry has such an important role to play here in providing risk-managed access to the markets through the strategies available in ETFs. But the transparency around that, the risks around that, how you make sure it is understandable and consumable when there is so much data, that’s a real challenge. 

Dave Nadig: But we have a whole other challenge, and that’s communicating. We all live in our bubbles, mine happens to include my Zoomer-aged kids. And it’s not so much they don’t want to learn about markets, they’re just not interested in learning about them the way we all tend to teach.

Samara Cohen: Yes. And that is the crux of it. They are interested. So I think an actual, very cool thing happened in the last few years. People started participating in the markets, whether it was commission-free trading, stimulus checks, or just being stuck at home. It’s cool! My adult brother, much younger than me, called me last spring, and he’s like, “I just made 300 bucks in a meme stock.”

I just said, “What is happening? You have your 401k, but other than that, you’ve never been an investor!” But actually, it started a conversation. So he had a wild ride with a few hundred bucks on a meme stock. But then he was on the platform. Then he’s available for education and figuring out the right way to do it. I think it’s a big opportunity. It’s just figuring out how to provide that education and that transparency in the most consumable and relevant way.

Dave Nadig: Of course. But it’s a huge challenge to take the complex and boil it down. Information density is everything. Of course, the problem with markets is, every time you do that — condense information — you’re losing enormous amounts of nuance and information, and markets are big, and they’re complex, and they’re scary for people who don’t understand them. 

Samara Cohen: That’s right. And that’s why we also need to help them find advice. I have a financial advisor. I think there’s a huge role for financial advisors, whether it’s a person you talk to or a robo-advisor. I don’t have a personal trainer, but I do have a Peloton, and that’s kind of personal training at scale. It gives me access to programs and provides advice. And so I think that is doable, and I think it’s really important.

Dave Nadig: Well, I certainly agree it’s important, and I’m enough of an optimist to think doing the personal at scale is the future in a lot of areas. Samara, this has been great. Thanks so much for your time, and I wish you well in the new role!

Samara Cohen: Thanks for having me, Dave. 

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