Good morning, ladies and gentlemen, welcome to the Fireside Chat with BlackRock, iShares and the Evolution of the ETF Landscape. At this time, all participants have been placed on listen only mode and questions today will be taken via the webcast. It is now my pleasure to turn the floor over to your host, Alex Blostein. Sir, the floor is yours.
Great. Thank you, Paul. Good morning and good afternoon, everyone. Welcome to our Fireside Chat with BlackRock to discuss the ETF landscape. I'm very excited to introduce our guests for today, Salim Ramji, Global Head of ETFs and Index Investments, Stephen Cohen, Head of EMEA ETF and Index Business for BlackRock, Samara Cohen, Co-head of ETF Markets and Investments, and Samantha DeZur, Global Head of Investor Relations and Corporate Sustainability. Our session will be about an hour today, and you can submit your questions for the team via webcast, as Paul mentioned, or you can email them to me directly at alexander.blostein@gs.com. We'll have a little bit of time towards the end of this call for Q&A. Before we begin, a couple of legal disclaimers. As always, we're required to make certain disclosures in public appearances about Goldman Sachs' relationship with companies that we discuss.
Disclosures relate to investment banking relations, compensation received, and 1% or more ownership. We are prepared to read aloud disclosures for any issue upon request. However, these disclosures are available to you in our most recent reports available to you as clients in the firm's portals. Disclosures and updates to those disclosures are available by ticker on the firm's public website at www.gs.com/research/hedge.html. Views stated by non Goldman Sachs personnel do not necessarily reflect those of Goldman Sachs. Okay. With that, welcome everyone. We're really excited to have you on to discuss the developments in the ETF landscape. Thank you all for being here.
Thanks, Alex.
Thank you for having us.
Great. Clearly lots to cover. I was hoping to structure today's conversation in really three parts. First, maybe we do a quick look back on how the iShares franchise has performed through the downturn over the last couple of months. Second, we'll get a quick update on flow dynamics and channel trends you're seeing currently in the space. Third, which is where I think we'll probably spend most of our time, I would like to discuss the forward outlook for the business as you guys see it over the next couple of years. Why don't we jump right into it. Let's do a quick look back, and Salim, this one is probably for you. Taking a step back, the unprecedented volatility of the last couple of months, how do you think the iShares franchise has handled market stress?
What aspects of the business worked well? What are some of the lessons learned that you could apply the next time markets experience significant dislocations?
Great. Thanks, Alex. Look, I think the most important thing that's happened within iShares over the past several months has really been a story of extraordinary resilience and performance. It's not just the market volatility, but it's also the need for liquidity in markets around the world, particularly in some of the bond markets that had none for periods of time, the need for price discovery, where price discovery was extremely opaque, the need for functioning markets in the face of four market-wide circuit breakers. All the while, we were doing tens of billions of dollars of index rebalancing, and most of our teams, as well as the teams of our partners, are working from home. This was, I think, one of the most extreme tests that we've come under in our history, not just for iShares, but for ETFs generally and for indexation as a category.
The reason why I think it's the most important thing is because underneath what happened, Samara can talk about kind of the underlying quality dynamics and measures, is that iShares functioned efficiently. They provided a better way for investors to access the market throughout the turbulence. They tracked the market. They provided price discovery. They provided access to markets throughout the most recent bouts of market turmoil. I think it's really important for two reasons. One is that it really brought out the importance of quality. That's something that we've talked about in the past, but obviously quality becomes really important when things get volatile, as they have been for the past few months. The quality dynamics have really come to the fore of our clients' minds.
The second piece, and we can come into this a little bit later when you wanted to ask some of the questions about flow, is what's also happening is that it's unlocking new sources of client demand, sometimes from historic skeptics, particularly about bond ETFs, but it's unlocking all sorts of new sources of client demands from all kinds of investor bases all around the world.
Great. That's a helpful introduction. Let's build on that a little bit. I wanted to touch base on the sort of client behavior, Salim, probably staying with you on this one. In the second part of Q1 of 2020, iShares saw about $30 billion of outflows, primarily in fixed income as we've seen. While this is a meaningful amount, of course, ETF net redemptions broadly have actually held up much better than what we've seen from mutual funds, again, particularly within fixed income, where the industry, I think, have seen over $200 billion of outflows in March. Can you give us a sense of which customer segments have been the bigger driver of redemptions through this activity, and what did you find most surprising from customer behavior through the downturn?
Yeah. Maybe one piece of context, and then I'll answer your question. The one piece of context is that as you look at the sort of roughly $2 trillion, just over $2 trillion we have across iShares globally. There are multiple different client segments across the world. Wealth and wealth managers are an important segment, but so too are insurance companies and pension funds and other forms of asset owners as well as other asset managers themselves. We have a very broad base of buyers. We think the broadest base of buyers of any ETF provider. We obviously do this in different parts of the world, whether it's within EMEA, that Stephen oversees in the U.S. line, as well as with global buyers that will access our 40 Act line or our UCITS line.
To answer your question directly, though, where we saw much of the redemption activity in March, and actually much of the resurgence in April and May was amongst the institutional buyer segment. This was predominantly asset managers, pension funds, insurance companies. To a lesser extent, there was some wealth management kind of outflow in there, but that was mostly as a result of quarter-end rebalancing, which was just very natural and expected around movements away from fixed income into equities relative to their own long-term models. The bulk of it was institutions. The bulk of the inflows, and we've experienced some pretty significant inflows in the first half of this quarter, something like $24 billion into fixed income iShares so far this quarter, a lot of that has come from those same buyer segments.
I would say that the thing which wasn't a surprise is that it was coming from institutional buyers, because many of them were using ETFs in particular as either tactical allocations or aspects to help them manage liquidity. It's very natural to see that in periods of market downturn and upturn. You'll see that week to week or month to month volatility, albeit it was in more extreme form in March and then in the bounce back in April. The thing that was surprising was, and I'd hinted at this before, all the different new ways in which people are now using ETFs.
One of the biggest buyer segments for us, particularly in April and into May, has been other asset managers, and other actively managed fixed income managers in particular, that are starting to use ETFs, and particularly iShares, much more as instruments to help with price discovery, to help lower their overall transaction costs because of the spread differential between iShares and the bond market itself. Just sometimes help get access to markets which are otherwise difficult to access in the bond market itself. It's kind of turned surprises, and it's kind of turned this whole narrative of active versus index, and even active and index on its head, which is that active managers are using our ETFs to improve their alpha generation and lower their transaction cost and access new markets.
I think that's one of the really interesting surprises that's happened in the past few months and really gained steam in the past few months in a much bigger way than I might have expected.
Great. That's very helpful context. Appreciate that. Maybe building on some of the kind of experiences over the last few months, I wanted to shift gears a little bit and talk about market structure. Samara, this one's probably for you, but there's been obviously lots of focus on significant dislocations between ETF pricing and the NAV back in March. While this was probably most pronounced in fixed income, even some of the equity ETFs have seen wider disconnect between the NAV. Obviously, liquidity of the underlying is clearly a big driver behind these dynamics. How big of a concern was this for customers that either invest or trade ETFs? What has been the response from the regulators that you've heard over the last couple of months? How well do you think these dynamics are really understood in the marketplace today?
Sure. Look, as Salim mentioned in your first question, Alex, the past few months have been a very important moment for ETFs broadly as a category. To your point, as markets across asset classes and around the world dislocated, we saw spread widening and wider premiums and discounts across ETFs as well. ETFs were really broadly used by investors, and got a lot of attention because of that. I think what's particularly, as Salim mentioned, it was an important moment for understanding ETF quality. That's where we also saw a lot of differentiation of iShares ETFs. When we think about what makes a quality ETF, one of the best ways to observe is really usage. Like how many people are using the ETF, what are secondary volumes? iShares were seven of the 10 most traded ETFs around the world across asset classes.
iShares fixed income ETFs were eight of the 10 top most traded ETFs in the fixed income markets across fixed income sub-asset classes. What's particularly interesting here is we've seen this dynamic before in stressed markets, for example, during the energy sell-off at the end of 2015, where there was a lot of attention to high yield ETFs, which traded and provided a lot of price discovery then. We saw this across the sub-asset classes in fixed income. That was really a high yield and an energy event. We saw price discovery across high-yield investment grade treasuries, mortgage, and multi-asset ETFs. The utility of ETFs for bond market investors, during a time of significant dislocation and stress in the bond market was particularly pronounced.
iShares specifically, given really the trading ecosystems that exist around iShares products, got a lot of attention and a lot of interest from clients, which we measure in usage, but also, again, to Salim's point, in new adoption from fixed income investors who hadn't previously used ETFs as part of their strategies.
I gotcha. Well, maybe just building on that, are there any market structure changes that you expect to come out on the back of what we've discovered in the last couple of months with respect to ETFs? I'm curious to get your thoughts as part of this on whether the fairly thin capital base of many electronic market makers contributed in any way to some of the illiquidity issues or wider bid-ask spreads in ETFs that we've seen in March.
Let me take that in two parts. First, market structure changes, and second, electronic market makers, because I think both are important questions. On the first, really, we saw a lot about bond market structure in the last few months and probably out of scope for this call, although we've written prolifically around ways to improve and support transparency in the bond market. That's really, I think, where the ongoing use of indexation and ETF usage will help encourage technology to be developed that provides more transparency and visibility across the bond market. Trading of ETFs said a lot more about bond market structure, and how it has evolved, I think, than pointed to things in the ETF. However, one thing we do focus on a lot for clients is access to relative value technology.
We spend a lot of time on this for iShares clients so that investors can assess at any point in time what the value of an ETF is versus the underlying bonds. One of the things we've been working with trading venues on is standardizing those calculations so there can be shared intrinsic value methodologies that help progress this relative value conversation of ETFs versus portfolio of bonds. That's the market structure point. On the electronic market maker point, now that we have a rich data set to see how market makers performed and participated over the last few months, the story is pretty interesting.
For iShares ETFs, we saw the same breadth of participation across market makers and the same rates of participation, and in some cases even more participation from the electronic market maker community who profits from volume and velocity, which was what was delivered by heavily used ETFs like iShares. When we look across our funds, and again, this is really specific to funds that have trading ecosystems, options ecosystems, lending ecosystems, so they lend themselves to usage across the trading community during times of stress. Market makers leaned into those products and traded them the same or more, and were a key part of what made the ETF ecosystem and the iShares ecosystem specifically function the way it did.
Great. That's very helpful. Thanks for that. Stephen, maybe we'll pivot over to you. While we're obviously acutely aware of what happened in the U.S. markets, what were some of the distinctions that you can draw between the U.S. and Europe, in terms of both market structure, stress, or liquidity, and how did your European customer base react to some of the market turmoil that we've seen?
Absolutely. I think there are some similarities and some differences between what we've seen in the U.S. and what we've seen in Europe. Starting with the similarities, as Samara mentioned, same in Europe, we saw record volumes, increased use of ETFs by European investors. I think the experience overall during the crisis has underscored not just the resilience of ETF trading in Europe as it did globally, but also showed that in a way the European ETF market has come of age. We saw a surge in primary secondary ETF volumes, again, similar to the U.S. We saw more and more European investors switching to use ETFs to manage their portfolios through the crisis, both in the wealth type of clients, and also institutional clients.
If we think about the overall volumes that we saw, we saw record volumes in primary as a share of trading and also in secondary. Just to give you some feel for that, on the busiest day in March, ETFs in Europe were about 34% of overall equity trading volumes. If we look at the primary ETF market, we saw a two times increase in creation redemption volumes, all of which were managed without interruption, and nearly a two and a half times increase in secondary volumes. On some of the busiest days, the kind of peak of the market volatility, our flagship iShares fixed income funds in Europe were trading six to seven times normal volume. I think all of that is the European version of the U.S. story.
Similar to what we saw in the U.S., ETFs are increasingly becoming a tool for price discovery here in Europe, both in fixed income, but also actually interestingly in equities. As in the U.S., fixed income ETFs traded far more than the underlying bonds, everything that Samara just mentioned. There's also an interesting case here in U.S. equities. In March, as many of you know, trading in the U.S. cash market was halted four times. There were numerous instances when S&P futures were not trading in the European time, so in European morning before the U.S. opened, because they had hit pre-market up or down limits. Throughout all of this, our UCITS S&P 500 ETF, CSPX, continued to trade, continued to offer liquidity, and really, in many respects, became the main trading reference vehicle for U.S. equity exposure during that period.
I think, again, that highlights the growing maturity of the industry here. Having said that, there are some areas where we continue to see the European market ecosystem lag that of the U.S. and remain relatively fragmented. Two examples. One is, in Europe, we have over 300 iShares ETFs that are listed on seven exchanges and denominated in five currencies. Each of those exchanges can have different safety or halting mechanisms to manage market volatility. Those differences mean that the same ETF in a very, very volatile period can be trading on one exchange whilst it's halted on another, and obviously that can be confusing for investors. We're continuing to work with the exchanges to harmonize those standards across the different venues to give investors as good an experience as possible.
Secondly, unlike in the U.S., we continue to lack a real-time consolidated tape of pricing and trade reporting across venues. Visibility has absolutely improved with regulation. We saw that in the crisis. Relative to the U.S., there is room for improvement, which will be a positive for global investors who are looking at the European ETF industry. We continue to support a BlackRock industry engagement with regulators on the idea of appointing a European consolidated tape provider. I think that that would ultimately go a long way to the final improvement of visibility in the European ETF market.
Great. All right. That's perfect. Why don't we fast-forward a little bit and talk about what's going on today. So far, iShares flows in the second quarter are back in the positive territory, Salim, as you mentioned. I think quarter date, you guys are total, I think is around $10 billion of inflows. Recouping kind of some of the losses experienced in March, and again, predominantly driven by fixed income, and relative to still somewhat muted flows in the mutual fund space recently. In the past, you talked about doubling of iShares AUM over five years. Curious if you expect the events of the last two months to sort of accelerate BlackRock achieving this goal, and if so, what are some of the larger changes in the marketplace supportive of this acceleration, both in the U.S. as well as globally?
Great. First, we continue to be very confident in the long-term growth of iShares, the doubling over five years. Double-digit growth from an asset point of view. It's not so much because the past six weeks have been good flow quarters. Let me just give you an example as to fixed income, and then I'll kind of elaborate a little bit, Alex, as to why we're confident that we're going to see some acceleration happening in things like fixed income in particular, but also in areas like models or sustainable as well. Fixed income, quarter to date, has really led our flows. We're up about $11 billion quarter date across iShares, but we're up by a lot more, $24 billion quarter to date in fixed income as a category. Some of that is the reversal of what you saw in February.
Some of that is also a number of these first-time buyers coming in that I talked about. I think when you look underneath it, though, and you also look back over periods of history when we've had market volatility, what we've seen is that we've seen inflows into ETFs. I think the thing that gives us good medium-term confidence is that when we look at the dynamics of fixed income, performance, cost, and transparency are all kind of blinking sort of bright green. Right? Just on a performance basis, when you look across our short-term bond, intermediate core plus bond, inflation protected, corporates, muni, iShares ETFs, they're all now top quintile performance on a one, three, and five-year basis.
What it's really showing is that indexation works not just in equities, but also in bonds, and that performance story is a really important story for our clients, particularly our wealth clients. Cost has always been part of the story. If you think of this as a math problem, just particularly in a lower rate fixed income environment, costs are going to be increasingly to the fore of clients' minds. Just take the average expense ratio in active management in fixed income, which is like in the mid-60s, in terms of basis points, that a lot of our iShares provide kind of good value. I think the last thing is just the transparency. That all of our fixed income ETFs are transparent. You can see exactly what's in them.
I think that the confluence of good performance, good value, and transparency, that's really what's propelling, particularly the wealth buyers, to really look more towards fixed income ETFs, we think, over the coming years, much as they have, for a number of years, done so in equities. There are other examples that I could give you, but that's just kind of one example of the acceleration that we think some of this most recent bout of volatility is going to have, and is really going to increase areas like fixed income.
Great. We're going to unpack some of these more a little bit later on during today's call. I guess building on some of these kind of pillars of growth, I wanted to spend some time on kind of various channels with the group here. First, let's talk a little bit about retail and really retail plus technology that BlackRock has been using to drive share there. I guess growth in retail and sort of, you can almost include the FA intermediary channel really as one, has been a key growth focus for the firm. On the earnings call, I think you mentioned that managed models accounted for 30% of iShares flows last year, and then you expect them to Or half of the growth in the coming years.
Can you talk a little bit about utilization of managed models across different distribution channels, whether it's the wirehouses, independent broker-dealers, RIAs? Where do you see the most incremental growth opportunity for further model adoption, and what is really BlackRock doing to further enable and accelerate this growth?
Great. Let me give you a bit of context first, and then I'll answer the question. I'm going to focus here on the U.S. numbers. Models are a global phenomenon. Stephen's seeing it in Europe as well as here in the U.S. Just in the U.S., just to give you some context, there are really 3 types of models, broadly speaking, that we see growth in. The first is in asset manager models, right? BlackRock runs model portfolios ourselves. They're populated with iShares. We have about a $50 billion business in that. It's a roughly $150 billion-$160 billion category when you take all asset manager models. When you look to the next category, you see something that's kind of three or four times the size, about $600 billion, and that's wealth manager models.
A lot of our partners have CIOs with home office models, which is populated with a range of different asset manager products, but iShares tends to have very good placement and very good share on those models because of all the performance, transparency, and value propositions that I talked about earlier. The third piece, which is again about 3 to 4 times the size of the second, so a $2 trillion market, is really where technology comes in. These are sort of extremely customized model solutions that individual RIAs, large advisor teams that might have their own CIOs are using, and are using technology as part of it. iShares becomes an important building block in their overall model solutions. When we look at models, we clearly can look at our own models business, the models that BlackRock investors manage.
That's actually the smallest part of the whole $2.7 trillion ecosystem. They're all growing. Our own models business, the BlackRock models, have been having a really strong start to the quarter. Actually, a record start to the quarter. We've generated $4 billion of flow in the first quarter, and they've been strongly positive even through the market volatility itself. This is, for us, a really good leading indicator of what's happening in wealth manager models and in some of these hyper-customized model solutions that tend to have three to four times the impact for iShares in terms of flows over a three-year period.
Those models, as well as the ones that we ourselves will manage, tend to be ways in which things like fixed income and factors and sustainable really become much more part of the overall portfolio solution, much as our core ETFs had in the past. Increasingly, when we look to the growth of models, it's becoming an ever more important part of the growth of iShares, because iShares is becoming an essential part of portfolios, both the ones that BlackRock manages, as well as the ones that our clients manage. To your point about technology, you can almost think of technology as an accelerant to what I just talked about. Our partnership with Envestnet, which is about a year and a half old now, both is contributing to some of the record flows that we're seeing in models.
I think more importantly, what it's doing is that it's making it more convenient, more accessible for advisors to move towards a models-based practice and to help move their clients towards that. I think it's these three things working together around the growth of models, in each of the three categories I talked about across the entire retail landscape. Second, iShares is an important component of all these different types of models. Third, the technology aspect, which is really accelerating this above and beyond the acceleration that we have been seeing just as a result of the market volatility. That's really where we get our confidence around the notion of models becoming half of all iShares flows.
The hope and expectation is that those become good long-term holdings that clients keep in the core, in factors, in fixed income, and in growth areas like sustainable.
Great. That's really useful. Shifting gears a little bit to the institutional side. Obviously, you hit on some of these points already in your earlier comments, but I'm particularly interested in what's been going on with insurance clients. That's obviously been an area where BlackRock has tried to accelerate growth from an ETFs and iShares specifically. Can you discuss your footprint, maybe with institutional channel? What does that look like today, and what the opportunity set is there from now going forward?
Yeah. Just to give you some very rough numbers. If you think about the different segments that I talked about before, about 40 or about 50%-60% of our total asset base in iShares tends to be with some form of wealth management firm. It could be a big private bank, it could be a home office model, it could be an individual investor buying it through a self-directed platform, but just wealth management platforms generally. About 15%-20% tends to be with asset management firms. Then about 15%-20% of it tends to be with asset owners.
People like insurance companies that are running kind of balance sheets within their general accounts. Our competition really in insurance is in some ways the bond market itself, because some of the big insurance companies are looking at our ETFs as just better ways to access markets, better ways to access pricing, better ways to get transparency within the bond market itself. Certainly, they're looking to factors and sustainable as well. I think that one of the areas that we're unlocking is just this shift from individual bonds to fixed income ETFs themselves. I think that starts to unlock a real and new opportunity set for us all across the world. We're seeing it in Europe, but we're also seeing it in the U.S. We're seeing it in parts of Asia.
When you look at kind of the $24 billion of fixed income flows that I cited in terms of what we've raised so far this quarter, about a third of that comes from first-time users of bond ETFs. Asset managers, as I said, is an important kind of grouping. Right up there with other asset managers is insurance companies, and they're starting to use it for all the points that Samara had covered kind of earlier before in terms of the quality measures of access, of cheaper spreads, of greater transparency. We think that that just becomes a ever more important kind of market segment for us to unlock, just given the significance of insurance balance sheets and also their need to focus on lower cost, more transparent solutions, given the rate environment that we're in all around the world.
Great. That's a useful data point. Appreciate that. Stephen, maybe over to you. Let's talk a little bit about Europe and EMEA broadly. BlackRock's market share in European ETF landscape, I think, is nearly 2 times what it is in the U.S., although ETF as an industry broadly in Europe is clearly still somewhat behind the U.S. Maybe you can discuss some of the key differences you see in the European and U.K. competitive landscape versus the U.S. markets and how you envision BlackRock's growth evolving there over the next few years. I know you hit on some of the more near-term dynamics already, curious to get the longer-term perspective.
Sure. Actually this year is the 20th anniversary of ETFs in Europe, so it's a birthday celebration. I think if we look back over the last two decades, we've led the growth of the industry to $1 trillion in assets, I think that's been driven by having a very broad product set, deep penetration across all of the different countries and also brand. If we look at 2019, we experienced 18% organic growth with over $60 billion of net inflows. That's an acceleration over previous years. We think that acceleration that we've seen in the overall growth of the market and in iShares and BlackRock will continue over the next five years. There are a couple of things that we're very focused on when we look out over the next kind of three to five years.
One is that the industry around us and the regulatory environment around us are both changing very quickly. MiFID II, which many of you will know is a piece of European regulation. It came into force in 2019. It is very important because it completely changes the wealth management industry in Europe. It forces new levels of cost transparency to end clients. It shifts the industry away from a retrocession-based industry to a fee-based advisory industry. That is very key because ETF penetration in retrocession-based advisory has been minimal up until now, unlike what we've seen in the U.S. I think this is going to be accelerated by the current crisis when we are speaking to clients across the region, is that we are seeing a much faster adoption of digital distribution.
I think that the challenges of the last couple of months actually are going to accelerate that, and we're already seeing accelerated growth of things like online ETF-based savings plans. To use the current analogy, I think the wealth industry in Europe is jumping from a world of rotary telephones to video conferencing. In this post-MiFID II and more digital world, we're seeing the rise of centralized CIO models, very similar to what you heard from Salim. We're seeing the rise of ETF-centric model portfolios. In this, as we've seen before, we think iShares will play a major role, and we're already seeing that. The second area of growth or catalyst is in the institutional usage, and I'm going to build on some of the things that Salim said already. One driver is that there's another piece of MiFID II I mentioned earlier on.
It has mandated trade reporting for ETFs for the first time in Europe, and that is bringing greater visibility of trading volumes, which is particularly important to institutional investors becoming comfortable with using European ETFs. As I mentioned before, there's more to do. We would like to see a consolidated tape, but it's already greatly valued by institutional investors. Alongside that is that actually what we're seeing now, and we've seen this over the last 18 months, is that with European ETFs now at scale and with some of the withholding tax benefits that European ETFs often provide, and the evolution which we've led of currency hedged ETFs, that actually European ETFs are becoming a big staple for Asian and Latin American institutions and not just European investors. European ETFs, the UCITS industry is really going global as a product line.
Now when we think about the future, I mentioned the industry is about $1 trillion as of the end of 2019. We believe it can go to $2 trillion by 2024, and that will come from three main areas. The first one will be just overall index penetration in Europe. We are at a lower level than in the U.S. We've lagged the U.S., as we've talked about. Investors we see are increasingly recognizing the benefits of shifting a larger portion of their portfolio towards index investments, and that's coming at the core, it's coming through factors, and it's coming through precision exposures. This re-engineering of portfolios for the future, which I actually think will be accelerated by the events of the recent months, will in turn naturally accelerate ETF growth.
It really goes hand in hand with the changes in the wealth management industry. The second one is the adoption of sustainable ESGU investments in Europe. That is going to bolster indexing, and it's going to bolster ETFs. European investors are demanding sustainable investments at an increasingly fast pace, more than ever before. In the first four months of this year, we've seen $4 billion of net inflows into our ESGU products. That's 60% of what we saw in all of 2019. As we see index assets globally going up sixfold by the end of the decade, ultimately Europe is the epicenter for the shift to sustainable within the industry. Finally, the rise of fixed income ETFs. Salim mentioned this. This is a global story, but it's one that really resonates strongly in Europe at the moment.
iShares in Europe experienced $43 billion of net inflows into fixed income ETFs in 2019. That was an organic growth rate of 35%. We're seeing new adoption from all kind of investors driven by ease of access and flexibility. I think that everything we've talked about in terms of the recent market experience is going to be a big accelerator for the European industry in particular, because it's the first time we've really seen European fixed income ETFs trade the types of volumes that we talked about earlier on in the call. I think that's an area where, as a market leader, we can continue to drive the fixed income adoption in our range. All told, fixed income sustainable, in our view, can make up over half the industry when we look out in five years' time.
They are two huge drivers of adoption of the future of the ETF industry here.
Great. That makes a lot of sense. Stephen, you mentioned ESGU, that's a good segue to my next question. Salim, probably this one's for you as well. Obviously sustainable has been an important theme with very strong flows for BlackRock year to date. While clearly there's a lot of investor focus on this area, if we look at the lineup, roughly 20% of BlackRock's sustainable ETF exposure is still fairly concentrated with ESGU. I think that's the largest, kind of the biggest ETF product out there. When we kind of double-click into that, it's some of the really kind of tech giants, Microsoft, Google, Amazon, Apple, et cetera, that really kind of comprise the lion's share of the fund. It's kind of all the same stocks that have been leading the market higher for the last couple of years.
I'm really curious to spend a couple of minutes on how you expect ESGU investing to become more nuanced over the next several years. You suggested that sustainable ETFs are going to grow four to five times over the next three to four years. I was hoping to get a little more color on which strategies do you expect in particular to drive this growth?
Thanks, Alex. It's interesting you said suggestion, because when I mentioned this on earnings last month, Larry and Rob took it as a commitment that we're going to grow it four to five times. I think it's going to be a commitment, good. Maybe let me just give you some context first, and then I'll answer kind of how we see the more nuanced model evolving. If you look just a couple of years ago, we had, across our iShares ETFs and index funds, less than $10 billion in ESGU, ETFs and index funds. We had $9 billion. We had about 20 products. It was really a niche area of investing. If you look at today, we've got about $50 billion across ETFs and index funds. We have over 100 products. It's becoming a much more nuanced and means to mainstream investing within sustainable.
I think the movement towards greater sustainable investing, BlackRock as a whole has really talked about and elevated, particularly since January 2020. I'm not going to go into all the different aspects about that. It's all rooted in a view that sustainably integrated portfolios can provide better long-term risk-adjusted returns. I think what's really exciting as part of that is just as sustainable investing generally is growing, indexation within sustainable is growing at a much faster rate. The overall penetration rates that we look at when we look at how much penetration does index have of sustainability generally, like really small. We published something on this actually last month on Earth Day, so you can get all the numbers and statistics, but it's in the teens relative to something that we think can be two or three times the size of that.
What that means is that we think sustainable indexing is going to be a $1.2 trillion market over the course of the next decade. Really a sixfold increase relative to where it is today. We're investing so heavily in expanding out our product lineups and expanding out our research and expanding out our capabilities because we want to be a meaningful driver and participant in that. The quarter to date, as Stephen alluded to, in Europe, it's been very good. Globally as well. The year-to-date numbers on sustainable ETFs and index funds are $17 billion. Our global ETF share of flows is 70%. Last year was a record year for us, and year-to-date, we've raised more than we did in all of last year. We're very optimistic about the prospects for sustainable investing, and we're investing heavily behind that.
I think underneath that, what you have is that you've got some of the nuances that there isn't just a single way in which clients want to invest in ESGU. We have certain ETFs that screen out certain industries or companies that clients and we'll deem controversial. We have certain ETFs that'll be optimized, i.e., they'll improve ESGU scores, but they will be optimized to do it with limited tracking error to the market cap weighted benchmark. We have certain ETFs that strive only to invest in leaders, either leading sectors or leading companies. We have certain ETFs which are all about kind of being on the front foot of certain big themes, like climate, as an example.
If you look across our product lineup, the reason why we're investing so broadly, we have just over 100 today, we want to get to 150 over the next year or two, is because there is going to be nuanced usage. We think that ETFs in particular can give clients the nuanced usage they need, but can also do it transparently and at low cost and doing all the other things that ETFs do across other segments. That's really our optimism. It's an optimism based off of sustainable investing's risk-reward trade-offs and the ability to expand the market in sustainable investing by more deeply penetrating index investing within sustainable itself. For us, we think that for iShares sustainable ETFs, that's kind of everything that underlies our 4-5x commitment over the next 3-4 years.
Great. That's very helpful. Why don't we shift gears a little bit, Samara, this one is over to you. I wanted to get your thoughts on some of the longer-term market structure trends in fixed income. We talked obviously about what happened during the volatility and the benefits that ETF brought to the market. Broadly, electronification of fixed income trading has obviously been a very big theme within capital markets. BlackRock has been very vocal on this as well. How does growth in fixed income ETFs further enable this trend? At the same time, do you see that fixed income ETFs potentially could become a replacement to some of the underlying cash bonds or rates traded products, so sort of potentially taking some of the liquidity away from the underlying markets?
Maybe to answer this, Alex, I'll pull together a couple of themes of our conversations so far this morning. Both Salim and Stephen talked about new users of fixed income ETFs, and Salim also talked about the math problem for fixed income investors of low rates. What we see happening with ETFs is that they're offering what we consider operational alpha to investors, a way to trade thousands of items or to get the exposure of thousands of items by trading one. That releases operational capacity for a lot of these new users now that they're satisfied that the products function and the products deliver the exposures that they are supposed to. As they do that, remember I talked earlier when you asked me about performance over the last couple of months about secondary market liquidity.
As more ETFs are traded in the secondary markets, that's all incremental liquidity to the bond market. We have said before, and I think we experienced it over the last few months, that ETFs are supporting the bond market and the secondary trading of ETFs is really contributing to a virtuous cycle of bond market modernization because what is happening is that in order to participate and to meet client demand for ETFs, dealers, Goldman and others, are investing significantly in their own technology to algorithmically price portfolios of bonds. That improves transparency, velocity, and accessibility of the bond market overall to investors, ETF investors, as well as bond market investors. The demand for ETFs, again, contributes to these tailwinds for algorithmic trading technology, which helps clients get better operational capacity and dedicate their resources to the places where they have highest conviction for outperformance.
I think what we've seen, and it is accelerating, is the contribution of fixed income ETFs to an improved, more transparent, and algorithmically traded bond market.
Got you. That's helpful. Next question is around pricing. Salim, that one I think is for you. I guess when we look across the entire ETF lineup at BlackRock, I'm curious where you see biggest risks from a pricing pressure perspective over the next two to three years, versus where do you think iShares' pricing will be more resilient? At the same time, are there areas where you could see BlackRock be more of a disruptor when it comes to pricing by further leveraging your scale?
Yeah, thanks. Look, on pricing, again, a couple of pieces of context are our core series that we launched about six or seven years ago was really intended to be a disruptive, low-cost kind of overall series. It's actually done exceedingly well since its launch. It now accounts for about a third of overall iShares assets and about 10% of our total revenues. When we look across our pricing philosophy, and this has kind of been pretty consistent and we don't see any compelling need to change the framework because we've consistently applied it in the core and periodically outside the core for the past five years, is that we've reinvested about 1.5%-2.5% of iShares' revenues annually in pricing investments. Last year, they were at the lower end of the range. This year, we expect a more normalized level of pricing.
That's sort of the rough parameter of what we reinvest back in pricing. We're always looking at, though, two things when we look at underlying pricing decisions. One of them is around how sensitive is that client segment to the total expense ratio part of pricing, because that's really what you're talking about is the expense ratio. Buy and hold investors often are investors like some of the institutional buyers that I referenced earlier, are much more sensitive to things like liquidity and spreads and tracking and other aspects to it. The second piece that we look at is, how much growth do we think that long-term growth will there be to be had by kind of reinvesting in a particular exposure? That's, as I said, it's served us well.
We're always reevaluating and looking at our lineup all around the world, and continue to make price changes in different markets, kind of at whenever the opportunity seems right based on those two principles, as well as kind of the rough range of reinvestment that we've had. I think that's kind of our pricing philosophy in a nutshell. In terms of guidance, I think Gary had talked about it back towards the end of last year, and it's pretty much in the same zone that he talked about, which is a more normalized level of pricing investments in 2020 relative to our kind of five-year trend.
I got you. Maybe just building on that, one of the pieces of the framework that you mentioned was around sensitivity to pricing. Maybe a quick follow-up on that. If we look over the last couple of quarters, there have been a handful of zero-fee ETFs or index products launched by some of the competitors out there. Again, mainly more in the core category. Curious-
Yeah
to get your thoughts, how big of a threat is it? Does it eventually mean that pricing for core can just kind of go to zero across? That's a kind of an area that maybe has become less price sensitive?
Yeah, I don't think so. I don't think so because fees are only one part of the equation that investors, even buy and hold investors, use in deciding on an ETF. They'll look at the total expense ratio, certainly, but they'll also look at the total cost of ownership, right? Tracking error can often be a really big deal. It can often, if you don't do it well, it can outweigh the total expense ratio by a multiple. The bid-ask spreads, particularly for model buyers that might want to tactically move in or out of an exposure from time to time, become an important contributor to cost. Liquidity, like you want to make sure when you're ready to sell it, there's someone on the other side who's willing to buy it at the right price. That's just another aspect of cost.
When we look at the total equation for cost, particularly for model buyers, and particularly for advisors that are looking for how these fit in a total portfolio, they're looking at it increasingly, just like our institutional buyers at, which is a total cost of ownership. Yes, they pay attention to TER. They also pay attention to how well does it track. They also pay attention to what the trading costs embedded in the spreads are. Really, they're also taking care to really look how does this fit into a portfolio and does this particular index fit with the other indices that we have. I suspect there will be a buyer of a zero price ETF, but I think for most of the wealth buyers, most of the long-term holders, they're looking at the total cost of ownership and the dynamics that I talked about.
Really, the whole movement towards ETFs is not one ETF versus another ETF. An ETF often provides, particularly an iShares ETF, provides great value relative to what many investors were coming out of, which in some cases is a much higher priced, often underperforming active fund, or in other cases, it could be individual securities themselves that just don't have the risk dynamics that they want.
I got you. Great. Thanks for that. We got about five minutes left, and I want to make sure we squeeze a couple of questions from the audience in. We got a bunch coming up on the webcast, the one that does tend to come up a lot, is around direct indexing. The question is around direct indexing, is a natural endpoint for iShares core type of customers direct indexing. What will speed a slow pace of adoption, I guess, direct indexing? How can BlackRock participate in it?
Yeah. Look, in one lens, we already are the biggest direct indexer out there. Outside of iShares, we manage close to $2 trillion in segregated accounts using Aladdin for institutional clients all over the world, where we're kind of managing it in that segregated form. We also have started to roll out our own direct indexing capability on our separately managed account platform here in the U.S. When you look across indexation, our general philosophy is like, if you want it in a separate account, if you want it in an ETF, if you want it in an index fund, we can provide all different vehicles for you.
I think the really new and interesting news from some of the direct indexing points that you're referencing, Alex, is that just technology is enabling that to go to lower and lower levels of average account sizes. I think its principal benefit when you look underneath it is the ability to tax harvest. The real proposition under direct indexing is not so much that what we do for three in ITOT, three basis points in ITOT, for example, someone else can do for less than three. The real benefit is that it's got some tax benefits, which for non-qualified accounts of wealthy individuals in the U.S., that can be a big deal. That's why we're continuing to innovate through our SMA platform. We obviously have very good tax efficiency within the ETF itself.
We just look at these as kind of a broad sort of menu of different vehicles in which to provide indexation and technology, and increasingly our Aladdin-based technologies are helping us kind of do it at even lower and lower levels of average account size. The short answer is we think direct indexing is great. We've been doing it for decades, and we like the idea of continuing to lower the thresholds as we're doing in our SMA platform already.
Great. Thanks for that. Maybe I'll squeeze another one from the webcast. Samara, I think this one is going to be for you. BlackRock has entered into a venture with ICE to launch ETF Hub, which is now up and running. What's been the feedback so far? How do you expect standardization of AP protocols here to further enable growth in fixed income ETFs?
Well, as you may know, the ETF Hub went live at the end of 2019 with order taking in equities and fixed income, it was live just a couple of weeks ago with functionality for what we call fixed income custom baskets. That's really what we think is going to be the game changer here for issuers to have a way and a set of standard ways to reach authorized participants and market makers, and for authorized participants and market makers to have a hub and a set of standards to reach issuers to create and to redeem fixed income ETFs. It's a bit early for custom basket feedback because, again, we went live over the last couple of weeks, we are seeing a lot of our orders, our fixed income orders, go through the hub.
We're very optimistic about it, and certainly all of the dynamics that we've talked about here on this call underscore our conviction that as use of fixed income ETFs grow, standards and scale for the ecosystem around them are going to be very positive. This is a watch this space with a lot of interest over the next few months.
Great. Thanks for that. I think we're right about at 11:30 mark, so I think we're going to wrap it up there. Really appreciate everybody's time. Salim, Samara, Steve, and Sam, thank you so much for dialing in and spending some time with us this morning. Always great and helpful to hear your perspectives.
Thanks, Alex, and thanks, everyone, for listening.
Great. Take care, everyone.
Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.