Daily ETF Watch: Goldman’s Big ETF Plans

September 24, 2014

Goldman takes the ETF plunge with a number of filings that suggest it plans to be an important player.

Goldman Sachs, the Wall Street investment bank and trading powerhouse, is planning a broad push into exchange-traded funds with a number of regulatory filings that suggest the firm will be involved in just about every pocket of the rapidly growing world of ETFs.

A series of filings the company has made suggest the company plans to market: 1) plain-vanilla index ETFs; 2) index ETFs using homemade indexes that will likely be "smart beta" funds designed to beat some of the market’s well-known benchmarks; and 3) transparent actively managed funds that must disclose portfolio holdings daily. The only area Goldman Sachs hasn’t gestured toward is the still-unapproved-by-regulators realm of nontransparent active ETFs.

In sum, the company’s filings recall very much the moves that its fellow Wall Street investment bank, J.P Morgan, has made in the past few years. J.P. Morgan has obtained so-called exemptive relief for precisely the types of funds Goldman wants to market. It seems that ETFs, which now command almost $2 trillion in assets, have inspired an “if you can’t beat them, join them” sense among Wall Street’s titans.

J.P. Morgan this year has brought to market the JPMorgan Diversified Return Global Equity Fund (JPGE), a globally focused equity ETF in the smart-beta realm. J.P. Morgan’s and Goldman’s focus on this prospective and vibrant pocket of indexing suggests these big players know where the action is in terms of product development and investor receptivity.

Self-Indexing, Too

Moreover, the Goldman filing detailing smart-beta strategies also stipulated that the firm plans to design its own indexes, putting Goldman smack in the middle of another hot trend in the ETF industry. Such homemade “affiliated” indexes are said to be cheaper than licensing external indexes; give fund sponsors more flexibility in custom-making funds; and shorten product-development cycles.

The filing says Goldman is prepared to sponsor equities and fixed-income strategies; use a fund-of-fund structure when appropriate; and, overall, package all its ETFs in master-feeder structures, meaning its ETFs could be attached to a much broader portfolio that holds similar securities that are not held in an ETF wrapper.

It specifically mentioned long/short strategies and 130/30 long/short approaches to the market as possible securities it might bring to market.

Active Filing

In its filing requesting permission to issue transparent active funds, Goldman also said it aims to make use of a master-feeder structure.

It described the initial active ETF as the Goldman Sachs Equity Dividend Fund.

The proposed ETF will seek total return with an emphasis on dividends, the filing said. The fund will seek to achieve its investment objective by investing in dividend-paying equity investments in U.S. issuers—including foreign issuers that are traded in the United States—with large public stock market capitalizations.

Don’t Forget Plain-Vanilla Index ETFs

It’s been five years since Goldman filed for “pure beta” index ETFs, and while that realm of the ETF world is more than accounted for, not leaving itself the possibility to issue such funds would be a conspicuous absence.

In that 2009 filing, the New York-based investment bank said it was seeking permission to sponsor a broad swath of strategies—including equities, fixed income and balanced—that could hold U.S. and foreign securities.

J.P. Morgan first filed for permission to offer ETFs in 2009, with petititions requesting permission to index ETFs as well as transparent active strategies. It asked for permission last year to design its own indexes and brought to market "JPGE" that is based on one of its "affiliated" indexes earlier this year.

That is precisely what Goldman Sachs seems to be working toward as well: Namely, a focus on quasi-active "smart beta" strategies that are designed to outperform some of the market's benchmarks, such as, say, the S&P 500 Index or the MSCI Emerging Markets Index.

 

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