Hidden Gem ETFs

December 01, 2017

Goldman Sachs Hedge Industry VIP ETF

Hedge funds have historically been good stock pickers. They’re staffed with some of the smartest traders and analysts on wall street who’ve earned their stripes in fundamental stock research. The problem is, their fees are sky-high. Moreover, you must be a qualified investor to invest… and a well-connected investor to access the very best funds on the market.

What if, instead, you could own their best ideas—in a liquid wrapper—for cheap? That’s the idea behind GVIP, which owns the 50 most popular hedge fund holdings and charges just 0.45% a year to do it. For the full year ending Nov. 1, 2017, that approach has translated into more than 750 basis points of outperformance versus the s&p 500. Not bad!

Finding alpha is hard, especially in today’s market. But if you’re going to search it out, working with goldman sachs to tap into the top stock picks of leading hedge funds doesn’t sound like such a crazy idea.

Matt Hougan, CEO, Inside ETFs: Why did you develop GVIP?
Eric Halper, Vice President and ETF Specialist, Goldman Sachs Asset Management (GSAM): Goldman Sachs has been a leader in hedge fund research for many years. We developed GVIP to offer investors access to our firm’s analysis of hedge fund positioning. This is consistent with our strategy as an ETF issuer more broadly. We continue to deliver solutions in areas where we have unique capabilities that we believe will add value to client portfolios.

What’s the actual methodology like?
Using 13-F filings, we identify the top 10 long equity positions of each manager within our universe of over 600 fundamentally driven hedge fund managers. We then select the 50 stocks that appear most often as a top 10, and equally weight the portfolio.

The idea is to “crowd-source” high-conviction themes from hedge funds, all through a rules-based strategy. Research suggests that hedge funds have been successful with their long positions, even while their shorts and hedges may have detracted from performance. Focusing on their long positions has proven to deliver alpha over time.

How does an investor use GVIP in a portfolio?
We think GVIP is best used as a complement to an investor’s core U.S. equity allocation. Roughly 70% of the portfolio is large-cap and 30% is small/midcap. If you’re in a risk-on frame of mind, allocating to GVIP is a way to add an inexpensive source of potential alpha.

GVIP is also a good diversifier. Over time, its excess returns have had low or negative correlation to the excess returns of a universe of large-cap managers, and most of its alpha can’t be explained by common factors like value, size or even momentum.

There are other hedge fund replication ETFs out there. How does GVIP compete?
To be clear, GVIP is not a hedge fund replication strategy: It provides access to high-conviction themes of hedge funds. When looking at our competitive universe, it’s really important to look just at funds that focus on the long side of hedge funds, and within that space, there are only a few competitors.

The key differentiator for us is that our approach builds upon many years of experience researching hedge fund trends and positioning. This is not new to us. Hedge funds themselves follow our approach to identify their peers’ most important positions, which we think speaks volumes.

One criticism of 13-F-driven portfolios is that there is a lag between when funds take positions and when they show up in quarterly filings. Aren’t we getting these holdings late, after the trade has already happened?
There is a 45-day lag between quarter-end and when filings are due, but historically there’s been only 25- 30% turnover during each of GVIP’s quarterly rebalances. Said differently, 70-75% of the names remain top hedge fund positions quarter over quarter, which we believe validates our approach for targeting hedge fund favorites.

And perhaps most importantly, it’s worked—there has been outperformance tied to longs based solely on 13-F filings. With a management fee of 0.45%, you’re getting low-cost, efficient access to the positions that matter most to hedge funds.

When will this product perform better than the overall market, and when will it perform worse?
When hedge funds make the right sector and security selections on the long side, it will outperform, and when they make the wrong bets, it will underperform. The strategy has no constraints on sector or style. For instance, the universe of hedge funds we pull from has been overweight technology for some time, and that has been a great driver of recent outperformance.

How has the recent performance been?
For the full year ending Nov. 1, 2017, GVIP is up 32%, outperforming the S&P 500 by over 750 basis points. This strong performance has resulted in the fund being recognized as a Large Cap Core Category King by the Wall Street Journal. GVIP’s Index has seen compelling performance over longer periods as well.

How did you decide on the 0.45% fee?
One of the key tenets of our philosophy as an ETF issuer here at GSAM is to leverage the scale of Goldman Sachs and be very competitive on fees. GVIP is the least expensive strategy that focuses on the long side of fundamental hedge funds.

How liquid is it?
The underlying portfolio of GVIP is made up of mostly large-cap U.S. stocks. If you look at the underlying liquidity metrics on Bloomberg, about $470 million can be traded without representing 25% of the average daily volume of any of the names. We think there’s a lot of liquidity there, and we have an industry- leading capital markets team to help investors source that liquidity.

Any particular companies that tell a story about the kind of stocks that get selected?
We’ve owned the FANGs [Facebook, Amazon, Netflix and Google] for some time, and that’s certainly helped performance. We’ve owned some of the Chinese internet companies like Alibaba and JD.com via their ADRs, which have also been drivers of performance.

We also own lesser-known small-cap companies, which might surprise investors by being a popular hedge fund position. For example, Nexstar Media Group is a $3 billion company that came into the portfolio at the last rebalance. It owns affiliated TV stations.

If you had to sum up GVIP in one sentence, what would you say?
GVIP provides low-cost, efficient access to the most important positions of what many consider to be the best stock pickers in the world.

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