Smart Beta ETFs At Vanilla Prices

September 12, 2018

Case in point: The Vanguard FTSE Emerging Market ETFs (VWO), at 0.14%, comes in 31 basis points cheaper than the Goldman Sachs ActiveBeta Emerging Markets ETF (GEM). When GEM first launched in 2015, however, the dominant emerging markets fund was the iShares MSCI Emerging Markets ETF (EEM). EEM has an expense ratio of 0.69%, or 24 basis points higher than GEM's 0.45%.

With such low fees, that percentage point or two of outperformance captured by Goldman Sachs's ETFs can make all the difference for the investor's ultimate take-home.

Organic, Not 'BYOA' Growth

Notably, almost all the assets in GSAM's ETFs are external to the firm. According to Crinieri, the bulk of flows are from big banks and large retail investors, like RIAs and wirehouse advisors, who seek to tap into Goldman Sachs' signature strategies for themselves.

"The whole 'bring your own assets' model [of accruing ETF assets], we haven't done that," he said. "Our growth mostly has been organic."

What's more, those assets are sticky. Investors tend to buy GSAM ETFs and hold on to them for the long haul. For example, over the course of GSLC's three-year life span, the fund has seen only 21 days of net outflows.

That makes some intuitive sense, notes Crinieri: "In factor investing, you need that longer-term investment horizon to see the benefit of your factor tilts."

Brand has played a big part in attracting new investors, says Crinieri, as has GSAM's access to the economies of scale. As one of the biggest investment banks and asset managers on the planet, now managing more than $1 trillion in investor assets, Goldman Sachs has a wealth of asset management machinery and expertise at its disposal.

That has helped GSAM keep its ETF prices low, despite the complexity of its multifactor benchmarks. So too has the use of self-branded indexes, constructed and maintained by Goldman Sachs itself. "That was a big cost savings for us, which we were able to pass on directly to investors," said Crinieri.  

Capital Markets Credibility

GSAM's ETF effort is steered primarily by Crinieri, who has a long pedigree in ETFs. Back in the mid-90s, he helped construct the World Equity Benchmark Series (WEBS) products, which were 17 single-country ETFs that later became the first iShares.

In 2000, Crinieri joined Goldman Sachs, where he headed the firm's ETF trading desk. Providing liquidity for ETF investors gave him hands-on insight into who was using ETFs and for what purposes—knowledge that would come in handy in 2014, when he was tasked with building GSAM's first line of ETFs.

"Having that capital markets background was so important," he explained. "It gave us credibility in talking to potential investors, and in guiding them through the execution process."

To Goldman Sachs, a firm with a long tradition of active management, ETFs offered the advantage of intraday trading flexibility and higher tax efficiency, as well as the greater transparency that clients had been asking for. ETFs also carried lower internal costs, with portfolios that were often much cheaper to manage than active management counterparts.

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