Smart Beta ETFs At Vanilla Prices

September 12, 2018

Too Many Factors?

Compared to other multifactor ETFs, GSAM's products have clearly resonated with investors. Among the roughly 300 multifactor ETFs on the market, GSLC and GEM are among the top 10 ETFs with the most assets under management (read: "Do Multifactor ETFs Make Sense?").

But critics of GSAM's multifactor approach point out that the act of blending several factors into a single index tends to dilute the power of any one factor to provide outperformance.

A survey of the factor exposures in the six ActiveBeta ETFs, for example, shows minimal factor exposure in GSLC and the Goldman Sachs ActiveBeta International Equity ETF (GSIE) over the past year (Figure 3). (Note: factor exposure between 0.20 and -0.20 is considered minimal):


Figure 3: Factor Exposure In GS ActiveBeta ETFs, 8/13/17 to 8/31/18

Factor Exposure In GS ActiveBeta ETFs. 8/31/17 to 8/31/18
  Portfolio Exposure
Momentum 0.07 -0.49 -0.39 0.09 0.06 0.32
Trade Activity 0.04 0.40 -0.25 0.04 0.05 0.38
Value 0.06 -0.30 1.01 -0.04 0.08 -0.04
Dividend Yield 0.00 -0.74 -0.67 -0.10 0.00 -0.24
Size 0.11 -0.21 -0.57 0.04 0.35 -2.29
Earnings 0.00 0.88 -0.39 0.02 -0.03 0.33
Leverage 0.01 -0.72 0.41 -0.10 0.12 -0.17
Growth -0.03 1.69 -0.29 0.00 -0.08 0.11
Volatility -0.05 0.51 0.16 -0.07 -0.05 -0.02
Profit 0.23 -0.08 -0.27 0.12 0.03 -0.65

Source: Bloomberg; data as of Aug. 31, 2018


But Crinieri argues that this dilution of factors can actually benefit buy-and-hold investors.  

"We believe in factor investing, but we also think factor timing is a very, very difficult game, one that not many people are successful at," he said. "A multifactor approach makes more sense for investors looking for a core portfolio to hold over a complete market cycle."

What Next?

For its next moves, GSAM has turned its eyes toward the industry's few remaining frontiers. In June, the firm hired Peter Thompson, founder of Source ETFs, as its head of a new European business line. The firm also plans to enhance its fixed-income product line by launching three additional Access ETFs in the coming weeks. These will include two emerging market debt funds and a TIPS ETF.

"We think the fixed-income market is less saturated," noted Crinieri. "There's more need for differentiated products."

Intriguingly, Goldman Sachs has also filed for a suite of thematic ETFs in a partnership with Motif Investing, a fintech firm known for its “motifs,” or index-less baskets of stocks. Motifs often fulfill a super-narrow theme, such as social networking companies, recent IPOs or Chinese solar companies. According to the filing, GSAM will build and manage five ETFs based on five Motif benchmarks (read: "Goldman Files For 'Motif' ETFs").

Crinieri declined to comment on the filings, citing the “quiet period” before a launch, but a partnership with a third-party firm would represent a significant departure from how Goldman Sachs has approached its ETFs in the past.

New approaches, however, are what this ETF newcomer does best.

"We're just getting started," said Crinieri.

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