Smart Beta ETFs At Vanilla Prices

September 12, 2018

[This article appears in our October 2018 issue of ETF Report.]

Goldman Sachs crashed the ETF party late. Though the heavyweight asset manager and investment bank had dabbled in exchange-traded notes (ETNs) as early as 2007, it wasn't until 2015 that the firm launched its first bona fide ETF: the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC).

But what a debut it was.

GSLC was the ETF equivalent of a thrown gauntlet, a thumb in the eye of established players like State Street and BlackRock. The fund, a multifactor take on U.S. large-cap equities that cost just 0.09%, packaged Goldman Sachs' institutional-level strategy at a price tag retail investors could love. Within two months, GSLC had surpassed $100 million in assets. Within 12 months, it had surpassed $1 billion.

"Cost matters," said Michael Crinieri, global head of ETF Strategy for Goldman Sachs Asset Management (GSAM). "[GSLC] was a cost-effective way to get exposure to more sophisticated strategies."

Since then, Goldman Sachs Asset Management's fledgling ETF wing has launched 11 additional smart-beta funds, all of which carry rock-bottom fees. Essentially, it's smart-beta investing at vanilla index prices—a combination that's won plenty of fans.

Flipping The Script With Factors

To date, GSAM has amassed combined assets under management of $9.3 billion in its 12 ETFs (Figure 1). (There are also three ETNs bearing the Goldman Sachs brand, but those are issued and managed by the firm's securities side, says Crinieri, not its ETF division.)

 

Figure 1: Goldman Sachs Active Management ETFs

Fund Expense Ratio AUM ($M) Launch Date
Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF 0.09% 3,970 9/21/2015
Goldman Sachs ActiveBeta Emerging Markets Equity ETF 0.45% 1,710 9/29/2015
Goldman Sachs Access Treasury 0-1 Year ETF 0.12% 1,610 9/6/2016
Goldman Sachs ActiveBeta International Equity ETF 0.25% 1,100 11/6/2015
Goldman Sachs JUST U.S. Large Cap Equity ETF 0.20% 272 6/7/2018
Goldman Sachs Access Investment Grade Corporate Bond ETF 0.14% 259 6/6/2017
Goldman Sachs Hedge Industry VIP ETF 0.45% 110 11/1/2016
Goldman Sachs ActiveBeta Europe Equity ETF 0.25% 75 3/2/2016
Goldman Sachs Equal Weight U.S. Large Cap Equity ETF 0.09% 72 9/12/2017
Goldman Sachs ActiveBeta Japan Equity ETF 0.25% 53 3/2/2016
Goldman Sachs ActiveBeta U.S. Small Cap Equity ETF 0.20% 47 6/28/2017
Goldman Sachs Access High Yield Corporate Bond ETF 0.34% 46 9/5/2017
  Total AUM: $9.324  

Sources: ETF.com, FactSet; data as of Aug. 31, 2018

 

Almost all of GSAM's ETFs take some market segment or sector commonly covered by a vanilla, core product and add a smart-beta or factor twist.

The six ActiveBeta equity ETFs, for example, rank and index potential constituents according to four factors, then combine the results into one blended, multifactor index. The Access fixed-income products, meanwhile, use liquidity constraints and fundamental factors to excise underperforming issuers from broad baskets of bonds.

Even the nonsmart-beta ETFs, like the Goldman Sachs JUST U.S. Large Cap Equity ETF (JUST), flip the script on what ETFs of a certain type ought to look like. In JUST's case, it's a socially responsible fund whose holdings—and even social objectives—evolve as investors' priorities do (read: "'JUST' Takes In $250 Million Its First Day").

Though GSAM's ETF business remains small, its asset-gathering ability has proven mighty: Seven of the firm's 12 funds have already crossed $100 million in assets, a commonly used yardstick to measure an ETF's profitability. Four have topped $1 billion.

Smart Beta On The Cheap

Although Goldman Sachs uses factors specifically to harness their excess return, most GSAM ETFs aren't performance superstars. Most of the firm's funds hug their respective segment benchmarks fairly closely, and although on a one-year basis all Goldman ETFs outperform the top competing fund in the space, most do so by a percentage point or less (Figure 2):

 

Figure 2: Goldman Sachs Asset Management ETFs vs. Top Competing ETFs

Goldman Sachs ETFs vs. Top Competing ETFs
Goldman Sachs ETFs Largest Competing ETF
Ticker Fund Name Expense Ratio YTD Return 1 Year Return Ticker Largest Competing Fund Expense Ratio YTD Return 1 Year Return
GSLC Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF 0.09% 10.75% 22.78% SPY SPDR S&P 500 ETF Trust 0.09% 9.57% 20.75%
GEM Goldman Sachs ActiveBeta Emerging Markets Equity ETF 0.45% -6.58% 0.24% VWO Vanguard FTSE Emerging Markets ETF 0.14% -5.78% -0.29%
GBIL Goldman Sachs Access Treasury 0-1 Year ETF 0.12% 1.04% 1.35% SHV iShares Short Treasury Bond ETF  0.15% 1.00% 1.25%
GSIE Goldman Sachs ActiveBeta International Equity ETF 0.25% 0.46% 7.16% EFA iShares MSCI EAFE ETF 0.32% -0.58% 6.27%
JUST Goldman Sachs JUST U.S. Large Cap Equity ETF 0.20% -- --    DSI iShares MSCI KLD 400 Social ETF 0.25% 10.15% 21.22%
GIGB Goldman Sachs Access Investment Grade Corporate Bond ETF 0.14% -1.94% -0.79% LQD iShares iBoxx USD Investment Grade Corporate Bond ETF 0.15% -3.03% -1.58%
GVIP Goldman Sachs Hedge Industry VIP ETF 0.45% 9.92% 17.76%   n/a      
GSEU Goldman Sachs ActiveBeta Europe Equity ETF 0.25% 1.00% 6.36% VGK Vanguard FTSE Europe ETF 0.10% -0.29% 5.58%
GSEW Goldman Sachs Equal Weight U.S. Large Cap Equity ETF 0.09% 7.95% --    RSP Invesco S&P 500 Equal Weight ETF 0.20% 7.52% 18.79%
GSJY Goldman Sachs ActiveBeta Japan Equity ETF 0.25% -1.31% 9.30% EWJ iShares MSCI Japan ETF 0.49% -1.60% 9.30%
GSSC Goldman Sachs ActiveBeta U.S. Small Cap Equity ETF 0.20% 14.09% 27.56% IWM iShares Russell 2000 ETF 0.19% 13.82% 27.00%
GHYB Goldman Sachs Access High Yield Corporate Bond ETF 0.34% 1.86% --    HYG iShares iBoxx USD High Yield Corporate Bond ETF  0.49% 1.92% 3.05%

Sources: ETF.com; FactSet; data as of Aug. 31, 2018

 

Goldman's ETFs are, however, cheap. GSLC, for example, sports an expense ratio of just 0.09% —equal to that of the SPDR S&P 500 ETF Trust (SPY) and a whopping 41 basis points cheaper than the average large-cap equity ETF. The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL), meanwhile, costs just 0.12%, or 3 basis points cheaper than the iShares Short Treasury Bond ETF (SHV) and 36 basis points less than the average Treasury ETF.

In fact, GSAM's modus operandi seems to be to target a segment's most popular vanilla ETF, then offer its own multifactor product at a substantial discount. In the few cases where GSAM ETFs are more expensive than the competition, it's usually because a cheaper rival has usurped the crown from the segment's former leader.

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.

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
Factor GSLC GEM GSEU GSIE GSJY GSSC
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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