[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, GSAM’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.)
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.
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 GSAM ETFs outperform the top competing fund in the space, most do so by a percentage point or less (Figure 2).
For a larger view, please click on the image above.
GSAM’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.