Goldman Sachs: Low Cost ETFs Key For Us

October 08, 2015

Goldman Sachs Asset Management is the latest big player to enter the ETF market for the first time. Before you think the firm is late to the party, know that Goldman isn’t vying for a me-too spot. Its two first ETFs are smart-beta funds, but they came with unexpectedly low expense ratios in a segment that’s populated by much higher costs. The ActiveBeta U.S. Large Cap Equity ETF (GSLC) costs only 0.09 percent, or $9 per $10,000 invested. The Goldman Sachs ActiveBeta Emerging Markets Equity ETF (GEM) charges 0.45 percent.

Michael Crinieri, global head of ETF strategy for GSAM, tells us about the firm’s plans. The first thing that struck me about your first ETF was its expense ratio: smart beta for 9 bps? How are you pulling this off? Are ETFs going to be loss leaders for GSAM?

Michael Crinieri: We aren’t a startup. We’re part of a large financial firm. This is a highly scalable business, and we think we can get to scale very quickly by offering our products at very competitive prices.

We’ve been implementing these strategies for institutional investors for a number of years. We’re now packaging them into the ActiveBeta index and offering an ETF on this index. We want to offer these strategies to a large group of investors at a competitive price. How is the smart-beta concept—its quasi-active nature, if you will—the best fit for Goldman’s expertise?

Goldman Sachs has a lot of experience in the quant space. We’ve been involved in quantitative management for 25 years and manage more than $60 billion in quant strategies. This is a strategy that’s completely rules-based.

It’s a multifactor approach: We’re looking at value, quality, momentum and low volatility. We package the four factors together in an equal-weighted manner. This is a product that’ll give clients diversified exposure and smooth out the ride over various market cycles. Do you worry about differentiation? Multifactor ETFs are very popular, and we’ve had a lot of them come to market. How are you different?

Crinieri: We think our product will be differentiated based on our structure, our differentiated approach and certainly our pricing. The ActiveBeta strategy is really a good replacement for a traditional market-cap-weighted index. The strategy is benchmark-aware, in that we start with a market-cap-weighted index, and we’re making small tilts to overweight or underweight certain securities based on their scoring in each one of those four factors I mentioned. Is Goldman going after Northern Trust’s enhanced index assets; in other words, are you looking to grow assets, or are you looking to take market share?

Crinieri: We think this is a good alternative for investors who have already bought into passive management and are just looking for the ability to outperform the traditional market-cap-weighted indexes. That’s the opportunity.

And we think that’s a very broad opportunity, if you think about the number and types of investors that are using traditional index strategies. These products will appeal to individual investors, as well as large institutions.

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