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.
ETF.com: 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.
ETF.com: How is the smart-beta concept—its quasi-active nature, if you will—the best fit for Goldman’s expertise?
Crinieri: 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.
ETF.com: 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.
ETF.com: 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.
ETF.com: Some say you’re late to the party. Why make a move into the ETF space now?
Crinieri: First of all, we still think it’s early insofar as the development of the ETF market. There's $2 trillion in assets in U.S. ETFs alone. Goldman Sachs research on the ETF sector concluded that the global ETF market could double in size by 2020. There’s significant room for growth.
But really, the reason we’re doing it now is that our customers are asking for it. Our clients have asked for these strategies in an ETF wrapper. So we’re responding to demand from our clients.
We also think the market has evolved from the traditional index products to more strategic products that are more leaning toward active management, and that really plays to GSAM’s strengths.
ETF.com: Will Goldman remain focused on multifactor approaches? Are you going to consider active ETFs? What comes next?
Crinieri: We intend to have a broad offering of ETFs over time. We’re focusing on the ActiveBeta products right now. We’ve filed for six of those; two are launched already. So there are four additional products to come, including U.S. small-cap, international, Europe and Japan.
We’ve also filed for five liquid alternative strategies, which are hedge fund replication strategies. We have a multistrategy hedge fund replicator, and then four individual hedge fund strategies that we’ve already filed for. And we have a pipeline of other products that we’re working on that have not been filed yet.
ETF.com: To clarify, you’re marketing your first ETFs as “ActiveBeta.” How much of these strategies are actively managed?
Crinieri: These strategies are designed by our quant team, who have a lot of experience in this area, but they are 100 percent rules-based. They’re rebalanced on a quarterly basis, so no one’s making investment decisions along the way. It’s really an index-based strategy.
ETF.com: Can you tell me a little about your first ETFs?
Crinieri: We launched GSLC (the Goldman Sachs ActiveBeta U.S. Large Cap Equity) on Sept. 21, priced at 9 bps—very competitive to products in the traditional beta space. This strategy works very well over long periods of time, but also over different geographies.
We apply this strategy to the emerging markets in our Emerging Markets Equity (GEM), which we launched on Sept. 21, just as we apply it to U.S. stocks with very interesting results. This is a great way for investors to think about outperforming the market when it comes to their emerging market allocation at a competitive price.
We’re obviously going through a period of volatility, especially in the emerging markets, but what we’re hearing from clients is that they’re looking for new opportunities in the space, so it’s an interesting time to be bringing a new alternative to the market.
ETF.com: What do you think will be the most difficult thing for Goldman to get traction in the ETF market?
Crinieri: We really think we’re very well-positioned. We have interesting strategies. We’re a well-known asset manager and have a great distribution team that can really help get the word out to our investors. We’re pretty excited about the opportunities.
Contact Cinthia Murphy at [email protected].