Wall St. Titans Gain ETF Foothold

September 20, 2017

Goldman Sachs

Goldman Sachs has found similar success. Bringing to market 11 ETFs since 2015, the firm is nearing the $6 billion-in-ETF-assets mark. (It also has a pair of ETNs launched in 2007 that are not part of the firm’s current ETF efforts.)


New Heavyweights In Smart Beta ETFs


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To Goldman Sachs, it made most sense to build the ETF business internally, tapping into the skill set it already had as a $1 trillion money manager. The idea was to deliver to its clients strategies they already knew and “wanted to consume” in the cost-efficient ETF wrapper.

According to Steve Sachs, head of the firm’s capital markets, from the get-go, Goldman set out to accomplish two key things.

First, to focus on what the firm is good at: quantitative security selection. Goldman never wanted to become the sponsor behind a list of hundreds of ETF tickers dabbing into every niche possible.

“When you think about active beta, out first ETF suite, those are strategies that existed inside the firm for a number of years,” Sachs said. “We had $10-billion-plus in assets in institutional separate accounts to varying degrees in those strategies. And we had several institutional clients come to us and say, ‘Look, we like this, we can certainly do a separate account, but we're actually using ETFs more and more.’”

Cost-Leader Goal

Secondly, the firm wanted to make these ETFs cheap. That’s a luxury it had, quite frankly, because it is Goldman Sachs, a trillion-dollar asset manager. The cheapest ETF costs only 0.09%, and the entire lineup of funds has an average expense ratio of 0.38%.

“ETFs are cheaper; but smart beta is not as cheap as pure passive. We just didn't want to have both conversations,” he said. “We wanted to talk about the strategies and why they're superior. We didn't want to have to try to justify the cost. So we decided we’re going to take price off the table.”

The approach quickly gave Goldman a reputation as the low-cost, smart-beta ETF provider.

According to the firm, ETF asset growth has been driven by new investors and has not come at the expense of other vehicles within the firm.

“You don't build a house with just a hammer; you use all the tools in the tool box,” Sachs said. “It's just that we—given how early we are in this process and given the nature of our active funds—aren’t seeing cannibalization of our existing fund lineup. Will we? Probably. It's natural. But we're OK with that.”

The asset-flows shift from active funds into ETFs should come as investors look for cheaper alternatives to active management.

Consider that the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC), Goldman’s flagship active beta product, with $2.4 billion in assets, costs 0.09%, the same cost as the world’s largest ETF, the SPDR S&P 500 ETF Trust (SPY). That’s $9 per $10,000 invested. According to Sachs, if you were allocating to a U.S. large-cap growth or value active manager or active fund, you're probably paying 0.75% for that—more than eight times as much.


Charts courtesy of StockCharts.com


No Easy Hill To Climb

While Goldman Sachs’ initial ETF efforts are working out well, there have been some challenges. Most notably, finding traction on the Goldman Sachs Hedge Industry VIP ETF (GVIP)—a fund that owns the top long-equity positions of hedge fund managers. The methodology is based on intellectual property Goldman has had in-house for a decade. That IP has long been adopted by institutions in the synthetic world through things like structured notes and swaps.

In an ETF wrapper, however, the idea has struggled to find a following, raking in only some $45 million in almost a year.

“The ETF structure works very well for that, very tax efficient, and it's outperformed on every metric. Performance has been stellar,” Sachs said. “But asset raise has been slow. It's one of those things: ‘How do I allocate to it?’”

And that’s a challenge that impacts newcomer issuers, particularly smart-beta ETF providers—explaining how their funds work and where they belong in a portfolio. Walking would-be investors through what can often be complex, thorny due diligence processes is a task that impacts every issuer in this industry.

Even household names such as J.P. Morgan and Goldman Sachs have to allocate time and resources to the well-known hurdle of investor education. But that makes their almost-instant success a much more powerful testament to the growing demand for smart-beta ETFs, and for the overall outlook of the ETF industry.

Contact Cinthia Murphy at [email protected]


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