Goldman Sachs Takes On 'ARKK' Upstart

Goldman Sachs Asset Management has repackaged five ETFs focused on different areas of innovation into a single ETF, the Goldman Sachs Innovate Equity ETF (GINN), which went live Nov. 6. The move comes at a time when investors can’t seem to get enough of the disruptive innovation theme—a high-growth segment of the equity universe that has delivered impressive performance and seen big asset-gathering success this year. GINN will have to take on serious competitors for a slice of this thematic pie, none bigger than  the ARK Innovation ETF (ARKK). However, GSAM Head of Capital Markets Steve Sachs tells us the fund’s unique approach to capturing innovation has what it takes.

ETF.com: Tell us about the transition of five Motif-linked ETFs into a single new ETF, the Goldman Sachs Innovate ETF (GINN). Why is one better than five to access innovation as a theme? (Read: Goldman Launches Merged ETF)

Steve Sachs: This is really driven by client feedback and demand. Everything that we’ve done, for the most part, in our ETF business at GSAM has been driven by our clients. That's no secret to anyone.

Our client base was asking for access to our fundamentals/equity team's best thinking about what the world was going to look like in the coming decades from an innovation perspective. When we did it, we originally launched the five individual themes because, to us, that made sense—people wanting to pick individual themes to position in their portfolios.

Lo and behold, after we launched them, we heard and saw that the vast majority of shareholders owned at least three of the five funds. A substantial portion owned all five. And an overwhelming portion of clients told us, “I love these, but even in zero-fee world, a zero-commission trading world, it'd just be so much easier if this were one fund.”

Given that we had to make a change of index because of Motif exiting the business, and us taking those indices in house, we decided to reorganize the funds and combine them.

ETF.com: Each of the original five ETFs had innovation as the common denominator in security selection. Are we perhaps learning a lesson that you can actually slice and dice thematic investing too thinly?

Sachs: Not at all. In fact, the portfolio construction is still driven by that very fact. When you think about all we've done here, we've taken those five individual themes—new age consumer, data-driven world, finance reimagined, human evolution and manufacturing revolution—and equally weighted them within this composite index.

The index is constructed such that we construct five individual indices and then we combine them. We did that for its elegance and its simplicity. Equal weighting is very popular with clients seeking exposure to the theme. And if we choose to relaunch one or all of the individual themes, it's very easy to do, because the subindices are already there.

ETF.com: The equal weighting is appealing to avoid a lot of single-stock risk on any particular disruptive segment, right?

Sachs: That’s correct. Clients are using it as core exposure in their portfolio to a certain extent, an ACWI [All Country World Index]-like investment, because it's global in nature. It's kind of like factor investing.

One of the things that we say all the time is that factor investing can be challenging, because, which factor should I invest in now? Factor timing is difficult.

Thematic investing, while it probably is not as difficult—because the key to it is to think long term—can also be challenging. That’s another reason it made sense for us to combine them: You have to realize that, while these themes can be used tactically, they’re meant to play out over not just multiple market cycles, but multiple decades. This is how we view the world changing over the coming decades.

ETF.com: Goldman has had huge success with the “Active Beta” lineup, which are low cost core exposures. GINN sits outside of that with an expense ratio of 0.50%. Where does it fit in the firm’s overall ETF strategy as an issuer?

Sachs: First and foremost, this fund is grounded in and driven by our fundamental team—it’s their best thinking as it relates to investing in innovation for the coming years. This sort of vision permeates everything they do, from a bottom-up fundamentals stock-picking perspective. This is a group of 80-plus professionals managing upward of $70 billion in other active strategies. In and of itself, that type of thinking is the cornerstone to everything that we've done.

When you think about the Active Beta lineup, quantitative stock selection is something that GSAM has been doing for 30 years. When you think about our fixed income suite, fundamental screening is used for better beta. And when you think about other intellectual properties listed within the firm, thematic is the same thing.

Is it more expensive than active beta in the U.S. large cap space? Of course; because it should be. There's still a premium that’s commanded for forward-thinking portfolio construction like this. That said, it's still a significant discount to traditional active in the open-end mutual fund space. And it's also very competitive to the rest of the thematic ETF space.

ETF.com: I can’t help but compare GINN to ARKK, which costs 0.75%. In this “innovation” space, the narrative has usually been that investors are using these strategies as satellite exposures. You mentioned GSAM clients are using it in the core? That’s interesting.

Sachs: It is. And don't get me wrong, not everybody's using it that way. But a lot of clients do. The logical approach is thinking about this from a satellite perspective relative to a core. But we also think that that's one of the unique things about our portfolio construction: the fact that it’s all-cap, global and a very diverse portfolio—not for nothing; we love what Ark has done. I’m a big fan of Cathie Wood. It's been fantastic to see their success in this space.

But these are very different approaches. One, ARKK is actively managed. It’s a concentrated portfolio with a much higher degree of tracking error. That’s all great as long as you understand what they're doing. It’s a really good performance story.

GINN is different. It's passive. It's rules-based. It's quantified and repeatable. It's a much, much broader portfolio. There are times when that's an advantage, and there’s going to be certain market environments where that might be a disadvantage. It all depends on what you're looking for and how you're using it in your portfolio.

ETF.com: Logistically speaking, when you combine five ETFs into one, is the right assumption here that all those assets came along to the new wrapper? Was there any friction, any clients who didn't want that, or was it easy?

Sachs: I'm going to say it was pretty easy. Yes, all the assets that were there in the funds as of this past Friday were merged into the single fund. GINN now has upward of $310 million in assets, which is a testament to the fact that demand for these five funds was strong in a little over a year.

But did every single shareholder love this idea and stick with it? No. The transition process started back in April. It was very transparent, and our shareholders had the ability to vet this well before Monday. They could vote with their dollars, and choose to exit, or to stay. The growth of these funds in 2020 alone has been significant. In April, we were at roughly $75 million across all five ETFs, and here we are with $300 million-plus. That's the appeal of this strategy.

Cinthia Murphy can be reached at [email protected]