2015 is a year of innovation for the ETF industry. Smart Beta is no doubt the hottest theme. Hundreds of smart beta (or other fancy names) rolled out throughout the year. But one of the most remarkable news attracted my attention is Goldman Sachs launched its first ETF in September 2015 which also uses smart beta concept.
By my personal percetpion, the ETF market has an overwhelming “winner takes all” characteristic. The big three fund managers, Black Rock, State Street and Vanguard, take away 80% of the asset under management. By my rough calculation, the largest 20 ETFs count for only 1% of the numbers of funds, but count for more than 30% AUM and trading volume. Scale really matters in ETF markets. This make new funds very difficult to survive. Neither for the big name as Goldman Sachs.
Goldman Sachs launched its first ETF in September 2015, the Goldman Sachs ActiveBeta(R) U.S. Large Cap Equity ETF. According to the US Securities and Exchange Commission webiste, Goldman Sachs’ ETF lineup has 12 funds, among which 6 funds are ActiveBeta ETFs, 5 are Hedge Fund Tracker ETFs, 1 is ESG ETF. Up to now only 3 ActiveBeta funds are incepted.
Source: WWW.SEC.GOV webiste
In order to know more about Goldman Sachs’ ETFs, I read theire documentations and have some personal findings:
1, Goldman Sachs funds’ positioning strategy is taking the two ends of the spectrum. At one end, it has 6 broad market ActiveBeta ETFs, which are must-have components in any portfolios. At the other end, it tries to target a niche market with Hedge Fund Tracker ETFs, which the market has high potential demand but limited supply. I believe Goldman Sachs don’t want to compete in the very crowdy middle market (funds of single investment theme).
2, Its funds use multi-layer indexes. For example, the Goldman Sachs US Large Cap Euqity ETF (GSLC), uses Solactive US Large Cap Index as the bottom layer index which provides the investment universe. Then the fund construct 4 sub-indexes with seperate methodologies. Lastly, the fund combine 4 sub-indexes and get a fund index. The second and third indexes are developed by Goldman Sachs. I checked both Solactive Index and the ETF’s holdings, the Solactive Index has 493 holdings, but the ETF has only 44o holdings. This is becase some stocks are allocated to zero weight after the screening process.
3, The Goldman Sachs US Large Cap Euqity ETF (GSLC) utilized a 4-factor model: Value, Momentum, Quality, Low Volitility. These 4 factors are equally weighted in the final index. These 4 factors in a higher degree played a weight tilt role rather than screening role. So that even 4 factors are applied, 90% stocks in the investment univers (base index) are ketp in the ETF. Some other smart beta funds use multi-factors as multi-layer filter, so the final holding numbers are very concentrated relative to the initial investment universe, such as QVAL (only 41 holdings) and OUSA (147 holdings).
4, The ETF utilized a “Turnover Minimization Technique”, which is pending patent, to decrease the trading cost. So when rebalancing schedule comes, the fund has some discretion to decide the amount of adjustment within the buffer range.
Why do I say Goldman Sachs’ entry is a milestone for the ETF market? Because it is the most infuential power in the financial industry. It has all the resources to enter the ETF markets at any time. But it didn’t do that until 2015. This is an persuasive evidence that Goldman Sachs realized ETF is the market trend you cannot ignore. I like Goldman Sachs becasue of its innovation. I beilive its joining with make the ETF markets much more exciting and prosperous.