From the October 2017 issue of Investment Advisor • Subscribe!

Goldman Starts Smart Beta ETF Price War

The move intensifies competition between smart beta and actively managed funds — possibly even passive index funds

Fund providers are racing to develop new low-cost products. Fund providers are racing to develop new low-cost products.

The price war that had been raging among mutual funds, then spread into ETFs, has now spilled over into the smart beta ETF space with the second launch of a Goldman Sachs smart beta fund that charges just nine basis points. Only Vanguard charges less, with some smart beta funds costing just six basis points.

In mid-September, Goldman launched an equal-weight U.S. large-cap equity ETF (GSEW), which tracks the Solactive U.S. Large-Cap Equal-Weight Index comprising approximately 500 of the largest U.S. equities. It was the 11th ETF launched by Goldman since September 2015, when it introduced its first ETF, the Goldman Sachs ActiveBeta U.S. Large-Cap Equity ETF (GSLC), charging nine basis points.

(Related: 13 Top-of-Mind Trends for Investment Managers)

“GSEW seeks to help investors looking for a low-cost way to avoid market-cap biases by allocating evenly to the largest U.S. companies, independent of their relative size,” said Michael Crinieri, GSAM's global head of ETF strategy, in a statement announcing the launch.

“The days of ‘sacred cow’ ETFs that can charge a premium fee are ending,” says Todd Rosenbluth, director of ETF and mutual fund research at CFRA.

Indeed, less than three months before the latest Goldman launch, Guggenheim Investments slashed the fee on its Guggenheim S&P 500 Equal-Weight ETF (RSP), the first smart beta ETF, from 40 basis points to 20. Guggenheim wanted to get ahead of the Goldman launch, says Rosenbluth.

The reason: “Investors are embracing lower-cost products, and the asset managers are working hard to get a piece of the pie,” says Rosenbluth. “Some of them are willing to enter with a lower price point in an attempt to gain share.”

Many asset managers with actively managed funds have been investing in smart beta products in the hopes that their lower costs would “reignite asset growth” at a lower price than their active funds and at a higher price than plain vanilla index funds, says Stephen Tu, senior analyst at Moody's Investors Service.

“Smart beta is the new active,” says Tu. He explains that when an actively managed fund outperforms its benchmark index, the primary reason is often the investment tilt or investment factors it favors in managing the fund. (Common factors used besides equal weighting include momentum, size and quality.) Smart beta funds, then, have a greater potential to outperform traditional actively managed funds for a lower cost, according to Tu.

They traditionally charge about half the median price of actively managed funds — 34 basis points versus 68, according to Tu. He says Goldman is now “solidifying a price point below 10 basis points for a simple smart beta strategy” — the segment of the fund industry that has been receiving the most asset flows. “The move is significant.”

How low can these charges go? Down to five to 10 basis points eventually, says Tu, adding that some plain vanilla ETFs are now priced as low as zero to five basis points. (Even at zero, asset managers can make money through securities lending, says Tu.)

Ben Johnson, director of global ETF research at Morningstar, anticipates “cost competition in this space will become more prominent in the years to come.”

--- Read No Slowing of ETF Growth, Just New Areas to Grow Into on ThinkAdvisor.

Reprints Discuss this story
We welcome your thoughts. Please allow time for your contribution to be approved and posted. Thank you.

Related

Betterment Adds Smart Beta and Targeted Income Strategies

The additions are meant to address the investment needs of the firm's increasingly diverse client base.

Most Recent Videos

Video Library ››