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Goldman Starts Smart Beta ETF Price War

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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.

On Thursday 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 eleventh 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.

“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 vs. 68, according to Tu. He says Goldman is now “solidifying a price point below 10 basis point for simple smart beta strategy” — the segment of the fund industry that’s 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 5 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.”

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