Truly passive index and exchange-traded funds are winning over many financial advisors. There are some holdouts among these middlemen who look after perhaps as much as $25 trillion.
They are not rushing to move their clients into cheap beta-style ETFs for fear of seeing their own value diminished. But at the same time, these fee-based advisors and their clients may want to move away from out-of-favor and expensive active mutual funds.
Enter Goldman Sachs Group Inc., which has built the ETF equivalent of the T-1000 Terminator, a killer cyborg fund sent from the future perfectly calibrated to eliminate human managers by exploiting the growing world of fee-based advisers.
The firm’s Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF, or GSLC, is a multi-factor fund loaded with all the bells and whistles a fee-advisor goes nuts for, which should scare the daylights out of an active fund manager.
GSLC has taken in cash in all but two months of its three or so years in the market, accumulating $3.5 billion in assets even though it has underperformed, an unheard of feat for a smart-beta ETF.
GSLC’s success is spawning a new generation of similar multi-factor ETFs from the likes of JPMorgan Chase & Co. and Fidelity Investments. Even ETFs from BlackRock Inc. and Vanguard Group Inc. that are priced for next to nothing and could end up stealing a large portion of the (remaining) assets from active mutual fund managers.
So what exactly makes GSLC a force to be reckoned with? There are five main components:
Cost: GSLC charges an absurdly low fee of 0.09 percent, which is 10 times cheaper than the average active mutual fund and five times cheaper than the average ETF.
The fee “opened up a lot of doors for us,” Michael Crinieri, the global head of ETFs at Goldman Sachs Asset Management, said in an interview on ETF IQ on Bloomberg TV. The dirt-cheap cost is hyper-appealing to advisors who have moved to fee-based models, as opposed to the fading commission model.
They know cost is a key variable in predicting performance and it allows them to better protect their own fees. Let’s stop for a minute and just take note of that last sentence because it is the single-biggest driving force all fund flows for the past 10 years — and likely the next 20 years.
Low cost, check.
Quant: Factor investing is hot, winning over the clients of traditional discretionary active managers.
Factor investing looks for characteristics of stocks that academic studies have shown to explain outperformance over time. Factor investing is typically rules based, meaning it effectively removes emotion from the equation.
The most popular — and respected — factors are value, momentum, quality and low volatility.
The problem for many advisers is trying to figure out which factors to use and when. GSLC attempts to solve this by combining four factors into one fund using separate sub-indexes with their own calculations, as seen below.