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Secrets To This ETF's Success

March 4, 2016 8:50 am
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Secrets To This ETF's Success

Over 280 exchange-traded products debuted in the United States last year. As is the case with every annual wave of new exchange-traded funds, some are immediately successful in terms of asset gathering, others take a while to reach assets under management milestones and some just meander until they are sent to the ETF graveyard.

Goldman Sachs Group Inc (NYSE: GS) introduced its first three ETFs last year, and it is fair to say each resides in the first group of new ETFs (the immediately successful group).

That is certainly true of the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (NYSE: GSLC), the oldest of Goldman's three ETFs.

Related Link: Expect Exponential Growth For ETF Managed Portfolios

It’s All Relative

“Old” is stretching it, though, GSLC debuted mid-September. The ETF had $367.1 million in assets under management as of March 3, a tidy sum for about seven months of work.

Part of GSLC's advantage is its low fees. Actually, GSLC's annual fee of 0.09 percent is downright scant when measured against other strategic beta offerings. The average expense ratio for ETFs in the Morningstar US ETF Large Blend Strategic Beta category is 0.38 percent per year, and the average annual fee for funds in the Morningstar US ETF Large Blend Index group is 0.36 percent, according to Goldman.

GSLC’s Methodology

An interesting element to GSLC's smart beta methodology is that it combines several investment factors, including momentum and value. That is compelling because on their own, momentum and value do not always perform well in unison.

“Momentum tends to work well when value doesn't, and vice versa. Therefore, combining these two styles can offer good diversification benefits. The fund's index measures momentum based on risk-adjusted (where risk is defined by market sensitivity and volatility) performance over the previous 12 months, excluding the most recent one. This risk-adjustment may increase the fund's exposure to stocks whose momentum is more likely to persist and slightly reduce risk,” said Morningstar in a recent note.

GSLC also employs the quality factor, so it is not surprising to see cash-rich technology titans such as Apple Inc. (NASDAQ: AAPL) and Microsoft Corporation (NASDAQ: MSFT) among the ETF's top 10 holdings. GSLC's overall technology allocation is 19.4 percent, its largest sector weight, followed by consumer discretionary at 18.1 percent.

What GSLC Has To Offer

GSLC is a different bird than other broad market ETFs, and with that, investors should expect varying returns. That has been a positive to this point as GSLC is down 3.8 percent over the past 90 days, an advantage of 90 basis points over the S&P 500.

“Quality can also diversify value, which tends to favor less profitable names. The fund's index assesses quality based on gross profits/total assets. (It uses return on equity for the financials sector.) Similar to positive momentum stocks, stocks with high profitability tend to trade at higher valuations than their less profitable counterparts. Because the fund allocates half of its portfolio to these two sleeves, it has a less pronounced value orientation than many of its peers,” added Morningstar.

Image Credit: Public Domain

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