Market Overview

An Admirable First Year For Goldman's EM ETF

An Admirable First Year For Goldman's EM ETF

The Goldman Sachs ActiveBeta Emerging Markets Equity ETF (NYSE: GEM), one of the first exchange-traded funds brought to market by Goldman Sachs Group Inc (NYSE: GS), is about a month away from its first anniversary, and it is accurate to say GEM is off to a fine start.

Happy Birthday, GEM!

GEM is now home to nearly $880 million in assets under management, easily making it one of the most successful ETFs, based on AUM growth, to come to market over the past year. That is up from $646 million in assets in early May when Goldman revealed it is locking in GEM's annual expense ratio at 0.45 percent, which is favorable relative to the universe of smart or strategic beta emerging markets ETFs.

GEM takes the stocks found in the widely followed MSCI Emerging Markets Index and weights them based on based on low volatility, momentum, high quality and good value.

GEM's underlying “index identifies stocks from companies that demonstrate sustainable profitability over time. This allows investors to gain exposure to companies with strong fundamentals and potential for consistent returns,” according to Goldman Sachs Asset Management.

Related Link: An Even Hotter Way To An Already Hot ETF Trade

Year-to-date, GEM is up 14.5 percent, which puts it behind the MSCI Emerging Markets Index by 230 basis. However, that is not a criticism of GEM. That data point merely underscores what investors can expect to find and not find in GEM.

Weights, Holdings And Allocations

At the top, GEM's country weights do not deviate much from the MSCI Emerging Markets Index with China, South Korea and Taiwan for nearly 52 percent of GEM and the emerging markets benchmark. One of the differences between GEM and the MSCI Index is exposure to some of the energy and materials names that previously dragged on developing markets equity indexes.

What used to be trash is now treasure in some emerging markets ETFs, and the MSCI Emerging Markets Index's combined weight of almost 14 percent to the energy and materials sectors is 260 basis points above GEM's combined weight to those groups, partially explaining the emerging markets benchmark's advantage over GEM this year.

Again, this scenario is not a knock on GEM. Remember, the Goldman ETF emphasizes sustainable profitability and strong fundamentals, traits many large-cap, state-controlled commodities producers have lacked in recent years.

Interestingly, at the country level, GEM's combined weight to Brazil, South Africa and Russia, major emerging markets commodities producers, is about 300 basis points higher than the MSCI index's.

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