Goldman Details Plans To Foray Into Active ETF Market

Goldman Sachs (NYSE:GS) filed a request with the SEC late last week to launch a series of actively-managed exchange-traded funds (ETFs) – making it the latest addition to the list of banking giants that have expressed an interest in the rapidly growing investment option. ^[1] The bank joins Wells Fargo (NYSE:WFC) and JPMorgan (NYSE:JPM) in seeking regulatory approval to provide active ETFs to retail and institutional investors. ^[2]

The move marks yet another step by Goldman Sachs to grow its asset management business as it looks to increase the share of less volatile revenue streams in its business model amid increasing regulatory pressure to downsize its riskier trading operations.

We maintain a $185 price estimate for Goldman’s stock, which is around the current market price.

See the full Trefis analysis for Goldman Sachs

ETFs have been the fastest-growing investment vehicle for institutional as well as retail investors in recent years – turning from an obscure product at the turn of the century to an almost $2.3 trillion global industry now. ETFs in the U.S. had $1.6 trillion in assets at the end of 2013 – almost 12% of the $13.9 trillion in total assets managed by all mutual funds and ETFs in the country. ^[3] In comparison, the relatively new actively-managed ETFs have a little more than $13 billion in assets combined – less than 0.1% of the market.

Active ETFs are, however, seen as the “next big thing” in the industry, as they can potentially grant retail investors easy and cost-effective access to the services of professional fund managers. To add to that, active ETFs have the additional benefits of transparency, flexibility as well as liquidity compared to actively-managed mutual funds. All these factors taken together make active ETFs a strong bet for asset management giants as well as banks with sizable asset management operations.

The only point of contention among asset managers about active ETFs is the mandatory requirement to detail the holdings at the end of each day. ^[4] As trading strategies can be replicated easily by others as a result of the daily disclosure, strong-performing active ETFs won’t have much of a competitive advantage. In fact, they potentially stand to lose, as their large positions will be more difficult to change if smaller funds follow the same strategy. While asset managers continue to negotiate with regulators over this concern, the banks have been quite eager in pursuing active ETFs over recent months, as is evident from plans filed by Wells Fargo, JPMorgan and now Goldman Sachs.

As can be seen from the chart above, Goldman Sachs’ asset management business contributes a notable 12.5% of the investment bank’s total value. The unit is an important part of the bank’s overall business model, as it offers a stable source of revenue as opposed to its trading units which are highly volatile. If active ETFs do indeed witness exponential growth in the near future, this will help boost Goldman’s asset base over coming years. The bank reported $1.1 trillion in assets under management at the end of Q2 2014, and you can understand how changes in the size of these assets affects its share price by making changes to the chart below.

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Goldman Sachs files for active ETFs, joins Wall Street bank trend, Reuters, Sept 22 2014 [↩]
2. J.P. Morgan launching its first exchange-traded fund, Reuters, Jun 17 2014 [↩]
3. ETFs Gain Ground on Index Mutual Funds, The Wall Street Journal, Feb 20 2014 [↩]
4. BlackRock’s Wiedman Says Active ETFs Are ‘Out of Money’ Option, Bloomberg Businessweek, May 29 2014 [↩]