Why Is Goldman Pricing Its ETFs So Low?

Late last week, Goldman Sachs (NYSE:GS) filed additional details about the ActiveBeta range of exchange-traded funds (ETFs) with the SEC – finally shedding some light on the expense ratio figures for each of the six ETFs that the bank is looking to launch in the near future. ^[1] Interestingly, the expense ratios proposed by Goldman for these ETFs are well below the average fees for similar offerings by competitors. The Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF stands out in particular in this regard, as its expense ratio of 9 basis points (0.09%) is just a fraction of the 35 basis point (0.35%) fee commanded by the similar iShares FactorSelect MSCI USA ETF from BlackRock (NYSE:BLK). ^[2]

We believe that Goldman’s decision to enter the ETF industry by competing with rivals on the basis of price stems from the sense of urgency that the investment bank has shown over recent years to grow its asset management business. Goldman has been under considerable pressure from regulators and investors since the economic downturn to increase the share of less volatile revenue streams in its trading-focused business model. As a result, the bank is looking to grow its asset management revenues by 10% annually over the foreseeable future. This ambitious target can be achieved if Goldman gains a strong foothold in the ETF industry. By launching its first line of ETFs at much lower expense ratios compared to incumbents, Goldman is looking to target investors in a bid to boost revenues at its asset management arm.

We maintain a $210 price estimate for Goldman’s stock, which is about 10% ahead of 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 a $3-trillion global industry now. With Goldman working towards a long-term goal of rebalancing its business model away from trading and towards asset management, the investment bank clearly cannot afford to overlook the ETF industry.

Goldman took the first step towards offering its own ETFs last April, when it acquired Westpeak Global Advisors – a company focused on smart beta investing. ^[3] Goldman was also involved in talks to acquire the New York-based ETF provider IndexIQ last October. ^[4] But with New York Life Insurance acquiring IndexIQ in December, Goldman went on to detail its intention to launch six ActiveBeta ETFs and a separate line of five hedge-fund themed ETFs in an SEC filing. ((N-1A Filing, SEC Website, Dec 12 2014))

More recently, Goldman has revealed the expense ratio figures for the ActiveBeta ETFs. The following list includes details about each of these ETFs, including their tickers, expense ratios as well as the expense ratios for the competing iShares FactorSelect ETFs from BlackRock (wherever applicable).

• Goldman Sachs ActiveBeta Emerging Markets Equity ETF (GSEU): 0.45%
• Goldman Sachs ActiveBeta Europe Equity ETF (GSIE): 0.35%
• Goldman Sachs ActiveBeta Japan Equity ETF (GSJY): 0.35%
• Goldman Sachs ActiveBeta International Equity ETF (GEM): 0.35% vs 0.45% for iShares FactorSelect MSCI International ETF (INTF)
• Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC): 0.09% vs 0.35% for iShares FactorSelect MSCI USA ETF (LRGF)
• Goldman Sachs ActiveBeta U.S. Small Cap Equity ETF (GSSC): 0.25% vs 0.50% for iShares FactorSelect MSCI USA Small-Cap ETF (SMLF)

As can be seen here, Goldman’s ActiveBeta line of ETFs are priced several basis points below similar iShares FactorSelect ETFs – highlighting the bank’s aim of attracting as much investor cash as possible once the funds become active. This should result in a sizable increase in the rate of growth of assets under management for Goldman in the near future. The bank reported $1.18 trillion in assets under management at the end of Q2 2015, and you can understand how changes in the size of these assets affects its share price by making changes to the chart below.

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1. Prospectus, SEC Website, Sep 11 2015 [↩]
2. iShares Unveils New Family of Smart Beta ETFs, Forbes, May 5 2015 [↩]
3. Goldman Sachs Asset Management To Acquire Smart Beta Business Westpeak Global Advisors, Goldman Sachs Press Releases, Apr 22 2014 [↩]
4. Goldman Sachs in talks to acquire ETF provider IndexIQ, Reuters, Oct 16 2014 [↩]