Focusing On An Alternative To S&P 500 ETFs

Goldman Sachs Group Inc. GS continues bolstering its footprint in the exchange-traded fund business, but the ETF that really helped Goldman assert itself in this industry is the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF GSLC.

GSLC, which turns 2 years old in September, has over $2.2 billion in assets under management, making it one of the most successful ETFs to launch in 2015. GSLC tracks the Goldman Sachs ActiveBeta U.S. Large Cap Equity Index, which “seeks to capture common sources of active equity returns, including value (i.e., the security's price compared to market value), momentum (i.e., performance history), quality (i.e., profitability relative to total assets) and volatility (i.e., consistency of returns),” according to Goldman.

In other words, GSLC is one of a growing number of multi-factor ETFs that have come to market in recent years. The ETF's emphasis on U.S. large caps makes it a suitable replacement for traditional broad market strategies, including S&P 500 ETFs.

A Top Ranking

GSLC holds 450 stocks and the possibility exists that there will be times when the ETF lags the S&P 500. For example, the Goldman ETF is trailing the benchmark U.S. equity index by more than 200 basis points over the past year. Still, some analysts remain enthusiastic about GSLC.

“GSLC is part of a crop of multi-factor ETFs that have come to market in the last few years that combine various fundamentally and trading-based factors that have historically performed well,” said Todd Rosenbluth, CFRA Research director of ETF & mutual fund research, in a note out Wednesday. “GSLC launched in September 2015, but has already gathered more than $2.2 billion and earns a top ranking from CFRA. The large-cap ETF incorporates value, risk-adjusted momentum, quality based on a profitability ratio, and low volatility factors through four different sleeves into one portfolio that tracks a proprietary index. These factors are intended to complement one another.”

CFRA, which named GSLC its focus ETF for July, has an Overweight rating on the ETF, the highest rating the firm gives to ETFs.

Cheap Helps

As has been widely noted, low-fee, passive ETFs continue to steal assets from higher-cost, under-performing, active mutual funds. With an annual fee of just 0.09 percent, GSLC is seizing upon the low-cost theme.

“For example, the cost of our ActiveBeta US Large Cap ETF is 9 basis points, compared to the industry average for smart beta ETFs of 38 basis points,” according to Goldman.

The ETF is home to familiar, high-quality holdings, such as Apple Inc. AAPL and Johnson & Johnson JNJ.

“CFRA's holding-based ETF ranking methodology leverages our own valuation and risk consideration tools that have used in independently assessed stocks for decades,” added Rosenbluth. “GSLC ranks in the top quartile of our equity ETF universe for the attractive valuation of its holdings (STARS) as well as from a quality perspective (S&P Global Credit Ratings and S&P Global Market Intelligence Quality Rankings).”