ETF NEWS - ULTUMUS

GS Smart Beta?

Written by Bernie Thurston | 23 March 2022

Goldman Sachs launches another multifactor ETF

Goldman Sachs has launched another multi-factor ETF that primarily targets volatility.

 

The Goldman Sachs ActiveBeta World Low Vol Plus Equity ETF (GLOV) is self-indexed to the Goldman Sachs ActiveBeta World Low Vol Plus Equity Index.

The index is made up of one sub-index and three sub-subindexes (indexes within the subindex).

 

The subindex is made up of low volatility global shares, where volatility is scored based on a 12-month daily average. Stocks above a set volatility threshold get more weight.

 

Within this volatility subindex, a further three sub-subindexes are created, one each for value, momentum, and quality. Factors are then scored in the standard ways (i.e. price-to-book for value). Within each sub-subindex, stocks with better factor scores are given an overweight.

 

The final step involves smooshing all the indexes together and equally weighting everything.

The fund charges 0.25%.

 

Bernie’s commentary – a smart-looking closet tracker

So the index methodology looks like there is a lot going on. Four different indexes. Four different factors. Indexes within indexes. A lot of big words. You might get the impression that this is a very clever fund. And indeed it is a clever fund – but for reasons other than you might expect.

 

Why do I say that? Because the smart beta and multi-factor approach this fund uses is a bit of a ruse. Just look closely at how the subindexes work. They start out by overweighting things based on factors. But in the final step, everything gets smooshed together and equally weighted—thereby undoing all the previous work creating factor overweights.

 

The other reveal is the sector and country weights. Looking at Goldman’s website, GLOV’s country and sector tilts are all broadly in line with MSCI World. If you’re taking a true factor approach, there should be sector and country tilts. 

 

So what’s going on? Why build a smart-beta looking closet tracker like this?

 

The answer I suspect is that GS wants pricing power. If you’re just recreating the MSCI World these days you have zero room to charge any kind of fee. If you’re going up against Vanguard you’re going to lose. But another more important reason is that it helps advisers keep their jobs. A busy-looking ETF that hugs the benchmark means there won’t be any underperformance. And an adviser buying a clever-looking fund might just look a bit clever in the process.