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Goldman Sachs Entering The ETF Arena Generates Some Questions

January 6th, 2010

raises-questions“The interest by Goldman Sachs Group (NYSE:GS) to enter into the ETF market generates some questions as to how profitable it can be and how much of a foothold they can secure in an already crowded field of approximately 800 ETF funds already out there. While Goldman Sachs already has a trading desk for ETFs, these ones will be developed by Goldman themselves. The financial giant filed with the SEC the day before Christmas in order to gain permission to enter the industry. I’m not that impressed with this move, as it pretty much mirrors what their competitors have already done, and offers nothing of innovation, as an ETF doesn’t need to be managed much by its nature, and so is inexpensive and cheap to the investor, while offering small gains to the provider,” Gary Reports From American Banking News.

“There are actively managed ETFs of course, but even though they are legally identified as an ETF, they are in reality something different; more like a mutual fund than an index fund. Actively managed ETFs will of course cost more to the investor, require higher costs to be run, and make it less predictable than traditional ETFs which usually track a basket of securities, although there are exceptions to that general rule. It seems Goldman’s strategy, per their filing, will be to center their strategy on index ETFs instead of actively managed ETFS. Assuming that’s the case, that should generate better results if they are able to convince their clients to invest in them,” Gary Reports.

“The problem with index ETFs is they are almost impossible to differentiate and can easily be copied as far as what the fund is tracking. So if you’re tracking certain securities and another company is tracking the same securities, there is no way to differentiate from them other than cost, which is never a winning proposition. In other words, an index ETF is a commodity product, and there is no way to set yourself apart from others in that regard. This is why actively managed ETFs have been emerging, but again, they are really no longer an ETF from the practical point of view once they are managed in that manner. One thing Goldman Sach could attempt to do is rely on their brand, but that would mostly apply to their existing customers. So if they do sell to them, it’s a huge stretch to assume that would be new business, rather than possibly transferring capital from low-performing investments in order to get better returns. Include low fees and that’s not a very profitable business to look at,” Gary Reports.


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