Goldman Sachs Group Inc. (GS) is launching a broad strategy intended to boost its share of the $4 trillion ETF market, as reported by Bloomberg. In hopes to overtake JPMorgan Chase & Co. (JPM), Goldman will try out the same strategy as its fellow Wall Street peer. The financial giant has filed to introduce a line of ultra low-cost, broad-based index products, set to start trading as early as next week, per regulatory records. The strategy is likely to take business from market leaders BlackRock Inc. (BLK), State Street Corp. (STT), Vanguard Group, as well as other ETF industry players.
Big Banks Employ 'BYOA' Strategy
Goldman, which already has 18 ETFs, including its highly successful factor investing ActiveBeta U.S. Large Cap Equity fund (GSLC), is copying JPMorgan's controversial “bring your own assets” strategy, in which it creates ETFs similar to the most popular on the market, and moves billions of dollars in assets from its existing wealthy clients from those, its own ETFs.
Goldman first got into the market four years ago when it launched its own inexpensive factor ETFs. Earlier this year, the financial behemoth’s asset management arm announced plans to buy Standard & Poor’s Investment Advisory Service (SPIAS), a model portfolio business which holds ETF and mutual funds that have become more popular among financial advisors.
“As we continue to grow and build out our ETF business, along with our recent acquisitions, it just makes sense in some areas for us to have the building blocks that fuel those portfolios,” said Steve Sachs, head of capital markets for ETFs at Goldman.
Using the “bring your own assets” method, JPMorgan was able to triple its ETF business to $30 billion in assets in just 14 months.
JPM's Push into ETFs
JPMorgan made its first major splash in the ETF market in June 2018, with the launch of its suite of ETFs called BetaBuilders, which track broad developed-market benchmarks at a low fee. Since then, it has pushed into the fixed income ETF market, and has become an early mover in the European market, where it has $2.8 billion in assets, per Bloomberg.
“JPMorgan saw this as a smart move ahead of anyone,” said Bloomberg Intelligence analyst Eric Balchunas. “We’ve seen how hard it is to get any assets. But bringing your own assets gets you mojo, and mojo gets people in the door and investors on the phone.”
Many are critical of the way that JPMorgan, and now Goldman, are winning a greater share of the ETF market by directing wealthy clients to their own products. In response, JPMorgan’s head of ETF distribution, Jillian DelSignore, says, “we have internal affiliates in our products, but they are institutional clients and we treat them as such with their own due diligence.”
According to Bloomberg Intelligence, JPMorgan’s low-cost BetaBuilders have saved clients $42 million collectively per year.
Big Three Asset Managers Threatened
Following the lead of JPMorgan and Goldman, other asset managers such as Morgan Stanley (MS), UBS Group AG (UBS) and Wells Fargo Corp. (WFC) could follow suit and create their own “in-house” cheap beta ETFs. This would pose a serious threat to the dominance of the Big Three providers, with BlackRock, Vanguard and State Street currently accounting for 80% of ETF assets in some 600 products in the U.S. market, per Barron’s.
As for Goldman in particular, if the firm succeeds with its BYOA strategy, BlackRock may be the worst off, according to an analysis of regulatory filings. United Capital clients hold roughly $4 billion in BlackRock’s iShares ETF line, which could be reallocated into Goldman’s new ETFs, per Bloomberg.
“The advisers -- by being so brutal with cost obsession -- have created this monster of cost migration,” said Bloomberg's Balchunas. “By making moves like this, the banks are able to own the end client and the flows. It’s brutal out there.”