Goldman Sachs Group Inc. (GS) is known for being home to some of the smartest minds on Wall Street and the firm's foray into exchange traded funds (ETFs), which began in earnest in late 2015, looks to extend that smartness. Smart beta, that is.
Nearly all of Goldman's ETFs fall under the jurisdiction of the smart beta classification, including the Goldman Sachs ActiveBeta Emerging Markets Equity ETF (GEM). With nearly $1 billion in assets under management, GEM is one of the most successful ETFs that debuted in 2015 and easily one of the most successful funds among newer emerging markets ETFs.
The ETF follows the Goldman Sachs ActiveBeta Emerging Markets 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 Sachs Asset Management.
Clearly, that is a different methodology than cap-weighted emerging markets ETFs or index funds that track the widely followed MSCI Emerging Markets Index. So, in an arena of the ETF space with no lack of competition, GEM needs to standout relative to its cap-weighted peers.
That has yet to happen. Since debuting in September 2015, GEM has slightly trailed the MSCI Emerging Markets Index. Over the past year, GEM is up 28%, but that is well behind the 30.6% delivered by the Vanguard FTSE Emerging Markets ETF (VWO), the largest emerging markets ETF. However, GEM has been slightly less volatile than VWO over that stretch.
In terms of its largest country exposures, GEM looks similar to the MSCI Emerging Markets Index as China, South Korea and Taiwan combine for about 53% of the Goldman ETF and the developing economies benchmark. On a combined basis, GEM is about 200 basis points overweight Brazil and India compared to the MSCI benchmark.
In GEM's favor is the fact that most funds, including ETFs, are judged more on three- and five-year performances rather than just 17 months. Plus, many of the assets allocated to GEM arrived courtesy of institutional investors, indicating to retail investors that there is some “smart money” sitting in this smart beta ETF.