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.
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.
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.
It’s possible that this is just the initial volley from Goldman concerning its ETF strategy, and maybe they’re looking at expanding into more actively managed funds once they get their feet under them in this sector, which would generate more revenue and profit.
More than likely this is just copying their competitors in order to keep them from saying they have products and services not offered by Goldman. This is a legitimate response to that possibility, but not one that will make a big difference on the bottom line of the company for its shareholders.