"He was a giant, six foot nine at least, wearing a bronze helmet and full body armor. He carried a javelin, a spear, and a sword.” Malcolm Gladwell’s description of Goliath in his book, David and Goliath: Underdogs, Misfits and the Art of Battling Giants was as imposing as the Bible’s. But Gladwell says the hulking warrior stood little chance of beating the brave young shepard. David was a slinger. He could accurately hurl rocks at head crushing speeds. What if Goliath, however, had his own lethal sling? The investment industry could be asking that now.
Goldman Sachs is Goliath, standing with armor and shield since 1869. Among other financial services, they sell mutual funds to plebeians. Your employer’s 401[k] might be chained to them. Low-cost index funds are the rocks that can smash them. Using data from Morningstar, The New York Times says that index funds have beaten most of Goldman Sachs’ funds over the past 10 years.
In 2013, Fortune’s Stephen Gandel wrote, Goldman pushes hedge funds for your 401(k). Such products are great for the firms that sell them. But I’ve described, in a previous article, how bad they are for investors. During the past 13 years, hedge funds have averaged less than 1 percent per year.
Goldman Sachs’ fund investors may have struggled. But the company’s revenue was still $34.53 billion last year. Net revenues from their investment management divisions totaled $6.04 billion. More investors, however, are saying no to swords and armor. Morningstar reports that 74 percent of the money added to mutual funds went into indexes, ETFs and Target Date products during the 12 months ending June 30, 2014.
Of course, some Target Date funds are actively managed. But on the flipside, Dimensional Fund Advisors sells a series of index funds that are much like hybrids. They attracted large cash inflows. But Morningstar labeled their funds as active. If they hadn’t, Morningstar’s data would have shown that even more cash went into index funds and just 20 percent went into actively managed mutual funds during the one-year period. (Makes you wonder if Wall Street can spell d-i-n-o-s-a-u-r, doesn’t it?)
That’s why Goldman Sachs is picking up the sling. Last month, they entered the ETF market for the first time by introducing their ActiveBeta US Large Cap Equity ETF (GSLC ). It costs just 0.09 percent per year. They have since added five more exhange traded funds.
Goldman Sachs ETFs
|Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF||GSLC||0.09%|
|Goldman Sachs ActiveBeta Emerging Markets Equity||GEM||0.45%|
|Goldman Sachs ActiveBeta Europe Equity ETF||GSEU||0.35%|
|Goldman Sachs ActiveBeta International Equity ETF||GSIE||0.35%|
|Goldman Sachs ActiveBeta Japan Equity ETF||GSJY||0.35%|
|Goldman Sachs ActiveBeta U.S. Small Cap Equity ETF (GSSC)||GSSC||0.25%|
Each of the new ETFs blends four investment styles: value, strong momentum, high quality and low volatility stocks. They’ll get rebalanced once a quarter. That means management will skim proceeds from the stocks that represent the current hot sector. They’ll add the money to the style that happens to be out of favor. Backtested studies claim that this method can beat the market. But real world evidence hasn’t fully proved it.
Investment manager and author, Larry Swedroe says Smart Beta funds are a marketing gimmick. Burton Malkiel agrees, in a recently published interview with The Journal of Portfolio Management. The Princeton Economics professor and author of A Random Walk Down Wall Street says, “Smart Beta is much more about smart marketing than it is about smart investing.”
Marketing, however, is Goldman Sachs’ specialty. They’ve convinced legions of investors to buy their actively managed mutual funds. They’ve convinced employers that stuffing hedge funds into 401(k)s isn’t ridiculous, despite the dismal fee arithmetic.
What’s important here is that the new Goldman ETFs are cheap and Goldman has figured out that cheap is good for marketing. And low-cost funds can be better for investors. The company’s future could rest on this change. Investors are getting smarter. They’re fighting for their retirement. Today, they know what a sling shot can do to ancient armor.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and The Global Expatriate's Guide to Investing: From Millionaire Teacher to Millionaire Expat.