The Goldman Sachs ActiveBeta Emerging Markets Equity ETF (NYSEarca: GEM), a relatively new player in the emerging markets exchange traded fund space, has quickly caught the eyes of institutional investors.
GEM, which first began trading in September, has grown to $552.3 million in assets under management after attracting $375.6 million in net inflows this month, according to ETF.com.
According to Goldman Sachs, GEM experienced a major growth spurt over the past few days, growing to $400 million in AUM from $180 in just one day, due to large institutional investor interest.
Institutional investors have been early adopters of Goldman Sachs’ smart-beta ETFs. For instance, the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (NYSEArca: GSLC), which implements multi-factor strategies through its patented ActiveBeta Portfolio Construction Methodology, first hit the market with a cool $50 million in institutional seed money. [Goldman Sachs Fuels ETF Fee War with New Smart-Beta Strategies]
The sudden interest in the Goldman Sachs ActiveBeta Emerging Markets Equity ETF may have to do with the end of the year. While we can only speculate, the timing of the increased inflows suggests that some institutional investors may be implementing a tax-loss harvesting strategy with an emerging market ETF to maximize their portfolios.
ETFs are a great way for investors to capitalize on the tax-loss harvesting strategy if they do not want to be out of the market. To maintain exposure to the international equities, an investor could buy an ETF that tracks similar international exposure after selling the original international position to register a loss for tax purposes. [Tax Loss Harvesting: What You Need To Know]
This year has not been kind to emerging markets as the investment category has significantly lagged developed markets due to weakness in the commodities market and expected rate hike from the Federal Reserve. Consequently, emerging market equity and debt benchmarks have fallen off as net inflows from overseas investors dipped from $285 billion in 2014 to $66 billion this year, with ETF investors pulling $2.8 billion from Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and $7.0 from iShares MSCI Emerging Markets ETF (NYSEArca: EEM) this year. [2015’s Black Sheep ETFs]
However, when implementing a tax-loss strategy, investors need to be aware of the “wash-sale” rule. Investors cannot claim the loss if they buy a “substantially identical” security within 30 days of the sale. The IRS, though, hasn’t provided a hard definition of “substantially identical,” and investors should consult a tax advisor about the wash-sale rule.
As a way to meet the regulatory rules, many investors utilize the tax-loss harvesting strategy featuring ETFs that track the same market segment but pegged to different indices.
For example, GEM tries to reflect the performance of the Goldman Sachs ActiveBeta Emerging Markets Equity Index, which includes exposure to developing market stocks but selects components based on good value, strong momentum, high quality and low volatility.
For more information on ETF flows, visit our ETF Performance Reports category.
Max Chen contributed to this article.