The Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (NYSEarca: GSLC), one of the most successful exchange traded funds to come to market last year, can act as a complement to or as an alternative to traditional capitalization-weighted index funds.
As a multi-factor ETF, part of GSLC’s objective is to provide investors with a broad basket of equities with the potential to top traditional benchmarks, such as the S&P 500, while removing the need to time individual investment factors.
Cap-weighted indices may also expose investors to other fundamental risks as the weighting methodology would attach more weight toward indebted countries or companies Multi-factor benchmarks attempt to avoid such problems. Frequently used factors in multi-factor indexes include, value, growth, quality and low volatility.
Related: Institutional Smart-Beta ETF Adoption is Quickly Rising
GSLC’s “portfolio is divided into four equally weighted sleeves that each tilt toward stocks with a different characteristic of interest. This simple approach is transparent, though a more integrated approach would probably be a bit more efficient. Each sleeve gives over- or underweightings to stocks from the large-cap selection universe based on the degree to which they exhibit the targeted style characteristic,” according to a recent Morningstar note.
GSLC factors include value or how attractively a stock is price relative to fundamentals like book value and free cash flow; momentum or the current up or down trend in a company stock; quality or profitability; and low volatility or the degree of fluctuation in a company’s share price over time.
[related_stories]With an annual fee of just 0.09%, or $9 per $10,000 invested, GSLC is one of the least expensive smart beta ETFs on the market today. In fact, GSLC’s fee is on par with or below many run-of-the-mill, cap-weighted U.S. equity index funds.
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There are approximately 200 multi-factor ETFs on the market today with combined assets under management of almost $40 billion.
GSLC “constructs its value and momentum sleeves differently than many of its peers. Within the value sleeve, the managers limit the fund’s industry tilts relative to the selection universe, arguing that such bets are not rewarded. They measure momentum based on returns adjusted for market sensitivity and stock volatility. This gives the fund a cleaner read on strong performance that is specific to a stock that may be more likely to persist,” adds Morningstar.
Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (NYSEarca: GSLC)
