Modest factor tilts, modest fee.

fundcoverage@morningstar.comGSLC
by Alex Bryan
1/29/2019
Goldman Sachs ActiveBeta U.S. Large Cap Equity GSLC

Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF GSLC offers similar exposure to the S&P 500 but has a good chance to beat it long-term. While the fund's factor tilts are modest, it has a low expense ratio to match, supporting a Morningstar Analyst Rating of Bronze.

The fund offers broad exposure to U.S. large-cap stocks, but tilts toward those with characteristics that have historically been associated with market-beating performance. These include low valuations, strong momentum, high profitability, and low volatility. This approach diversifies risk because each factor tends to work well at a different time.

The 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 likely lead to stronger style tilts and slightly higher returns. Each sleeve gives over- or underweightings to stocks from the selection universe based on how attractive they look on the factor it targets. The fund scales these active bets to give each sleeve a 4% target tracking error to its selection universe. Consequently, stocks with factors that introduce greater tracking error, like low volatility, receive lower active weightings. Together, these active bets partially offset one another, allowing the overall portfolio to maintain a 2% tracking error target.

The resulting portfolio looks a lot like the S&P 500's. It includes more than 450 stocks out of 500 eligible names, with an active share of 26%, as of this writing. These holdings have a smaller average market capitalization than the constituents of the S&P 500. However, they tend to trade at similar valuations. This is because the fund's momentum and quality sleeves pull the portfolio toward pricier names, while its value sleeve leans in the other direction.

This strategy was launched in September 2015, so its live record is limited. From its inception through December 2018, the fund's realized tracking error to the S&P 500 was below 2%, and it lagged that index by 1.01 percentage points annually, partly due to less favorable exposure to consumer cyclical stocks.



Portfolio Construction

The fund employs full replication to track the Goldman Sachs ActiveBeta U.S. Large Cap Equity Index. This index applies a transparent methodology that diversifies across four well-vetted factor strategies, supporting the Positive Process Pillar rating. The selection universe for the index includes the largest 500 U.S. stocks. From this pool, the fund tilts toward stocks with strong value, risk-adjusted momentum, quality (gross profits/total assets), and low-volatility characteristics. The portfolio is subdivided into four equal-sized sleeves, each of which has a different factor focus. Each sleeve sizes its active weightings in order to target a 4% tracking error to its market-cap-weighted selection universe. In contrast to the other sleeves, which start with this market-cap-weighted universe, the low-volatility sleeve applies its active weightings to a starting point that is 50% equal-weighted and 50% cap-weighted. The low volatility effect has historically been stronger among smaller stocks, so this adjustment is sensible. The value sleeve also differs from the others. It rescales its sector weightings to match those of its selection universe, on the premise that value-based sector bets are not rewarded over the long term. The fund casts a wide net, typically including at least 80% of the stocks in the selection universe. It reconstitutes quarterly and applies buffer rules to mitigate unnecessary turnover.

Fees

The fund's 0.09% expense ratio is among the lowest in the large-blend Morningstar Category and a fraction of what other multifactor funds charge. Therefore, the fund earns a Positive Price Pillar rating. Goldman initially launched this fund with a 0.24% expense ratio and a 0.15% fee waiver, but it has made the 0.09% fee permanent and removed the waiver.

S&P 500 index data: S&P 500 Copyright @ 2019

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