With the $3 trillion in exchange-traded funds worldwide expected to double by 2020, Goldman Sachs is preparing to launch its first line of ETFs.
The powerful bank may find breaking into the ultra- competitive U.S. ETF industry a long, tough slog.
Goldman shouldn't be underestimated, and it has accumulated $239 billion in U.S. mutual fund assets. But with mutual funds, brokers may be compensated for selling certain funds, deals can be struck that guarantee a fund family's offerings will be among those offered to investors, and 401(k) plans provide a steady stream of money from retail investors.
The ETF world isleaner and meaner. It's less like a country club and more like a jungle ruled by survival of the cheapest. Big-name issuers fight tooth and nail over every investor dollar, and with fees far lower than on actively managed mutual funds, there's a lot less to go around.
Mutual funds generate about $80 billion in revenue each year, based on approximately $16 trillion in assets and an asset-weighted average expense ratio of about 0.50 percent. ETFs produce about $6 billion a year in revenue for U.S. issuers, based on $2.1 trillion in assets and an asset-weighted average expense ratio of 0.30 percent. Moreover, 81 percent of that $2.1 trillion goes to just three well-established ETF issuers: BlackRock, Vanguard Group, and State Street. Investors and traders tend to rely on products from the Big Three because they're generally cheap and have proven, liquid markets.
That means there's only about $1 billion in revenue to go around for the other 57 issuers of U.S. ETFs.
Investors have come to expect their ETFs to be dirt-cheap and widely traded. While an issuer can control costs, it can’t just create liquidity. The marketplace decides whether it wants a new product, and it can take a long time, a hurdle that's increasingly difficult for a new ETF to overcome. This is a world where the top 100 most traded ETFs generate about 90 percent of the volume and the other 1,600 fight for the remaining 10 percent.
Such a brutal environment explains how a behemoth like JPMorgan Chase & Co. can have less than $200 million in assets after nearly a year in the ETF market, and Franklin Templeton about that same amount after nearly three years.
For new ETF issuers, the only hope for survival is to provide some kind of unique value, killer performance, or access to an asset class or strategy for the first time. Good timing helps too. The PureFunds ISE Cyber Security ETF (HACK), issued by a one-person firm, has raked in over $1 billion, five times more than all of JPMorgan’s ETFs combined. HACK offered something valuable and different, and came out about two weeks before the famous Sony hack.
Goldman hopes to break into the ETF world with “smart beta” products that Michael Crinieri, Goldman Sachs Asset Management's global head of ETF strategies, said provide the "low-cost, high- quality market exposure" its clients want. The ETFs aim to outperform the market by adding a twist to a traditional market- cap weighted index.