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Goldman Sachs Enters The ETF Fray In A Compelling Way

Summary Goldman Sachs recently announced their entry into the ETF marketplace with 6 ActiveBeta ETFs. One in particular caught my eye. Investors have historically faced the choice of going with completely passive (i.e. index) ETFs to obtain low costs, or active ETFs with much higher costs. In this article, I dive into an offering that may bridge the gap. As announced earlier today on Seeking Alpha as well as several other news sources, Goldman Sachs’ (NYSE: GS ) first foray into the ETF marketplace is open for business. The ActiveBeta U.S. Large Cap Equity ETF (NYSEARCA: GSLC ) is the first of six ETFs Goldman will be launching. Of the group, this is also the one in particular that caught my eye. Why? For this simple reason. Goldman previously announced that this ETF will be sporting an incredibly low .09% expense ratio. That’s right. An ETF which certainly contains components of active management in the sense of using factor investing tools and techniques in an attempt to provide market-beating returns, while doing so at an expense ratio that is competitive with the very lowest cost index ETFs. My curiosity was sufficiently piqued to spend a little time digging into this ETF, in an attempt to understand what an investor who decides to invest would be getting. Composition and Analysis It didn’t take too much digging to find the prospectus . Here are some tidbits you may find interesting. First of all, the fund tracks a proprietary index known as the Goldman Sachs ActiveBeta® U.S. Large Cap Equity Index. With a little more digging, I was able to find supporting documentation with respect to this index. Here is the index itself and here is the methodology used in its construction. One can quickly see that the index tracks a large number of securities, 455 to be precise. Once the base securities are selected, a proprietary “factor score” is assigned to each, based on the following factors: Value – A composite of various valuation measures. Momentum – Beta and volatility-adjusted total returns. Quality – Various measures of profitability divided by assets. Low Volatility – The inverse of standard deviation Based on this analysis, each security will be assigned some weight in the final index, ranging from overweight down to as low as zero (the prospectus clarifies that the fund will not short securities, so zero is the lowest possible weighting). In addition to this, the fund attempts to reduce the costs and tax implications associated with excessive turnover by employing proprietary tools to attempt to identify offsetting pair trades, as well as allowing each security to “float” a defined distance away from its prescribed target weight. I interpret that as a mathematical formula which identifies that the cost of trading exceeds the risk from the slight imbalance. The index is rebalanced quarterly; in February, May, August and November. Finally, using the index reference linked above, I was able to determine the top holdings as of the latest rebalancing. To help you dig just a little deeper, I hereby present, not just the Top 10, but the Top 20 holdings: As can be seen, these cross a wide variety of sectors; including technology, health care, financial, energy, and telecommunications. Summary and Conclusion I am impressed with Goldman Sachs’ offering. About the closest thing in my portfolio that I can compare it to is the Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ), which I have written about previously right here on Seeking Alpha. Some high-level similarities include the fact that both use a proprietary index to screen for desired criteria, rebalance the indexes on a regular basis to eliminate securities that no longer meet the criteria, and sport rock-bottom expense ratios (.10% in the case of VIG). I haven’t made any final decisions yet. I tend to move slowly and carefully. However, I would not at all be surprised if the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF ends up occupying a place in my portfolio. Disclosure: I am/we are long VIG. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I am not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes, and to consult with their personal tax or financial advisors as to its applicability to their circumstances. Investing involves risk, including the loss of principal.

Dividend ETFs: Another Canary In The Coal Mine?

Bloomberg reports that money is flowing out of dividend-focused ETFs. That’s a big change after years of inflows. Pair this up with the REIT and Utility selloff, and maybe dividend investors should start getting worried. Years ago, coal miners would bring canaries into the mines with them. Not because they wanted to have a mascot around, but because canaries were more sensitive to deadly gases. When the bird died, it was time for the humans to run for the exits. Right now, the shift taking place in income-oriented stocks could be flashing just such a warning sign. Who doesn’t love an ETF? According to Bloomberg , Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ) has seen more money flow in its doors every year since it was created in 2006. Until this year, that is. Roughly $800 million has left the roughly $20 billion fund so far in 2015. And VIG isn’t alone. According to Bloomberg the dividend ETF category, with about $100 billion in assets, has seen roughly $2 billion in outflows this year. Now that’s not a huge amount of money percentage wise, but it’s a clear indication that the popularity of dividend ETFs is waning. And that’s a big deal. But what’s going on? For starters, as the Federal Reserve has talked about raising short-term interest rates, the market has already started the process. The rate on 10-year treasuries has inched up from 1.6% to 2.3% this year. VIG yields around 2.2%. Why take the risk of owning stocks if you can get the same yield from a treasury? And to add insult to injury, VIG is down roughly 2% so far this year while sibling Vanguard S&P 500 ETF (NYSEARCA: VOO ) is up about 2%. VOO yields around 2%, for comparison. So VIG is lagging the broader market and it doesn’t offer much of a yield advantage compared to the S&P 500 Index. Once again, why bother with VIG? Bigger picture But that’s not the whole picture. For example, real estate investment trusts have also fallen out of favor. Vanguard REIT Index ETF (NYSEARCA: VNQ ) is down around 4% so far this year and roughly 12% from its early year highs. And Vanguard Utilities ETF (NYSEARCA: VPU ) is down roughly 11% this year and nearly 15% from its early year highs. So dividend ETFs aren’t the only ones facing performance headwinds. Note that market watchers have commented on the asset outflows from these two funds this year, too. The take away is that sectors of the market that are associated with dividend investing aren’t the bright spots they once were. They are lagging and seeing investor outflows. And it’s worth noting that VNQ and VPU both have higher yields than the 10-year treasury. So investor flight is about more than just yield. The most likely reason for all of this bad news is investor sentiment. And that’s a potentially dangerous thing if it starts to snowball. At that point it could easily turn into an avalanche of selling. Remember Benjamin Graham’s Mr. Market isn’t sane, the prices he offers sometimes appear ridiculously high and ridiculously low. This is just another way of explaining the pendulum nature of the market, in which prices move back and forth from the extremes. Over long periods, the prices may make sense, but over short periods that’s not really the case. The next shoe to drop? There’s no way to tell, of course, what might cause what’s happening to dividend-focused investments to turn into an avalanche. However, there’s a pretty big issue coming to a head right now: the Fed and short-term rates. Some suggest that any rate hike will be small so it will have little impact on companies. And, thus, should lead to little change in stock prices. You could also argue that any hike will be driven by economic improvement, though I’d argue that the economy is hardly robust and stable right now. But these counter arguments miss the emotional impact, which is what drives stock prices over short periods of time. And it also ignores the multi-year run up in the prices of dividend-focused investments. For example, despite their recent pull backs, VIG, VNQ, and VPU are up still up roughly 70%, 55%, and 40%, respectively, over the past five years. That’s down from early year highs and you could easily argue that the declines so far this year for REITs and utilities have brought at least these two sectors back into buying territory. This thesis, however, ignores the usual market pendulum from extreme to extreme. Yes, the pendulum swings through rational, but that normally happens as it’s swinging to the other extreme. In other words, I don’t think now is the time to be aggressive. I think caution is still in order. And until the Fed actually starts raising rates, uncertainty will be your enemy. So I think the canaries are starting to choke. Perhaps it’s not time to exit the mines just yet, but I’d sure be making plans to do so if you own anything speculative. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

2 Excellent Dividend Growth ETFs In Focus

After a widespread sell-off last week in the wake of events in Greece and China, stocks have rebounded nicely this week. While in the shorter term, market volatility is expected to remain high, investors should focus on the longer-term picture. Here in the US, recent economic data has been mixed, pointing to a gradually recovering economy. If the economy perks up in the coming months, the Fed may start raising interest rates, even though the pace of hikes will most likely be very gradual. In any case, investors should start positioning their portfolio for the rising rate environment. Dividend stocks and ETFs have been extremely popular with investors over the past few years due to rock-bottom interest rates. Investors should however remember that most high yielding dividend ETFs focus on defensive sectors like Utilities and Telecom. In view of the rising rates scenario, investors may like to avoid ETFs that have a lot of focus on these rate-sensitive (bond-like) sectors, as these sectors underperform when rates start rising. On the other hand, cyclical sectors are likely to do well in the rising rate scenario Companies that consistently grow their dividends are usually high-quality companies that deliver excellent risk-adjusted return in the longer term. Further, many US companies have a lot of cash on their balance sheets and are likely to continue increasing their dividend payouts. Dividend Growth ETFs are excellent options for investors looking to invest in such companies. To learn more, please watch the short video below: Original Post Share this article with a colleague