Goldman Sachs is 'all in' on ETFs. But why?

00:00 Speaker A

Joining me is Todd Stone, Chief ETF strategist at Strategus Asset Management for this week’s ETF report brought to you by Pimco.

00:07 Speaker A

Man, it is just fast and furious. Does it? I mean, it’s interesting for you from a product perspective. Right.

00:15 Speaker A

Is it indeed are there implications from a market perspective?

00:18 Speaker B

So the context here is there are still more mutual funds than ETFs. in both uh number and assets under management. Right. Okay. So while it feels like saturation, we’re not quite there on the level.

00:28 Speaker B

The key part though is the due diligence of ETFs is becoming more and more important, right? Because they are getting far more complicated. It used to be very simple types of exposures, right? Track an index, S&P 500, emerging markets, whatever.

00:38 Speaker B

Now we’re in this derivatives era where things are much more complex, trying to complement portfolios, provide solutions and doing your homework has become ever more important now with 900 funds launched year to date.

00:44 Speaker A

Well, and on, um, that front, we got a news of a sale today. Yes. that Goldman is buying a company called Neos, um, and Neos is not an a vanilla ETF company, right?

00:54 Speaker B

No, Neos is much more income focused, right? So they have a lot of strategies that focus on selling calls or selling options to generate income on an underlying asset like the S&P 500, the Nasdaq 100, Bitcoin, gold. Uh, and they do it very tax efficiency using index option contracts. That was kind of their, maybe their angle to get in here.

01:11 Speaker B

And it’s also not an a very strong marketing and distribution game by them. You don’t get to two billion in selling covered call funds without a very strong ground game. So credit to them uh on this deal.

01:21 Speaker A

And it looks like what, $2.3 billion is the sales price on this. What’s also interesting is what Goldman is building, right? Because they bought Innovator ETFs not long ago. So what does that say about this the flag that they’re planting?

01:29 Speaker B

Goldman is all in on ETFs. I think after arguably being a little in and out over the last decade. And what’s interesting is, okay, so we have income funds via Neos and uh innovator is much more structured outcome buffers.

01:38 Speaker B

Both of those cater to the aging demographics of the UN United States, right? There’s trillions of dollars of whatever generation you want to call it, it’s heading through retirement. Maybe they still want income and market exposure or maybe they want the safety net of a structured outcome product.

01:49 Speaker B

So I think this is more geared towards the older generation than the younger generation, which is much more interested in thematics or just building core exposures, which Goldman does offer too. So they’re setting themselves up to hit every angle on the ETF spectrum.

02:00 Speaker A

Interesting. Uh as you mentioned earlier, there’s still more mutual funds, which I I I know that factor already and I still every time I hear it, I’m surprised by it because we don’t have a sponsored mutual fund segment, for example. Nobody’s talking about mutual funds.

02:09 Speaker B

They’re not really bought anymore.

02:10 Speaker A

When is that, when are we going to see the tipping point for that, do you think?

02:13 Speaker B

It’s happening. Yeah. Uh, mutual fund flows, if you take a cumulative basis back to the 1980s, are now negative.

02:18 Speaker B

A lot of that has come from active manager equity mutual funds and that’s going to equity ETFs, both active and passive. Uh but as long as there are still 401K plans, the fine contribution plans, that’s where mutual funds live.

02:28 Speaker B

But for organic growth of mutual funds, it’s just it’s just not happening, right?

02:31 Speaker A

Why haven’t we seen 401Ks um switch in more size to ETFs?

02:34 Speaker B

They lose their tax magic, right? ETFs are very tax efficient vehicles because of the in-kind mechanism that’s built into them. When you put it in a uh, a non-taxable account, they kind of lose that power. Yeah, the fees are lower, there’s far more exposures, but it’s just not necessarily needed. So mutual funds, uh, you can get an index fund growth value blend for pretty cheap in a 401k, especially if it’s one of those low cost issuers.

02:50 Speaker B

Um it’s very difficult to then nudge that away for an ETF. You know, we’ll get there, but it’s just not as much a priority I think for a lot of folks.

02:57 Speaker A

Um coming back to what you were saying about leveraged ETFs, that that is where a lot of the growth has come from and so you have to look under the hood a little bit more carefully. Um you know, are people taking too much risk at this point?

03:07 Speaker B

I think what’s interesting is July we had this reset for levered funds.

03:10 Speaker A

Especially over in Korea, they really tightened that market. Yes. Yes.

03:13 Speaker B

Um but the levered long exposure only went down about 25%. In prior corrections over the last few years, that number went up to 40 or 50%. So as much as it may have felt painful and like a wash out, I don’t think we’re fully there yet.

03:25 Speaker B

And so and as much as these semiconductor names, the uh neocloud names and the photonics names, if they continue to rebound here, that leverage exposure can go right back up to the high. So, um, do I think there’s a lot of risk there? Yes, and that’s why we continue to say look elsewhere beyond tech.

03:36 Speaker B

You have enough tech in your benchmark. Look at all these other smaller, less influential uh sectors in the S&P that can offer energy exposure, financials exposure, they’re lower beta, lower correlated.

03:45 Speaker B

Um but I suspect we’ll be back in this levered episode again pretty soon.

03:49 Speaker A

Interesting. Okay. And we’ve talked about this before that like the levered funds aren’t a high percentage of the overall holdings. There was a Bloomberg story though recently that pointed out they’re a lot of the trading volume though.

03:55 Speaker A

So, what does that mean about, you know, does it mean every subsequent blow up will be worse? Does it do we not know? What it I mean, what’s sort of the how how much are they pouring gasoline on the risk fire?

04:05 Speaker B

So they’re all the the majority of the assets are focused on tech, semiconductors and individual single stocks, right? They’re about one to one and a half% of ETF assets, but they can do upwards of 20 some odd percent of the volume. So their usage rate is really high. People typically get in and out of these things. You’re not supposed to buy and hold them.

04:15 Speaker B

The issue would be if the space continues to get bigger, if these stocks continue to climb, the reset becomes more painful and we’ll probably read about another fund blowing up somewhere, someone using too much leverage. Does that knock the bull market off that we see globally? Not necessarily, but it does cause pain for various amounts of corners. You’re you’re playing with fire when you get into these products if you don’t know what you’re doing.

04:28 Speaker A

And and as you said, it’s interesting, you’re not recommending necessarily people add to those holdings right now. Yeah. So there is definitely, um, you know, a defensive impulse, I guess that is now happening, not just for you guys, but we’re seeing that play out in the market to some extent too.

04:37 Speaker B

Yeah, I I wonder, um maybe you know, the earnings have been pretty good, especially for some of these uh semi-derivative type names, the Neoclouds, whatever. Yeah, I mean, Core Weave and Nes both reported today and did very well.

04:44 Speaker B

So that could be off to the races there. Um but that’s a little bit more of a niche ETF exposure, but if you want to play momentum and thematics, that’s a route to go. Uh I just think don’t ignore what else is going on besides technology as much as it’s high beta and momentum, like look at other corners, there’s some great things out there that’s happening, especially in the financials or industrial space too. Those get very overlooked.

04:57 Speaker A

Okay, look at financials and industrials. Noted. Todd, thanks for being here. It’s good to see you.

04:59 Speaker B

My pleasure.