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Many smaller ETF issuers have dominated the new fund growth picture here in 2012, putting out a variety of fresh products. Among these firms, ALPS has been extremely quiet, debuting just one fund, the Sector Dividend Dogs ETF (SDOG - ETF report), in the first 11 months of the year.
However, the company now appears to be back on the product development track having just released four new ETFs. The move doubles the company’s total ETF offering and suggests that after a period of uncertainty for the firm, it is on track once again (read Three Biggest Mistakes of ETF Investing).
It is also worth noting that the group stretches across a variety of segments and goes beyond the firm’s traditional strengthen in the MLP and equal weight markets, giving the company access to several new segments. Additionally, a partnership with Goldman Sachs to develop the underlying indexes could add some extra star power to this group and make them a series of successful launches for the upstart firm.
“ALPS is excited to introduce ETFs based on the Goldman Sachs indices to our suite of ETFs” said Tom Carter, Executive Vice President of ALPS Holdings in a recent press release.
“This collaboration helps us achieve our shared goal of providing ETF investors with thoughtful index-based investment alternatives with various types of market exposures” said Federico Gilly, managing director and head of the Equity Sales Strats and Structuring Group at Goldman Sachs.
Potentially, this collaboration could be a big step for the company and attract a new series of investors to the firm who are looking for a different way to target the market. For those curious on how this will work, we have highlighted some of the key points for each of the four new ETFs below:
Three of the funds, the Multi-Asset Index ETF (GSMA - ETF report), the Growth Markets Equities and US Treasuries Index ETF (GSGO - ETF report), and the Asia ex-Japan Equities and US Treasuries Index ETF (GSAX - ETF report) utilize the Goldman Sachs momentum builder technique to find top securities. This means that they take a fund-of-funds approach and target ETFs that have the highest six-month historical return subject to limits on weighting and volatility (See The Truth about Low Volume ETFs).
Additionally, on a daily basis, the three months realized volatility of the current index is computed. If it exceeds the cap, part of the portfolio is shifted to cash in order to reduce volatility until realized volatility levels get back in line.
The products are then rebalanced on a monthly basis in order to find the top momentum stocks at a regular interval for the given volatility target.
At time of writing, GSMA was focused in on EFA, ELD, and EMB giving it an emerging market focus. Meanwhile, GSGO had heavy exposure to FXI, EWW, and TUR, as these three account for about 90% of assets. Lastly, GSAX had an Asian stock ETF focus with THD, EWA, and EWH making up about 90% of assets for the new fund.
The last product in the new offering doesn’t take a fund of funds approach and instead zeroes in on American stocks. This ETF, the Risk-Adjusted Return US Large Cap Index ETF (GSRA), looks to target the highest risk-adjusted returns available using 12 month price targets for stocks in the Russell 1000.
The selection process includes having coverage of at least five analysts, ranking in the top 90% of market cap, along with liquidity and corporate action filters. Risk-adjusted returns are then calculated while sector risk parity is also computed to determine the number of stocks to pick in each sector (read 4 Best New ETFs of 2012).
Once that has been accomplished, securities are ranked within sectors and a resulting target basket of about 50 stocks is produced. This results in a well spread out portfolio across sectors, with, at time of writing, no single stock taking up more than 2.5% of assets.
It is hard to say how well these products will do in accumulating assets. Goldman certainly has plenty of star power in the investing world, but marketing—at least with their other products—hasn’t exactly been their strong suit.
Investors haven’t really embraced momentum or trend following ETFs by and large either. Instead, the focus has been on low volatility ETFs or those with high dividends, although this could change if the Fiscal Cliff is resolved and if investors take a more bullish look at the market again (see Invest like Warren Buffett with These ETFs).
Given this, these funds could be well positioned to benefit, save for one issue; their expense ratios. GSRA isn’t too bad, charging investors 55 basis points a year, but the rest are a tad pricier. The rest of the group all cost at least 1.14% a year with GSGO and GSAX coming in at, respectively, 1.29% and 1.22%.
Due to this, there is a significant alpha hurdle which will have to be cleared in order to justify these products to many investors. However, if the intense momentum focused strategies can deliver and make the costs worthwhile, any of the group could make for interesting bullish plays heading into 2013.
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