Source, Goldman Sachs launch smart beta ETF

Jan 28th, 2014 | By | Category: Equities

Source, a London-based provider of exchange-traded products, has teamed up with Wall Street titan Goldman Sachs to launch an equity ETF designed to outperform traditional market capitalisation-weighted benchmarks.

Source, Goldman Sachs launch smart beta equity factor ETF

The London-listed ETF is linked to an innovative index from Goldman Sachs which weights constituents so as to maximize exposure to key equity factors whilst controlling for risk.

Listed on the London Stock Exchange, the Source Goldman Sachs Equity Factor Index World UCITS ETF (EFIW) aims to deliver consistent outperformance versus market capitalization benchmarks, on both an absolute and risk-adjusted basis.

Styled by Source as a “beta plus” product, the fund will line up alongside a growing list of so-called “smart beta” funds, which are fast gaining in popularity. Smart beta is an umbrella term for rules-based, index-linked investment strategies that track non-conventional indices. Typically, these strategies are designed to take advantage of perceived systematic biases or inefficiencies in the market.

The new Source fund is linked to the Goldman Sachs Equity Factor Index World Net TR, an alternatively weighted index devised by Goldman Sachs, which emphasizes five equity market factors (described in academic literature as “risk premia”):  size, value, momentum, quality and low beta. The index is constructed so as to maximise exposure to these factors, while controlling country and sector risk versus market cap weighted benchmarks.

Weightings are calculated such that each factor contributes an equal amount of risk, once correlations between factors are taken into account. The maximum weighting per constituent is 0.5%. As of 31 December 2013, the index comprised 626 constituents from 22 countries. It is reviewed monthly and calculated independently by Russell.

Quentin Andre, co-Head of Equity Structuring and Marketing for EMEA at Goldman Sachs, said: “Factor investing is nothing new. However, individual factor returns sometimes diverge significantly from established benchmarks and can add significant risk to a portfolio. To achieve consistent outperformance, diversification is key. We have selected five factors – all well-supported by academic research – and developed an index that delivers efficient, diversified exposure”.

Ted Hood, CEO of Source, added: “Investors are increasingly looking outside traditional market cap benchmarks for an enhanced return. Academic research recognises the importance of combining equity factors but before this listing there was no way of harnessing their combined ability to deliver outperformance using an ETF. We have seen meaningful flows into our value-added ‘beta plus’ products in 2013 and are delighted to be expanding our product range.”

The ETF trades in USD.  The management fee is 0.65% per annum.

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