Speaker 1:
From the library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're inside the ICE house, our podcast from Intercontinental Exchange on markets, leadership and vision and global business. The dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week we feature stories of those who hatch plans, create jobs and harness the engine of capitalism right here, right now at the NYSE and at ICE's exchanges and clearing houses around the world. And now welcome inside the ICE house. Here's your host, Josh King of Intercontinental Exchange.
Josh King:
The intersection of humans and technology sounds a lot more complex than it often is. We talk about that all the time here at Intercontinental Exchange. Think about it. It's really at the root of so many purchases that we make. Let me give you an example. A few weeks ago I was in the market for a new set of Bluetooth earbuds. The battery life on my trusty unit was having trouble getting me through hearing a single hour long podcast. I began with some market research, noticing what my fellow commuters had in their ears and seeing if what they were wearing might be the right fit for me. Then I did some Googling about the latest ear tech and compared different brands and models. And finally, I dove into the online reviews from customer feedback on Amazon to articles by professional audiophiles. I siphoned in all the data, narrowed my choices down to a few options and trusted my gut on making the right selection.
Josh King:
The experience made me reflect on how technology has changed consumer habits, not just in what we buy, but how we buy it. Growing up, if I wanted a new Walkman and that's really dating me, I went to RadioShack where, with the assistance of a store employee, I could choose from a few models. We had to trust that our local retailer was stocking its shelves with the best options and the salesperson knew the products well enough to make an informed suggestion. At RadioShack, how things change. Well, while recent trends suggest that the demise of brick and mortar stores may be a bit premature, today over 90% of shoppers inside them will consult their smartphones to research their purchases. And only a third will get advice from a trained store employee.
Josh King:
The investment market has also undergone a similar C change. Data and access to investment strategies have expanded to the point that sophisticated tools are available to anyone looking to invest, regardless of portfolio size. Investors are increasingly using their own research and vehicles like ETFs to deploy their investments in a way that combines their self education with their gut. Our guest today, Steve Sachs, joins us to talk about how Goldman Sachs Asset Management partnered with Motif, a provider of systematic data driven indices and strategies to launch a suite of ETFs that helps investors capitalize on the innovators and companies working on the future of technology from the consumer space, to healthcare, to the blockchain. Our conversation with Steve Sachs right after this.
Speaker 3:
And now a word on ICE's ETF Hub.
Speaker 4:
Across global markets, ETFs are flourishing and ETF assets now top $5.5 trillion, yet a variety of protocols and lack of standardization mean the time is right to help fuel further growth. Now new advancements can help simplify the process. We're working with the industry to create a centralized hub that connects participants and brings efficiencies to the primary market. ICE ETF Hubs, unified standards and protocols supports order entry across equity and fixed income ETFs. For fixed income the speed of custom basket facilitations will increase with both parties using APIs, UI, and chat to assemble a mutually beneficial basket. Market efficiency will be enhanced by improved transparency, helping to boost the number of creation and redemption baskets assembled and underlying bonds traded. ICE ETF Hub brings new efficiencies to the primary trading process, fueling ongoing growth, participation and market modernization.
Josh King:
Our guest today, Steve Sachs, is head of capital markets for Goldman Sachs exchange traded funds business. The prior to joining the firm in 2015, Steve was head of capital markets for ProShare advisors and has held senior trading positions at a number of well known firms. Welcome Steve, inside the ICE house.
Steve Sachs:
I am happy to be here. Thank you for having me, Josh.
Josh King:
Before we go any further, Steve Sachs of Goldman Sachs bears the question, do you have any relation to founder Samuel or the first Goldman Sachs partner to be a member right here at the New York Stock Exchange, Henry Sachs?
Steve Sachs:
Sadly for myself I am not a legacy, at least as far as I know. I will tell you though, that I now get that question almost every single day from a colleague or a client.
Josh King:
I don't mean to be original here at the ICE house, but when I guy from Goldman Sachs named Steve Sachs shows up, I have to ask where you hail from.
Steve Sachs:
Well, I hail from the Midwest actually. I hail from Ohio, spent the vast majority of my childhood and young adult life there.
Josh King:
What town?
Steve Sachs:
Actually grew up in a town called Springfield about an hour west of Columbus.
Josh King:
And was the Sachs family in financial services, or were they doing something completely different?
Steve Sachs:
Something completely different. Auto parts, actually. My grandfather on my father's side was a very large auto parts dealer and had been for many, many decades in the Springfield area, which at the time throughout the 40s, 50s, and 60s was very much an industrial town. And it's one of those towns that if you think about what happened in this country broadly, particularly in the late 60s, all the way through the 70s, particularly in the rust belt in Ohio, Springfield was one of those towns that essentially almost died. The manufacturing businesses, particularly International Harvester, which we all know now as Navistar was based there. And it was one of those companies that was the life blood of the town that essentially throughout the 70s, Springfield was one of those small towns or midsize towns at that point that lost more than half its population, I think, during the course of the 70s. So, it went from a thriving sort of Midwestern, small town to a rust belt almost dying town.
Josh King:
I think of names, maybe they're Michigan names, but I thought they were Ohio names. People like Delco and Fisher Autobody. And I think if you probably looking at your family's heritage in this industrial sector, but you go to Franklin College in Ohio state and think, well, I've got to find a different path out of here, because through the industry that we all have grown up on, it's not going to be the one for me.
Steve Sachs:
Yeah, no, a hundred percent. I was definitely one of those small town, Midwestern kids that wanted nothing more, but then to get out of that environment. And it's funny, I was also extremely lucky. So, from the age of 14, I knew I wanted to be a trader. I didn't necessarily know exactly what that meant or what the path was to that, but I just knew that, that's what I wanted to do. And I had a teacher in high school that I credit with that actually. That actually was the first one that really turned me into a student of the markets and started me down that path.
Josh King:
How did you get your first whiff of the markets though that your teacher then sort of seized on and helped push you through on?
Steve Sachs:
Yeah, so it was sophomore year in high school and in this town, which I just described as a relatively dying or as near dead town to begin with, we actually had a really good public school system. To this day I don't know exactly how that happened, but we did. We had an entire business academic department in my high school. We had a number of courses we could take through accounting, economics, micro and macro and business administration. So, my sophomore year I signed up for an elective business administration. And one of the first things that we did was a module on the stock markets.
Steve Sachs:
And part of that was we were to pick three stocks and we were going to track these stocks in our three stock portfolio, equally weighted. We can talk about that later if you'd like. Equally weighted across these three stocks over the course of the school year. And there was essentially a prize for whoever picked the best portfolio. That's really where it began. This particular teacher, Mike [inaudible 00:08:39], his name. He was then principal at the high school for many years after that. I credit him with that. He really turned me onto it, helped us understand it. And it's just something that got into my blood at that point.
Josh King:
So, you remember the three names in your portfolio?
Steve Sachs:
Yeah, I do. You might find this funny and I can certainly give you context, I guess. Anheuser-Busch, Budweiser. Seagram's V.O. and Molson Brewing Company.
Josh King:
I detect a trend. There was at least a personal affinity or familiarity with the product.
Steve Sachs:
Yeah. There is definitely a trend there and there was certainly a familiarity with the product.
Josh King:
So, Steve, recently there's some big news in the ETF world when the United States Securities and Exchange Commission announced significant regulatory changes to how ETFs can come to market. What impact do you think having an easier on-ramp will be for the industry and all the way down the chain to the retail investor?
Steve Sachs:
Yeah, no, look, I think it's a huge impact. It's something that's been a long time coming, as everyone, I think, in the industry knows. The rule was actually proposed well over a year ago now. So, one of the things that we've often talked about in the ETF industry and I just used air quotes there, which that I just dawned on me, we're in a podcast and not on TV. So, nobody just saw me do the air quotes, but you saw me.
Josh King:
The record will show that air quotes were given.
Steve Sachs:
Air quotes were used. One of the things that I said recently was when do we get to stop calling the ETF industry an industry? It's not a separate industry. An ETF is just a wrapper. It's a delivery mechanism for investment strategies or exposures within the market. But one of the things that we've talked about within this part of the ecosystem for a long time is that ETFs are a patchwork of regulation, not vastly different than many, many other structures and financial services products out there. But it really seemed to be very acute in the ETF world for lots of different reason, some good, some bad, but as always, regulation catches up with innovation with change in the marketplace. So, this one in particular, we think will do a lot to continue to advance the usage and the ability to use the wrapper.
Steve Sachs:
And I know we're biased being in ETF space. Although, the caveat of that is obviously we are a very large global asset manager at GSAM, but that being said, we're a little bit biased. We like the structure, but the reason we like the structure is our clients tell us they like the structure and our clients tell us they want more and more choices within that particular structure to use across the whole full spectrum of products. We think it's a great thing. Obviously from a competitive perspective, I love competition. I love innovation. I think it's one of those things that will be very beneficial from that perspective. But look, it also lowers the bar. It actually lowers the barrier to entry into the space, which will feed that innovation and competition. We have to think about that from the business perspective. Personally I'm okay with that. I think more is better in this particular case.
Josh King:
So, Steve, the SEC chairman Jay Clayton connected the changes directly to retail investors saying, and I'm going to quote chairman Clayton and use air quotes, "As the ETF industry continues to grow in size and importance, particularly main street investors, it's important to have a consistent, transparent and efficient regulatory framework." You are just talking about how regulation catches up with the innovation. Are you seeing in inflow from the retail market looking to access the complex trading strategies that have really normally been reserved for actively managed accounts?
Steve Sachs:
Yes and no. And actually chairman Clayton said something just recently in a public forum around something similar, basically to the effect and I'm paraphrasing here that look, if you had to tried to go to your broker 30 years ago and say like an institutional style strategy, and I'd like that delivered in a very cheap and cost efficient way, your broker likely would've possibly laughed, best case and worst case said, yeah I'm happy to try to give you that. It's probably going to cost you four or 5%, 500 basis points. So, obviously fast forward now you can do that. Individual investors can do that. And we think that's very important broadly speaking from the perspective of, again, more choice is better than less choice. The fact of the matter is that when you think about how ETFs are used, they're used typically in a very active fashion, they're passive tools by nature, but they're being used in active global asset allocation models.
Steve Sachs:
People are simply choosing to build those models using a very transparent tax efficient, low cost tool. We do think that, again, the continued natural evolution of that is a good thing. Does it mean that investors need to be market structure and investment experts? Not necessarily, but there's probably a higher bar of education there. And we spend a lot of time with advisors, with institutional clients, talking about exactly that. Look, there's a responsibility there to, again, you don't have to be a true market structure expert. You probably need to know how ETFs work, how the mechanics work. So, you can, again, effectively use them in a portfolio. There's some level of that to the individual investor that clearly needs to be done as well.
Josh King:
You described them in one instance, just now as a transparent, low cost tool. And in the time since you've joined Goldman Sachs, the overall ETF space, and I'm using the word space rather than industry has nearly doubled to of $4 trillion. The Goldman website cites four Ts of ETFs for its popularity. Can you take us through them? You mentioned transparent, low cost tool, also trading ease and total cost.
Steve Sachs:
Yeah. And really the fourth one is obviously tax efficiency. So, we talk about all four of the is on a regular basis.
Josh King:
Let's go through them.
Steve Sachs:
Yeah. So, when you think about tax efficiency, let's start there. That actually probably is really the number one conversation that we have with professional investors, asset managers, investment advisors, asset allocators, around the tax efficiency and we could probably spend a few minutes talking about what is inherit in the ETF structure that makes it tax efficient. But essentially it's that mechanism the ability to manage a portfolio to an index within that structure, that creation redemption mechanism, which when we talk about ETFs, remember where he is talking about two markets, the secondary market. The market that all of you provide here at the NYSE in the various markets where you and I, and everybody else buy and sell our ETF shares.
Steve Sachs:
There's also what we call the primary market. That creation redemption process. That's where it all starts. And it's really that process, namely the redemption side of that process, where tax efficiency within an ETF comes from. It just gives you the ability to move things around in the portfolio. Rebalance handle flows without actually doing a transaction. You do it on an in-kind basis. You exchange positions with dealers, not a taxable event for the portfolio. Highly cost efficient. Keeps the drag in the portfolio down. That's really the one that we spend the most time talking about. The typical 40 act registered ETF structure is highly tax efficient. Particularly when you look at it compared to other vehicles such as mutual funds. Transparency's the other one. I think if you ask me personally being the old trader that I am, I love to know what I own.
Steve Sachs:
I love to know what's under the hood and what's inside the portfolio, particularly when you think about, as I'd mentioned, how particularly financial professionals, advisors are using ETFs, they're using them very actively. We spend a lot of time talking about this debate from the flows from active to passive and active versus, and you'll never hear GSAM talk about active versus passive. It's always active and. They sit on a spectrum. You use all the tools on the spectrum. This is a perfect example is when you're building global asset allocation models using ETFs, you want to know what's in there. You want to know how that particular building block is going to fit into your portfolio and react. And then the other's really cost. Obviously that's one of those things where ETFs just continue from a total expense ratio, just continue to get cheaper and cheaper.
Steve Sachs:
From an investor perspective, and again, as an investor myself, as a trader, I love that. From the business or space perspective, as we just called it, not an industry. Look, it's one of those things that it's the natural evolution of the business. Those expense ratios should continue to come down over time. And it goes back to that point of if you tried to do this 30 years ago, you clearly couldn't. To your point at the top of this, which I think is a great one. Things change. Not only do markets change, technology changes, data sets change, things become more robust and give us the ability to do things at a much different price point than we used to do.
Josh King:
And the last of the four Ts, trading ease.
Steve Sachs:
Trading ease is just that. I'm so glad you did that. Because I'm sitting here thinking to myself, wow, which one didn't I just cover? Trading ease. That's the one that it's interesting. Advisors will tell you and professional investors will tell you and even retail investors. My father-in-law says this to me all the time. Love the fact that I can go in and just trade this any day of the week. Do you? Well, no, of course not. Why would I do that? The whole point is that while you can, you've got that liquidity on not only a daily basis, but an intraday basis. If you look at the stats, holding periods for ETFs and the vast major are actually very similar to mutual funds. Again, they're being used as tools and building blocks in the portfolio, but it is one of those things that, again, it gives people a level of comfort. And obviously from what we talked about before, it's what really makes the mechanism work, allows you to be able to transfer that risk in the secondary market, buy and sell without actually impacting the underlying portfolio.
Josh King:
So, GSAM, which is this acronym, which we'll be talking about a little bit during the show is Goldman Sachs Asset Management launched in 1988, a few years before the first ETF was listed on what is today NYSE American. When Goldman entered the ETF creation business, how did the firm incorporate its a existing strategies of GSAM to underpin its first offerings?
Steve Sachs:
Yeah, no, it's a great question. So, when you think about not just GSAM, but Goldman Sachs as a whole, we say all the time that GSAM is new to the ETF space from a issuer perspective of providing that solution to our client base. But Goldman Sachs isn't new to the ETF space at all. In fact, Goldman Sachs has been there really since day one since the launch of the Spider. Obviously from the broker dealer perspective, from our securities division, they've long been right there from a supporter, from a market maker perspective and all those things that help out from an ETF issuance perspective. But for us at GSAM, to your point, it's still relatively new, but it's really sort of grounded in the fact that it actually came out of client demand. One of the questions that we get all the time is, oh, well you entered this space because it is the hot space and it's where all the assets are flowing.
Steve Sachs:
It's like, look, certainly that probably weighed into it. But the biggest factor quite frankly, was the fact that we had a number of strategies existing within GSAM within Goldman Sachs Asset Management that our clients just more and more were saying, look, we really like this strategy. Could you deliver this in an ETF wrapper? And at the end of the day, you have to remember one of the founding principles and continued operating principles of Goldman Sachs as a whole. We were advisors to our clients first and foremost, that's what we do. So, at GSAM, what we say is we're a wrapper agnostic solutions provider to our client base. Clients who are asking for access to certain GSAM intellectual property and strategies. They wanted an ETF wrapper. We're happy to do that. Thus, the actual ETF business was born.
Josh King:
So, Steve, this year, CNBC's Bob Pisani launched ETF Edge to focus on the rapidly expanding space. This is Bob talking to Tom Lindon about factor investing using Goldman ETFs. Let's take a listen.
Bob Pisani:
It's waiting. So, what I notice is depending on how you slice and dice it, if you just use one of them, you can get an outperformance at certain times. And if you combine them all, you can get a certain outperformance, but do you get any long term? Is there a compelling case to go to the average investor and say, yes, you should consider this?
Tom Lindon:
Well, I think there is, and you mentioned long term. There is factor chasing that goes on and we can tell just by the flows, people buy the wrong factors at the wrong times. However, if you look back when early factor investing in the ETF space was really getting hot. It was pre-financial crisis. And through '07 to '09, those factor strategies did quite well compared to capital market weighted. So, we really are in the situation where those that are looking at factors are doing it because they want a defensive strategy.
Josh King:
So, that clip Steve, from Bob and Tom was from earlier this year. Have you seen an inflow to your products as investors are looking to hedge against some increasing volatility and recession concerns?
Steve Sachs:
Yeah, no we have. And back to your earlier question, we launched this ETF business within GSAM little over four years ago, launched our first fund here on the NYSE in September of 2015. Since then we now have a total of 19 funds across that platform, about 15 billion in assets across those. In that first sort of suite of products, our active beta suite of products, which is our six funds covering US large cap, US small cap developed international emerging markets and then Europe and Japan. That was exactly what I had talked about from the perspective, those were existing multifactor strategies that existed inside Goldman for a number of years in the form of institutional separate accounts that we had clients asking, love it, want this ETF, can you deliver it? Absolutely. Look at that suite now, of the 15 billion that's upwards of 9 billion GSLC, which is our US large cap fund, four factor fund, is nearly 7 billion in assets.
Steve Sachs:
And there's a couple of ways in which we see clients using those strategies, particularly something like GSLC, certainly something like GEM, G-E-M, which is our emerging market strategy in the active beta suite. There's a couple of different ways, but to what you just said, what we've seen particularly in the last call it 12 to 14 months is we've seen more volatility in equity markets. We've actually seen some pullbacks, obviously on the macro economic front. You've got slowing earnings to some degree, you've got trade wars, you've got all these things going on globally from a global growth perspective. More and more we're having conversations with the clients about just that. How can I position my portfolio? What can I think about gaining exposure to still as a core? I still want US large cap exposure. I want it in a little bit smarter way. Cap waiting has a place on that spectrum, certainly is a valuable tool in the toolbox, but it's not particularly the exposures you want all the time. Other times you want exposure to individual factors, maybe you want equal weight, things of that nature.
Josh King:
So, in reacting to investor's request for having their opportunities presented to them in a little bit smarter way, and now pivoting to some of the innovations that we have in front of us, how did the partnership between Motif and Goldman come together leading to this March's launch to the Goldman Sachs Motif ETFs?
Steve Sachs:
Yeah, that's one of the really interesting stories. We're very lucky from the perspective of the environment in the firm in which we work in, being Goldman Sachs, from the perspective of, we have no shortage of extremely intelligent people inside our walls. And it literally is in my nearly 25 year career, I'm not exaggerating when I say it, it really is the smartest people I've ever worked with. I joke often that kid from Springfield, Ohio going to state school in Ohio, I would've never gotten into this organization 25 years ago. I just wasn't smart enough. I had to spend a whole career before I could find my way into the back door. They'll probably throw me out after this podcast. When you think about not only that talent, but then the opportunities that we have to partner with organizations like Motif, it really is something quite special.
Steve Sachs:
And really where that came out of, that partnership came out of, Motif, for those listeners that don't know, is a data science company based in Silicon Valley. We joke all the time that this is really a marriage of Silicon Valley and Wall Street. Some might think that's a good thing. Some might think it's a bad thing. We think it's a good thing from the perspective of we'd had an existing relationship with Motif and really liked the way in which they approach things. Take along with that completely separate path, parallel work stream, we've been working with our fundamental equity team, the Goldman Sachs Asset Management fundamental equity team, a team run by Katie Koch and others here in New York and around the globe. It's a team of 80 plus investment professionals that are boots on the ground, all around the world, understanding companies from the bottoms up. Traditional stock pickers.
Steve Sachs:
We started talking with them around what they thought was making the world move. And more importantly, what's going to make the world move over the next decade or two decades. What are the fundamental changes? At the end of the day I think we're all pretty well grounded in the perspective that structural growth drives fundamentals, fundamentals drive shareholder value. And shareholder value is expressed the return of that shareholder value either through stock price appreciation or dividends or the like. We started talking with this team around, what's going to push that? What's going to drive that? Not what did. We know that. We know that if we'd invested in Microsoft in 1989 or whatever, I totally just made the year up, whatever the year was.
Josh King:
It was around then.
Steve Sachs:
Whatever it was, we all know that we'd done really, really well, Intel, Apple. All those sorts of things. The question is, what are those companies now? What are those innovations now? So, we started working with that fundamental equity team. We started working with Motif. We figured out that, you know what, there's got to be a better way to look at the world, certainly through this fundamental lens, what are the things that are going to drive growth? But how can we actually build a portfolio that reflects that and reflects it in a true way, getting away from, again, the traditional cap waiting and things of that nature. Thus, the partnership was born. They just have a really, one, unique data set. It's global it's 50,000 plus companies. And two, we worked with them to develop a very unique way in which to measure the impact or what we call the thematic beta. How much of a particular company is exposed to the particular innovation that we're looking for?
Josh King:
So, I want to hear along those lines to Hardeep Walia, he's the CEO of Motif, on the methodology behind these ETFs.
Hardeep Walia:
Tech is no longer a sector. It is the driver of growth across all industries. And so what we've tried to do with these sets of ETFs is to be very scientific. And we've waited these companies in the index buy their thematic exposure to these ideas.
Bob Pisani:
Yeah. So, let's take one. You're Goldman Sachs Motif data driven, G-D-A-T. This is a sort of mishmash of everything. AI, big data, cyber security, data infrastructure. How do you decide what goes in this? It's not a market cap weighted index. It just started, it's three days old.
Hardeep Walia:
That's right. We launched three days ago. So, we start with the theme. We partnered with Goldman Sachs' research, their fundamental equities team. What are the forward looking ideas that we have that are likely to drive disproportionate structural earnings growth? And we took those ideas. And then we unleash our algorithms. We look for interesting data sets and we mine these algorithms. We mine these data, both structured and unstructured data to come out with the list of relevant company to these.
Josh King:
The algorithms are unleashed, Steve, the ETF that Walia was describing was this Goldman Sachs Motif Data Driven World ETF, which is the NYSE Arca ticker symbol, G-D-A-T. Now I've seen the term leverage innovation used to describe these funds, but Goldman's expertise provides an important human element. Similar to what we talked about at the very beginning of the show, relying on data plus using your gut, how are they combined?
Steve Sachs:
Yeah, it's interesting. You probably should have had Hardeep on here. He actually does this far more justice than I do from a methodology perspective. But to your point, our fundamental equity team is firmly grounded in the concept of human insight. You have all this data, you have all these factors out there in the world, but you got to boil it down. You got to, as a human, distill that information and figure out what it means. And that really is that cross section or that intersection I should say right there, it's the human insight. We just accomplished that through big data and through the form of big data and distilling information down.
Steve Sachs:
But that's what I touched on at the beginning is at the end of the day and GDAT is a great example of that, our Data Driven World ETF, as Hardeep had mentioned in that piece, it's about big data. It's about the internet of things. It's about all those things out there within what you might have historically called the tech sector. But again, the problem with that as Hardeep said in that piece, which we say every day, every company's a tech company these days. How do you really think about that? So, we thought about it from the perspective of who are the innovators of technology. Who's out there really doing internet of things and really feeding that? Who's out there really using big data?
Steve Sachs:
Robotics is another good example. Not just creating that, but who's using it? So, we focus on two things, the innovation and the adopters of those innovations. Because we think that, that's that really solid intersection of where you're going to get the most of long term value out of that. And that's really what our fundamental equity team does. And again, they didn't sit around and do this just randomly. This feeds all of our fundamental equity business. I mean, this is what they're thinking about day in and day out. We didn't really go out and necessarily sort of just create these. This is what they were all already thinking about and how they're actually thinking about managing money on an active basis in our fundamental equity business.
Josh King:
So, that conversation between Pisani and Hardeep was at day three of the launch of this suite, but it's now over a half a year into the market. Do you have a sense of who's using these vehicles?
Steve Sachs:
Yeah, we do. It's what you would think from one, an ETF perspective. Our business GSAM is really focused on the institutional client community and the advisor client community. Financial professionals, those that are managing money for institutions or large pool of assets and those managing money for folks like you and I right. Managing both individual as well as high net worth portfolios. It's really that advisor community. This is one of those things that it's a strategy that definitely resonates in the institutional community as well. And it's kind of one of those things that the institutional community, particularly like the pension funds endowments will be like, yeah we've been thinking about it through this lens for a long time. It's then one of those things that the advisor community will tell you, huh, that's really interesting.
Steve Sachs:
That's a very interesting, unique way to look at this. Because again, they're global portfolios, they are very unique. They're very forward looking portfolios. They're not backward looking. It's really that advisor community, particularly one of the things that we spend a lot of time talking to advisors about is what we would probably unaffectionately call building the moat, if you will. Advisors face a number of struggles in their practices. Particularly when you think about the demographics of this country, generational wealth transfer, wealth transferring from the generation that made it to the second generation. And now even sometimes the third generation, as well as fees. One of the reasons we talked about earlier that advisors like ETFs is the low fees. They can build an asset allocation model, they can do it very cheaply and it helps protect the client returns from a fee perspective. They really like these portfolios from that perspective and that it gives them access to extremely unique strategies, very forward looking, that actually are resonating with that second and third generation of wealth.
Steve Sachs:
When you think about, and I hate to use the word millennial, but I will. But when you think about that generation, half my team is going to be an uproar now that I used that word to describe their generation. But when you think about that, they think about the world differently. They think about everything that they do they think about differently. They think about their whole world exists on this imaginary iPhone that I'm now holding in my hand showing to Josh that none of you guys can see. They think about interacting and the world in a different manner. When you think about GFIN, which is our financial revolution. The New Age Finance Motif ETF, that's part of that. The digitization of the asset management industry, how you and I interact.
Steve Sachs:
That's something that the advisor community faces every day right here, right now. These are the types portfolios that really give them something unique to position in their client portfolios for that next generation. Because again, remember these are really meant to be, I won't even say market cycle products. These are multi-market cycles. These are meant to be held in portfolios for decades to really take advantage of that structural growth that we think comes out of these innovations.
Josh King:
Steve Sachs and I building the moat together. After the break, we talk about the next wave of innovation that Goldman Sachs Motif provides investors exposure to through its human led data driven model. That's right after this.
Speaker 3:
And now a word from John Berger, president and CEO of Sunnova, NYSE ticker, N-O-V-A.
John Berger:
We're a solar company. We're out there to bring solar to every home in the country. We have such a vast market that remains untapped. I think it's less than 3% of the market of homes in the United States. And so there's just so much potential. New York Stock Exchange is the home of capitalism. It's just where the action happens no matter where you are in the world. All eyes are on the New York Stock Exchange. Sunnova, now listed on the New York Stock Exchange.
Josh King:
Welcome back. Before the break, Steve Sachs, head of capital markets for Goldman Sachs's exchange traded funds business, and I were talking about the current state of the ETF market and the formation of Goldman Sachs Motif ETFs. And before the break we spoke a bit of how you're combining Goldman's human insight and Motifs data driven analytics. But what is transformative change? Again, using air quotes that you hope to capture with the Goldman Sachs Motif ETFs?
Steve Sachs:
It's really a number of changes. And when you think about it, the whole Motif suite, it's really meant to capture the transformative changes that we think are going to take place broadly across the global capital markets. It's really capturing 25 changes or innovations or themes, if you will. I always hesitate to use the word themes or thematic, because it makes people think of tactical. And as we had talked about before the break, these are really meant to be long term structural shifts. But it's really all of those things are crossed. Again what we would call data driven world or what you might think of traditionally as tech. Obviously when you think about the human evolution, things like robotic surgery, precision medicine, human genomics, that's another great one when you think about human genomics and let's focus on gDNA for a minute, the human genome sequencing thing blows my mind quite frankly.
Steve Sachs:
And here's a stat that our fundamental equity team threw at me and others that kind of blew my mind. When you think about sequencing the human genome, first time it took over 2 billion dollars and decades to do. Now, today as we sit here, you can literally do it for a thousand dollars. In a very, very short period of time the world thinks that'll happen in the matter of hours and you can do it for a hundred bucks. That's the type of thing from an innovation perspective that we want to make sure that we capture in a portfolio, because that's what's going to drive change in medicine.
Steve Sachs:
Think about that. Being able to fully sequence the human genome, that's how you not only cure disease, but quite frankly, it's how you eradicate it. That's how you take a disease out of the human evolution, because you can attack it at the gene level. These are all the different types of innovations that we're talking about in these portfolios. And again, there's 25 of them, particularly when you think about the consumer, how we consume things through not only online retailing, but through social media and all those aspects. How we learn about products through social media, how we interact with the world. These are all the types of things that we're talking about.
Josh King:
I mean, in order to capture the future transformative potential of a company, a company that might be involved in mapping the human genome, for example, Motif looks at a number of alternative sources from patents issued to academic article to how well clinical trials are progressing. And I looked at your deck that you used to present and it shows all of these sort of smaller and different kinds of micro trends and things that you'd look at other than company financials, but how is all that information studied and calculated?
Steve Sachs:
Yeah, and that really is, I don't want to call it the magic, but it is the absolute strength and the power of the partnership that we have with Motif. This is what they do. They're a data science firm. And to your point, what they do is they screen more than 50,000 companies globally. They look at traditional sources of data to your point, NKs to NQs, financial filings, all the stuff that we all look at, but then what they also do, to your point, is they look at everything else that's out there from a data perspective. And you think about all the different stats of the amount of data that's been created on this planet, just in the last two years alone. So, to your point, they look at everything that's available, not just the news, but financial journals, medical journals, patent filings, anything and everything.
Steve Sachs:
They employ web crawlers and natural language processors to collect all of that data. And then essentially boil it down to what we really want to know is of the companies that are out there. I don't want to understand because we know through giggs classification and all that, we know what the world says the industry that they're in. But what we want to know is what's really driving that company. What's driving that company not only from a current earnings perspective, what are the patents that are filing? What are the medical journals that they're mentioned in? What are all those other non-traditional source of information? So we can calculate what is the beta of that company to the particular theme or as I talked about earlier, the thematic beta. And then we want to weight that portfolio. So, for example, GDAT, the Data Driven World ETF.
Steve Sachs:
We want to weight that portfolio by a combination of both its thematic beta and its market cap. We need to make an investible portfolio. One that, of the 120 companies that are in that portfolio, again globally, you want to make sure that you can obviously invest in that portfolio from a liquidity perspective. And we do. But we also want the thematic beta to come out. We want to make sure that the highest weight in that portfolio is driven by the companies that have the highest thematic beta to the data driven world. That's where you're really to see the long term structural changes and thus the opportunity for that fundamental value change.
Josh King:
So, I'm looking at this slide and it shows these sort of five transformational change areas, search beta, revenue beta, academic beta, patent beta, clinical trials beta. Was there a sixth beta that you wrestled with that you wanted to include in this that you just had to say, no, man, five is enough, we can't have more inputs to this?
Steve Sachs:
Yeah, look, that's a great question for Hardeep and team. The short answer is, look, there's always more data. There's always more data points that you can collect and incorporate, but at the end of the day, it also goes back to we're doing these in the exchange traded fund wrapper. We built an index. We track the index. There's a certain degree of transparency and understanding that you want people to be able to have. You want it to be economically intuitive or intuitive from the investment perspective. And we think that, that's the right combination there.
Josh King:
So, I noticed that all five ETFs provided a broad regional exposures compared to similar S&P based indexes, particularly the Motif New Age Consumer ETF. Was that a surprising finding for you?
Steve Sachs:
Not really. I mean, when you think about one, what we set out to do, and again GSAM being a global organization and always thinking through that global lens, but then two, again, just think about how much has changed in the global economy, even over just the last decade, but certainly the last two to decades while obviously a significant amount of innovation still takes place here. And particularly in Motifs backyard in Silicon Valley, it's a global economy. You're never going to put that genie back in the bottle. You've got to think globally from not only that perspective, but then certainly from an asset allocation perspective. You just are reaping so many benefits from diversification and the opportunity for that long term growth when you're thinking about it through that global lens.
Josh King:
The Motif Finance Reimagined ETF looks at innovation in finance. So, I was surprised to see that blockchain up only 14% of the index exposure. That is less than something called asset management makeover.
Steve Sachs:
Yeah, no, it is. But again, you're thinking about, we're trying to capture a number of trends in the financial services industry. Blockchain is certainly a part of that. The digitization of finance is another one where what we uneffectionately call robo advisors these days or digital wealth. There's a number of themes within financial services that we're looking to capture. Blockchain is one of them. But I think blockchain is an example of something that we all know it's important and we all know that it's going to impact the world. Not sure we quite know how yet. That's one of those things that the world and the industries, particularly financial services just hasn't quite figured out exactly what the long term use of that is. But I think everybody is well grounded in the fact that is clearly a very important technology and you want to be exposed to it.
Josh King:
So, Steve, as we wrap up, is there any aspect of any of the thematic beta ETF suites that we haven't yet covered that would be remiss in not sharing with the listeners?
Steve Sachs:
No. I really hope that everybody listens to this podcast because I quite frankly, I think you did it more justice than I would have. Those were extremely good questions. I think that look, the overarching theme here is a couple of sort of threshold decisions that we talk to people about with this particular suite of ETFs. One of them being understand that they're very forward looking portfolios, that these are meant to be long-term changes and transformations in the marketplace.
Steve Sachs:
We talk about that thematic world all the time. Thematic kind of feels like waves to me. And I actually steal this analogy from somebody on my team, from the perspective of you say thematic and I think of waves. You say transformational changes and I think of the tide rising. And this is really what that is. That this is the long term change in the sea level, as it relates to all of these themes. So, I think that's really the key focus. What are you looking for, for your global equity exposure in your portfolio? Do you want it to be forward looking? Are you a long term asset allocator that's willing to think about those transformational changes and how that's going to drive long term shareholder value?
Josh King:
As you're looking out into the crystal ball, Steve, how are you hoping five years from now these products will be used by investors?
Steve Sachs:
That's a great question. I think that what we would tell you right now is that across that suite of five products, you could implement them using them either all together, as put together a bit of a jigsaw puzzle and build a core out of it. Or you could use it individually, if you want exposure to a particular area of innovation or that particular theme. I guess my hope that five years from now they really would be viewed as glow core portfolio holdings from that perspective.
Josh King:
Well, thanks so much for sharing a bit of that perspective with us here, inside the ICE house today, Steve.
Steve Sachs:
Thank you for having me. This was great fun.
Josh King:
That's our conversation for this week. Our guest was Steve Sachs, head of capital markets for ETFs at Goldman Sachs Asset Management. If you like what you heard, please rate us on iTunes so other folks know where to find us. And if you've got a comment or a question you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet at us @ICEHousePodcast. Our show is produced by Theresa DeLuca and Pete Asch with production assistance from Ken Abel. I'm Josh King, your host signing off from the library of the New York Stock Exchange. Thanks for listening. Talk to you next week.
Speaker 1:
The information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor its affiliates make any representations or warranties, express or implied as to the accuracy or completeness of the information and do not sponsor, approve or endorse any of the content herein. All of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security or a recommendation of any security or trading practices. Some portions of the preceding conversation may have been edited for the purpose of length or clarity.
