MW Goldman Sachs managing director makes the case for a modified low-volatility ETF
By Philip van Doorn
Laurene Azoulay describes an indexing approach that enables U.S. investors to broaden their global exposure with a low-volatility stock-selection strategy that encompasses three other factors
A low-volatility approach to stock-portfolio management can give investors a "smoother ride" over the long term by avoiding emotional reactions during bull markets, according to Laurene Azoulay, a managing director at Goldman Sachs.
The Goldman Sachs ActiveBeta World Low Vol Plus Equity ETF GLOV follows a low-volatility indexing approach that also encompasses quality, value and momentum factors. The exchange-traded fund also helps U.S. investors broaden their horizons, because about one-third of its portfolio is invested in developed markets outside the U.S.
How a low-volatility strategy can outperform
During an interview with MarketWatch, Azoulay, global co-head of client portfolio management for QIS at Goldman Sachs Asset Management, cited academic research that showed investors weren't well rewarded for the risks they took holding stocks with higher price volatility. In a report titled "Know your VMS Exposure" and published in the Journal of Portfolio Management in December 2010, Roger G. Clarke, Steven Rollin Thorley and Harindra de Silva wrote that U.S. data from 1983 through 2008 suggested "that idiosyncratic volatility [had] only sporadically been rewarded on a cross-sectional basis within the equity market."
A PDF of that report is available here.
The QIS in Azoulay's title stands for quantitative investment strategies. This group within Goldman Sachs Asset Management oversees more than $120 billion in assets for clients, she said.
During the same conversation, Brendan McCarthy, the global head of ETF distribution for Goldman Sachs Asset Management, said GLOV was the "flagship" among seven ETFs within the firm's Active Beta strategy. He described Active Beta as sitting "between traditional market-cap investing and more active investing," with low expenses. Annual expenses for GLOV total 0.25% of assets under management.
Volatility risk might not be on the mind of an investor who has enjoyed a 107% return for the S&P 500 SPX over the past five years through Tuesday. But five years isn't a very long period for investors looking to build a nest egg over a period of decades. (All returns in this article include reinvested dividends.)
Here's a comparison of total returns for the S&P 500 and the S&P 500 Low Volatility Index for 10 years through 2008:
This chart encompasses the later part of the internet bubble that began to deflate in 2000, as well as the financial crisis of 2008, although the S&P 500 didn't hit its crisis bottom until March 2009. But it is a long enough period to display the viability of a low-volatility strategy.
Now take a look at a 20-year chart for the same two indexes through 2008:
This illustrates the smoother ride cited by Azoulay. The periods of price appreciation during the internet bubble and the bull market heading into the 2008 crisis were canceled out. The Low Volatility Index had a higher return for the 20-year period.
S&P Dow Jones Indices conducted a study of risk-weighted returns for these two indexes for five decades through 2019.
Azoulay said investors' "behavioral bias" can reflect "a bit of overconfidence about the high-risk lottery tickets" during bull markets.
It is also worth pointing out that a nonclairvoyant market-timer seeking to avoid the broad declines for the S&P 500 would be likely to sell and move to the sidelines after a decline had started. The investor would also be likely to return to the market after a broad rebound had started. This underscores how investors' own behavior can lead to underperformance, even with index funds. The low-volatility approach might help some investors avoid the temptation to sell into declining markets.
Stock selection
The Goldman Sachs ActiveBeta World Low Vol Plus Equity ETF was established on March 15, 2022. Here's how it performed from March 17, 2022 (the first date for which FactSet has pricing information), against the iShares MSCI World ETF URTH, which tracks the MSCI World Index XX:990100, through Tuesday:
The fund has grown rapidly to $1 billion in assets under management. It currently holds 412 stocks, with U.S. stocks making up 69% of the portfolio.
GLOV tracks the Goldman Sachs ActiveBeta World Low Vol Plus Equity Index, which is rebalanced quarterly. Stock selection begins with the Solactive GBS Developed Markets Large & Mid Cap USD Index, which is made up of 1,435 stocks "covering approximately the largest 85% of the free-float market capitalization in the Developed Markets," according to Solactive's description.
This initial index is weighted by market capitalization, as is the S&P 500. Azoulay explained that the four factors for GLOV have the effect of retaining some of the market-cap weighting, with familiar technology giants such as Apple Inc. $(AAPL)$, Microsoft Corp. $(MSFT)$ and Nvidia Corp. $(NVDA)$ having the largest allocations, but that these allocations are much lower than they are in the S&P 500 and in the MSCI World Index.
Starting with the Solactive GBS Developed Markets Large & Mid Cap USD Index, the group is narrowed down according to four factors:
-- Volatility. Each stock is assigned a volatility score based on its daily price movement over the previous 12 months. Stocks are ranked by volatility within each country. This retains the country makeup of the Solactive index but changes the weighting within each country by volatility. One effect of this is to reduce weighting toward the largest stocks by market cap.
-- Quality. This factor compares each company's gross profit divided by total assets to those within its peer groups, within countries and sectors. So again, the broadest index weightings toward countries and sectors are maintained, but a poorly performing sector will by nature of its market cap have a lower weighting. And bad performers within the groups will have lower weightings.
-- Value. Various measures, including ratios of price to book value, price to sales and price to free cash flow, are used to increase the fund's exposure to stocks considered undervalued and lower exposure to stocks that appear to be expensive.
-- Momentum. "Most stocks with prices that have been rising historically over the past couple of months tend to outperform the broader market," Azoulay said, so the quarterly rebalancing places higher weighting toward stocks showing recent price increases.
Top holdings
This table is designed to compare the top 10 holdings of the Goldman Sachs ActiveBeta World Low Vol Plus Equity ETF with those of the iShares MSCI World ETF and the SPDR S&P 500 ETF Trust SPY. For each ETF, the top 10 holdings are all companies based in the U.S.
If the portfolio percentage is blank for a company, it means that company is not among that ETF's top 10 holdings. In other words, that stock might be held by that ETF, but the figure is blank on the table to indicate it isn't among that fund's top 10.
The list is sorted by GLOV's top 10 holdings. Then more rows are added at the bottom to add top 10 holdings of URTH or SPY that aren't among GLOV's top 10.
Company Ticker % of GLOV portfolio % of URTH portfolio % of SPY portfolio Apple Inc. AAPL 3.48% 4.96% 7.20% Microsoft Corp. MSFT 2.85% 4.86% 6.51% Nvidia Corp. NVDA 1.91% 4.35% 7.04% Walmart Inc. WMT 1.38% Amazon.com Inc. AMZN 1.25% 2.55% 3.61% Berkshire Hathaway Inc. Class B BRK.B 1.22% 1.69% O'Reilly Automotive Inc. ORLY 1.03% International Business Machines Corp. IBM 1.01% Motorola Solutions Inc. MSI 0.99% Meta Platforms Inc. META 0.88% 1.86% 2.63% Alphabet Inc. Class A GOOGL 1.42% 2.02% Alphabet Inc. Class C GOOG 1.23% 1.67% Broadcom Inc. AVGO 1.13% 1.69% Tesla Inc. TSLA 1.06% 1.46% Eli Lilly and Co. LLY 1.04% Percentage of holdings within the top 10 16.00% 24.46% 35.52% Sources: Goldman Sachs, BlackRock, State Street
The Goldman Sachs ActiveBeta World Low Vol Plus Equity ETF is far less concentrated at the top than the MSCI World Index and the S&P 500.
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October 30, 2024 12:01 ET (16:01 GMT)
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