Goldman Sachs makes big bet on ETFs focusing on downside protection
Goldman Sachs Asset Management is betting big on defined-outcome exchange-traded funds, also known as buffer ETFs, that use options to help hedge against market losses.
This month, Goldman Sachs agreed to acquire defined outcome ETF provider Innovator Capital Management for $2 billion. The deal is expected to be completed in the first half of next year.
Bryon Lake, co-head of the firm’s Third Party Asset team, expects the funds to be an important growth engine for the sector.
“We did this deal with Innovator. We’ve loved this business for years. We know the founders. We know the team. We’re really excited about this space, the defined results space, that they’ve invented.” he told CNBC’s “ETF Edge.” “The defined result in particular is a very fast and attractive field for us.”
His logic: ETFs solve specific problems for investors.
“They’re looking for income. They’re looking for downside protection. They’re looking for more growth,” Lake said.
Kathmere Capital Management, which had $3.4 billion in assets under management as of the end of November, invests heavily in ETFs.
Defined outcome ETFs are used as part of an equity strategy built to reduce downside risk in some client portfolios, according to Nick Ryder, the firm’s chief investment officer. They are used in conjunction with tools such as trend following and covered call strategies.
“There is both customer demand for these and we see their role in portfolios,” Ryder said.
He added that ETFs are very attractive because they are aimed at investors who want to take exposure to the stock market with a built-in safety net.
“Stocks both go up and down. Over the long term, they tend to move up to the right. But we know from years of experience… it’s not a smooth ride,” Ryder said. “So for us, this category of risk-managed equity solutions…plays a role in a portfolio, and that’s really where we’re driving our adoption.”
