Goldman Sachs Asset Management (GSAM) has introduced a new US equity ETF that combines a multi-factor investment approach with adherence to the carbon reduction goals of the Paris Agreement.
Armen Avanessians, Global Head and CIO of GSAM’s Quantitative Investment Strategies team.
The Goldman Sachs ActiveBeta Paris-Aligned Climate US Large Cap Equity ETF (GPAL US) has been listed on Cboe BZX Exchange with an expense ratio of 0.20%.
The fund is linked to the Goldman Sachs ActiveBeta Paris-Aligned US Large Cap Equity Index which screens an initial universe of US-listed large-cap companies to remove violators of UN Global Compact principles, companies associated with controversial weapons, tobacco, fossil fuels, coal, or gaseous fuels, and high-polluting electricity producers.
The index then adopts GSAM’s proprietary ‘ActiveBeta’ methodology which systematically exploits four well-established equity factors – value, momentum, quality, and low volatility – in a bid to provide higher returns at similar or lower levels of risk relative to traditional market-cap-weighted US large-cap benchmarks.
The construction process involves two steps. In the first step, four sub-indices are determined, one for each factor, by assigning eligible constituents a score for each of the four factors based on financial and technical attributes. Constituents are over- or under-weighted in these four single-factor sub-indices according to factor rank.
In the second step, the four sub-indices are equally weighted with offsetting positions calculated and netted off to determine the final index weights, subject to weight constraints to control industry group biases. Additionally, constituents with final weights below a certain threshold are eliminated from the index. The resulting index is known as the ‘Factor Diversity Portfolio’.
Finally, the weights of companies in the Factor Diversity Portfolio are adjusted upwards and downwards in order to satisfy the requirements of EU Paris-aligned benchmarks. This includes a 50% reduction in aggregate greenhouse gas emissions relative to the market-cap-weighted universe and at least a 7% annual decarbonization moving forward.
The final composition of the index is evaluated to ensure that exposure to each of the four factors – value, momentum, quality, and low volatility – is no lower than the corresponding factor exposures in the Factor Diversity Portfolio.
The index is rebalanced quarterly but existing constituents are allowed to deviate either side of their target weights within a range to reduce portfolio turnover.
As of 15 December, the index contained approximately 400 constituents. Information technology stocks accounted for roughly one-third (30.7%) of the index weight with the next-largest sector exposures being health care (15.5%), consumer discretionary (13.7%), financials (11.9%), and communication services (9.7%).
Notable positions included Apple (6.5%), Microsoft (5.9%), Alphabet (4.3%), Amazon (3.5%), Meta Platforms (1.9%), and NVIDIA (1.4%).
Commenting on the launch, Armen Avanessians, Global Head and CIO of GSAM’s Quantitative Investment Strategies team, said: “The launch of our Paris-aligned offering is a natural extension of our ActiveBeta suite of smart beta ETFs. This approach combines our well-established track record of managing diversified, multi-factor ETFs, with our ability to reflect many investors’ growing desire to reduce carbon emissions and more deliberately manage the transition to a low-carbon economy through our rules-based and transparent approach.”
Michael Crinieri, GSAM’s Global Head of ETFs, added: “We continue to enhance our offerings of smart beta equity ETFs, working closely with our Quantitative Investment Strategies team to develop new and innovative products such as this. GPAL will provide investors with US equity exposure, aligned with the goals of the Paris Climate Agreement, in a competitively priced vehicle backed by the global platform and resources of Goldman Sachs.”