By Snehasish Chaudhuri, MBA (Finance)
Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (NYSEARCA:GSLC) is an exchange traded fund that invests in value, momentum and less volatile stocks of large-cap companies across diversified sectors in the US market. The fund has an asset under management of $11.6 billion, and an expense ratio of 0.09 percent. It invests almost 70 percent of its net assets in four high-growth potential sectors – information & communication technology (ICT), industrial, healthcare and financial. Its turnover ratio is quite low at 12 percent. It pays quarterly dividends with a significantly low yield. However, total returns have been impressive. GSLC’s portfolio has a weighted average price to earnings (PE) ratio of18 and is currently trading almost at par with its net asset value.
Low-Yielding GSLC Has Consistently Been Generating Double-Digit Returns
Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF was launched and is managed by Goldman Sachs Asset Management, L.P. It benchmarks its performance against that of the Goldman Sachs ActiveBeta U.S. Large Cap Equity Index. This index is designed to deliver exposure to equity securities of large capitalization U.S. issuers. The fund was formed on September 17, 2015, and has been offering consistent quarterly pay-off, but with a significantly low yield. Average yield generated during these years ranged between 1 percent and 1.7 percent. GSLC thus fails to fulfill the needs of income-seeking investors. However, it consistently generated strong total returns. Total return over the past twelve months stood at 13.85 percent, while annual average total return over the past five years was also quite impressive at 11.2 percent.
Major Investments in GSLC are Mostly in Technology, Healthcare and Retail Stocks
Top investments of Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF are mostly technology stocks. The list includes software developers – Adobe Inc. (ADBE), Microsoft Corporation (MSFT); technology hardware firm – Apple Inc. (AAPL); interactive media giants – Meta Platforms, Inc. (META), Alphabet Inc. Class A (GOOGL), Alphabet Inc. Class C (GOOG); IT consulting company – Accenture plc (ACN); semiconductor giants – Broadcom Inc. (AVGO), NVIDIA Corporation (NVDA). Besides those, there are also technology-focussed stocks from other sectors like e-vehicle manufacturer – Tesla, Inc. (TSLA); transaction processing companies – Mastercard Incorporated (MA), Visa, Inc. (V); and wireless connectivity provider firm Comcast Corporation (CMCSA).
Healthcare stocks like UnitedHealth Group Incorporated (UNH), Johnson & Johnson (JNJ), Eli Lilly & Company (LLY), Merck & Co., Inc. (MRK) AbbVie Inc. (ABBV) and retail giants such Amazon.com, Inc. (AMZN), The Home Depot, Inc. (HD), Walmart Inc. (WMT), Costco Wholesale Corp (COST), Lowe’s Companies, Inc. (LOW) are also among the top investments of Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF. This provides an impression that GSLC’s portfolio is topping up allocations with growth generating stocks.
GSLC has done because its top investments have done well
Tech stocks have done well this year. These stocks I mentioned have shown growth percentage ranging from13 to a high of 228 in just the last year. In the last 5 years, as well, they have done well. All these stocks, barring CMCSA, registered strong CAGR of 11 percent at least. Price performance of health and retail sector stocks were also decent over the long run. However, among big pharma, only lLY saw a positive price growth this year, which goes to show that the healthcare sector has not done terribly well. Retail stocks, on the other hand, mostly generated double digit growth. This has enabled GSLC to register a year-to-date price growth of 18 percent. Like with FDLO, what is surprising is that despite such consistent price growth, GSLC is not distributing this gain through its pay-out.
Rule of Investment Cap on Large Holdings in a Diversified Fund Might Impact GSLC
An interesting development is taking place in the US stock market that is going to significantly impact diversified funds. Funds that register themselves as “diversified funds” with the Securities and Exchange Commission, cannot put more than 25 percent of their assets into large holdings. Many investment funds, thus, cannot buy further units of some of the most sought-after stocks, as they struggle to keep up with indices that are increasingly dominated by stocks from giant technology firms. The BlackRock Technology Opportunities Fund S (BSTSX) was blocked from buying shares in AAPL, MSFT and NVDA; while the JPMorgan U.S. Large Cap Core Plus Fund Inst (JLPSX) crossed its limit for investing in MSFT, AAPL, GOOG, AMZN and NVDA.
Only a handful of mega-cap companies are creating unexpected issues for investors and index providers. The S&P 500 registered a YTD growth of 18.18 percent, but 7 large technology stocks have accounted for more than half of such gains. Incidentally, all these seven stocks are among the top investments of Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF. Large-cap tech stocks like MSFT, AAPL, META, GOOGL, GOOG, AMZN, TSLA, NVDA, AVGO and ACN are at present account for 24.4 percent of GSLC’s entire portfolio. This leaves little scope for buying more units of these large-cap technology stocks, as further price rise of those stocks may very soon breach the 25 percent cap.
Investment Thesis
Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF is a nicely calibrated equity mix and has a lower standard deviation. It invests almost 70 percent of its net assets in four high-growth potential sectors – ICT, industrial, healthcare and financial. It has been generating strong returns over the years. Investors who are on the lookout for a well-priced large-cap mix with strong quality and adequate growth should go for this fund. It is worth mentioning that GSLC’s turnover ratio and expense ratio are highly competitive. However, GSLC fails to fulfill the needs of income-seeking investors as it generates a very low yield.
Moreover, GSLC is placing heavy bets on large-cap tech stocks. In general, tech stocks go through frequent periods of short-term bumps, even when they are going through a bullish run over the longer time horizon. After various months of relentless rise, the technology stocks may lose out as their strength relative to the S&P 500 index may fade out. And even if the reverse happens, and a bullish rally in technology stocks continues, GSLC does not seem to be in a position to buy additional units of those stocks in huge numbers. Thus, even if GSLC has been able to generate double-digit returns, in absence of strong yield, I don’t see any extraordinary investment potential, and thus assign a hold rating on Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF.
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