Goldman Sachs makes ‘white-label’ bet on white-hot ETF market

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Goldman Sachs Group Inc.’s decision to become the first big-name institution to launch a “white-label” exchange-traded fund (ETF) business is being seen as a large bet that ETFs will continue to seize market share from mutual funds.

The arrangement allows smaller fund managers and new entrants to launch ETFs more quickly and cheaply, with the white labeller providing services such as distribution, marketing, capital market support, custody, compliance, seed funding and administration.

Goldman Sachs’ ETF Accelerator will launch in both the U.S. and Europe, but the latter region has seen a particular flurry of activity in recent months.

“The concept of white labelling in Europe has been around quite a while, but it has just exploded this summer,” says Andrew Jamieson, global head of ETF product at Citigroup Inc.

“It’s the hottest ticket in town,” says Hector McNeil, co-founder and chief executive officer of HANetf Ltd., currently Europe’s only white labeller, which is now set to face fierce competition.

Despite the looming threat from rivals, he believes there was room for all of the would-be participants, particularly as only about 10 per cent of European asset managers are offering ETFs versus “closer to 50 per cent of meaningful [asset] managers” in the U.S.

“There is no monopoly on good ideas. Imitation is the best form of flattery. It’s a validation for the industry and the segment,” he adds.

White labelling is more advanced in the U.S., where the likes of Tidal Financial Group, Exchange Traded Concepts and ETF Architect are active.

However, since 2017, when ETF Securities’ Canvas platform was acquired by Legal & General Investment Management Ltd. and essentially closed to third parties, HANetf has had the European white-label market to itself.

It now has US$1.8-billion of assets, 40 funds and 40 members of staff on its platform, according to Mr. McNeil, who believes the disparity in white-label provision was one reason why the U.S. ETF market has “grown exponentially” to 259 ETF issuers but Europe boasts just 94, according to consultancy ETFGI LLP.

“We have had over 1,000 inquiries since we launched, one-and-a-half to two a day. There are a ton of people out there who are interested,” Mr. McNeil says.

“For the last four years, HANetf has been the only game in town,” Mr. Jamieson says.

“Most people have been genuinely surprised by just how successful HANetf has been. It’s little wonder that other companies are looking at this success, and wondering how they could replicate it.”

Goldman Sachs is far from alone in eyeing this opportunity, though. Asset management servicing firm Waystone Group, Luxembourg-based Axxion SA, exchange-traded product issuer Leverage Shares and crypto specialist Ionic Capital Management have all announced plans to enter the European market, as well as Tidal, which already has 55 ETFs and US$6.5-billion of assets on its U.S. platform.

Mr. Jamieson believes the development would be particularly attractive to mutual fund providers yet to dip a toe into the ETF waters.

He says that outsourcing a swath of functions to a white-label manager “can help catapult a manager forward by six to 12 months in terms of their [ETF] launch trajectory and possibly more.”

For providers with “modest” aspirations in the ETF market, the cost of building their own infrastructure, rather than the white label “plug and play model” would also be “significant,” he adds, although five products ought to be the “tipping point,” after which they might perhaps consider developing their own platform.

Without white labelling, “the choice is to build or buy” an ETF platform, Mr. McNeil says, “now you can build, buy or rent, or rent for a period of time with a view to bringing it in-house after a period of time.”

Nevertheless, Mr. McNeil says that white labelling “is the cheap end of the market and Goldman don’t do anything cheap.” He also believes Goldman Sachs would have a “massive conflict of interest,” given that its asset management arm already operates its own ETF range.

“We don’t have our own products so we will never compete with our clients,” he adds.

However, Deborah Fuhr, chief executive officer of ETFGI, plays down fears of conflicts of interest, noting that banks such as JPMorgan Chase & Co., HSBC Holdings PLC and Deutsche Bank AG offer services such as ETF market making, custody and research, alongside their own ETFs.

“It’s not unusual for banks to have multiple lines of business,” she says.

Another commentator, who requested anonymity, says he also had “every confidence” that Goldman’s ETF Accelerator “will be standalone,” given the white-label platform is being operated in a new division rather than out of its investment bank or asset management arm.

Goldman Sachs said in a statement that “by leveraging our expertise and risk management capabilities, we created a scalable solution as a response to our clients’ needs.

“We have independently operated our own asset management business for decades and whether on the buy side or sell side, we are well positioned to serve the unique needs of our institutional clients in this area.”

The anonymous commentator believes the new white-label offerings were likely to attract interest.

“The traditional mutual fund issuers are often paralyzed by fear of the unknown unknowns, therefore their ability to outsource practically everything beyond their own IP [intellectual property] is clearly very appealing,” he says.

Ms. Fuhr is also upbeat about Goldman Sachs’ chances.

“It’s likely they will be successful,” she says. “Many people like Goldman and see it as one of the top Wall Street firms.”

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