It’s an Exchange Traded Fund, but not like one you will have seen before. Goldman Sachs Asset Management tell us why they think their new ETF that offers daily liquidity will be a big hit with corporate cash investors.
In today’s lower rate environment and with new regulation just around the corner, treasurers who favour money market funds (MMFs) as a place to park cash are now being forced to seek alternatives. Asset managers are responding by ramping up their liquidity offerings. New short-term investment products are now fast emerging; some of which may, at first, seem quite alien to many cash investors.
Take, for example, The Goldman Sachs TreasuryAccess 0-1 Year ETF (Ticker: GBIL) launched by Goldman Sachs Asset Management (GSAM) earlier this month. The new fund, which began trading on NYSE Arca on 8th September is the first ETF to offer same-day settlement of creation and redemptions in the short-term US treasury market. Unlike other ETFs, traditionally marketed to investors with longer investment horizons, this is a product evidently developed with corporate cash investors very much in mind.
“In the US we have the SEC regulation coming into effect and the price of liquidity has changed such that treasurers sitting on excess cash are increasingly looking for other ways to deploy it besides money funds,” says Christina Kopec, Head of Product Strategy for Global Fixed Income at GSAM. “In the US we have seen investors moving en masse into government money market funds and we have been getting a lot of questions about what else is out there that can offer incremental yield on excess cash.”
This got the product strategy team at GSAM thinking about whether an investment product like an ETF developed for a different purpose could be applied elsewhere. One way to broaden the potential investment applications of an ETF, they reasoned, would be to offer same day liquidity. “One of the gaps we observed was that the settlement cycle was T+3, something we knew would be incompatible for many institutional cash clients,” says Kopec. “Sometimes T+1 can work, but most cash investors are accustomed to funds offering daily liquidity. That hearkens back to money market funds too; they did not always settle same day, it was an innovation that the industry introduced to make them more broadly desirable.”
But it does beggar the question, of course, of why this has not been done before? It is not, Kopec explains, because it is inherently difficult to design an ETF with daily liquidity. It is simply a case of new regulation and market environments creating a demand that previously didn’t exist. “Our innovation is not as much the actual features of the product as recognising the utility of the product to a new set of investors,” Kopec explains. “Because of the demand we are now seeing, we are taking these two things – ETFs and liquidity – that used to be separate and combining them.”
GSAM understand it may take some time for cash investors to gain the broader acceptance amongst cash investors that they seek. Her advice for treasurers is to “start with a clean slate” and consider what their investment priorities are, what risks they are comfortable with and what new risks are presented by the changing regulatory and market dynamics. Given the way the investment environment has changed, she cautions, there has to be some trade-off between security of principal, liquidity and yield.
But by virtue of its longer duration, GBIL should outperform government MMFs and, with a very competitive cost to investors of 14bps, she believes it is a product that could have a lot of appeal to corporate cash investors over the coming years. “We believe it will be evolutionary in terms of adoption of the product – it really is a long-term play on our part,” she adds. “As was the case when MMFs were first introduced, it will take some time to feel comfortable in terms of the accounting treatment and how the product fits with investment policies.”