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Why Goldman ETFs Make Sense

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Despite the populist anger against the bank, investors will want in.

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The well-heeled executives at Goldman Sachs (GS), always on the lookout for new ways to make money, think they've found one: cashing in on the surging popularity of exchange-traded funds.

The Wall Street Journal reports that Goldman, which already has a well-regarded ETF trading desk, filed with the SEC for permission to launch a slate of these funds.

The filing indicates that Goldman's first ETF will be an index fund targeting Brazilian, Indian, Chinese, and Korean stocks, an area already covered by other heavy hitters like BlackRock (BLK).

Check out the filing for yourself here.

It's no surprise that Goldman might be looking to carve out a slice of the ETF pie. These relatively new vehicles for portfolio diversification -- first introduced in 1993 -- have attracted a lot of fans in a pretty short period of time.

In November 2004, ETF assets under management totaled $213 billion in the US, according to Strategic Insight, a New York-based fund industry research firm. By November 2009, just five years later, that number had tripled to $746 billion and there are now more than 800 ETFs available to investors.

Investors like ETFs because they're cheap, transparent, and tax efficient, says Loren Fox, the Senior Research Analyst at Strategic Insight. He forecasts ETFs assets under management in the US hitting $1 trillion before 2012.

The mutual fund industry, of course, is carefully watching all this growth with great interest. Nobody is arguing that the mutual fund industry is going belly up, obviously, but pros do expect ETFs to continue taking more market share.

So says Peter Way, chief investment officer of Peter Way Associates and editor of the Block Traders' ETF Monitor newsletter.

"The mutual fund industry charges very healthy fees for doing very little," Way says. "Relative to the mutual fund industry, ETFs are quite small. But there will be a lot of movement that way."

Many mutual fund companies have decided that it's better to join the ETF parade rather than let it pass them by. Vanguard, which launched its first ETF in 2001, now has $91.3 billion in ETF assets. Pimco launched its first ETF last year. Baltimore-based T. Rowe Price (TROW) is now also getting involved.

What could Goldman offer that competitors can't?

"A successful part of an ETF is the trading of it," says Fox. "Goldman is obviously very good at trading. They already have a business that helps trade ETFs, which they can build on."

The analyst concludes, "The ETF world is big enough that, if you get just 1% or 2% of the market, that is a good chunk right there. You don't have to be one of the top three players in order to have a successful and profitable ETF business."

Goldman is in the crosshairs right now in a lot of ways, not least of which are the angry headlines blazing about the bonus backlash, which we documented in our video What Would God Say About Goldman?

But image problems aren't going to detract from investor enthusiasm for a Goldman-branded ETF, say market pros.

"Most sophisticated investors are going to think to themselves that it is better to traffic with the devil they know than the one they don't," says Way. "Investors think that these guys know what they're doing and maybe some of it will rub off on them."

He adds, "Goldman is the big, strong firm in the business. People would rather have them on their side than fight them."

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No positions in stocks mentioned.
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